Good morning, everyone, 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 the Chairman of the company. The agenda for this morning is on the screen. I'll start with a little bit of an overview then hand over to Nigel for the financial results and the business review. Sandwiched in between that, we've got Gustaf Roba, 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. You can see on the slide that we've achieved 13% per annum adjusted EPS growth and dividend growth over the 10 years, 29% compounded growth in TSR.
It's been a good period. What's behind that? The strategy, really. You know the strategy. I won't repeat it. I know you liked it when Bruce always used to do that, I can't remember the phrase now, compounded EPS growth and supplemented by acquisitions, generating lots of cash, good margins, diversified different sectors and different geographies, which gives us a resilience that we think is valuable, particularly in uncertain economic times. That's what's behind all this, and that generates strong returns for our shareholders. How is it achieved? It's the job of management to deliver on the strategy. 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 headhunters 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. I've got more people to see. I think we're making some pretty decent progress. I'm happy with where we're at at the moment. 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 was spending more time with the business, which is true. I am. 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 rest of the senior management have focused on the job in hand and stepped up to the challenge and helped us to deliver these sort of results. I'm very pleased with that. We did take the opportunity at the end of the year to widen that senior management group. We've appointed two more people. I can't find Carolyn. Carolyn's here somewhere. Carolyn's at the back. Carolyn Dick, who is looking after financial planning and information systems for us. Neil, is Neil here?
No.
Okay. Neil Yazdani, who's joining us actually in January to become group controller. We've widened the management pool. We're still working on some more of that. We are planning to appoint somebody to help us with HR, an HR director, and that will happen probably into early part of next year. I'm very pleased with what's happened there. All of that added together, that underpins the group's track record of delivering these sort of results. For the detail of what's behind it, I'm going to hand over to Nigel.
Thank you, John. Thanks. Oh, wait. 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. Turning to the results. In 2018, Diploma has achieved a 7% increase in reported revenues to GBP 485.1 million and a 9% increase in adjusted operating profit to GBP 84.9 million, as adjusted margin has moved up 20 bits 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, I'll come back to that again when we look at the different sectors.
Underlying revenues also increased by 7% with acquisitions completed 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 GBP 84.8 million. Free cash flow was robust at GBP 60.5 million, with the sale of a non-core business contributing GBP 4 million 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 GBP 20.4 million on acquisitions similar to last year, mostly towards the end of the second half. A further GBP 7 million 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, I'll come back to that a little later in this presentation. We ended the year with net cash of GBP 36 million. Of course, substantial committed bank facilities of GBP 60 million 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. That really reflects the benefit of the reduction in the U.S. federal income tax announced earlier in the year. There was also a small impact from buying out some minority shareholder in March.
Finally, we've increased the total dividend again, this time by 11% to GBP 0.255, reflecting the strong financial position and confidence in the group's prospects. I've talked that through. Looking at PBT and revenue, as I said, up 7%. If we now look at the bridge there. The impact from stronger sterling on translation was GBP 13.1 million or 3%, with sterling gradually getting weaker in the second half of this year. Acquisition, net of the small disposal in the U.S., contributed GBP 14.8 million. That's GBP 5 million from the acquisitions completed this year. That's FS Cables and Coast, and GBP 10.5 million incrementally from last year was mainly Abacus and EDCO as well. The incremental loss of revenue from the disposal was negligible.
That provides underlying revenue growth of 7%, which comprises 10% in Seals, 5% underlying revenue growth in Controls, and 5% in Life Sciences, and we'll come back to that a little later. Turning back to PBT. Adjusted operating profit, as I said, up 9%, reflecting the margin up 20 basis points to 17.5%. As 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 GBP 100,000 of interest cost, and therefore we arrive at adjusted PBT of GBP 84.8 million, up 9% on last year. Below this line, we have our usual two charges.
That's the acquisition related charges of GBP 9.6 million, principally being the amortization of intangible assets, and then a charge of GBP 400,000 to fair value the put options for the minority shareholders in Kentek and M Seals. 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 GBP 2.1 million and includes the settlement with Richard Ingram following his departure from the company at the end of August. At 30 September, GBP 800,000 of that was paid in cash and GBP 1.3 million will be paid over the next few weeks. An analysis of these costs is set out in Note 15 to the announcement, and the terms of the settlement are set out in the Section 430 statement on the company's website.
I do wish to make it clear that all the employment costs relating to Bruce Thompson have been charged in arriving at adjusted PBT. The exceptional GBP 2.1 million below the line comprise only of the cost relating to Richard Ingram and that transition of the CEO. With these items deducted below the line, we arrive at statutory profit, also up 9% at GBP 72.7 million. Taxation. The group's effective tax rate reduced to 23.9% this year, a reduction of 260 basis points. This is in line with what we reported back in January when the U.S. rates were announced as being reduced. The driver to this is clearly the reduction in the corporate tax rate in the U.S. from 35% to 21%, effective from 1 January 2018. With around 26% of our revenues being U.S. driven, we've had a real benefit coming through from that.
This reduction in 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 GBP 84.3 million, 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 GBP 5.1 million. That compares with GBP 4 million last year and around GBP 11 million 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. We had a large outflow at March as the businesses rebuilt their inventories.
In the second half of the year, inventories were at levels which support the current trading environment. 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 GBP 19 million were slightly lower than last year, again, reflecting the benefit from the cut in the U.S. rate. This is a cash tax rate of 23% against 24% last year. Capital expenditure this year doubled to GBP 6.6 million, up GBP 3.3 million 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 IT infrastructure to support the increased trading activity which we've seen over the last two years.
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 GBP 600,000 on refurbishing the facilities in Kitchener and in the Markham facility. Also relocating A1 Seals to a new property in Liverpool. The Seals business invested GBP 1.1 million 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. In Controls, GBP 700,000 was spent on expanding the office and warehouse at Sommer's business near Stuttgart. That's the Controls business. This should be completed by March next year for a cost of around GBP 1.6 million.
Apart from this infrastructure spend, the healthcare business has also invested just over GBP 2 million on new field equipment to be placed in hospitals and diagnostic laboratories, reflecting new product introductions during this year. After spending GBP 2.2 million to fund the company's long-term incentive scheme, we ended the year with free cash flow of GBP 60.5 million, 9% up from last year. Of this free cash flow, we spent GBP 20.4 million on acquisitions, as I said, about the same as last year, and around GBP 27 million on funding shareholder dividends. That leaves us with GBP 36 million at the end of the year, with an additional GBP 60 million of committed facilities available as well. 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.
We spent GBP 1.2 million acquiring Coast in October, a small U.S. fasteners business, and GBP 16.9 million on acquiring FS Cables in August this year. A further GBP 2.3 million was spent on buying out the 10% minority interest held in TPD, the Irish healthcare business, and some small amounts of deferred consideration. As I said earlier, just after the year-end, we spent GBP 7 million on buying Gremtek, a small Controls business based in France. As I said at the beginning, the acquisition environment has remained challenging to us for much of this year as it was last year. 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 two years, and they have been reluctant to miss the opportunity to take advantage of that strength. Equally, they don't want to miss the opportunity to exit their businesses at a good price. 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 exit processes that are about to kick off.
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 some of these to completion. Turning briefly to the balance sheet, trading capital employed of GBP 282.8 million up on last year. The return on average trading capital employed, so remember that's our invested capital measure with goodwill intangibles all added back, was 24.5%, well above our threshold of 20% and slightly ahead of last year. Below that, the closed defined benefit pension scheme in the U.K. and Switzerland have a net deficit of GBP 10.5 million. Slightly ahead of last year, 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 deficit up slightly.
The U.K. deficit is being funded at half a million a year in cash by the employer, a little bit up on last year's GBP 400,000. Acquisition liabilities of GBP 5.6 million. They now comprise the put options held by the minorities in Kentek and M Seals, both at 10% and both with their options crystallizing during the next six months. At 30 September, we have closing total shareholders equity of GBP 291 million. Now before I review the operational results of each sector, I'm going to hand over to Gustaf Roba, 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 GBP 128 million that we spent on acquisitions over the past five years.
Thank you, Nigel. At Diploma, we use acquisitions to accelerate growth. Over the last 5 years, we've spent approximately GBP 125 million on acquiring companies to join the group. Let me tell you about the last 3 acquisitions. This is an excellent example of a Diploma acquisition. Coast Fabrication started as a distributor of aerospace grade fasteners into the U.S. motorsport industry. This is exactly the same way that our Carrington business in the U.K. started supplying the U.K. motorsport market. This business, which was acquired in October, is being integrated or has been integrated into Clarendon Specialty Fasteners, which makes us a global player in that fastener market into the motorsport side. More crucially, this gives us a platform within the U.S. to target the aircraft interiors market.
Carrington, over the last 3 to 5 years, has been very successful in targeting the aircraft seating manufacturers within the U.K., Europe, and within Asia, and also their subcontractors. The intention is to use this business to target the U.S. 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'd done in terms of developing their own branded product. They've spent the time to go out to China, to visit the factories, the wire and cable factories, and identify the right product for the U.K. market. They've also worked with those factories on actually ensuring that the quality is right for our customer base. Therefore, they've been able to bring that product back, sell it under the FS Cables brand, and achieve those attractive margins that we look for.
The other part that excited us about this business was how it complements Cablecraft. We acquired Cablecraft 2 years ago, Cablecraft supplies cable accessories. Wherever you have wire, you will need cable accessories to identify that product, to connect that product, or to protect that product. Therefore, these 2 businesses can work closer together, targeting each other's customer bases and get synergistic benefits going forward. Our most recent acquisition was Gremtek. We acquired this in October last year. 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 U.K. and Germany to more broadly across Europe and also into that industrial customer base. This business does both of those things. It's based 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 U.K. and Germany, but we haven't got the location in France, and this gives us that presence to do that. Also, we can take the Gremtek product range, which is an own branded product range, but at a different price point.
It allows us to target the more industrial customer base. We can use their product targeting the U.K., the German market, and also more broadly across Europe. I suppose finally, I think these are excellent examples of Diploma acquisitions. 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.
Great. Okay. Thank you, Gustaf. Okay. We'll finish up with the 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 and Life Sciences following at just under 30%. Again, by geography, well diversified, 40% North America, European at 48%. We'll see the U.K. pick up a bit this year as FS Cables comes in, and 12% overseas, mainly in Australia. Starting with Life Sciences, this is 85% of these revenues are contributed from the healthcare businesses and 15% from the environmental businesses. Looking at their results, the Life Sciences sector reported revenues up 7% at GBP 134.7 million.
After adjusting for the acquisition of Abacus, which is the Australian diagnostic business purchased last year in April, which increased sector revenues by 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 healthcare businesses, where revenues benefited from the successful introduction and rebranding of a new premium product in the Canadian surgical business, and in the 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% to GBP 23.9 million, operating margins fell 80 basis points 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. Looking a little bit more at the developments in this sector during the year. Beginning with the healthcare business, which account for 80% of revenues in the Life Sciences sector.
Revenue growth slowed in the second half against a strong prior year comparative. That reflected some delays in capital which have slipped into FY 2019. Diploma Healthcare businesses operate in 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 and 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 growth in revenues from consumables in the 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 rigid and flexible endoscopes. The supply of specialized instruments used in laparoscopy and other minimal invasive surgical procedures also contributed to this growth. In Australia, revenues grew strongly in the newly combined Abacus dx business. Abacus is now a large, broader-based clinical diagnostic business. It's focused on Life Sciences and patient simulation business, supplying both public and private laboratories and to research establishments across Australia. In the surgical business, revenues reduced as it struggled to secure sales of new products to replace an existing supplier acquired by a large industry player. The electrosurgery 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.
We continue to introduce new replacement products. In Canada, we won a large five-year contract shortly after the year end, albeit at lower average selling price. In Ireland, the Technopath 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 service supply model by replacing them with new suppliers and business segments. The business has been successful in forging strategic partnerships with new suppliers. The business is broadening its service to sell electrosurgical and smoke evacuation products, similar to those that we supply in Canada and Australia.
Finally, the environmental business, which represents 15% of 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 sell in the U.K. gave rise to an 8% reduction in revenues in this business. Both businesses continue 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 three business clusters here. Aftermarket, Industrial OEM in North America, which account for 60% of sector revenues. Then we've got the international Seals business, which account for 40% of revenues. The Seals sector reported revenues up 7% at GBP 208 million.
After adjusting for the small acquisitions of EDCO and PSP last year, which increased revenues by 2%, the small disposal of 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 GBP 36 million, with margins up 100 basis points to 17.3%. The operating leverage in these Seals businesses, particularly in the aftermarket in the U.S., contributed to the improvement in the bottom line operating margins.
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. By the second half of the year, most businesses had managed to secure good price increases. Again, looking at the developments in this sector, beginning with North America. The North American Seals business, which accounts for 31% of sector revenues, increased underlying revenues by 11%, driven by robust 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, seal manufacturers struggled to keep up with demand, and repairers 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 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 of 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 U.S.
This is likely to be a GBP 10 million 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. Obviously, we'll say more about that as the year progresses. It's a big project for us. The Hercules industrial area end business in North America also reported strong underlying growth, up 13% in a very robust industrial market. This really reflected broader 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. A key and necessary part of this exercise was to implement a new ERP system to replace the disparate legacy IT systems in the businesses. This went live shortly after the year-end and has proved successful. This will increase operational efficiency and allow greater focus on higher margin segments and products. If 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 EDCO last year, with strong growth in the second half of the year.
FPE and M Seals, with their principal operations in the U.K. and Scandinavia, developed underlying growth in revenue of 6%. In the U.K., the FPE Seals business delivered modest underlying growth, with good growth in its U.K. aftermarket Seals business being held back by weaker international sales, partly driven by the absence of a large export order last year. M Seals 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 U.K. revenues, with customers expanding their activities. EDCO also benefited from this recovery and delivered good growth on a like-for-like basis in its first year with the group.
Kubo 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 Kubo during the year, and this will provide good opportunity for growth in the years ahead. Kentek in Finland and Russia, revenues increased marginally 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, and the business continued its focus on industrial area ends. 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, a new management team has made good progress in growing revenues and have gained new contracts from the power generation sector and from the increased mining activity. The international Seals cluster of businesses have strengthened management during the year and are collaborating increasingly on developing increased e-commerce functionality. In addition, two major ERP implementations are planned for 2019, which will improve operational efficiency and bring these businesses closer together. Turning to the Controls sector. Just to remind you, this is interconnects, specialty fasteners, and fluid Controls. Revenues in Controls sector business increased by 9% to GBP 142.4 million. 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 Clarendon Specialty Fasteners 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 GBP 25 million, with margins remaining unchanged from last year at 17.6%. Gross margins improved, reflecting a stronger customer mix in Clarendon, pricing initiatives in Cablecraft, 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. The improved gross margins was offset by investment in sales resources in Clarendon to drive growth in the U.S., and from investment in Cablecraft to enhance their e-commerce functionality and refresh their brand offering.
Looking at the developments in this business, the Interconnect business, which accounts for 59% of sector revenues, increased underlying revenues by 7%, reflecting good contributions from IS-Group and Cablecraft, but held back by a large decrease in revenues from Filcon, reflecting the absence of a major project delivered last year. The IS-Group, with its principal locations in the U.K. and Germany, delivered strong growth in its core markets of defense, aerospace, motorsport, and industrial. In the U.K., business revenues increased by 18%, which was boosted by broadening its customer base by targeting cable harness houses 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, with strong performances from 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 end user customers, including electrical 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. In Clarendon Specialty Fasteners, which account for 21% of sector revenues, underlying revenues increased by 8% with good increased demand in the buoyant civil aerospace sector. Clarendon's automatic inventory replenishment system, known as Clarendon Air, has continued to broaden its customer base of major aircraft seating and cabin manufacturers across Europe and into Asia.
Motorsport revenues were held back by the absence of major rule changes in Formula 1 against a very strong prior year comparative. As Gustaf explained earlier, the small Coast business acquired in October 2017 made a good contribution this year, with particular success selling into the space technology sector. Last but not least, Fluid Controls, which accounts for 20% of revenues, reported a decrease of 4%. This was largely because of the absence of a large project delivered in Abbeychart last year, but also because of Hawkhurst's decision to pull back from highly competitive pricing, low margin business in the air conditioning business. This apart, Abbeychart achieved good growth by focusing on its value-added services such as refurbishment, kitting, and assemblies. That takes us through the operating sectors. Just looking briefly at outlook and prospects.
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. 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.
Good 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. What sort of scenario does the board think it might consider giving cash back in way of a special divvy or perhaps increasing the dividend? Just some thoughts around that would be useful. Thanks.
John.
Well, I'll start. We would like to find acquisitions that we can reinvest the money in and continue the momentum of growth. That's our first target. We haven't got to the stage yet where we think that's not possible. So
It's further down the line.
Yeah.
I think, we've only got GBP 36 million cash at the moment. 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, as I've said before, there is a cyclical change. There is cyclicality in acquisitions. We've seen it in 2008, we've seen it in 2013, and I think we're probably coming up to that period now. I'm quietly confident that 2019 will bring more opportunities forward.
It's the cash neutral long term is the.
As you know, we haven't tried to be cash neutral, but we've ended up there. We're very comfortable going into debt, and as I've said many times, I'm happy to go up to 1x EBITDA, which would give us at least GBP 100 million debt if we wanted to. Beyond that, we'd look at how we were financing things. I think that gives us a lot of firepower. We want to spend. We've done GBP 25 million over the last five years. I think as Bruce said before, we want to do that GBP 30 million-GBP 35 million. We realize that we need to up the pace of spend. We're focused on that this year.
I should add that actually towards the end of the year, the board looked at the strategy 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? Our conclusion was, yes, we still think it's got legs, and it can still take us forward and create more value.
Thanks.
Jane Sparrow from Barclays. On the M&A front, I guess shortly after a period of very strong trading that stopped people wanting to sell, perhaps they're now wanting to sell but at 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 buying family-owned business in that private sector, we've always paid around about a multiple, EBITDA multiple of around about five and a half up to eight and a half times. That's we've seen to be a pretty acceptable multiple at different times of the cycle. Clearly, people are coming forward maybe with peak earnings, they're not necessarily looking for stronger multiples. We do have to be conscious very much that they may be at peak earnings. 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 U.S., we are seeing multiples stronger than we see in the U.K., that's for sure.
Something we might feel is acceptable here, say seven to eight times, in the U.S. that's going to be nine plus I think. I think we have to face the fact that U.S. acquisitions are going to be more expensive. We've got more opportunity over there maybe to realize synergies and get more value.
In terms of sector allocation, the comments around building a sort of broader pan-European-
Yeah
industrial business. Is that where we're more likely to see activity?
No.
When you look across the three sectors?
Yeah. We're not completely opportunistic, but we haven't got any favored sector. It depends where those opportunities arise. Personally, I would like to think we can do some acquisitions in the U.S. We haven't actually made an acquisition in the U.S. other than that small business last year. We haven't made a sizable acquisition for about five or six years now. I think we ought to be looking in that market, which is a good market to us. It provides good earnings growth, and we ought to be looking for opportunities there. Also, as the Controls business develops, we've seen there that we're broadening that market in Europe. There are opportunities there as well.
Good morning. It's Julian Cater from Numis. Nigel, can you perhaps talk about what sort of impact the U.S. tariffs have had on the behavior of your customers?
Yeah.
How you think that might change as we go into the new calendar year?
Sure.
Related to that, what impact that has on the decisions you need to make about potential inventory build given stock availability, et cetera? Thanks.
Well, I think there's three, but there's been two particular tariff increases. There's the July one that came in. That was really about stainless steel or about steel. It didn't impact us that much. It had a small impact in our industrial Hercules business in the U.S., where we import some customized parts for our industrial businesses. That was probably in the region, in terms of the impact, I think it was about half a million dollars or something. It wasn't significant. I'll come back to what we're doing with it. We had the second one in August, which was another 10%, but with the threat to go up to 25%. That was much broader. That went into a lot of our seals, and again, we procure quite a lot of seals from China and elsewhere in the Far East, particularly in the industrial business.
That will impact us more, that 10%. That will have an impact in the region of $2 million or $3 million in terms of additional costs that we have to deal with. If it goes up to 25% in January, that will become a reasonably large figure for that industrial Hercules business. I believe finally, there has been another. I'm not sure of 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. In terms of what we've been doing with it, we've been passing those costs on. 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 going to want you to come with different sources of supply." Go off and find other places. We don't want to carry this tariff cost if we can help it. Some customers are now asking us to embed the tariff cost into product cost, which will be bad news because that will just inflate prices, and we'll lose sight of what the tariff cost is. I realize it's not a particularly clear answer at the moment, but we're in this period of people are talking, jostling around as to how to treat the tariff increases.
As I said, if we see these move 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. We've made that clear to our customers, and our customers understand that and will react accordingly. At the same time, they also want us to make good effort to find alternative sources of supply.
Great. Thank you.
No more questions?