Preliminary Results

RNS Number : 0302N

Hargreaves Services PLC

25 September 2012

 



For Immediate Release

25 September 2012

HARGREAVES SERVICES PLC

(the "Company" or the "Group" or "Hargreaves")

Preliminary results for the year ended 31 May 2012

Hargreaves Services plc (AIM:HSP), the UK's leading supplier of solid fuel and bulk material logistics announces its preliminary results for the year ended 31 May 2012.

Highlights of the year

	Year ended 31 May 2012	Year ended 31 May 2011	Change %
Revenue	£688.3m	£552.3m	+24.6%
Operating Profit	£49.5m	£43.1m	+14.9%
Underlying Operating Profit (1)	£54.0m	£46.7m	+15.6%
Profit Before Tax	£43.1m	£36.9m	+16.8%
Underlying Profit Before Tax (2)	£47.5m	£40.5m	+17.3%
Diluted EPS	106.1p	90.5p	+17.3%
Underlying Diluted EPS (2)	121.9p	103.7p	+17.6%
Dividend (including proposed final dividend)	17.8p	15.5p	+14.8%
Net Debt (3)	£77.7m	£66.0m	+17.7%

Operating Highlights

·      Strong performance in the year ended 31 May 2012, record profits

·      Geological problems at Maltby announced in May 2012, progress being made, but increasing risk profile causing concern

·      Board considering future of mine to manage Group's forward risk profile

·      Major contract wins for Industrial Services business in Steel sector

·      Strong performance from coal trading business, UK and Europe

·      European coke trading volumes subdued reflecting low steel production

·      Tower project in production

·      Banking facilities renewed and extended in April 2012 to October 2015

Commenting on the results, Chairman Tim Ross said:

"The Group has had another successful year, with a strong performance resulting in record profits. The developments at Maltby were unexpected and we are closely assessing the implications of those developments. However the overall progress we have made across all our divisions is encouraging and gives us confidence in further growth in the business going forward. I can report that the Group is trading strongly. Based on early trading, setting Maltby aside, and despite a slow start to production at Tower, we are cautiously optimistic that we will meet or even exceed our overall budget for this financial year."

(1) Underlying Operating Profit is stated excluding the amortisation of acquired intangibles and including share of profit in jointly controlled entities

(2) Underlying Profit Before Tax and EPS are stated excluding the amortisation of acquired intangibles

(3) Net debt comprises cash and cash equivalents, bank overdraft and other interest bearing loans and borrowings

Hargreaves Services Gordon Banham, CEO Iain Cockburn, Finance Director	0191 373 4485
Buchanan Tim Anderson	0207 466 5000
N+1 Brewin Sandy Fraser / Nick Owen	0845 213 1000
Jefferies Hoare Govett Limited Sara Hale / Harry Nicholas	0207 029 8000

Chairman's Statement

Results

The reported financial results show another successful year for Hargreaves. This is despite the significant falls in coal prices over the last 12 months and the recessionary pressures in both the UK and Europe, which demonstrates the robustness of our business and gives us confidence for the long-term future of the Group. Underlying profit before tax for the year increased 17.3% from £40.5m to £47.5m. Revenues increased by £136.0m, from £552.3m to £688.3m. Underlying diluted EPS increased by 17.6% from 103.7p to 121.9p.

The Group's financial performance was not materially impacted by the events that took place at Maltby in May as the main impact will be felt in this financial year. In this year we have budgeted for an £8.0m loss from Maltby, reflecting the impact of the anticipated face gap. In the last few weeks we have become more concerned about the risks of working in the area of the T125 panel. As we develop the face line the experts are learning more about the features of the strata and risks these pose to the completion of development and the subsequent production from the panel.

The panel T125 is a very attractive panel and we hope that concerns over gas levels do not prevent us from being able to continue to its production. The issues that are impacting Maltby are discussed in more detail below. These clearly illustrate the risk and volatility associated with owning deep mining operations. The Group has grown significantly over the last five years and the risk profile of Maltby contrasts starkly with the risk profile of our other Group businesses. The asset has played a key role in helping the Group develop and we have invested heavily in the mine since acquiring it five years ago. As a Group we have been very supportive and in return our management and staff have demonstrated a high level of commitment and flexibility. Geology is however a key variable and some of the most major risks that arise from that are outside the control of either the Group or the mining team. If we are unable to work through the current issues with an acceptable level of risk, we are fortunate to have reached a point in the Group's overall strategic development when we are able to contemplate closing or mothballing the operation with minimal impact on our growth prospects.

In the statements that follow there is more background on the risks around the current development and mining plans. We have given careful consideration to how the current position should be communicated at this time. Although we are not in a position to make a decision today, we are considering all the available options and therefore as a Board we feel it is right to highlight that we are actively reviewing the risks and considering the best path forward.

Dividend

The business performed very well in the year ended 31 May 2012 and our dividend cover remains very conservative. Notwithstanding the issues we face at Maltby, the progress that has been made in commencing production at Tower and in developing the Industrial Services business gives the Board the confidence to continue with its progressive dividend policy.  The Board has therefore recommended a final dividend of 11.8 pence per share, bringing the dividend for the year to 17.8 pence per share, an increase of 14.8% on the previous year. The final dividend is proposed to be paid on 12 December 2012 to all shareholders on the register at the close of business on 9 November 2012.

People

Our staff remain key to the business and once again I would like to thank them for their loyalty and hard work throughout a challenging year. A group as diverse and specialised as Hargreaves needs a strong and collaborative senior management team and we are fortunate in this regard.

Board

There were some significant changes to the Board during the year ended 31 May 2012. In last year's statement, we were pleased to announce the appointment of Peter Gillatt, whilst Nigel Barraclough resigned from the Board to assume a full time executive role. These changes were announced on 2 September 2011. Following last year's statement, we were also pleased to report that David Morgan joined the Board on 27 February 2012. David has joined the Board as Senior Independent Director and Chair of the Audit Committee.

Outlook

Our coal trading business remains very strong. European trading levels for coke remain subdued for now but the longer term opportunity for Hargreaves in that market place remains very exciting. The Industrial Services business is demonstrating significant potential for growth, particularly in light of the recent contract wins relating to biomass conversion projects and contracting services in Asia. The Transport Division remains stable and profitable. In the Production division, we are delighted that the Tower project has started and that we have added the first, albeit small, new surface mine site to our portfolio as we grow the scale of these operations. The progress that we have made across all our divisions not only contrasts with the issues we are encountering at Maltby (on which we provide an update in the Group Business Review) but also demonstrates the strength and breadth of the Group in its ability to absorb such setbacks while still moving forward with its long-term growth strategy.

Finally and on a more positive note I can report that the rest of the Group is trading strongly and based on early expectations, setting Maltby aside, and despite a slow start to production at Tower, we are cautiously optimistic that we have a good chance of meeting or even exceeding our overall budget for this financial year.

Tim Ross Chairman

24 September 2012

Group Business Review

Last year was the best performance by the Group to date, particularly gratifying when the difficult general economic and trading conditions are taken into consideration. The Group's strategy and business model delivered strong growth and record profits. The Tower project was delivered into production. The Industrial Services Division took a huge step forward by delivering significant contract wins in the steel sector and, more recently, by winning in excess of £30m of contracts to provide support to customers looking to convert from coal to biomass. The Industrial Services Division also provided management and engineering support on an outage project at a major power station in Hong Kong. Although the European markets were weak, particularly for third party coke trading, coal volumes in the UK and Europe grew and margins remained strong. Even Maltby delivered a strong second half, as predicted in the Interim Statement, having had its best production under our ownership during the last nine months.

Before reviewing the performance and position of the rest of the Group, I will provide a summary of the latest developments at Maltby and its long-term outlook.

Maltby

In May we reported that we had encountered significant geological problems while preparing the next panel of coal (T125).  Although this instance did not affect production on the current T15 panel and had only limited impact on the financial results in the year ended 31 May 2012, we indicated that the delay in the commencement of production on T125 was estimated to be between 12-16 weeks with a consequential estimated impact on the Group's profit in the year ending 31 May 2013 of between £12m and £16m.

The current development plan shows that development and face set up will be completed by 16 February 2013, some 15 weeks after the completion of the T15 panel. However, as the face line is being driven, gas issues, possibly emanating from the zone that caused the difficulties in May, are adding delays and risk to the completion of the face line. We envisage this may continue to add risk and further delay to both completion of the development and successful production of the panel once production commences. Our mining experts, together with external consultants, are reviewing the mining plans and performing additional investigative work to ensure that there is a plan that satisfactorily addresses both the health and safety risks and the financial risks this may cause. The outcome of this comprehensive review will be known by the end of October 2012, when there will also have been time to review the further geological data from driving the face and carrying out exploratory boring.  

Along with the Board I am unequivocal in my view that, should the presence of gas, water and oil in the vicinity of the panel put our employees at risk, in the opinion of our own management or the external consultants, we will not attempt to mine the T125 panel.  We anticipate that the abandonment of the T125 panel would lead to the mothballing or even closure of the mine as it would probably be uneconomic to switch production to a later panel due to the long face gap entailed. We believe that  prevarication on these types of issues, especially in the context of deep mines, can bring unacceptable levels of risk to employees, avoidable financial losses and destruction of shareholder value, none of which we will countenance. 

While any decision to close or mothball the mine can only be taken after the outcome of the comprehensive review is known, given the current risk profile, the Board wants to ensure that all stakeholders, internal and external, are kept fully informed and where necessary consulted with over the coming weeks. I personally hope that the review will provide unequivocal evidence that will leave the Group in a position to carry on with development and production of the T125 panel. We were and we remain very optimistic about the potential yield from the T125 panel given the thickness of the coal seam.

Should the level of risk ultimately prove to be unacceptable, the closure or mothballing of Maltby would obviously be a disappointing development for the management and employees. Having raised the possibility of mothballing or closure, I would like to provide some reassurance on the impacts of such action. Firstly, I can reassure investors that the Board are of the view that the Group is strong enough to absorb such actions. Although Maltby was one of the original catalysts of the development of the Group, it is now only one relatively small element among many within the Group. Maltby has not been driving our recent profitable growth and it has undoubtedly been adding risk and volatility to the Group's earnings profile and rating.

Although we would incur a substantial book impairment charge, the cash costs, including redundancy, of mothballing or closing the mine, would likely be less than the losses that are forecast to be made during the upcoming face gap. Based on the initial work we have done to date we are very confident that the cash that would be raised from selling the plant and machinery would be comfortably higher than the cash costs of redundancy. The harvesting of surface fines and the exploitation of the methane gas engines would continue until exhausted. The impact on overall future earnings would be limited to the profit stream from Maltby. Five years on from acquisition this stream now represents a far smaller proportion of overall earnings. It would also remove significant volatility from the Group's earnings.

Following the work we have done in recent months, we are confident that we will be able to protect Monckton's profit stream having found international coals with a very similar, although not identical, specification to Maltby coal. We are also confident that we can honour and meet all contractual obligations without exposing the Group to penalties or claims.

Setting financial matters aside, we can assure shareholders that the safety of our workforce is our primary consideration and, no matter which path is followed, that safety will not be compromised.

I would now like to switch the focus to the positive progress and development of the rest of the Group.

The Future for Coal

Coal remains a key profit generator for the Group. In last year's statement I outlined our view on the future for coal which was largely positive and I believe that what I said last year still holds true today.

We will indeed see a reduction in coal burn over the coming years in the UK power generation sector. In fact we are now helping some of our customers to convert coal facilities to handle biomass. We outlined last year that in contrast to the trend in coal fired generation, many of the specialised coal markets in which we deal, for example coal for Pulverised Coal Injection ("PCI") for steel making, are not likely to be impacted by such reductions and present long term market opportunities. In addition we still expect that the European and emerging markets will continue to provide growth opportunities.

We are often asked about the impact on Hargreaves of the declining coal burn in the UK power generation sector. Hargreaves only seeks to supply a small tonnage into the power generation market. For imported coals, as a minimum, we have to find a market for approximately one million tonnes of thermal coal which will always arise from the importing and processing of the coal we need for the speciality markets.  We also need to place the indigenous power station coal that is produced from Tower, Maltby and Hatfield. Indigenous coal has traditionally sold at a discount to imported coal and therefore will always find a place in the market ahead of imported coal. Indigenous coal is a small and declining proportion of projected coal burn, some 18 million tonnes, or 36% of the total 50 million tonne annual coal burn. We are therefore confident of being able to continue to place both our imported and future indigenous coal for a long time to come.

The Economic Environment

Although economic conditions have been very challenging, we continue to see resilience in all the coal markets we deal with in the UK and the wider European markets. We have enjoyed an increase in volumes of thermal coal for power stations in the UK and have successfully traded our first cargos of thermal coal through our joint venture with the major Russian producer, MIR Trade AG. Volume and margins have held up very well in the speciality coal markets.

The conditions in the coke market are mixed. Monckton sells most of its coke into niche markets such as ferro-alloy and soda ash producers. Demand for Monckton product has remained buoyant and continues to be strong, driven by the quality characteristics of the coke. On the other hand our coke trading activities in Europe that largely serve the steel sector and trade a lot of blast furnace coke have seen a reduction in general trading volumes, as the big steel makers reduce production to a level where they are self-sufficient for coke. The outlook for steel production in the short term remains uncertain.

The difficult economic conditions are placing great pressure on many of our larger customers and counter-parties. We are even more cognisant of counter-party and credit risks and continue to proactively manage these risks as best we can.

Coal and Coke Prices

A key feature of our markets in the last few years and over the last 12 months has been volatility in coal and coke prices.

We have always adopted a business model where we attempt to eliminate or at least smooth the impact of changing commodity prices. In recent years the volatility has been unprecedented and our business model has been tested by a number of rising and falling price cycles. The API2 coal index fell by 29% over the 12 months to 31 May 2012.

In the Energy & Commodities business, where we buy and sell coal and coke, we will continue to minimise open positions in our trading activities through hedging and the use of back-to-back purchase and sale contracts. The business model, in profitability terms, is therefore largely unaffected by rising or falling prices.

In the Production Division where we are selling commodities that are produced from a relatively fixed cost base, we will continue to utilise long term contracts that are fixed price or, where possible, RPI linked.  Although we are still exposed to long term price movements, these contracts have removed a great deal of the volatility from our results in recent years.

Last year, the prevailing commodity prices were comfortably higher than the average prices on our prevailing fixed price contracts. With the prices having fallen, although much of that cushion or uplift opportunity has gone, the contracts that the Group currently has in place will continue to provide protection from any further falls in market prices. We remain committed to locking in as much certainty on future price and margin levels as possible.

The contractual position in the three key business units where we have exposure to commodity prices can be summarised as follows. Maltby continues to benefit from a thermal coal contract that offers a fixed price through Q4 2014. At Monckton the contract with Xstrata is due to expire at the end of this calendar year. A number of contracts have been signed and contract discussions with a variety of customers for 2013 are progressing. As reported in the recent trading update, based on contracts and discussions to date, we remain confident that the average price that will be secured for the year ending 31 May 2013 will be at least as high as the average price achieved in the last financial year. We were pleased to announce last December that the Tower joint venture had secured a three year fixed price contract for its thermal coal off-take. Trials and contractual discussions on PCI coal are ongoing and we are confident of achieving contract prices in line with our business plan.

In summary, although commodity prices have softened over the last few months we have never built peak commodity prices into our forecast and are therefore still comfortable with the current and forward commodity price position of the Group.

Progress Against Targets

Let me now review the progress we made against the targets we set ourselves last year. We stated last year that we will continue to use our strong UK business base to fund and drive growth into new markets and geographies, with a particular emphasis on three opportunities - Europe, Asia and the Steel Sector.

Europe

In my statement last year I noted the risks around short term European trading volumes. Following strong growth in Europe in the year ended 31 May 2011, profits reported in our European business for the year ended 31 May 2012 were £9.5m, a slight reduction on the £9.9m reported last year. This was principally due to a fall in the volumes of coke sourced on behalf of European steel producers. The opportunities to trade coke also reduced as steel producers reduced their steel production to such an extent that they were largely self sufficient.

In contrast with coke, we saw increases in coal volumes traded in Europe. Up until the start of last year our focus in the coal markets in Europe had been on speciality markets, particularly anthracites and other low ash products. Although the growth achieved last year was encouraging, the strategic goals we had set ourselves were to start trading flows of both PCI coal into European steel producers and thermal coal to European power generators. We still await purchase decisions by several potential customers following a number of successful PCI coal trials and we see these as opportunities to add significant growth. In the thermal coal sector we successfully established the joint venture with MIR Trade AG, a major Russian producer, and have already won contracts to supply over 300k tonnes of thermal coal.

Asia

As we noted in last year's statement, in contrast to Western Europe, coal consumption and demand in markets such as China and India are set to continue to increase for the foreseeable future. Last year we set ourselves the goal of expanding our business development activities outside of Europe. In this regard I am pleased to announce that we have continued to develop opportunities with China Light and Power. We provided management and engineering support for a recent outage project at the Castle Peak power station in Hong Kong and are in the process of tendering for services contracts with a number of customers in the region. These promise to provide a substantial opportunity for Hargreaves to establish itself in Asia. We are finding strong interest in the services that are provided by the Group and will be continuing our business development activities. In combination with developing an opportunity for our Industrial Services Division we continue to search and explore for opportunities to start trading products through the Energy & Commodities Division.

Steel Sector

We set ourselves the target last year of establishing a presence in the steel sector. We see the steel sector as a promising market for both our Industrial Services and Energy & Commodities Divisions. We were pleased to report at the time of our interim results that we had secured major contract wins at all three major steel plants in the UK. These contracts are worth in excess of £80m of revenue and are providing a platform not only to sell additional services but are also providing the opportunity to supply both coking coal and PCI coal. Following the year end we secured an agreement to source and supply around 500k tonnes annually of coking coal.  The success we are demonstrating clearly shows the value and synergies of the Group's business model.

Future Strategy and Outlook

Despite events at Maltby, our broad strategy remains unaffected and you will find that this strategy and outlook statement is very similar to that of last year. We remain confident that the combination of the Group's capital, skills and business model offers an exciting platform for long-term growth into new markets.  We remain confident that we have an efficient and effective business model both in terms of managing risk and delivering profit, founded on not only our core strengths but increasingly the value-added nature of our services offering.

By way of example, in the last 12 months at Tower, we demonstrated how much support and value we can bring to surface mining projects. We have provided capital and expertise to deliver the project through design and planning and into production. We have secured an eight-year, £250m contract to provide outsourced operational management and mining services. We have added value to that service through our coal marketing skills.  As another example, we have taken on a £60m contract with SSI to outsource material, coal and coke handling at Redcar steel works. We have re-engineered the coke processing and screening facilities, we have helped to market surplus coke fractions and we have been able to provide assistance in sourcing and financing coking coal supplies.

These projects, together with projects like Hatfield, demonstrate the opportunity that we have created to grow the services and trading side of the business. They also demonstrate the synergies that we have available to cross-sell and the synergies we are able to exploit between our different divisions and we believe that these services are highly sought after, particularly in emerging markets. We will therefore be pushing on with even greater effort to expand our activities overseas, with a continuing focus on supporting operators of mines, power stations and steel plants.

Although the European markets, particularly in coke sourcing, have been subdued, we remain confident that there is a significant medium to long term opportunity in Europe and we still believe we are well positioned to exploit that opportunity. Off-setting this we are encouraged by the progress we have made recently in developing activities in the steel sector both in terms of services and opportunities to trade products such as PCI and coking coal into these markets.

These strategic plans and opportunities are unaffected by events at Maltby. We will monitor the position at Maltby closely over the coming weeks and we will not let ourselves get into a position whereby we put the Group at risk of excessive loss or volatility going forward.  In the meantime we will continue with our efforts to develop and grow the core parts of the Group.

Gordon Banham Group Chief Executive

24 September 2012

Review of Operating Performance by Business Unit

Group Overview

As anticipated, the Group saw a very strong second half weighting to its performance, benefitting from better production at Maltby, the first contribution of profit from Tower and strong volume increase and profit improvement from the coal trading operations.

Revenues for the full year increased by 24.6% from £552.3m to £688.3m driven mainly by the Energy & Commodities Division which enjoyed a substantial increase in the volume of coal supplied to power stations. Underlying Group operating profit increased by 15.6% from £46.7m to £54.0m. Reported operating profit increased from £43.1m to £49.5m. Underlying Group operating margin decreased from 8.5% to 7.8%, mainly reflecting a changing product mix in the Energy & Commodities Division with a significant increase in low margin sales to power stations.

Reconciliation of Operating Profit to Underlying Operating Profit, by segment, together with a reconciliation to Underlying Profit before Tax is as follows:

	Production	Energy & Commodities	Transport	Industrial Services	Total
	2012	2012	2012	2012	2012
	£000	£000	£000	£000	£000
Segment Operating profit	15,149	27,902	3,674	2,755	49,480
Intangible amortisation	-	2,429	393	1,570	4,392
Share of profit in jointly controlled entities	76	23	-	-	99
Underlying Operating Profit	15,225	30,354	4,067	4,325	53,971
Net financing costs	(1,831)	(3,350)	(749)	(530)	(6,460)
Underlying Profit before Tax	13,394	27,004	3,318	3,795	47,511
	Production	Energy & Commodities	Transport	Industrial Services	Total
	2011	2011	2011	2011	2011
	£000	£000	£000	£000	£000
Segment Operating profit	12,606	24,260	3,450	2,748	43,064
Intangible amortisation	-	1,630	393	1,569	3,592
Share of profit/(loss) in jointly controlled entities	46	(23)	-	-	23
Underlying Operating Profit	12,652	25,867	3,843	4,317	46,679
Net financing costs	(2,698)	(2,042)	(829)	(590)	(6,159)
Underlying Profit before Tax	9,954	23,825	3,014	3,727	40,520

Energy & Commodities Division

Our Energy & Commodities Division encompasses the Group's solid fuel trading activities, including power station coal and other more specialised carbon-based energy products such as sized coals, coke and biomass. Power station coal is a fairly commoditised product offering low margin potential. More specialised products such as sized coals for the domestic and commercial heating markets and industrial customers in the cement, steel and ferro-alloy sectors continue to offer greater opportunity to add value to the product and hence generate higher margins.

The Energy & Commodities Division had another very strong year. Gross revenues increased by £115.4m from £330.8m to £446.2m, reflecting increases in sales of coal to power station customers. The average profit per tonne and margin are influenced heavily by the product mix, most notably the difference between the lower margin sales of coal sold to power stations and the higher margin product sold into speciality markets.

An increase in the proportion of lower margin power station coal relative to the higher margin speciality product saw overall operating profit margin reduce from 7.8% to 6.8%. As can be seen from the table below the underlying profitability per tonne was fairly steady, with a slight improvement in the average profit per tonne of power station coal sold. Underlying operating profit increased from £25.9m to £30.4m driven largely by strong power station volumes and margins in the UK. Following a difficult year in the coke markets, underlying operating profit attributable to our European subsidiaries reduced from £9.9m to £9.5m. Low volumes of coke trading was only partially offset by an increase in traded coal volumes and margins.

The table below provides a breakdown on volumes and margins within the Energy & Commodities Division.

2012	UK Operations	European Operations		Total		Power Station Coal	Other Products		Total
Tonnes sold (000s)	3,247	815		4,062		2,609	1,453		4,062
Operating profit per tonne (£)	6.16	11.66		7.26		2.64	15.56		7.26
Operating profit from trading (£m)	20.0	9.5		29.5		6.9	22.6		29.5
JCE & non-trading (£m)				0.9					0.9
Total segment underlying operating profit (£m)				30.4					30.4
2011	UK Operations	European Operations		Total		Power Station Coal	Other Products		Total
Tonnes sold (000s)	1,592	802		2,394		931	1,463		2,394
Operating profit per tonne (£)	10.07	12.31		10.82		2.12	16.36		10.82
Operating profit from trading (£m)	16.0	9.9		25.9		2.0	23.9		25.9
JCE & non-trading (£m)				-					-
Total segment underlying operating profit (£m)				25.9					25.9

Note: Operating margin per tonne included profits on handling third-party product volumes through port operations.

The average profit per tonne sold fell from £10.82 to £7.26 due to the increased proportion of power station coal. Looking at power station coal specifically, we are pleased to report that the profit per tonne sold recovered slightly from £2.12 to £2.64. Sales of power station coal included 828k tonnes of coal under the new Hatfield Colliery marketing contract. The volume of specialised coal decreased slightly from 1,463k tonnes to 1,453k tonnes reflecting lower coke sales in Europe and a return of the UK volumes to normal levels following the exceptional orders received in the prior year. The profit per tonne of specialised product remained strong at £15.56, slightly lower than the £16.36 in the prior year, reflecting the loss of higher margin coke sales from the product mix.

In the Interim Statement we reported that we had concluded our first contracts for the supply of PCI coal. These supplies are expected to commence in the last quarter of this financial year. Trials with other UK and European customers for PCI coal have progressed well, but opportunities to finalise contracts with European customers have been delayed due to the slowdown in Steel production. We remain committed to developing further PCI coal supply opportunities and see this as an important opportunity for the Group, particularly considering the potential for PCI production from Tower Colliery.

As reported in last year's annual report, in June 2011 we completed the acquisition of Oxbow's share in the Eastgate Materials Handling joint venture for a cash payment of £1.8m which provides us with additional flexibility and control to develop operations at Immingham.

Production Division

The Production Division results for the year ended 31 May 2012 encompassed the operations at Maltby Colliery, Monckton Coke Works, MRT, Rocpower and our share of the Tower Regeneration Joint Venture. Gross revenues for the Division increased by £24.8m from £110.1m to £134.9m and underlying operating profit by £2.5m from £12.7m to £15.2m. As anticipated, the Division delivered a very strong second half performance aided by the steady production rates and thicker coal on the T15 panel at Maltby and a first contribution of profit from the Tower Colliery project.

Maltby

Total saleable production at Maltby increased by 111k tonnes from 1,517k tonnes to 1,628k tonnes. Both underground production and surface coal fines sales increased year on year, with underground production increasing by 30kt to 903kt and coal fines sales increasing by 81kt to 725kt.  The implementation of a fifth shift helped to increase underground production year on year.

The majority of underground production for the year ended May 2012 was sold as power station fuel to Drax under a long-term contract, with a further 257kt of coking coal being sold to Monckton. Coal sales from Maltby outside of the division generated £60.3m of revenue compared to £53.1m in the prior year. Increased coal sales and an improvement in average selling price from £59.75 to £69.38, resulted in coal (non-fines) revenue increasing from £40.6m to £47.6m. The increase in average selling price reflected improved proceeds on major contract renewals combined with higher market prices for coking coal.  The full year benefit of the Management Services Contract at Hatfield Colliery boosted revenue further, with coal fines revenue of £12.7m being little changed year on year.  Costs at Maltby increased by £3.8m compared to prior year, largely as a result of the full year impact of employing a fifth production shift.

Monckton

Production at Monckton remained steady and revenues increased by £8.7m from £47.6m to £56.3m. Coke sales increased by £10.7m from £43.4m to £54.1m, whilst by-product income improved by £0.5m to £4.6m as a result of improving prices.

The average coke price was £208 per tonne on the sale of 261k tonnes compared to £199 per tonne on 217k tonnes sold in the prior year.  During the year Monckton secured a contract to supply third party manufactured coke to a major existing customer in addition to Monckton's own coke production.  This boosted annual sales tonnage, and helped to satisfy demand from Monckton's customer base.  Once again the average sales price benefitted from improved contract renewal terms, underlining the demand for Monckton's low phosphorus coke.

Surface Mining

Our open cast mining joint venture, Tower Regeneration Ltd ("TRL") satisfied pre-production planning conditions in April 2012, which allowed operations to commence on site.  Immediately after receiving the planning certificate in December 2011 we were able to announce a three year contract to supply RWE's Aberthaw power station with thermal coal. We announced in the interim statement that we would be conducting tests and trials with potential customers in the UK and European steel markets for the PCI grade coal. The initial trials have been concluded with positive results and we are confident of announcing contracts in the coming months.

In line with previous guidance we are pleased to report that a contract for working the site was agreed between TRL and Hargreaves Surface Mining on an open book cost plus basis. By the end of May 2012 72k tonnes of coal had been produced and sold as the site was set up and established. 

Overall the Tower project contributed £3.6m of underlying operating profit to the Production Division during the year through a combination of our 35% share of TRL's profit, profit made by Hargreaves Surface Mining and management charges. 

Overall, we are very pleased with how the project has progressed through the start-up phase, which included overcoming the challenge presented by the wettest summer in 100 years. Production during the summer has been impacted but we are still confident of achieving the full year profit targets for the project, assuming of course that the exceptional bad weather does not continue.

We still expect that the joint venture will be deploying approximately £40.0m of plant and equipment. By the year end £19.2m of plant had been delivered. The balance has been delivered over the summer and is now fully operational. Financing to the joint venture at 31 May 2012 is in line with previous guidance. At 31 May 2012 we had advanced £22.8m to the Tower project including a short-term loan of £4.0m that was provided from the Group to TRL to fund the initial restoration escrow account. This £4.0m loan remains in place as we investigate the feasibility of replacing the cash escrow account with restoration bonds.  

Outside of the Tower project we were also pleased to announce the receipt of planning permission for our first small surface mine. The site at Well Hill in Northumberland is expected to produce 130,000 tonnes and we are hoping the site will have cleared pre-commencement conditions around or just after the end of this financial year. We remain on track to fulfil our previous target of getting an additional two sites into the planning process before the end of this financial year.

Other

The Group continues to provide management services to Hatfield Colliery Limited. As reported in the Interim Statement, the contract to provide services has been extended from the initial 12-month term to a 36-month term. In addition to, and separate from the management contract, the Energy & Commodities Division continues to market the output from Hatfield. The off-take contract has also been extended to the same 36-month period.

Industrial Services Division

The Industrial Services Division delivered a strong year. We set the target of breaking into the Steel sector where we felt our expertise in material handling and processing would add value. The highlight of last year was winning four major contracts in the Steel sector. Since winning these, we are also pleased to announce that we have secured in excess of £30m of contract work to support customers as they convert from coal handling to biomass handling.

In terms of financial performance, gross revenues increased by £11.2m from £69.5m to £80.7m reflecting the impact of previously announced power station contract wins and the first revenues flowing through the new Steel sector contracts. The new contracts contributed around £5.9m to revenues in the year ended 31 May 2012 and are expected to contribute £16m in the first full year ending 31 May 2013. Underlying operating profit remained flat at £4.3m, with the second half being impacted by the costs of starting and ramping up the new Steel sector contracts. In line with our standard policy, all bidding and mobilisation costs have been expensed. Profitability was also impacted by investment in business development and tendering activities relating to the provision of engineering solutions aimed at converting facilities to handle biomass. As noted below this investment has delivered two significant further contract wins.

The highlight of the strong performance was winning contracts at each of the three largest steel plants in the UK. The largest contract was the five-year £60m contract awarded by Sahaviriya Steel Industries UK Limited ("SSI") to provide coal and coke handling and processing services at the Redcar Steelworks. We have worked closely with SSI as they have worked through the difficult and challenging process of re-commissioning the Redcar steelworks, the first time such a project has been attempted in the UK. We are also pleased to note that in our first year as a contractor at Tata's Scunthorpe steelworks, we were awarded the honour of being nominated the "Contractor of the Year".

Outside of the Steel sector the core business delivered further contract wins in the power station sector, with new contracts agreed at SSE's Fiddlers Ferry power station. In April 2012 the division also secured an £11m project to convert coal handling facilities at EON's Ironbridge power station to handle biomass. Based on a successful commencement of that project the Division has just been awarded a £21m contract for biomass conversion work at Liverpool Bulk Terminal. 

The Group continues to develop opportunities in Hong Kong and we still expect the first significant contract opportunities to be tendered before the end of this calendar year. We are in the process of stepping up business development activities across the region.

Transport Division

Both our Bulk and Tanker fleets performed well in markets that continue to be challenging. The Transport Division's gross revenues decreased slightly from £78.7m to £77.3m due principally to decreased Tanker revenues, with the Tanker business experiencing a soft second half, as it successfully repositioned itself following the loss of a contract with Petroplus as a result of it going into administration. Underlying operating profit increased by £0.3m from £3.8m to £4.1m. Underlying margins remained consistent. The restructuring costs taken in the prior year and the impact of the harsh winter in the prior year largely accounted for the improvement in profits.

We are pleased with the performance of both fleets and they continue to make a valuable contribution to the Group's activities in the UK.

Gordon Banham   Group Chief Executive
Iain Cockburn Group Finance Director	24 September 2012

Financial Review

Results Overview

Revenue for the year ended 31 May 2012 increased by 24.6% from £552.3m to £688.3m.  Underlying operating profit increased by 15.6% from £46.7m to £54.0m which generated an increase in underlying profit before taxation of £7.0m from £40.5m to £47.5m.  Reported profit before tax increased from £36.9m to £43.1m generating diluted earnings per share of 106.1p (2011: 90.5p).

Revenue

Revenue for the year ended 31 May 2012 totalled £688.3m (2011: £552.3m).

The Energy and Commodities division, which represented 62.5% of Group revenue in the year, grew by 33% during the year from £323.6m to £430.5m and was the key driver behind the growth in Group revenue.  A strong performance from our coal trading business in the UK and Europe more than offset a subdued European coke market.  We also saw strong growth in our Industrial Services division on the back of a number of successful contract wins with revenue increasing from £66.8m to £77.8m during the year, an increase of 16.4%.

Operating Profit

The Group reported an improvement in Operating Profit from £43.1m to £49.5m, a 14.9% increase year on year.  The Energy and Commodities division was the most significant driver of the increase with the UK coal business outperforming our expectations due to increased power station volumes and resilient margins in the speciality markets.

Interest

Net financing costs incurred during the year totalled £6.5m compared to £6.2m for the previous year.  Higher net debt levels, driven by investment in the Tower project, and a one off amortisation charge of £0.4m relating to the bank fees on the previous facility were partially offset by interest income from jointly controlled entities of £0.5m.

Taxation

The UK mainstream corporation tax rate reduced from 26% to 24% in April 2012 giving an average mainstream rate of 25.67%.  The effective rate of taxation for the Group for the year ended 31 May 2012 was 28.6% (2011: 27.5%) with the higher rate on profit in our European business combined with the timing of deductions on share based payments being the significant reasons for the increase against the backdrop of a reduction in the mainstream UK Corporation tax rate.

Earnings Per Share

Basic earnings per share for the year were 109.0 pence(2011: 91.9 pence) and diluted earnings per share were 106.1 pence (2011: 90.5 pence). Underlying diluted earnings per share, after adding back amortisation of acquired intangibles, increased by 17.6% from 103.7 pence to 121.9 pence.

Dividend

The Board has proposed a final dividend of 11.8 pence (2011: 10.4 pence) bringing the dividend for the full year to 17.8 pence (2011: 15.5 pence), an increase of 14.8% in the total dividend for the year. The proposed dividend is covered 6.1 times by underlying earnings (2011: 5.9 times).

Pension liability

Both Monckton and Maltby continue to operate unfunded concessionary fuel schemes and Maltby continues to operate its two defined benefit pension schemes. The combined liability of all the schemes has increased over the year from £3.9m to £6.0m and resulted in an actuarial loss of £3.3m during the year. A difference between the expected and actual return on scheme assets, and a reduction in the assumed discount rate from 5.4% to 4.7% were the key reasons for the actuarial loss and increased deficit. During the year, it was agreed with the Trustees to maintain the base deficit recovery payments at a rate of just under £1.0m per annum with the payments increasing to a maximum of £1.4m if asset returns fall below an agreed threshold.

Operating Cash Flow

Earnings before interest, tax, depreciation, amortisation and other non-cash movements increased by £10.2m from £64.5m to £74.7m.

Working capital requirements consumed an additional £35.3m during the year. Whilst overall inventory levels increased by £8.7m, Group inventory days (measured against forward purchases) reduced by 10 days from 98.0 as at 31 May 2011 to 88.0 as at 31 May 2012 reflecting continuing tight management of inventory within the Group. As predicted in the Interim statement, overall levels of inventory have increased as the Group has maximised the benefits of its stocking yards by forward purchasing physical stock to take advantage of the forward price curve. This net increase in inventory levels has happened against a backdrop of falling commodity prices with the API2 coal price falling by approximately 29% during the year.

Trade and other receivables increased by £29.4m during the year in line with the growth in activity in the Group. Notably, Group debtor days reduced by 1 day from 27.8 days to 27.0 days. In addition, amounts advanced to the Tower JV increased by £18.8m from £3.6m at 31 May 2011 to £22.4m at 31 May 2012.

An increase in trade and other payables of £22.4m benefitted from the timing of coal vessels at the year end, as noted in the pre-close statement. Notwithstanding this, Group creditor days reduced by 5 days from 41.7 days to 37.0 days.

After interest payments of £5.4m and income tax payments in the year of £5.0m, resultant net cash from operating activities during the year was £29.0m compared to £44.7m in the previous year. The Group benefitted by £0.8m from the timing difference in cash tax payments arising from a sale and leaseback transaction conducted in the previous financial year.

Capital expenditure

Total net capital expenditure for the year was £30.7m compared to £18.0m in the previous year. Of the capital expenditure, £10.7m was financed through finance leases. The depreciation charge for the year was £20.6m (2011: £17.1m). The capital programme has exceeded ongoing depreciation during the year as we have strategically invested across the business. We anticipated in our Interim report that following the recent success of our Industrial Services business in the steel sector, we would be investing in plant and equipment to support these contracts at all three major steel plants in the UK. In addition, during the year, we completed the investment in T15's face equipment at Maltby and further invested in the face equipment for the next face, T125. Other significant investments included fleet upgrades at our Tankers business and the purchase of the new site to act as a regional head office and transport facility near Leeds. This site is ideally located to provide much needed expansion for our Yorkshire based staff and to provide a Yorkshire base for a significant portion of the transport fleet.

With regard to acquisitions and other investments, the Group purchased Oxbow Coal Limited's 50% share in our joint venture Eastgate Materials Handling Limited for a cash consideration of £1.8m and also increased its effective share in its European businesses to 82% during the year.

Financing activities

During the year the Group utilised an additional £31.0m of its banking facilities and made payments of £8.9m against finance lease liabilities. Dividend payments during the year included £3.6m paid to minority shareholders of the European subsidiaries.

Net Debt

Group net debt, comprising cash and cash equivalents, bank overdraft and other interest-bearing loans and borrowings was £77.7m at 31 May 2012, an increase of £11.7m from the £66.0m reported at 31 May 2011. Net debt as a ratio of net assets of the Group at 31 May 2012 was 57% compared to 58% at 31 May 2011.

Borrowings and Facilities

During the year, the Group was financed by a mixture of cash flows from operations, trade credit, short-term borrowings, longer-term borrowings and finance leases. Operating leases are used in conjunction with asset financing to balance the flexibility afforded by asset ownership and the efficient use of capital. 

In April 2012, the Group secured a new multi-bank committed facility increasing its core UK facilities from £115m to £175m.  The new facility consists of a £50m invoice finance facility and a £125m revolving credit facility ("RCF").  The arrangement was concluded with a five bank group comprising of RBS, HSBC, Lloyds, Santander and Barclays and is committed through to 30 October 2015.

The decision to secure new facilities early has locked in slightly improved pricing and, critically, provides the Group with increased debt capacity to support its growth aspirations. 

The Group continues to operate comfortably within its banking covenants. The key covenants on the RCF are interest cover and leverage, measured as a ratio of net debt to EBITDA. As at 31 May 2012 interest cover was 11.6 times, comfortably over the covenant minimum of 4 times and leverage was 1.0 times, comfortably under the maximum 2.5 times permitted.

The European business continues to operate on a facility of £52m (€65m) from Commerzbank. At the end of the year the net debt on this facility was £21.0m.

Capital Management

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern, whilst maximising the return to shareholders. The capital structure of the Group consists of debt, which includes borrowings, cash and cash equivalents, and equity attributable to equity holders of the parent, comprising capital, reserves and retained earnings.

The capital structure is reviewed regularly by the Group's Board of Directors. The Group's policy is to maintain gearing at levels appropriate to the business. The Board principally reviews gearing determined as a proportion of debt to earnings before interest, tax and depreciation. The Board also takes consideration of gearing determined as the proportion of net debt to total capital. It should be noted that the Board reviews gearing taking careful account of the working capital needs and flows of the business. In the trading businesses, where working capital cycles are regular, predictable and generally less than 90 days, the Board is comfortable to maintain higher levels of debt and gearing as measured against EBITDA.

Going Concern

The Group has considerable financial resources together with long-term contracts with a number of customers and suppliers across different geographic areas and industries. As a consequence, the directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook.

After making enquiries, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

Iain Cockburn Group Finance Director

24 September 2012

Consolidated Statement of Comprehensive Income

for year ended 31 May 2012

	Note	2012  £000	2011 £000
Revenue	2	688,262	552,259
Cost of sales		(593,329)	(468,045)
Gross profit		94,933	84,214
Other operating income		835	469
Administrative expenses		(46,288)	(41,619)
Operating profit		49,480	43,064
Financial income		2,304	1,443
Financial expenses		(8,764)	(7,602)
Share of profit in jointly controlled entities (net of tax)		99	23
Profit before tax	2	43,119	36,928
Income tax expense	4	(12,312)	(10,108)
Profit for the year		30,807	26,820
Other comprehensive (expense)/income
Foreign exchange translation differences		(2,201)	705
Effective portion of changes in fair value of cash flow hedges		3,068	(1,418)
Actuarial gains and losses on defined benefit pension plans		(3,274)	891
Tax recognised on other comprehensive income	4	(6)	17
Other comprehensive (expense)/income for the year, net of tax		(2,413)	195
Total comprehensive income for the year		28,394	27,015
Profit attributable to:
Equity holders of the company		29,455	24,600
Non-controlling interest		1,352	2,220
Profit for the year		30,807	26,820
Total comprehensive income attributable to:
Equity holders of the company		27,310	24,671
Non-controlling interest		1,084	2,344
Total comprehensive income for the year		28,394	27,015
Basic earnings per share (pence)	5	109.00	91.85
Diluted earnings per share (pence)	5	106.12	90.50

Consolidated Balance Sheet

at 31 May 2012

		2012	2011
		£000	£000
Non-current assets
Property, plant and equipment		98,340	87,120
Intangible assets		29,831	31,616
Investments in jointly controlled entities		140	-
		128,311	118,736
Current assets
Inventories		112,027	105,944
Derivative financial instruments		6,051	266
Trade and other receivables		114,779	66,072
Cash and cash equivalents		45,852	17,243
		278,709	189,525
Total assets		407,020	308,261
Non-current liabilities
Other interest-bearing loans and borrowings		(82,405)	(51,190)
Retirement benefit obligations		(5,969)	(3,886)
Provisions		(9,282)	(8,815)
Derivative financial instruments		(3,258)	(168)
Deferred tax liabilities		(3,482)	(3,883)
		(104,396)	(67,942)
Current liabilities
Bank overdraft		(31,215)	(23,994)
Other interest-bearing loans and borrowings		(12,094)	(8,059)
Trade and other payables		(100,462)	(79,205)
Income tax liabilities		(20,117)	(11,788)
Derivative financial instruments		(2,375)	(2,623)
		(166,263)	(125,669)
Total liabilities		(270,659)	(193,611)
Net assets		136,361	114,650

		2012	2011
		£000	£000
Equity attributable to equity holders of the parent
Share capital		2,709	2,683
Share premium		32,105	31,490
Other reserves		211	211
Translation reserve		(1,383)	550
Merger reserve		1,022	1,022
Hedging reserve		525	(1,759)
Capital redemption reserve		1,530	1,530
Retained earnings		97,804	74,158
		134,523	109,885
Non-controlling interest		1,838	4,765
Total equity		136,361	114,650

Consolidated Statement of Changes in Equity

for year ended 31 May 2012

	Share capital £000	Share premium £000	Translation reserve £000	Hedging reserve £000	Other reserves £000	Capital redemption reserve £000	Merger reserve £000	Retained earnings £000	Total parent equity £000	Non controlling interest £000	Total equity £000
Balance at 1 June 2010	2,660	30,429	(31)	(690)	211	1,530	1,022	51,813	86,944	2,840	89,784
Total comprehensive income for the year
Profit for the year	-	-	-	-	-	-	-	24,600	24,600	2,220	26,820
Other comprehensive income
Foreign exchange
translation differences	-	-	581	-	-	-	-	-	581	124	705
Effective portion of changes
in fair value of cash
flow hedges	-	-	-	(1,418)	-	-	-	-	(1,418)	-	(1,418)
Actuarial gains and losses on
defined benefit pension plans	-	-	-	-	-	-	-	891	891	-	891
Tax recognised on other
comprehensive income	-	-	-	349	-	-	-	(332)	17	-	17
Total other comprehensive income	-	-	581	(1,069)	-	-	-	559	71	124	195
Total comprehensive income for the year	-	-	581	(1,069)	-	-	-	25,159	24,671	2,344	27,015
Transactions with owners recorded directly in equity
Issue of shares	23	1,061	-	-	-	-	-	-	1,084	-	1,084
Equity settled share-based payment transactions	-	-	-	-	-	-	-	1,067	1,067	-	1,067
Dividends	-	-	-	-	-	-	-	(3,892)	(3,892)	-	(3,892)
Total contributions by and distributions to owners	23	1,061	-	-	-	-	-	(2,825)	(1,741)	-	(1,741)
Changes in ownership interests
Acquisition of non-controlling interest without a change in control	-	-	-	-	-	-	-	11	11	(419)	(408)
Total transactions with owners	23	1,061	-	-	-	-	-	(2,814)	(1,730)	(419)	(2,149)
Balance at 31 May 2011	2,683	31,490	550	(1,759)	211	1,530	1,022	74,158	109,885	4,765	114,650

	Share capital £000	Share premium £000	Translation reserve £000	Hedging reserve £000	Other reserves £000	Capital redemption reserve £000	Merger reserve £000	Retained earnings £000	Total parent equity £000	Non controlling interest £000	Total equity £000
Balance at 1 June 2011	2,683	31,490	550	(1,759)	211	1,530	1,022	74,158	109,885	4,765	114,650
Total comprehensive
income for the year
Profit for the year	-	-	-	-	-	-	-	29,455	29,455	1,352	30,807
Other comprehensive income
Foreign exchange translation
differences	-	-	(1,933)	-	-	-	-	-	(1,933)	(268)	(2,201)
Effective portion of changes
in fair value of cash
flow hedges	-	-	-	3,068	-	-	-	-	3,068	-	3,068
Actuarial gains and losses on
defined benefit pension plans	-	-	-	-	-	-	-	(3,274)	(3,274)	-	(3,274)
Tax recognised on other
comprehensive income	-	-	-	(784)	-	-	-	778	(6)	-	(6)
Total other comprehensive income	-	-	(1,933)	2,284	-	-	-	(2,496)	(2,145)	(268)	(2,413)
Total comprehensive income for the year	-	-	(1,933)	2,284	-	-	-	26,959	27,310	1,084	28,394
Transactions with owners recorded directly in equity
Issue of shares	26	615	-	-	-	-	-	-	641	-	641
Equity settled share-based payment transactions	-	-	-	-	-	-	-	1,332	1,332	-	1,332
Dividends	-	-	-	-	-	-	-	(4,428)	(4,428)	(3,642)	(8,070)
Total contributions by and distributions to owners	26	615	-	-	-	-	-	(3,096)	(2,455)	(3,642)	(6,097)
Changes in ownership interests
Acquisition of non-controlling interest without a change in control	-	-	-	-	-	-	-	(217)	(217)	(369)	(586)
Total transactions with owners	26	615	-	-	-	-	-	(3,313)	(2,672)	(4,011)	(6,683)
Balance at 31 May 2012	2,709	32,105	(1,383)	525	211	1,530	1,022	97,804	134,523	1,838	136,361

Consolidated Cash Flow Statement

for year ended 31 May 2012

		2012 £000	2011 £000
Cash flows from operating activities
Profit for the year		30,807	26,820
Adjustments for:
Depreciation		20,555	17,120
Amortisation of intangible assets		4,392	3,592
Net finance expense		6,460	6,159
Share of profit in jointly controlled entities		(99)	(23)
Profit on sale of property, plant and equipment		(836)	(469)
Equity settled share-based payment expenses		1,332	1,067
Income tax expense		12,312	10,108
Translation of non-controlling interest		(269)	124
		74,654	64,498
Change in inventories		(8,717)	(22,936)
Change in trade and other receivables		(48,189)	(5,540)
Change in trade and other payables		22,350	21,248
Change in provisions and employee benefits		(713)	(1,732)
		39,385	55,538
Interest paid		(5,384)	(6,083)
Income tax paid		(4,974)	(4,732)
Net cash from operating activities		29,027	44,723
Cash flows from investing activities
Proceeds from sale of property, plant and equipment		2,468	1,452
Acquisition of subsidiaries, net of cash acquired		(2,940)	(730)
Acquisition of property, plant and equipment		(22,493)	(12,777)
Acquisition of other investments		-	(44)
Net cash from investing activities		(22,965)	(12,099)
Cash flows from financing activities
Proceeds from the issue of share capital		641	1,084
(Repayment of)/proceeds from pre-lease creditor		(1,593)	1,593
Issue of secured loan		(2,192)	-
Payment of finance lease liabilities		(8,941)	(10,068)
Repayment of invoice discounting facility		-	(9,827)
Dividends paid		(8,070)	(3,892)
Proceeds from promissory notes		5,025	-
Proceeds from/(repayment of) revolving credit facility		31,000	(10,857)
Debt refinancing costs		(2,026)	-
Net cash from financing activities		13,844	(31,967)
Net increase in cash and cash equivalents		19,906	657
Cash and cash equivalents at 1 June		(6,751)	(7,206)
Effect of exchange rate fluctuations on cash held		1,482	(202)
Cash and cash equivalents at 31 May		14,637	(6,751)

1. Basis of preparation and status of financial information

The financial information set out above has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards as adopted by the EU (Adopted IFRSs).

The financial information set out above does not constitute the Group's statutory accounts for the years ended 31 May 2012 or 2011. Statutory accounts for 2011 have been delivered to the Registrar of Companies, and those for 2012 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

These results were approved by the Board of Directors on 24 September 2012.

2. Segmental information

The following analysis by industry segment is presented in accordance with IFRS 8 on the basis of those segments whose operating results are regularly reviewed by the Board of Directors (the Chief Operating Decision Maker as defined by IFRS 8) to assess performance and make decisions about allocation of resources.

The sectors distinguished as reportable segments are Production, Energy & Commodities, Transport and Industrial Services. A short description of these sectors is as follows:

Production: produces coal and coke and also recycles tyres for customers throughout the UK and Europe;

Energy & Commodities: provides coal, coke, minerals, smokeless fuel and biomass products to a range of industrial, wholesale and   public sector energy consumers;

Transport: provides bulk logistics to UK customers; and

Industrial Services: provides quality assured contract management services to the power generation, utilities, chemicals and minerals industries.

These segments are combinations of subsidiaries and divisions, have separate management teams and offer different products and services. These four operating segments are also Reportable segments.

The segment results, as reported to the Board of Directors, are calculated under the principles of IFRS. Performance is measured on the basis of underlying operating profit, which is reconciled to profit before tax in the tables below.

The table below sets out information for each of the Group's reportable segments.

	Production 2012 £000	Energy & Commodities 2012 £000	Transport 2012 £000	Industrial Services 2012 £000	Total 2012 £000
Revenue
Total revenue	134,873	446,214	77,326	80,722	739,135
Inter-segment revenue	(22,168)	(15,739)	(10,034)	(2,932)	(50,873)
Revenue from external customers	112,705	430,475	67,292	77,790	688,262
Underlying operating profit	15,225	30,354	4,067	4,325	53,971
Amortisation of intangibles	-	(2,429)	(393)	(1,570)	(4,392)
Net financing costs	(1,831)	(3,350)	(749)	(530)	(6,460)
Profit before taxation	13,394	24,575	2,925	2,225	43,119
Depreciation charge	(14,255)	(839)	(3,551)	(1,910)	(20,555)
Capital expenditure	21,178	2,427	4,055	5,547	33,207
Net assets
Segment assets	129,988	150,666	28,447	22,134	331,235
Segment liabilities	(52,573)	(86,809)	(17,177)	(17,949)	(174,508)
Segment net assets	77,415	63,857	11,270	4,185	156,727
Jointly controlled entities	76	64	-	-	140
Segment net assets including share of jointly controlled entities	77,491	63,921	11,270	4,185	156,867
Unallocated net assets					(20,506)
Total net assets					136,361

Unallocated net assets include goodwill and intangibles (£29.8m), revolving credit facility (£73.1m), cash and cash equivalents (£24.3m) derivative financial instruments (£0.4m), and other corporate items (£9.5m).

	Production 2011 £000	Energy & Commodities 2011 £000	Transport 2011 £000	Industrial Services 2011 £000	Total 2011 £000
Revenue
Total revenue	110,119	330,814	78,690	69,452	589,075
Inter-segment revenue	(15,870)	(7,232)	(11,082)	(2,632)	(36,816)
Revenue from external customers	94,249	323,582	67,608	66,820	552,259
Underlying operating profit	12,652	25,867	3,843	4,317	46,679
Amortisation of intangibles	-	(1,630)	(393)	(1,569)	(3,592)
Net financing costs	(2,698)	(2,042)	(829)	(590)	(6,159)
Profit before taxation	9,954	22,195	2,621	2,158	36,928
Depreciation charge	(11,168)	(1,101)	(3,261)	(1,590)	(17,120)
Capital expenditure	10,889	842	5,061	2,681	19,473
Net assets
Segment assets	94,373	133,687	30,396	16,165	274,621
Segment liabilities	(36,391)	(63,750)	(17,773)	(17,160)	(135,074)
Segment net assets	57,982	69,937	12,623	(995)	139,547
Jointly controlled entities	-	-	-	-	-
Segment net assets including share of jointly controlled entities	57,982	69,937	12,623	(995)	139,547
Unallocated net assets					(24,897)
Total net assets					114,650

Unallocated net assets include goodwill and intangibles (£31.6m), revolving credit facility (£43.0m), derivative financial instruments (£2.5m), and other corporate items (£11.0m).

Information about major customers

Included in revenue is an amount of £82,371,000 (2011: £43,400,000) arising from sales to the Group's largest customer.

3. Acquisition of subsidiaries

Acquisition of Eastgate Materials Handling Limited

On 1 June 2011, the Group acquired the remaining 50% share capital of Eastgate Materials Handling Limited a jointly controlled entity with Oxbow Coal Limited, satisfied by £1,826,000 cash. The company operates port handling facilities at Immingham, UK.

In the twelve months to 31 May 2012, Eastgate Materials Handling Limited contributed profit after tax of £202,000 to the consolidated profit after tax for the year.

	Pre-acquisition carrying amounts £000	Fair value adjustments £000	Recognised values on acquisition £000
ASSETS
Non-current assets
Property, plant and equipment	267	-	267
Intangible assets	-	2,540	2,540
Current assets
Trade and other receivables	3,178	-	3,178
Cash and cash equivalents	54	-	54
LIABILITIES
Non-current liabilities
Deferred tax liabilities	(6)	(582)	(588)
Current liabilities
Trade and other payables	(3,909)	-	(3,909)
Net identifiable assets and liabilities	(416)	1,958	1,542
Share of Eastgate Materials Handling owned			193
Goodwill on acquisition			91
Net purchase consideration			1,826
Satisfied by:
Consideration paid			1,826

Included in the consideration is the estimated fair value of the existing 50% stake which has been valued at £193,000.

The principal fair value adjustment was the recognition of an intangible asset of £2,540,000 for the guaranteed income based on discounted future cash flows for the duration of a customer contract. Goodwill comprises principally the benefits to the wider Group of control of the facility at Immingham.

The intangible asset is being amortised over the expected life of the contract, which is 36 months. The goodwill is not being amortised but is being reviewed annually for impairment.

Reorganisation of European businesses

The acquisition of the non-controlling interest comprises the acquisition in November 2011 of a further 8.5% of Hargreaves Raw Material Services GmbH for €660,000. This shareholding was subsequently swapped for an 82% shareholding in the newly formed European holding company, Hargreaves Services Europe Limited.

Acquisition of DWL Engineering Services Limited

On 16 January 2012, the Group acquired 100% of the share capital of DWL Engineering Services Limited for £5,000 satisfied in cash. The company is dormant, therefore contributed £nil to the consolidated profit after tax for the year.

Other

In July 2011 and November 2011, £180,000 of the £250,000 deferred consideration payable on the acquisition of trade and assets from Stiller Tankers Limited in October 2009 was paid in final settlement. The remaining £70,000 was released to profit.

In June 2011 and August 2011, €467,000 was paid in relation to the acquisition of the 5% non-controlling interest in Hargreaves Raw Material Services GmbH in June 2010.

Acquisition of Mekol NV and Hargreaves Carbon Products Polska Sp Zo.o.

On 15 March 2011, the Group acquired 100% of the share capital of Mekol NV through Hargreaves Carbon Products NV for £700,000 satisfied in cash.  The company owns and operates a coal wash plant facility at Ghent coal terminal, Belgium.

On 16 March 2011 the Group acquired 80% of the share capital of Hargreaves Carbon Products Polska Sp Zo.o.  This acquisition has been combined in the table below as it is not material.

The result that these acquisitions contributed to the consolidated profit after tax for the two and a half months following acquisition was immaterial.

	Pre-acquisition carrying amounts £000	Fair value adjustments £000	Recognised values on acquisition £000
ASSETS
Non-current assets
Property, plant and equipment	158	-	158
Current assets	49	-	49
LIABILITIES
Current liabilities
Trade and other payables	(100)	-	(100)
Net identifiable assets and liabilities	107	-	107
Satisfied by:
Consideration paid			710
Goodwill on acquisition			603

Acquisition of trade and assets of DWL Engineering Services Limited

In April 2011, the remaining £20,000 of deferred consideration was paid in relation to the acquisition of the trade and assets of DWL Engineering Services Limited.

Acquisition of additional stake in Hargreaves Raw Material Services GmbH

The acquisition of the non-controlling interest comprised the acquisition in June 2010 of a further 5% of Hargreaves Raw Material Services GmbH at its net asset value of €467,000.

4. Taxation

Recognised in the statement of comprehensive income

	2012 £000	2011 £000
Current tax expense
Current year	11,623	8,727
Adjustments for prior years	(225)	(1,131)
Foreign tax - current year	1,909	4,435
Current tax expense	13,307	12,031
Deferred tax credit
Origination and reversal of temporary differences	(915)	(1,617)
Adjustments for prior years	233	275
Reduction in tax rate	(313)	(581)
Deferred tax credit	(995)	(1,923)
Tax expense in income statement (excluding share of tax of equity accounted investees)	12,312	10,108
Share of tax of equity accounted investees	25	81
Total tax expense	12,337	10,189

Tax recognised in other comprehensive income

	2012 £000	2011 £000
Deferred tax
Effective portion of changes in fair value of cash flow hedges	(784)	349
Actuarial gains and losses on defined benefit pension plans	778	(332)
	(6)	17

Reconciliation of effective tax rate

	2012 Rate	2012 £000	2011 Rate	2011 £000
Profit for the year		30,807		26,820
Total tax expense (including tax on equity accounted investees)		12,337		10,189
Profit excluding taxation		43,144		37,009
Tax using the UK corporation tax rate of 25.67% (2011: 27.67%)	25.67%	11,075	27.67%	10,240
Effect of tax rates in foreign jurisdictions	1.00%	434	1.98%	734
Unrecognised tax losses	-0.20%	(85)	0.12%	44
Non-deductible expenses	2.84%	1,220	1.63%	602
Reduction in tax rate on deferred tax balances	-0.73%	(314)	-1.57%	(581)
(Over)/under provided in prior years	0.02%	7	-2.30%	(850)
Effective tax rate and total tax expense	28.60%	12,337	27.53%	10,189

The UK corporation tax rate reduced to 24% on 1 April 2012, giving an effective base rate of 25.67% (2011: 27.67%).

Factors that may affect future current and total tax charges

On 26 March 2012 the Chancellor proposed changes to further reduce the main rate of corporation tax by one per cent per annum to 22% by 1 April 2014, but these changes were not substantively enacted during the year and therefore are not included in the figures above.

5. Earnings per share

All earnings per share disclosures relate to continuing operations as the Group had no discontinued operations in either 2011 or 2012.

Earnings per share for the ordinary shares are as follows:

	2012	2011
Ordinary shares
Basic earnings per share	109.00p	91.85p
Diluted earnings per share	106.12p	90.50p

The calculation of earnings per share is based on the profit for the year attributable to equity holders and on the weighted average number of shares in issue and ranking for dividend in the year.

	2012 £000	2011 £000
Profit for the year attributable to equity holders	29,455	24,600
Weighted average number of shares	27,022,535	26,782,240
Earnings per ordinary share	109.00p	91.85p

The calculation of diluted earnings per share is based on the profit for the year and on the weighted average number of ordinary shares in issue in the year adjusted for the dilutive effect of the share options outstanding (effect on weighted average number of shares: 732,494; effect on earnings per ordinary share: 2.88 pence).

	2012 £000	2011 £000
Profit for the year attributable to equity holders	29,455	24,600
Weighted average number of shares	27,755,029	27,181,904
Diluted earnings per ordinary share	106.12p	90.50p

Underlying diluted Earnings per Share is calculated on the same weighted average number of shares in the table above, and on Underlying Profit after Tax, as reconciled below:

	2012 £000	2011 £000
Profit for the year attributable to equity holders	29,455	24,600
Amortisation of intangibles	4,392	3,592
Underlying Profit after Tax	33,847	28,192

6. Dividends

The aggregate amount of dividends comprises:

	2012 £000	2011 £000
Final dividends paid in respect of prior year but not recognised as liabilities in that year	2,803	2,525
Interim dividends paid in respect of the current year	1,625	1,367
	4,428	3,892
Proposed dividend of 11.8p per share (2011:10.4p)	3,196	2,790

The proposed dividend has not been included in liabilities as it was not approved before the year end.

7. Annual report

The annual report will be posted to shareholders on or around 31 October 2012 and copies will be available from the Company Secretary, Hargreaves Services plc, West Terrace, Esh Winning, Durham, DH7 9PT, or from the Investor Relations section of the Group website at www.hargreavesservices.co.uk

 

END

 

 

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