REVENUE GROWTH AND OPERATING MARGIN

2016
£m
2015
£m
Revenue436.9352.9
Underlying operating profit69.454.2
Underlying operating profit margin15.9%15.4%
GrowthLFL
Growth*
Group23.8%9.1%
UK25.3%10.5%
Mainland Europe14.9%2.4%

* Like for like (LFL) measures exclude acquisitions, where relevant, and are at constant currency translation.

Martin Payne

Group revenue at £436.9m grew 23.8% in the year, or 9.1% on a like for like basis excluding acquisitions and on a constant currency translation basis. Our UK operations, which include our Middle East factory due to the strong link with UK manufactured export product, grew 25.3% or 10.5% on a like for like basis. Strong growth in the Commercial and Infrastructure Systems – UK segment and improving performance in the UK Residential Systems segment in the second half of the year contributed to this performance, with little impact of the EU Referendum seen in our end markets. The effect of selling prices on revenue growth was negligible in the year, with deflationary effects from prior year running on into the first part of 2016, offset by a small selective price increase in April 2016. UK like for like volume growth is therefore 10.5%, although adjusting for one extra working day in 2016 compared to 2015, and an element of pre-price increase ordering by the merchants, we estimate true underlying volume growth to be c.8.8%. This growth is ahead of the UK construction market which according to ONS/CPA data for 2016 we estimate to have grown 2.3% adjusting for anomalies relevant to our business. This demonstrates the continued success of our strategy to grow by focussing on legacy material substitution opportunities, legislative tailwinds relating to carbon reduction and water management, and selective export markets such as the Middle East. Mainland Europe revenue grew 14.9% although much of this was down to currency translation, with like for like revenue growth at 2.4%.

The Group underlying operating margin improved to a record 15.9% (2015: 15.4%). Operational leverage and self-help efficiency benefits have more than offset the impact of polymer cost inflation driven by the post EU Referendum weakening of Sterling. Selling price increases have been implemented to recover this and other inflationary effects, but will not impact margins until the second quarter of the current year. The favourable currency translation impact relating to our Mainland Europe businesses, whilst significant in revenue terms, had little impact on earnings.

UNDERLYING OPERATING PROFIT GROWTH OF

28.0%

50 BPS IMPROVEMENT IN UNDERLYING OPERATING MARGIN TO A RECORD

15.9%

STRONG CASH CONVERSION RATE MAINTAINED

97.1%

NET DEBT REDUCED TO

1.9

TIMES EBITDA

NON-UNDERLYING ITEMS

Non-underlying items in both 2016 and 2015 predominantly related to costs associated with the acquisitions made during 2015. In 2016 they included non-cash charges of £7.7m in respect of a full year of intangible assets amortisation (£6.8m) and the impairment of a surplus freehold property which is held for sale (£0.9m). In 2015 they included non-cash charges of £4.7m in respect of a part year of intangible assets amortisation (£3.0m) and unamortised debt issue costs written off (£1.7m).

Non-underlying items comprised:

2016
£m
2015
£m
Amortisation of intangible assets6.83.0
Acquisition costs2.0
Unamortised debt issue costs written off1.7
Impairment of freehold land and buildings0.9
Profit on disposal of property, plant and equipment(0.3)(0.2)
Non-underlying items before taxation7.46.5
Taxation(1.6)(1.8)
Non-underlying items after taxation5.84.7

Taxation on non-underlying items is covered in the note on taxation below.

Exchange rates

The Group is exposed to movements in exchange rates when translating the results of its Mainland Europe operations from Euros to Sterling. Sterling depreciated against the Euro during 2016, particularly following the EU Referendum in June, with the average exchange rate used for translation purposes moving from £1:€1.38 in 2015 to £1:€1.23 in 2016. The impact of this was a £6.2m positive effect on revenue with no significant impact on underlying operating profit.

The Group trades predominantly in Sterling but has some revenues and costs in other currencies, mainly the US dollar and the Euro, and takes appropriate forward cover on these flows using forward currency derivative contracts.

Forward currency derivative contracts are classified as held for trading. There was an unrealised loss of £1.5m (included in financial liabilities) on these derivative contracts at 31 December 2016 (2015: £0.1m loss) resulting in an income statement charge of £1.4m during the year (2015: £0.1m credit). This charge is treated as an underlying charge and is recorded in Cost of sales in the income statement.

Finance costs

Net underlying finance costs for the year of £7.6m were £1.4m higher than the prior year. This increase reflected the full year impact of higher net debt following the Nuaire acquisition in August 2015, offset by the improved terms of our new RCF entered into at the same time.

Interest is payable on the RCF at LIBOR plus an interest rate margin ranging from 1.25% to 2.75%. The interest rate margin at 31 December 2016 was 2.00% (2015: 2.25%).

In order to reduce exposure to future increases in interest rates the Group has entered into interest rate swaps at fixed rates ranging between 1.735% and 2.21% (excluding margin) with notional amounts hedged ranging from £60.0m to £91.7m over the period of the interest rate swaps.

The unrealised mark to market adjustment on these forward interest rate swaps at 31 December 2016 was £4.2m negative (2015: £2.1m negative), the movement in the mark to market adjustment during the year of £2.1m is included in the Group Statement of Comprehensive Income.

Taxation

Underlying taxation:

The underlying tax charge in 2016 was £11.8m representing an effective tax rate of 19.1% (2015: 19.2%). This is slightly below the UK standard tax rate of income tax of 20.0% due primarily to the benefit of patent box relief. The impact of our Mainland Europe operations on the Group’s tax charge is currently not significant.

Taxation on non-underlying items:

The non-underlying taxation credit of £1.6m in 2016 represents an effective rate of 21.6%.

Earnings per share

20162015
Pence per share:
Basic22.217.1
Underlying basic25.119.5
Diluted22.117.1
Underlying diluted25.019.4

The Directors consider that the underlying earnings per share (EPS) measure provides a better and more consistent indication of the Group’s underlying financial performance and more meaningful comparison with prior and future periods to assess trends in our financial performance.

Underlying diluted EPS improved by 28.9% in 2016 due to the improved underlying operating result and the marginally lower underlying tax rate as explained above offset by higher interest costs.

Dividend

The final dividend of 7.0 pence per share is being recommended for payment on 2 June 2017 to shareholders on the register at the close of business on 28 April 2017. The ex-dividend date will be 27 April 2017.

Our dividend policy is to pay a minimum of 40% of the Group’s annual underlying profit after tax. The Directors intend that the Group will pay the total annual dividend in two tranches, an interim dividend and a final dividend, to be announced at the time of announcement of the interim and preliminary results respectively in the approximate proportions of one-third and two-thirds, respectively. The Group may revise its dividend policy from time to time.

Balance sheet

The Group’s balance sheet is summarised below:

2016
£m
2015
£m
Property, plant and equipment101.098.1
Goodwill329.3329.3
Other intangible assets42.349.1
Net working capital0.5(2.3)
Taxation(14.3)(14.7)
Other current and non-current assets and liabilities(7.1)(4.2)
Net debt (loans and borrowings, net of cash and cash equivalents)(164.3)(194.3)
Net assets287.4261.0

Property, plant and equipment increased by a net £2.9m predominantly due to capital expenditure exceeding depreciation by a similar amount. Other intangible assets decreased by £6.8m reflecting a full year of amortisation in respect of the 2015 acquisitions. Net working capital increased by £2.8m although much of this relates to currency translation effects in our Mainland Europe operations. Other current and non-current assets and liabilities increased by a net £2.9m primarily due to the increase in the fair value liability of our forward foreign currency derivatives and interest rate swaps. Net debt is discussed below.

Pensions

The Group does not have any defined benefit pension schemes and only has defined contribution pension arrangements in place. Pension costs for the year amounted to £2.7m (2015: £1.7m).

Cash flow and net debt

Cash generated from operations during the year, excluding the impact of nonunderlying items, and the cash conversion rate defined as the ratio of operating cash flow after capital expenditure to operating profit (also excluding the impact of non-underlying items) were:

2016
£m
2015
£m
Underlying operating profit69.454.2
Depreciation16.315.1
Underlying operating profit before depreciation (EBITDA)85.769.3
Movement in net working capital(0.2)4.9
Share-based payments1.00.4
Operating cash flow86.574.6
Capital expenditure(19.1)(19.3)
Operating cash flow after capital expenditure67.455.3
Cash conversion rate97.1%102.0%

Cash generated from operations (excluding non-underlying items) after capital expenditure was strong showing an increase of 21.9% during the year to £67.4m (2015: £55.3m) and this was after capital expenditure of £2.8m or 17.2% greater than depreciation. The cash conversion rate, a key measure of operating cash flow performance, remained strong at 97.1% of underlying operating profit.

In a measured response to the uncertainty created by the EU Referendum in June 2016, we took the decision to delay certain capacity expansion capital expenditure projects, whilst continuing to spend on development growth projects and essential replacement. Consequently, capital expenditure in 2016 was marginally lower than the prior year at £19.1m (2015: £19.3m), and significantly below our original plans for 2016. Spend on key projects such as completion of our manufacturing facility in the Gulf, a replacement extrusion line in our Broomhouse Lane plant and investment in equipment to allow product range expansion in our Terrain business unit has however continued during the year. The performance of the Group since the EU Referendum and the more positive economic outlook compared to the period immediately afterwards has given us the confidence to resume those delayed projects, and therefore capital expenditure in 2017 is expected to be up to 30% higher than 2016 expenditure.

During the year, one million shares were purchased and held in treasury, for the purposes of satisfying future employee share option schemes. This cost a total of £2.9m in the year.

Net debt of £164.3m comprised:

2016
£m
2015
£m
Change
£m
Bank loans(192.0)(217.5)25.5
Cash and cash equivalents26.521.64.9
Net debt (excluding unamortised debt issue costs)(165.5)(195.9)30.4
Unamortised debt issue costs1.21.6(0.4)
Net debt(164.3)(194.3)30.0
Net debt (excluding unamortised debt issue costs): EBITDA1.92.5*

* Adjusted to include a full year of EBITDA from acquisitions made during the previous twelve months.

At 31 December 2016 liquidity headroom (cash and undrawn committed banking facilities) was substantial and improved to £134.5m (2015: £104.1m). Continued focus on deleveraging following the Nuaire acquisition in August 2015 has seen our net debt to EBITDA ratio reduce substantially to 1.9 times EBITDA at 31 December 2016 (2015: 2.5 times), beating the target of 2.0 times EBITDA set at the beginning of the year, and demonstrating the cash generative nature of the business. This headroom enables us to continue to develop our acquisition pipeline and we continue to seek out compelling opportunities to accelerate growth in our strategic development areas.

Financing

The Group has a revolving credit facility (RCF) committed through to August 2020 with a facility limit at 31 December 2016 of £300m, reducing by £10m per annum at 31 December 2017, 2018 and 2019. At 31 December 2016, £192.0m of the RCF was drawn down.

The Group is subject to two financial covenants. At 31 December 2016 there was significant headroom:

Covenant:Covenant requirementPosition at 31 December 2016
Interest cover*4.00:19.7:1
Leverage**<3.25:11.9:1

* Underlying operating profit: Net finance costs excluding debt issue cost amortisation

** Net debt: EBITDA

Forward-looking statements

This report contains various forwardlooking statements that reflect management’s current views with respect to future events and financial and operational performance. These forward-looking statements involve known and unknown risks, uncertainties, assumptions, estimates and other factors, which may be beyond the Group’s control and which may cause actual results or performance to differ materially from those expressed or implied from such forward-looking statements. All statements (including forward-looking statements) contained herein are made and reflect knowledge and information available as of the date of preparation of this report and the Group disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or results or otherwise. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forwardlooking statements due to the inherent uncertainty therein. Nothing in this report should be construed as a profit forecast.

Martin Payne
Chief Financial Officer