Earnings Call: H2 2018

Nov 19, 2018

Okay. Good morning, everyone, and, welcome to the diploma results presentation for the year to September 2018. For those of you who may not know me, I'm John Nicholas. I'm chairman of the company. So the agenda for this morning is, is on the screen. I'll start with a little bit of an overview and then, hand over to Nigel for the financial results and the business review sandwiched in between that, we've got, Gustav Rober, who's sitting at the front here, who will talk to you a little bit about some of the acquisitions that we've done. Turning to a bit of an overview, it was a good year. In fact, it's been 10 good years. And you can see on the slide, that we've achieved 13% per annum adjusted EPS growth and dividend growth over the 10 years. And, 29% compounded growth in TSR. So it's been a good period. What's behind that? The strategy, really? I mean, you know, the strategy, I won't repeat it. I know you liked it when Brussel was used to do that, but, it's I can't remember the phrase now, but, compounded EPS growth and, supplemented by, by acquisitions, generating lots of cash, good margins, diversified different sectors, and, and different geographies, which gives us a resilience that, we think is valuable, particularly in, uncertain economic times, So that's what's behind all this. And that generates strong returns for our shareholders. So how has it achieved? It's it's the job of management to deliver, on, on the strategy. And, you know that we've had a bit of a hiccup this year in terms of, CEO succession, and that's why I'm here today and spending more time with the business, Just to sort of tell you where we are at on that, we've refreshed the process, appointed different head hunters to, to help us with that. They've done a long list of candidates, narrowed that to a short list of candidates. I've seen some of them, but not all. So I've got more people to see. And I think we're, we're making some pretty decent progress. I'm happy with where we're at at the moment, but we do still have more work to do to focus in on the right person. And we are very focused on getting the right person, as you might expect. I said I'm spending more time with the business, which is, which is true I am, but, one of the things that, I'm actually very pleased with, is the strength of the wider management team, not just Nigel, but including Nigel, all the, the rest of the senior management have have focused on the job in hand, stepped up to the challenge and helped us to deliver these sort of results. So I'm very pleased with that. We did take the, the opportunity at the end of the year to widen that senior management group. We've appointed, 2 more people, and I can't find Carolyn. Carolyn's here somewhere. Ah, Carolyn's at the back. So Carolyn Dick, who is, looking after financial planning information systems for us. And, Neil is Neil here. Okay. Neil, yes, Danny, who's joining us actually in January, to become group controller. So we've widened the, the management pool. And we're still working on some more of that. We are planning to appoint somebody to, help us with HR and HR and that will happen probably into, early part of next year. So I'm very pleased with, what's happened there. So all of that added together that underpins the group's track record of delivering these sort of results. So for the detail of what's behind it, I'm going to hand over to Nigel. Thank you, John. Wait. So good morning, ladies and gentlemen. As John has just explained, I'll start with an outline of the financial results. Take a break for Gustaf to say a little bit about the acquisitions we've done this year, and then return to review the performance of the businesses during the year. So turning to the results. In 2018, diplomas achieved a 7% increase in reported revenues to 485,100,000 and a 9% increase in adjusted operating profit to $84,900,000 as adjusted margin has moved up 20 bps to 17.5 which is up on last year and up on the half year as well. This largely reflects the operational leverage from stronger revenues, but I'll come back to that again when we look at the different sectors. Underlying revenues also increased by 7% with acquisitions complete in the last 12 months incrementally contributing 3% to revenue growth, net of a small disposal. And this was broadly offset by currency headwinds from a slightly stronger pound, that reduced revenues by 3%. With the group being in a net cash position most of the year, there was no real interest charge, apart from a notional pension cost, and therefore, adjusted PBT was also up 9% at $84,800,000. Free cash flow was robust at 60,500,000, with the sale of a noncore business contributing $4,000,000 to that free cash flow. Cash flow generated in the second half of the year was very strong as the business focused on bringing working capital back to more normal levels. We spent 20,400,000 on acquisitions, similar to last year, mostly towards the end of the end of the second half and a further 7,000,000 just after the year end, in early October. As I said in May, the acquisition environment has remained challenging for most of this year and last year, and I'll come back to that a little later in this presentation. We ended the year with net cash of 36,000,000 and of course, substantial committed bank facilities of 60,000,000 are also available to us to help with acquisitions that hopefully come through this year. Adjusted EPS was up 13% compared with just 9% in PBT, and that really reflects the benefit of the reduction in the U. S. Federal income tax announced earlier in the year but there was also a small impact from buying outs and minority shareholder in March. So finally, we've increased the total dividend again, this time by 11% 25.5 p, reflecting the strong financial position and confidence in the group's prospects. I've talked Matthew Looking at, profit before tax and revenue, as I said, up 7%. So if we now look at the bridge there, The impact from stronger sterling on translation was 13,100,000 or 3 percent with sterling gradually getting weaker in the second half of this year. Acquisition, net of the small disposal in the U S, contributed 14,800,000 So that's 5,000,000 from the acquisitions completed this year. That's cable, FS cables and coast and 10,500,000 incrementally from last year, which is mainly abacus. And EPCO as well. The incremental loss of revenue from the disposal was was negligible. So that provides underlying revenue growth of 7% which, which, comprises 10% in sales, 5% underlying revenue growth in controls, and 5% in life sciences, and we'll come back to that a little later. Turning back to profit before tax. Adjusted operating profit, as I said, up 9% reflecting the margin up 20 percent, 20 bps to 17.5. As I explained, this was driven by operational leverage, with the gross margins remaining unchanged on last year, but slightly larger than the first half as price increases kicked in in the second half of the year. We had just a $100,000 of interest cost, and therefore, we arrive at adjusted profit before tax of 84,800,000 up 9% on last year. Now below this line, we have our usual 2 charges. So that's the acquisition related charges of 9.6 principally being the amortization of intangible assets and then a charge of 400,000 to fair value, the put options, for the minority shareholders in Kentech And M Sales. But this year, we've identified as a separate charge against profit, the incremental and one off costs arising directly from the transition of the chief executive officer from Bruce Thompson to Richard Ingram. This charge is 2,100,000 and includes the settlement with Richard Ingram following his departure from the company at the end of August. At 30 September, 800,000 of that was paid in cash, and 1,300,000 will be paid over the next, few few months, few weeks. An analysis of these costs is set out in note 15th the announcement, and the terms of the settlement are set out in the section 430 statement on the company's website. But I do wish to make it clear that all the employment costs relating to Bruce Thompson have been charged in arriving at adjusted PBT. So the exceptional 2.1 below the line comprise only the costs relating to Richard Income and that transition of the CEO. So with these items deducted below the line, we arrive at statutory profit also up 9% at 72,700,000. Oops. This should be going all the way. So taxation, the group's effective tax rate was reduced to 23.9 this year, a reduction of 2.60 bps This is in line with what we, reported back in January when the, US rates were, were announced, as being reduced. The driver to this is clearly the the the reduction, the corporate tax rate in the US from 35% to 21% effective from 1 January 2018. With around 26% of our revenues being US driven, we've had a real benefit coming through from that. And the effective tax rate also drives that larger increase of 13% in adjusted and statutory EPS. Turning to the free cash flow. Operating cash flow was 6% ahead of last year at 84,300,000 reflecting a very strong inflow in the second half of the year as business focused on bringing their working capital back into line with their trading activity. You will see that the increased investment in working capital was just $5,100,000. That compares with $4,000,000 last year and around 11,000,000 that we, reported at the half year in March. As I explained back in May, it took time to build inventories to the level required to meet current demand and avoid stock outs and disappointed customers. So we had a large outflow at March, which is a business, as the businesses rebuild their inventories. In the second half of the year, inventories were at levels which support the current trading environment, and our working capital metric has returned for around 15%. Which is similar to that, which we had at 30 September last year. Moving down below operating cash flow, Tax payments of 19,000,000 was slightly lower than last year, again, reflecting the benefit from the cut in the U. S. Rate is a cash tax rate of 23 percent against 24% last year. Capital expenditure this year doubled to 6,600,000, up 3,300,000 against an unusually low number last year, Much of the expenditure this year has been on refurbishing or expanding office and warehouse facilities and on our IT infrastructure. To support the increased trading activity, which was seen over the last 2 years. And you may recall, back in 2012, we had a similar peak in CapEx as we went through a similar exercise. For example, in Life Sciences, we've spent 600,000 on refurbishing the facilities in Kitchener and in the Malcolm facility, and also relocating a 1 seabisc to a a new, property, in in Liverpool. The seals business invested 1,100,000 on a new ERP system, the largest of which was in North America, in the industrial businesses, which went live in October shortly after the year end. And in control, 700,000 was spent on expanding the office and warehouse at summer's business in Stuttgart. That's the controls business. This should be completed by March next year for a cost of around 1,600,000. But apart from this infrastructure spend, the health care business is also invested just over 2,000,000 on new field equipment to be placed in hospitals and diagnostic laboratories, reflecting new product introductions during this year. So after spending $2,200,000 to fund the company's long term incentive scheme, we ended the year with free cash flow of 60,500,000, 9 percent up on last year. And of this free cash flow, we spent $20,400,000 on acquisitions, as I said, about the same as last year and around $27,000,000 on funding shareholder dividends. So that leaves us with 36,000,000 at the end of the year with an additional 60,000,000 of committed facilities available as well. And then just looking at the acquisition environment and those completed this year, I won't say much here as Gustaf's going to say a few more words in a minute. But we spent $1,200,000 acquiring Coast in October, a small U. S. Fasteners business, and $16,900,000 on acquiring FS cables in August this year. And a further 2,300,000 was spent on buying out the min the 10% minority interest held in TPD, the Irish healthcare business and some small amounts of deferred consideration. And as I said earlier, just after the year end, we spent 7,000,000 on by GraemeTech, a small controls business based in France. As I said at the beginning, the acquisition environment has remained challenging to us so much of this year as it was last year. And I would remind you that our target markets are generally successful private sector businesses who owners are looking to retire or take risk capital off the table. Like us, these owners have benefited from the strong macro backdrop over these past 2 years, and they have been reluctant to miss the opportunity to take advantage of that strength. But equally, they don't want to miss miss the opportunity to exit their businesses at a good price. So the fact that we're seeing some uncertainty now over the direction and strength of global markets gives me confidence that some of these vendors are going to be revisiting their exit plan soon. We've seen that in the acquisitions we completed towards the second half of this year, And we've been alerted by some vendors of other, act or other exit, processes that are about to kick off. So we have a good healthy pipeline of businesses that we've been tracking over a number of years, and we're confident that over the next 12 months, we should be able to bring Turning briefly to the balance sheet, trading capital employed of $282,800,000, up on the up on last year, the return on average trading capital employed. So remember, that's our invested capital measure with goodwill intangibles added back. 24.5%, well above our threshold at 20% and slightly ahead of last year. Below that, the, closed defined benefit pension scheme in the UK and Switzerland have a net deficit of 10,500,000, slightly ahead of last year, and that's mainly because We took the decision to buy in all the pensioner liabilities just before the year end, and the premium paid for those liabilities have pushed that light, pushed that deficit up slightly. The UK deficit is being funded at 500,000 a year in cash by the employer, a little bit up on last year's 400,000. And acquisition liabilities, of 5,600,000 They now comprise the put options held by the minorities in Kentech And MCLs, both at 10% and both with their options crystallizing during the next 6 months. So at 30 September, we have closing total shareholder's equity of 291,000,000. So and now before I review the operational results of each sector, I'm gonna hand over to Gustav Rober who's responsible for the controls businesses to provide a little strategic background to the acquisitions we've completed this year. Gustaf will start with a reminder of the 128,000,000 that we've spent on acquisitions over the past 5 years. Thank you, Nigel. At diploma, we use acquisitions to accelerate growth. And over the last 5 years, we've spent approximately 1,000,000 on acquiring companies to join the group. And let me tell you about the last three, acquisitions. This is an excellent example of a diploma acquisition. Coast Fabric Acacia started as a distributor of aerospace grade fasteners into the US motorsport industry. This is exactly the same way that our Clarington business in the UK started supplying the UK motorsport market. This business, which was acquired in October, is being integrated or has been integrated into Clariant And Specialty Fasteners, which gives us a global makes us a global player in that faster market into the motorsport side. But more crucially, this gives us a platform within the U. S. To target the aircraft interiors market Clarington over the last 3 to 5 years has been very successful in targeting the aircraft seating manufacturers within the UK, Europe and in within Asia, and also the subcontractors. And the intention is to use this business to target the UK, the US market, using the technical skills of coast and the local presence. What I really loved about this business when we first saw it was what they've done in terms of developing their own branded product. So they've spent the time to go out to China, to visit the factories via cable factories, and identify the right product for the UK market. And they've also worked with those factories on actually ensuring that the quality is right for our customer base. And therefore, they've been able to bring that product back, sell it under the FS Cable's brand and achieve those attractive margins that we look for. The other part that excited us about this business was how it complements cable craft. We acquired cable craft 2 years ago, and cable craft supplies cable accessories. So wherever you have wire, you will need cable accessories to identify that product to connect that product or to protect that product. And therefore, these two businesses can work closer together targeting each other's customer bases and get synergistic benefits going forward. And then our most recent acquisition was GraemeTech. We acquired this in October last year. And this business is based in Paris, and it's going to be integrated into the IS group. The IS group strategy is to become a genuine pan European distributor of cable harnessing components and to move away from our strengths or to develop from our strengths in aerospace, defense, motorsport and historic strengths in the UK and Germany to more broadly across Europe and also into that more that industrial customer base. And this business does both of those things. So it's basically in Paris and we can use that location to target the French market and specifically to target the aerospace and defense part of the French market. Where we have the product from our existing IS group in the UK and Germany, but we haven't got the location in France, and this gives us that presence to do that. But also, we can take the GraemeTech product range, which is an own branded product range, but at a different price point, so that it allows us to target the more industrial customer base. We can use their product targeting the UK, the German market, and also more broadly across the across Europe. And, I suppose finally, I think these are excellent examples of diploma acquisitions. They they give us something more than just adding revenue. They give us synergistic benefits and they allow us to go into new territories and to broaden our product portfolio. Thank you, Gustav. Okay. So we'll we'll finish up with a business review. Just reminding you The good balanced portfolio of businesses, providing resilience against a weaker macro with seals now the largest at 43% controls in life sciences following just under 30%. And again, by geography, well diversified, 40% North America, European, and 48%. We'll see the UK pick up a bit this year as FS cables comes in. And 12% overseas, mainly in Australia. So starting with Life Sciences, this is 85% of these revenues are contributed from the health care business as and 15% from the environmental businesses. Looking at their results, the Life Sciences sector reported revenues up 7% 7,000,000 after adjusting for the acquisition of Abacus, which is the Australian Diagnostic business purchased last year in, in April, which increased sector revenues 5 5% and for a currency headwind of 3% underlying revenues in life sciences increased by 5%. The increase was largely driven by good performance in the health care businesses, where revenues benefited from the successful introduction and rebranding of a new premium product in the Canadian Surgical business and in a strong growth in revenues, on a like for like basis from Abacus DX, which, if you recall, was integrated with our existing Diagnostic Solutions business earlier in the first half of the year. Environmental revenues remained unchanged in constant currency terms. Adjusted operating profit increased by 3 percent to 23,900,000, but operating margins fell 80 bps to 17.7. This reduction reflected investment in cost to support the introduction and penetration into new markets of the surgical products in Canada, and weaker margins in the Australian businesses. In Australia, the margins were impacted in part by dilution from a full year contribution from the lower margin Abacus business, including one off integration costs, and in part from the loss of a supplier, in the Australian Surgical business, which also contributed to weaker margins. In the environmental business, negative leverage from unchanged revenues also led to a small reduction in sector operating margins. Now looking a little bit more at the developments in this sector during the year. So beginning with the healthcare business, which, account for 80 percent of revenues in the life sciences sector. Revenue growth slowed in the second half against a strong prior year comparative. And that reflected some delays in capital, which are slipped into FY 2019. Diploma Healthcare Businesses operating Canada and Australia achieved underlying revenue growth of 8%. This was against a background of continuing budget pressures caused by the ongoing restructuring and amalgamation of the group procurement offices, particularly in Canada. These activities both lengthen the sales process by introducing strict requirements in large frame contracts and introduce more competitiveness into the procurement process by opening up tenders to a much wider audience, including in particular the very large industry players. In Canadian Healthcare, underlying revenues increased by 8% with steady gross in revenues from consumables in the client, clinical diagnostic business, but lower capital sales following a catch up last year. The surgical endoscopy business benefited from the introduction of this premium range of of rigid and flexible endoscopes and the supply of specialized instruments used in laproscribing are the minimal invasive surgical procedures, also contributed to this growth. In Australia, revenues grew strongly in the bind Abacus DX Business. Abacus is now a large, broader based clinical diagnostic business. It's focused on life science and patient simulation business supplying both public and private laboratories and to research establishments across Australia. However, in the surgical business, revenues reduced as it struggled struggled to secure sales of new products to replace an existing supplier acquired by a large industry player. The electro surgery and smoke evacuation business in both Canada and Australia In the core, surgical business have continued to be under pressure from the large medical device companies entering these big budget opportunities and increasingly commoditizing the sectors. However, we continue to introduce new replacement products and in Canada, won a large 5 year contract shortly after the year end, albeit at lower average selling price. In Ireland, the TPDs TPD business reported broadly flat revenues in a year when we had to manage a transition of a number of suppliers who decided to move to a direct successful in forging strategic partnerships with new suppliers, and the business is broadening its service to sell Electro Surgical And Smoke evacuation products similar to those that we supply in Canada and Australia. Finally, the environmental business, which represents 15% of revenues, sector revenues, Reported revenues unchanged. With increasing regulations in Germany, driving 7% revenue growth in the German business, but significant delays in order placement for the continuous emission monitoring systems that we set in the UK gave rise to an 8% reduction in revenues in this business. However, both businesses continued to report a strong increase in service revenues as these continue to grow on the back of new instrument installations. Turning to seals, Just to remind you, we've got 3 business clusters here, aftermarket, industrial and OEM in North America. Which account for 60 percent of sector revenues, and then we've got the international sales business, which account for 40 percent of revenues. The sales sector, sales sector reported revenues up 7 percent to $208,000,000 after adjusting for the small acquisitions of Edco and last year, which increased revenues by 2%, the small disposable bulldog this year in June and for 5% currency headwind, underlying revenues increased by 10%. The result reflected the strength of North American markets throughout the year and a strong boost to international revenues in the second half of the year. Adjusted operating profit increased by 13% to 36,000,000 with margins up 100 bps to 17.3 percent. The operating in the leverage in these sales businesses particularly in the aftermarket in the US contributed to the improvement in the bottom line operating margins. However, the benefit we would have expected to see was held back somewhat by a small reduction in gross margins caused by a lag in the first half of the year from passing on supplier increases and from increased freight costs from expediting inventories into customers to avoid disappointment. However, by the second half of the year, most businesses had managed to secure good price increases. Now again, looking at the developments in this sector, beginning with North America, which account for 30 the North American sales business, which accounts for 31% of sector revenues, increased underlying revenues by 11%, driven by trading conditions in both the U. S. And Canadian markets. The aftermarket reported a 9% in underlying revenues, With heavy mobile equipment levels growing throughout the year, steel manufacturers struggle to keep up with demand and repairs and distributors turned to Hercules for their superior service and product availability. Canadian revenues, which increased by 7% also benefited from increased residential housing starts and new mining projects, increased demand for non residential construction. The HKX attachment business, attachment kit business, which is generally more cyclical, also grew revenues by 13% benefiting from both tight availability of OEM excavator equipment in the U S. And strong demand in Canada for Tier 3 machines ahead of the mandate for Tier 4 that comes into effect on the 1st January 2019. The aftermarket businesses continue to add new products to their portfolio of seal kits, such as aerial lifts and logging, and to develop new market opportunities, including seal kitting services for OEM industrial plants. Management has also embarked on a major new project to set up a second warehouse facility to provide capacity to meet the growing demand for kits. As well as to gain greater access to expand new territories in the US. This is likely to be a 10000000 dollar project, the largest project we will have done in diploma, and it'll be a key focus during 2019 with a targeted go live date in 2020. And obviously we'll say more about that as the year progresses. It's a big project for us. The F the Hercules Industrial Area M Business North America also reported strong underlying growth, up 13% in a very robust industrial market. This really reflected border and deeper penetration into some large key accounts across a range of specialized industrial applications, in industries, including water, medical, oil and gas and fluid handling. These businesses now comprise a cluster of individual businesses which we brought together towards the end of last year and are now led by a single senior management team directing the key functions of sales, supply chain, technical and finance, but still maintaining the distinct identity of each business. And a key and necessary part of this exercise was to implement a new ERP system to replace the disparate legacy ISIS disparate and legacy IT systems in the businesses This went live shortly after the year margin segments and products. We turn to the international businesses, which account for 40% of sector revenues, Here, underlying revenues increased by 7% on a constant currency basis and adjusting for the acquisition of AECO last year, with strong growth in the second half of the year. FPE and MCLs with their principal operations in the UK and Skandinavia developed underlying growth in revenue of 6%. In the UK, the F. P. Sales business delivered modest underlying growth with good growth in its UK aftermarket sales business being held back by weaker international sales, partly driven by the absence of a large export order last year. MCLs continued to deliver strong growth in revenues driven by its strong customer relationships, which have provided a number of major new projects this year. A recovery in the oil and gas market also benefited their UK revenues with customers expanding their activities. And Edco also benefited from this recovery and delivered good growth on a like for like basis in its 1st year with the group. HUBO reported a 13% increase in revenues, benefiting from strong improvement industrial production in Switzerland, driven by increased exports and supported by the weaker Swiss franc. A large new distribution supply contract was won by Cuba during the year, and this will provide good opportunity for growth in the years ahead. Kentech, Finland, and Russia, Revenues increased marginally 1 by 1% with the Russian revenues helped by strong oil prices and despite the additional European and U. S. Sanctions, which increasingly impacts this business. Finnish revenues increased to the business continued its focus on industrial OEMs. And then finally, in WCIS, revenues were impacted by cost reduction initiatives I think we mentioned this at the half year in the major nickel mining customer that we have in New Caledonia. However, in Australia, our new management team has made good progress in growing revenues and have gained new contracts from, power generation sector and from the increased mining activity. The international sales customer businesses have strengthened management during the year and are collaborating increasingly on developed on developing increased e commerce functionality. In addition to major ERP implementations, a plan for 2019, which will improve operational efficiency and bring these businesses closer together. Turning to the control sector. And just to remind you, this is interconnect, especially fasteners and fluid controls. Revenues in Control Sector Business increased by 9% to 142,400,000 Again, after adjusting for the acquisitions of Coast and FS cables, which added 4% and with no real currency impact underlying revenues increased by 5%. The interconnect and Claraden, especially fastener business is reporting good underlying growth, but this was partly offset by reduced revenues in the fluid controls business. Adjusted operating profit increased by 9% to 25,000,000 with margins with margins remaining unchanged from last year at 17.6%. Gross margins improved, reflecting a stronger mix in Clarington, pricing initiatives in cable craft, and a pullback from lower margin business in fluid controls. These all more than offset the impact of strategic pricing used by the interconnect business IS group to penetrate new customers in the broader European region. However, the improved gross margins was offset by investment in sales resources in Clarity to drive growth in the US, and from investment in cable craft to enhance their e commerce functionality and refresh their ground offering. Again, looking at the developments in this business, The interconnect business, which accounts for 59 percent of sector revenues, increased underlying revenues by 7% reflecting good contributions from IS group and CableGraft that held back by a large decrease in revenues from Philcon, reflecting the absence of a major project delivered last year. The IS group with its principal locations in the UK and Germany delivered strong growth in its core markets of defense aerospace, motorsport, and industrial. In the UK, business revenues increased by 18%, which was boosted by broadening its customer base by targeting cable harness hazards across the wider European region as well as supplying the traditional network of European sub distributors. In the German business, revenues increased by 12% on last year, again, with strong performances in aerospace, defense and industrial markets, supported by strong German export markets. The German business was also successful at the end of the year in extending a distribution contract to a much larger region from Germany, which will provide good growth in future years. Cablecraft delivered 5% increase in revenues from its continuing to target new and new end user customers, including electrical panel, panel builders and industrial OEMs. The acquisition of FS Cables in August this year, which Gustaf referred to earlier, will provide opportunities to accelerate growth by developing cross selling opportunities between the two businesses. And then in Clarity And Specialty Fasteners, which account for 21 percent of sector revenues, underlying revenues increased by 8% with good increased demand in the buoyant Civil Aerospace Sector is with Clarington's automatic inventory replenishment system known as Clarington Air has continued to broaden its customer base, of major aircraft seating in cabin manufacturers across Europe and Intuasion. Motorsport revenues were held back by the absence of major rule changes in Formula 1 against a very strong prior year comparative. And as Gustaf explained earlier, the small coast business acquired a knot October 2017, made a good contribution this year with particular success selling into the space technology sector. And finally, last but not least, fluid controls, which accounts for 20% of revenues, reported a decrease of 4%. This was largely because the absence of a large project delivered in Abby Chart last year, but also because of Hawkeye's decision to pull back from highly competitive pricing, low margin business in the air conditioning business. This apart, Abby Chart achieved good growth, by focusing on, on its value added services, such as refurbishment, kitting, and assemblies. So that, takes us through the operating, sectors. And then just looking briefly at outlook and prospects, And clearly, this year, we've delivered another strong result, double digit earnings growth. As John said at the beginning, the group's got a proven business model, a broad geographic spread of businesses with a robust balance sheet, and consistently strong cash flow. The performance in 2018 provides confidence in the group's prospects from a combination of steady GDP plus growth and a proven value enhancing acquisition program. So despite the global macroeconomic uncertainty, the board remains confident that the group will continue to make further progress in the coming year. Thank you. That completes the formal presentation. And John and I and Gustaf will be pleased to take questions now There's a microphone, I think, going around, and, we'd like you just to announce your name before your question. This morning. It's Henry Carver from Peel Hunt. Just one on, sort of capital allocation going forward. Obviously, free cash flow is getting higher. Some years you spend more, some years you spend less, but what sort of scenario, does the board think it might consider giving cash back in whatever specialty perhaps increasing the dividend. Just some thoughts around that would be useful, please. Sure. Well, I'll start. We would like to find acquisitions that we can reinvest the money in and continue the momentum of of growth. That's our first, target. We haven't got to the stage yet where, where we think that's not possible, sir. Yes. I think, I mean, we're going 36,000,000 cash at the moment. And, you know, if we still haven't made acquisitions this time last year, then that's a valid challenge. I think the fact that we made acquisitions in the second half of the year towards the end of that year, and as I said earlier, I feel, you know, as I've said before, there is a cyclical change. I don't know, there is cyclicality in acquisitions. We've seen it in 'eighteen. We've seen it in 'thirteen. And I think we're probably coming up to that period now. So, you know, I'm quietly confident that 'nineteen will bring more opportunities forward. So it's the cash neutral long term. Well, as you know, we've always, we haven't tried to be cash neutral, but we've ended up there. I mean, we're, we're very comfortable going into debt. And as I've said many times, I'm you go up to one times EBITDA, which would give us at least 100,000,000 debt if we wanted to. Beyond that, we'd look at how we were financing things. But I think that gives us a lot of firepower. And we want to spend, you know, we've done 25,000,000 over the last 5 years. I think as Bruce said before, we want to do that 30,000,000 dollars, $35,000,000, we realize that we need to up the pace of spend. And, and, you know, we're focused on that this year. I should add that, actually, towards the end of the year, we did the board looked at the you again, just as a refresh, do we think it's still the right strategy? It's been very successful, but has it still got legs? And our conclusion was, yes, we still think it's got legs and, it can still, take us forward and create more value. James Barrow from Barclays. Just on the M and A front, I guess shortly after a period of very strong trading that stop people wanting to sell, perhaps they're now wanting to sell, but somewhat unrealistic multiples. Can you just talk about pricing expectations in these deals that are starting to come across your desk? Yeah. As you know, we're we're buying family owned business in that private sector, and we've always paid round about a multiple, EBITA multiple of round about 5, 5 a half up to 8, 8 a half times. And that's we've seen to be a pretty acceptable multiple at different times of the cycle. Now clearly, you know, people are coming forward maybe with peak earnings, but they're not necessarily looking for stronger multiples. But we do have to be conscious very much that they may be at peak earnings. And that's where we build in the structures of performance payments and what have you to try and guard against paying over the top. I think in the US, we are seeing multiple stronger than we see in the UK. That's for sure. So something we might feel as acceptable here, say, 7 to 8 times in the US, that's gonna be 9 class, I think. So, I think we have to face the fact that U. S. Acquisitions are going to be more expensive. But we've got more opportunity over there maybe to realize synergies and get more value. And then just in terms of sector allocation, the comments around building a sort of broader pan European industrial business. Is that where we're more likely to activity when you look across the three sectors? That, that is, I mean, we're not completely opportunistic, but, we haven't got any favored sector. It depends where those opportunities arise. Personally, I would, you know, I would like to think we can do some acquisitions in the US. We haven't actually made an acquisition in the US other than that small business last year. We haven't made a sizable acquisition for 5 or 6 years now. So I think, you know, we ought to be looking in that market, which is a good market Jurassic provides good earnings growth and we ought to be looking for opportunities there. But also as the controls business develops, we've seen there, that we're broadening that market in Europe. So there are opportunities there as well. Good morning. It's Julian Kater from Numis. Pleasure, can you perhaps talk about, what sort of impact the U. S. Tariffs have had in the behavior of your customers and how you think that might change as we go into the new that has on the decisions you need to make about potential inventory build, given stock availability, etcetera? Well, I mean, where we there's been, I think there's 3, but there's been 2 particular tariff increases. There's the July one that came in, and that was really about staying at steel or about steel. It didn't impact us that much. It had a small impact in our industrial area in business in the U S, where we import, some, some, customized parts, for our industrial businesses, was probably in the region, in terms of, the impact, I think it was about half a $1,000,000 something. So it wasn't significant, and I'll come back to what we're doing with it. Then we had the second one in August which was another 10%, but with the threat to go up to 25%. And that was much broader. That went into a lot of our seals. And again, we we procure quite a lot of seals from from China and, and elsewhere in the Far East, particularly in the industrial business. And that will impact us more, that 10%. I mean, that will have an impact of, in the region of of $2,000,000 or $3,000,000 in terms of additional costs that we have to deal with. And if it goes up to 25% in January, that will become, that will become, you know, a reasonably large figure for that industrial OEM business. And I believe finally, there has been another I'm not sure the detail of it, but recently there was another, he was extending the tariffs again. Trump's extending them again, but I'm not sure exactly how much, and that's still a little unclear. Now in terms of what we've been doing with it, we've been passing those costs on with with almost an agreement amongst all our customers that this is a single line item, stick it in on the invoice as such, and it's just going through the system. However, a number of larger customers are saying, well, that's fine for the moment, but if this goes on much past December, then we're gonna want you to come with with different sources of supply. So go off and find other places. We don't want to carry this tariff cost if we can help it. And also, some customers are now asking us to embed the tariff cost into product cost. Which will be bad news because that will just do freight prices and we'll lose sight of what the tariff cost is. So it's not a I realize it's not a a particularly clear answer at the moment, but we're in this period of people are talking jostling around as to how to treat tariff increases. I think, as I said, if we see these move into the into 2019 and they increase to 25%, I think then the market's going to be, a little bit more disrupted by that, and we'll have to see how we react. We are very sure that we're passing on these costs And we've made that clear to our customers, and our customers understand that and will react accordingly. But at the same time, they also want us to make good effort to find alternative sources of supply. No more questions. Okay? Thank you very much for coming.