Period End Trading Update

RNS Number : 9244R

Hargreaves Services PLC

02 July 2015

 

2 July 2015

HARGREAVES SERVICES PLC

(the "Group" or "Hargreaves")

Period end trading update for the year ended 31 May 2015

Hargreaves Services plc (AIM:HSP), the UK's leading supplier of solid fuel and bulk material logistics, provides the following period end trading update for the financial year ended 31 May 2015.

Aside from the financial impact of the recent settlement in relation to the Group's Liverpool Biomass Conversion project with a major UK power generator detailed below, underlying trading for the year has continued to be broadly in line with management's expectations. The Group's previously announced simplification programme is now substantially complete and the debt reduction initiative has progressed very well with cash generation in the second half slightly ahead of management expectations. After £6.3m of share buyback spend, net debt at the year end was £1.0m, benefitting by approximately £8m from the timing of year end payments and collections.

In February 2015, the Group embarked on the second phase of the simplification programme. In the face of falling coal prices and a significant reduction in the short term level of expected orders from UK power stations, the Group announced its intention to seek reductions in its overhead base and port and coal production operations. The Board set a challenging target of achieving a cost reduction of at least £3m by the year end and it is pleasing to note that this target has been exceeded. As part of this review, we have merged the Energy and Commodities and Production divisions to form one new division called Coal Production and Distribution (CPD). This second phase of the simplification programme has resulted in further one-off costs and charges totalling £4.5m. In addition to the cost of £1.4m for the programme of redundancies across the Group, we have provided £1.9m in respect of fuel hedges that are now ineffective given the reduced forward mining programme. We have also reviewed mining reserves and provided £1.2m against mine development costs for sites and reserves that we no longer anticipate mining in current market conditions.

Following the end of the year, after careful consideration, we have agreed to accept a reduced amount to conclude the Group's Liverpool Biomass Conversion project with a major UK power generator; a project which commenced in 2012 and largely concluded in early 2014. Whilst this will fall £2.4m short of the amount that the Group expected to collect on the contract, the decision will allow the Group to conclude the long running negotiations and move on and will result in a cash inflow to the Group of approximately £10m, the collection of which had been delayed by the negotiations. The provision shortfall of £2.4m will be charged against profits in the year ended 31 May 2015.

Since we reported half year results in February, a number of power stations have announced potential closure decisions and conditions in the coal markets have continued to deteriorate. There remains very limited revenue visibility from UK power generators. In addition, the coal price, a key driver of the profit in our coal production and distribution division, has continued to fall and is currently £3 lower at approximately £38 per tonne. Whilst this will impact short term profits, the Group continues to take the view that it is right to continue to protect the viability of its current Scottish operations, subject to reviewing mining plans and reducing forecast production volumes where necessary. The Board is of the view that the longer term opportunity afforded by these operations, including the synergy with its speciality coal distribution operation, continues to outweigh the negative impact on short term profits. The Group also continues to work hard with Government and other stakeholders on a solution that will allow the commencement of major restoration projects.

Market conditions in the steel sector have also further deteriorated since we last reported and we continue to closely manage counterparty risk against this challenging backdrop.

With the simplification programme largely complete, the Board is focussing on the strategic options for the Group going forward. These include the continued evaluation of share buybacks and selective expansion of the Industrial Services division. The Board expects to provide an update in conjunction with the preliminary results.

In the meantime, encouraging progress continues to be made with the development of the renewables and property portfolios, although the Group awaits the outcome of the Government's recently announced review of subsidies to on-shore wind farms.

Gordon Banham, Chief Executive Officer, commented: "Market conditions in the coal sector are the most challenging that I have ever seen. The restructuring process at Hargreaves was broad and deep and involved a lot of sacrifice across the organisation. Although we continue to see downward pressure on our profits, the Group has a secure and strong balance sheet position from which we can assess market movements and strategic options. The management team and staff deserve praise for their continuing effort and commitment to deliver profits in such difficult market conditions."

The Group expects to report preliminary results on 11 August 2015.

For further details:

Hargreaves Services Gordon Banham, Chief Executive Officer Iain Cockburn, Finance Director	0191 373 4485
Buchanan Mark Court  / Anna Michniewicz / Sophie Cowles	0207 466 5000
N+1 Singer Sandy Fraser / Nick Owen	020 7496 3000
Jefferies Hoare Govett Sara Hale / Harry Nicholas	020 7029 8000

 

 

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