Hill & Smith : Annual Report & Financial Statements 2023

2023

International provider of sustainable infrastructure products and services

Hill & Smith PLC

Annual Report for the year ended 31 December 2023

INTRODUCING OUR 2023 ANNUAL REPORT

WHO WE ARE

Hill & Smith creates sustainable infrastructure and safe transport through innovation.

The Group employs c. 4,400 people worldwide with the majority employed by its autonomous, agile, customer focused operating companies based in the UK, USA, India and Australia.

WHAT'S IN THIS REPORT

OUR

STRATEGY

Read more on pages 14 to 15

OUR

BUSINESS MODEL

Read more on pages 16 to 17

OUR ENGAGEMENT

WITH STAKEHOLDERS

Read more on pages 32 to 35

OUR SUSTAINABLE

APPROACH

Read more on pages 36 to 55

OUR FINANCIAL

STATEMENTS

Read more on pages 118 to 198

CONTENTS

STRATEGIC REPORT
Our Investment Proposition	01
Group Highlights	02
Our Group at a Glance	04
Executive Chair's Letter	06
Our Products	09
Our Strategy	14
Our Business Model	16
Measuring our Performance	20
Operational and Financial Review	22
Stakeholder Engagement	32
Our approach to Sustainability	36
Risk Management	56
Group Principal Risks	60
Non-financial Information Statement	66
GOVERNANCE
Board of Directors	68
Governance at a Glance	70
Introduction to Governance	72
Governance Report	74
Nomination Committee Report	84
Audit Committee Report	86
Remuneration Committee Report	94
Directors' Report	113
Statement of Directors' Responsibilities	117
FINANCIALS
Independent Auditor's Report	118
Consolidated Income Statement	126
Consolidated Statement of Financial Position	128
Consolidated Statement of Changes in Equity	129
Consolidated Statement of Cash Flows	130
Notes to the Consolidated Financial Statements	131
Company Balance Sheet	187
Company Statement of Changes in Equity	188
Notes to the Company Financial Statements	189
Five year summary	198
SHAREHOLDER INFORMATION
Financial Calendar	199
Shareholder Information	200
Principal Group Businesses	201
Directors, Contacts and Advisors	203
Shareholder Notes	204

Stock Code HILS

OUR INVESTMENT PROPOSITION

DELIVERING LONG TERM STAKEHOLDER VALUE

Structural growth underpinned by the need for infrastructure investment in our core markets

Read more on pages 16 to 17

Market leader, with strong track record, in attractive niches with high barriers to entry

Read more on pages 22 to 31

Sustainability at the core of our business model

Read more on pages 36 to 55

Entrepreneurial culture supported by an autonomous operating model

Read more on pages 14 to 17

High, and improving, returns profile

		Read more on pages 22 to 31
	Strong balance sheet, supported by excellent
	cash generation, enabling the Group to take
	advantage of significant organic and inorganic
	opportunities	Read more on pages 29 to 31

STRATEGIC REPORT

Hill & Smith PLC | Annual Report and Accounts 2023

01

GROUP HIGHLIGHTS

Continuing operations

Revenue	% change OCC
£829.8m	+5%
(2022: £732.1m)	% change at constant currency
+13%	+14%

Underlying operating profit	% change OCC
£122.5m	+12%
(2022: £97.1m)	% change at constant currency
+26%	+26%

Underlying operating margin

14.8%

(2022: 13.3%)

+150bps

Underlying profit before tax

£111.9m

(2022: £87.9m)

+27%

Underlying earnings per share			Dividend per share
105.4p			43p
(2022: 85.4p)			(2022: 35p)
+23%
+23%

HIGHLIGHTS

Record trading performance

• Revenue up 14% and underlying operating profit up 26% on a constant currency basis
• Underlying operating margin increased by 150bps to 14.8%, reflecting volume growth and improved portfolio mix
• Strong momentum across US businesses, with standout performance in composites and electrical utility business
• US representing 76% of 2023 underlying operating profit
• Resilient performance in our UK businesses given market conditions

Positive momentum on M&A

• £48m spent on growth and margin accretive acquisitions in 2023
• All recent acquisitions are trading in line or ahead of expectations
• Further £11.6m across two acquisitions, 2024 year to date
• Strong M&A pipeline

All underlying measures exclude certain non-underlying items, which are as detailed in note 5 to the Financial Statements and described in the Financial Review. References to an underlying profit measure throughout this announcement are made on this basis. Non-underlying items are presented separately in the Consolidated Income Statement where, in the Directors' judgement, the quantum, nature or volatility of such items gives further information to obtain a proper understanding of the underlying performance of the business.

Underlying measures are deemed alternative performance measures (῾APMs') under the European Securities and Markets Authority guidelines and a reconciliation to the closest IFRS equivalent measure is detailed in note 4 to the financial statements. They are presented on a consistent basis over time to assist in comparison of performance.

02	Stock Code HILS

STRATEGIC REPORT

Revenue			Reported operating profit
£829.8m			£103.8m
(2022: £732.1m)			(2022: £78.5m)
+13%		+32%

Reported operating margin

12.5%

(2022: 10.7%)

+180bps

Reported profit before tax

£93.2m

(2022: £69.3m)

+34%

Basic earnings per share

86.0p

(2022: 66.7p)

+29%

Strong cash generation and enhanced ROIC

• Cash conversion 115% (2022: 51%)
• ROIC 22.0% (2022: 19.2%)
• Covenant leverage at 0.4 times, providing significant capacity for investment in organic and inorganic growth

Final dividend proposed of 28.0p, making a total dividend of 43.0p, up 23%

Well-positioned in infrastructure markets with attractive structural growth drivers. Expect to make further progress in 2024 and beyond

Where we refer to organic constant currency (῾OCC') movements, these exclude the impact of currency translation effects and acquisitions, disposals and closures of subsidiary businesses. In respect of acquisitions, the amounts referred to represent the amounts for the period in the current year that the business was not held in the prior year. In respect of disposals and closures of subsidiary businesses, the amounts referred to represent the amounts for the period in the prior year that the business was not held in the current year. Constant currency amounts are prepared using exchange rates which prevailed in the current year.

Hill & Smith PLC | Annual Report and Accounts 2023

03

OUR GROUP AT A GLANCE

OUR PURPOSE

Creating sustainable infrastructure and safe transport through innovation.

OUR CORE BUSINESS UNITS

ENGINEERED SOLUTIONS

Supplying engineered composite and steel solutions for a wide range of infrastructure markets, including energy generation and distribution, marine, rail and housing.

The division also supplies seismic protection solutions and engineered pipe supports for the water, power and liquid natural gas markets.

Read more on page 25

GALVANIZING SERVICES

Supplying a service that dramatically increases the sustainability and maintenance free life of steel products.

This includes structural steelwork, lighting, bridges, agricultural equipment and other products for the industrial and infrastructure markets.

Read more on page 26

ROADS & SECURITY

Supplying products and services to support road and highway infrastructure including temporary and permanent road safety barriers, renewable energy lighting and power solutions, intelligent traffic solutions, street lighting columns and bridge parapets.

The security portfolio includes hostile vehicle mitigation solutions, high security fencing and automated gate solutions.

Read more on pages 27 to 28

04	Stock Code HILS

STRATEGIC REPORT

GROUP OVERVIEW

By geography

3%

41% REVENUE £829.8m

US

UK

Rest of World

24%

4%

20%

UNDERLYING

OPERATING

56%PROFIT £122.5m

76%

By division

10%

37%

REVENUE £829.8m

44%

32%

UNDERLYING OPERATING PROFIT £122.5m

53%

Engineered Solutions	Galvanizing Services	Roads & Security	Read more on pages 22 to 31

Hill & Smith PLC | Annual Report and Accounts 2023

05

EXECUTIVE CHAIR'S LETTER

DEAR STAKEHOLDER

2023 has seen Hill & Smith deliver a record set of results. This is testament to the effectiveness of our autonomous operating model, the quality of the leadership within our operating companies, and the skill and dedication of our employees, many of whom I have had the opportunity to meet with over the last 12 months.

2023 has seen Hill & Smith deliver a record set of results. This is testament to the effectiveness of our autonomous operating model."

Alan Giddins

Executive Chair

Performance Highlights

On a continuing operations basis the Group had revenue of £829.8m (2022: £732.1m) and underlying operating profit of £122.5m (2022: £97.1m), representing a revenue and underlying operating profit growth of 13% and 26% respectively. Underlying operating margins improved from 13.3% to 14.8%.

These results reflect the strong demand for our products and services, particularly in our Engineered Solutions division, where we saw an excellent performance in our US composite and utility businesses. We also saw further positive growth in our Galvanizing Services division, despite

a more challenging market in the UK. Our Roads & Security division posted a disappointing headline performance. This reflects a strong performance in our recently acquired off-grid solar business, National Signal, and in our core UK roads businesses, offset by certain non-recurring costs, most notably in our US roads business and in our loss making car park solutions business, which we exited during the year.

During 2023 we completed four acquisitions, investing in aggregate £48.4m. Within US composites we acquired Enduro Composites, a Texas based manufacturer of highly engineered composite products, and United Fiberglass, an Ohio based designer, manufacturer and supplier of composite pipe, conduit and drainage systems. Both businesses have been integrated into the Creative Composites Group. We also acquired Korns Galvanizing, which is now part of our US Galvanizing business. Enduro and Korns have contributed 10 months' trading to this year's results, and both are ahead of our original investment case. United Fiberglass was acquired in November 2023 and starts 2024 with a strong order book. We also acquired the equipment, inventory, customer lists, order book and intellectual property of Conn-Fab Sales, a small bolt-on to our US seismic protection solutions business.

Cash generation was strong across the Group at 115% (2022: 51%). As at 31 December 2023 total net debt was

06	Stock Code HILS

Welding bay at Lionweld Kennedy, UK

£108.4m (2022: £119.7m), leaving financing headroom of £247.2m on the Group's borrowing facilities. Return on capital employed during the year was 22.0% (2022: 19.2%).

Board

Following the departure of Paul Simmons in July 2022 the Board ran an extensive CEO search process. While we met a number of interesting candidates, we did not feel that we had met the right candidate to lead Hill & Smith. As a result, in May 2023, the Board asked me to continue in my role of Executive Chair.

In December we announced the appointment of Carol Chesney as a non- executive director. Carol brings extensive PLC board experience through her time as an executive at Halma and as a non- executive at Renishaw. Carol will take over from Mark Reckitt as Audit Committee Chair when Mark stands down from the Board at the Annual General Meeting, having completed eight years as a Board member. I would like to thank Mark for the considerable time he has committed to Hill & Smith, and in particular, for the support, help and constructive challenge he has given me as Chair over the last four years. Mark is a very accomplished non-executive director, and has been a significant contributor in helping evolve the Hill & Smith model during his time on the Board.

In January 2024 we announced the appointment of Hooman Caman Javvi as Chief Operating Officer and Board Member. Hooman joined Hill & Smith in March 2022 as Group President, having previously held senior management positions at ABB and Hitachi Energy. Having worked closely with Hooman over the last 18 months I am very excited about the impact he will be able to have in this new role.

Employees

The Group employs c. 4,400 people around the world. How we look after and help develop our employees is critical to the long-term success of the Group. During the year I attended employee forums in both the UK and US, as well as two apprentice forums in the UK. This confirmed to me the considerable potential that sits within our organisation, as well as giving me the opportunity to receive feedback on where we can as a Group do better in helping support and develop our workforce. The success and growth in the number of apprentices in our UK businesses is something which is a huge credit to the organisation.

In September, we conducted our annual worldwide employee engagement survey. This is a critical feedback mechanism, enabling the Board and the executive team to understand how our employees are feeling, their views on the way the business is run and how the business

STRATEGIC REPORT

is executing on its strategy. Our engagement levels remain close to the benchmark for other industrial companies but did decrease slightly at a Group level, with cost-of-living pressures in the UK being specifically highlighted. The importance of providing employees with regular recognition was also noted and is something that we will be focused on in 2024. Each business has been asked to prepare a clear action plan in order

to address specific issues raised within the engagement survey and these plans are being cascaded throughout each operating company. Progress in delivery against these plans will be reviewed by the Board on a regular basis.

Last year we introduced a Charitable Donation Matching Programme. The programme matches charitable funds raised by our employees on an application basis and was available to employees

in all our operating companies. During the year we have matched donations benefiting causes such as the Disaster Committee, Alzheimer's Society and the Downs Syndrome Association of Tulsa.

Governance

The Board continues to be committed to the highest standards of governance, and stakeholder considerations remain central to the Board's decision-making. Our full Corporate Governance Report, including details of our compliance with the UK Corporate Governance Code, is set out on pages 74 to 83.

To reflect my role as an executive within the business the Board agreed to put in place certain additional governance steps within our processes, in addition to which Tony Quinlan took over from me as Chair of the Nomination Committee. These changes have worked well, and I would like to thank all of my Board colleagues for their considerable support over the last 12 months.

Health & Safety

The Board and senior leadership within the Group are focused on ensuring that being a Hill & Smith employee means that everyone has the right to expect to be safe at work. While we have continued to make progress in lowering our lost time incident rate ('LTIR'), we still have work to do in this area.

During the year we made the decision to restructure the management of health and safety, moving away from having a Group Head of Health & Safety to having two geographic heads, covering the UK (including India and Australia) and the US, with these individuals reporting directly into our Group Presidents. This

Hill & Smith PLC | Annual Report and Accounts 2023

07

structure allows for greater agility in responding to incidents and in providing localised and targeted support to our operating companies.

Strategy

Hill & Smith has a very clear strategy, which was re-confirmed by the Board in June. Our focus is on investing our capital into our highest growth markets and behind our best businesses and management teams. We then use selective M&A to give us access into new customers, technologies and markets. Delivery of this strategy is dependent on excellence in execution and strong financial and risk management

at both a Group and operating company level.

In order to help stakeholders assess our performance, in March 2023 we set out an updated set of medium- term financial targets. These are built around consistent organic growth, clearly targeted M&A, operating margin expansion and strong cash conversion and return on invested capital ('ROIC').

M&A

Our focus is on identifying high quality businesses that complement our strategy and operate in industries where we have existing knowledge. When I was appointed Executive Chair in 2022, I set out to re-invigorate our M&A pipeline and processes, and I am pleased that we have been able to maintain our momentum over the last 12 months. Indeed, we enter 2024 with a strong pipeline of potential targets, an excellent central M&A team based in both the UK and US, and significant financial headroom to fund acquisitions from our balance sheet.

Since the year end we have completed two further acquisitions: Capital Steel, a US supplier of structural steel products and services, principally into the electricity transmission and distribution market, and FM Stainless, a manufacturer of stainless steel pipe supports and fasteners, serving the water and wastewater industry.

Sustainability

Our Sustainability objectives are of critical importance to our ambition to deliver sustainable, profitable growth. We have a Group Sustainability Committee, on which both Hannah Nichols and I sit, and which reports to the Board on a six-monthly basis. During the year we have made significant progress in a number of areas, including having our Science Based Targets initiative ('SBTi') targets submitted and approved. Within our operating companies we have excellent examples of where we have been able to reduce greenhouse gas emissions both through changing our processes, as well as through investment in renewable electricity and the transition away from diesel.

You can read more about our work on sustainability during the year on pages 36 to 55.

Dividend and Annual General Meeting

The Board recognises that dividends play an important role for investors, both current and potential. I am pleased therefore, to confirm

the Board has proposed a final dividend of 28p (2022: 22p) which, if approved, would result in a full year dividend of 43p (2022: 35p), keeping dividend cover of around 2.5 times underlying earnings.

The Annual General Meeting of the Company will be held at

11.00 a.m. on Thursday 23 May 2024 at Cranmore Park Conference, Event & Exhibition Centre, Cranmore Avenue, Shirley, West Midlands, B90 4LF, United Kingdom. The meeting is an ideal forum for raising any questions you may have of your Board, and I hope many of you will take advantage of this opportunity. I very much look forward to meeting you there.

Looking Ahead

2024 is the 200th anniversary of Hill

• Smith. From modest beginnings as a partnership between Edward Hill and his brother-in-law, Henry Smith, the business has evolved and grown to become an international group serving a range of attractive infrastructure end markets. There is much to be proud of within our history.

Looking forward I feel very confident about the Group's ability to deliver strong medium and long term growth and value for our shareholders, while providing excellent career opportunities for our employees. Our entrepreneurial culture, proven business model, strong leadership team and attractive end markets are a very powerful combination.

Alan Giddins

Executive Chair

11 March 2024

"Looking forward I feel very confident about the Group's ability to deliver strong medium and long term growth and value for our shareholders."

08