Strategic Repositioning and Trading Update

RNS Number : 4647W

Hargreaves Services PLC

27 April 2016

 

For immediate release

27 April 2016

Hargreaves Services plc

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

Strategic Repositioning and Trading Update

Hargreaves Services plc (AIM: HSP), the UK's leading supplier of solid fuels and bulk material logistics, is pleased to provide the following update on its strategic repositioning programme and recent trading.

Over the last two years Hargreaves has worked hard to position itself to face the growing challenges that have emerged in the coal and steel markets. This programme has included undertaking a far-reaching restructuring exercise aimed at simplifying the Group through disposals and business closures to reduce debt levels and to seek to mitigate the risks and volatility faced by the Group in its coal, coke and steel related activities.

Over the last year, the challenges facing the coal sector in the UK have increased due to continuing coal price weakness and low levels of coal demand arising from weak gas prices and an accelerated programme of UK coal generation plant closures. Given these continuing pressures the Board has elected to further accelerate its withdrawal from the thermal coal sector. We note the announcement by RWE released earlier this week concerning its intention to potentially cease taking delivery of Welsh coal at Aberthaw power station after March 2017. Our Interim Results Statement indicated that we were reviewing options to curtail coal production at Tower earlier than planned and that such a decision might result in a modest impairment to the value of loans the Group has extended to the joint venture.  Although the RWE announcement means that curtailment of coal production may potentially be necessary even earlier than we had anticipated, we will continue to review plans and mitigation opportunities to minimise any necessary impairment of loans and continue to believe that any impairment will be modest. Recent pressures in the steel markets, including the closure of Redcar steelworks and the uncertainty over the future of Port Talbot have exacerbated the trading pressures in the UK.

Although the coal and steel sectors remain highly challenging, the Group has made significant progress in transitioning the business away from thermal coal exposure in the UK.  Most of the initiatives to deliver that strategy are underway and have been clearly highlighted in our recent shareholder communications.

As this repositioning exercise nears completion, there are three separate segments of activity that are evident within the Group:

1.   Continuing Long Term Core Operations;

2.   Development and realisation of value from Property and Energy projects; and

3.   Run-out of legacy assets into cash.

It is the intention of the Board to manage and report these activities under a new structure of segmentation to ensure that progress in each area can be easily seen. The Board believes that this will assist investors and other stakeholders in identifying the value that exists within the Group and the rate of progress being made in development activities.  We expect strong value creation from our Property and Energy portfolio and significant cash generation from the run out of legacy assets, whilst our Long Term Core Operations represent a profitable and sustainable ongoing business with growth opportunities and tight capital discipline.  

LONG TERM CORE OPERATIONS

Consists of two segments of operations that have been identified by the Board as offering the opportunity to generate long term and sustainable profits:

1.   A simplified and UK-focussed Coal Distribution operation; and

2.   A diversified Services operation comprising an Industrial Services unit, a Transport unit and a Specialist Earthworks unit.

·      Coal Distribution

The Group will continue to support coal distribution to speciality coal markets which the Board believes offers a continuing longer term opportunity. These markets will be served through a combination of output from the House of Water coal production site in Scotland and from imports. The Board views that these markets offer a continuing longer term opportunity.  The Coal Distribution operations will be focused on the Group's Immingham and Killoch coal terminals and will be managed to maximise market share and optimise the sourcing of imported and indigenous coals from the House of Water site.

·      Specialist Earthworks & Infrastructure Services

The acquisition of CA Blackwell in January has created an established platform for the Group to develop a strong long term specialist earthworks and related civil engineering operation. This acquisition offers significant plant and skills synergies and extends the Group's operations into contract mining and quarrying. The Division will control the entire Group's heavy plant, one of the largest heavy plant fleets in Europe. The greater financial strength and balance sheet of the Group will enable CA Blackwell to compete for larger contracts and opportunities. Synergies relating to the physical operation of the House of Water site will be targeted by this Division in conjunction with the Coal Distribution business.  In addition, all future Scottish restoration tenders targeted by the Group will receive support from our specialist earthworks business to utilise its skills in project delivery and soils and land remediation.

·      Industrial Services

As previously announced the accelerated closure program for UK coal generation capacity combined with the closure of Redcar steelworks and the commercial pressures faced by the remaining UK steel plants will result in UK operations reducing in scale over the coming eighteen months. The Group will continue to seek to grow its international opportunities. Whilst this opportunity for growth is not expected to replace the UK losses in the near term, the Board regards the Industrial Services operation as offering a positive long term business opportunity.

·      Transport & Logistics Services

The Transport and Logistics operation will continue to offer UK bulk haulage services. We plan for this business unit to increase its efforts to further target road transport, recycling and disposal for the waste and construction markets, as well as the supply of aggregates. The opening of the new depot near Harlow should accelerate the development and growth of operations around the London market. The Board is confident that divisional profits can be returned to levels experienced in the prior financial year, even with the loss of bulk coal volumes.

PROPERTY AND ENERGY PROJECTS

The Board has identified the opportunity to create significant medium term value and cash generation from the development of projects around the Group's extensive property portfolio. The Group controls some 18,500 acres of property in England, Scotland and Wales. Activity and investment in this portfolio has been ongoing for the last two years.

In addition to the development of value through planning gain and tenanted occupancy, the Group is also working on a number of select and potentially high-value energy related projects. This includes the development of carefully selected high wind-speed onshore wind energy projects, two energy-from-waste projects and a number of other projects and collaborations centred on the Group's electricity grid connections.

The Board is setting itself the medium term aspiration of generating between £35m and £50m of incremental value over the next five years from this portfolio of property and energy projects. By the nature of the development milestones, this gain is likely to have an uneven profile.

The investment, cash flows and gains and losses around such projects will be reported in a separate segment to allow investors to track the development of value, the capital investment and the cash realisation.

In respect of future financial reporting periods, the Group will analyse operating performance in accordance with the following simplified Divisional reporting structure:

UK Speciality Coal Distribution
Europe
Distribution
Specialist Earthworks and Infrastucture Services
Industrial Services
Transport and Logistics
Services
Property and Energy
Corporate Overheads
Group Operating Profit

To improve transparency, and reflecting the smaller size of the Group's continuing operations, segmental operations will be reported before the allocation of indirect Group overheads, with such overheads being reported separately.  The Directors expect that the annual normalised charge to Group profits for central overheads will be of the order of £5.0m.

The Board's medium term aspiration is that the Group's core operations, excluding property and energy projects and before Group overheads, should deliver a trend rate of annual operating profit within the range of approximately £10-£15 million, with Services delivering approximately 60% of that figure.  In view inter alia of the aspirational nature of these targets and the expected uneven profile of development gains from property and energy projects described above, it is emphasised that this aspirational target should not be treated as a forecast of operating profitability, either for any specific operating division or for the Group as a whole, for any future financial reporting period.

REALISATION OF LEGACY ASSETS INTO CASH

As the Group exits from thermal coal and coke production, following the recent drop in demand, the Group is actively working on realising cash from its assets that relate to these non-core activities. In particular, these assets include:

·      coal and coke stocks;

·      surplus plant and equipment; and

·      loans to the Tower joint venture.

The net realisable value of these assets is approximately £66m as summarised below. The Group's objective is to realise these assets into cash as quickly as possible in an orderly fashion. As these assets are held for resale they are being held in the balance sheet at the lower of cost and net realisable value.  The Board expects the bulk of inventory realisations to be completed before the end of May 2017.  The table below does not include a provision for any potential impairment of the Group's loans to the Tower joint venture.  As noted above, the need for any impairment will continue to be evaluated over the coming weeks.

Current Indicative Legacy Balance Sheet Items as at 31 March 2016	£m
Surplus Yellow Plant	10.0
Maltby Face Equipment	5.0
Other	2.0
Property, Plant & Equipment	17.0
Thermal Coal	10.0
Coke	10.0
Coking Coal	2.0
Other	1.0
Inventory	23.0
Tower Loans	23.0
Other Working Capital	9.0
Maltby Pension	(5.0)
Other Balances	(1.0)
Net Legacy Assets for Realisation	66.0

Cash generation and any gains and losses on the disposal of these assets will be reported separately to allow investors to see progress made in the realisation process.

The Board is setting the target of having completed the bulk of realisations before the end of May 2017.

CURRENT TRADING UPDATE

The Board is encouraged by progress in assimilating the CA Blackwell acquisition and is pleased to announce that the business has recently been confirmed as the preferred provider for two major sections of the Government's £1.5 billion A14 improvement scheme which is part of the UK's largest road improvement programme since the 1970's. These projects provide a strong underpinning to the Division's forward order book and are expected to commence before the end of this calendar year.

Trading in Transport and Logistics remains challenging but revenues are showing signs of recovery. A lease was secured in March on a new depot near Harlow which should assist this business unit to accelerate its growth in and around the London market.

Current trading remains in line within the Industrial Services Division. The previously announced closures of a number of UK coal fired power stations will have little impact on profit in the current year beyond the establishment of redundancy provisions as previously announced. The Group is actively seeking further opportunities to reduce costs and reposition the business in light of these closures and in light of the threat over the future of the Port Talbot steelworks. The Group expects to incur a further £0.5m of restructuring costs over the coming months, assuming Port Talbot continues to operate. The Group's potential redundancy liability at Port Talbot is approximately £1.0m.

The Board remains pleased and encouraged by the progress it is making with the development of the Group's property and energy projects portfolio.

Underlying trading results in the Coal Production and Distribution Division will be further impacted by continuing soft demand in domestic coal markets that will result in a further £0.5m shortfall in the current period. The share of loss for the current year of the Tower joint venture is now likely to be £1.0m higher than expected due to the combination of lower production and sales volumes. Efforts are underway to establish a curtailed mining strategy in light of the continuing risks associated with RWE's announced plans for Aberthaw power station. We continue to evaluate the need for any impairment relating to the Group's loans to the Tower joint venture.

Efforts are also underway to accelerate the rationalisation of Scottish operations to a single site focused on speciality coal production. The early curtailment of coal mining at other sites will result in House of Water becoming the Group's single remaining Scottish coal production site. This accelerated programme to cease coal production, combined with the decision to curtail a number of development options over further sites is likely to result in further estimated exceptional cost write-offs totalling between £3.0m and £3.6m over the next three months.

The Group will continue to seek all possible overhead reduction opportunities and expects to have largely completed its restructuring before the end of this financial year. The following year is expected to be a year of consolidation.

Gordon Banham, Group Chief Executive commented, "This announcement marks an important turning point for the Group. After eighteen months of market turmoil, we are finally completing a challenging phase of restructuring to move away from our traditional areas of focus and reposition the Group. The bulk of that restructuring work is complete and we can now look forward and actively pursue the value creation opportunities ahead of us. We have protected our strong balance sheet position throughout this difficult time. Today we find ourselves with a balance sheet with net assets of around £140m and we have set ourselves the objective of turning £66m of legacy assets on that balance sheet into free cash as quickly as possible in an orderly fashion. We are also setting ourselves the aspirational goal of developing and realising £50m of incremental value from our extensive property and energy project portfolio over the next five years to further grow our net asset base. Finally, we have identified a core of business operations that offer a long term value creation opportunity and we are focused on growing operating profits and delivering strong contributions from each of these areas. Whilst risks remain in achieving our targets, the Board is confident that the Group is well placed and well equipped to deal with these challenges."

A presentation is available on the website (www.hsgplc.co.uk/investors/presentations.aspx) to provide further background and explanation on this statement.

For further details:

Hargreaves Services Gordon Banham, Chief Executive Officer Iain Cockburn, Finance Director	0191 373 4485
Buchanan Mark Court  / Anna Michniewicz / Sophie Cowles	020 7466 5000
N+1 Singer Sandy Fraser / Nick Owen	020 7496 3000

 

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