Final Results

Shanks Group Plc 02 June 2005 Shanks Group plc Preliminary Results 2005 Shanks Group plc ('Shanks') a leading European independent waste management company, announces its preliminary results for the year ended 31 March 2005. Highlights Key features are: •Headline Profit (before tax, exceptional items and goodwill amortisation) rose by 10% to £33.3m (2004: £30.3m) due to better than expected results from the continuing business; •Operating profit before goodwill amortisation and exceptional items on continuing businesses rose by 22% to £38.3m (2004: £31.3m); •As a result of the landfill and power disposal, turnover was lower at £504m (2004: £588m); •Profit before tax of £64.4m (2004: £18.7m) after exceptional profit of £41.1m; •Adjusted earnings per share were 9.4p per share (2004: 8.9p per share); •Maintained final dividend of 3.8p per share, bringing the total dividend for the year to 5.7p (2004: 5.7p); •Reduction in total debt to £162m (March 2004: £309m), of which £63m (March 2004: £28m) is non-recourse debt in PFI companies; •PFI contract for Dumfries & Galloway commenced in November 2004 Commenting on the results, Michael Averill, Chief Executive of Shanks Group plc said: 'These results provide further evidence that Shanks not only is in a sound financial position but is also strategically positioned at the higher technology based end of the waste treatment and disposal industry. We are therefore ideally placed to compete in the changing European waste market, particularly in the burgeoning UK municipal PFI market.' CHAIRMAN'S STATEMENT Financial Performance I am pleased to announce a 10% growth in the Group's profit before tax, exceptional items and goodwill (Headline Profit) from £30.3m to £33.3m. Operating profit before goodwill and exceptional items on the continuing businesses was up 22% to £38.3m from £31.3m. This improvement was achieved through a substantial turnaround in the continuing UK business as a result of management actions. In its strategic review Shanks determined that landfill volumes will reduce in the future. The combined effect of the Landfill Directive and steeply rising Landfill Tax will provide a stimulus for higher technology waste management solutions. As a consequence on 1 July 2004 the Group completed the disposal of its UK landfill and related power (L&P) operations for a gross consideration of £227.5m. The trading profit (operating profit before goodwill and exceptional items) of the discontinued business was £5.8m (2004: £19.7m). An exceptional profit of £52.5m was achieved on the disposal. Other disposals resulted in a net exceptional loss of £1.0m, after £2.1m of goodwill write off and there was an exceptional charge of £10.4m for the restructuring of UK operations. Overall turnover was lower at £504m (2004: £588m) reflecting the L&P divestment. Continuing business revenue increased by £9m to £466m (2004: £457m). Finance charges reduced markedly to £10.8m (2004: £20.7m). After the net exceptional profit of £41.1m (2004: £Nil) and goodwill amortisation of £10.0m (2004: £11.6m), the Group profit before tax was £64.4m (2004: £18.7m). The tax rate on the headline profit increased to 34% (2004: 31%) due to the increased mix of profits from countries where underlying tax rates are higher than the UK. Profit after tax was £60.2m (2004: £9.2m). Adjusted basic earnings per share (eps), before exceptional items and goodwill amortisation, increased by 6% to 9.4 pence per share (2004: 8.9 pence per share). Basic eps were 25.7 pence per share (2004: 3.9 pence per share). Your Board recommends an unchanged final dividend of 3.8 pence per share which, if approved by shareholders, brings the total dividend for the year to 5.7 pence per share (2004: 5.7p). Since 31 March 2004, debt relating to the core business has fallen by £182m whilst Private Finance Initiative company (PFICO) debt increased by £35m. PFICO debt, which is bank debt in companies set up for PFI contracts and which is non-recourse to the core Group, is consolidated as the PFICOs are wholly owned. Total Group debt at 31 March 2005 was £162m, of which £99m is core and £63m is PFICO debt. Divisional Review United Kingdom As a result of the L&P disposal, the UK operations have been reorganised under a single management team to reduce administration costs and to focus the sales effort on the opportunities arising from the changing legislative environment. Before exceptional charges, the continuing businesses delivered a major turnaround from the £4.5m trading loss in 2004 to a trading profit of £1.4m. This encouraging improvement of £5.9m is mainly in the collection and recycling business where management took the decision in 2004 to discontinue several loss making contracts. Vehicle operations have been rationalised, surplus assets disposed and overheads substantially reduced. Although the contaminated land operation performed well, the incineration activity at Fawley continued to operate in a challenging market. The contributions from the existing PFI businesses at Argyll & Bute and East London were in line with their business plans. A new 25 year PFI contract with Dumfries & Galloway commenced in November 2004. Belgium Trading profits in Belgium improved by £0.6m to £16.3m (2004: £15.7m). These better results were due to higher landfill volumes, following the receipt of the new permit last year and windfall sales during the maintenance shutdown of the Brussels municipal incinerator. There was also the full year effect of increased power capacity which came on line during last year. These factors more than offset the adverse effects of exchange rates, the land remediation activity and the special waste business. Netherlands Trading profits were maintained at £24.0m (2004: £24.2m) with the small reduction entirely due to exchange rate effects. As foreseen, the business continued to be adversely affected in the solid waste market where over capacity has led to price reductions. However higher volumes were received from the greenhouse waste market and performance improved at the ATM hazardous waste facility. Central Services Central Services costs at £3.4m (2004: £4.1m) were lower due to a reduction in the pension charge from last year's elevated level. Developments United Kingdom The strategic alliance with Italian partner Ecodeco has resulted in a deliverable solution to the municipal waste landfill diversion targets required of the UK by the EU Landfill Directive. This exciting technology based on mechanical biological treatment (MBT) is being used in the new contract with Dumfries & Galloway. Construction of the MBT plants at Frog Island for the East London Waste Authority (ELWA) contract is now well underway. Benelux In the Netherlands the expanded capacity of the ATM soil cleaner, the re-permitted ATM pyrolysis plant and the new waste wood processing plant at Utrecht will provide opportunities for further growth. However, the core solid waste market remains difficult. In Belgium, we anticipate household waste will be diverted from our landfill in Wallonia in the long term to meet the EU Landfill Directive. Various projects are under evaluation to provide new sources of profits. Directorate Mr Fraser Welham has been appointed as Group Finance Director with effect from June 2005. He has been our Finance Director in Belgium for the last seven years. Mr David Downes, the current Group Finance Director, will remain as a Director until his retirement at the end of 2005 to ensure a smooth handover of responsibilities and, based on his experience, give strategic input into suitable structures for the Group's current and future PFI contracts. Two new Non-Executive Directors, Mr Adrian Auer and Mr Peter Johnson were appointed in May to replace Mr Richard Biffa who retires in June 2005. They will provide continuity during the period when two further Non-Executive Directors, including me, retire from the Board on reaching the age of 65. I express thanks to the retiring Directors. Outlook Results from the UK operations, whilst still under performing, have nevertheless shown marked progress. The Directors are confident that, with the management actions taken, this improvement will continue. The Benelux operations have performed robustly in difficult market conditions which it is anticipated will improve when their economies recover. These results provide further evidence of the Group's sound financial position and its strategic position at the higher technology based end of the waste treatment and disposal industry. It is ideally placed to compete in the changing European waste market and for UK PFI projects in particular. I M Clubb Chairman CHIEF EXECUTIVE'S OPERATING REVIEW The most significant development in the 2004/5 year was the sale of the UK landfill and related power activities. This transaction not only transformed the Group balance sheet by reducing debt but also honed the UK operations into a smaller clearly focused single unit concentrating on future opportunities. It is strongly believed that advancing regulatory pressure from the EU Landfill Directive coupled with steeply rising Landfill Tax will drive waste from landfill into the newer higher value added services on which the Group will now concentrate. The business model already operating in our continental operations provides the example and much of the know-how for these developments. Once more these continental businesses have performed robustly despite the prevailing depressed economic conditions. The last year has been a challenging one for our staff who have responded superbly. I thank them all. Group Turnover Turnover from continuing activities of £466m together with a £38m contribution from the discontinued L&P business brings the total for the year to £504m (2004: £588m). Continental turnover was flat at £304m whilst revenue in the UK continuing business improved 5% to £162m (2004: £154m). United Kingdom UK operations now involve the collection and management of commercial and industrial wastes, treatment and recycling of hazardous chemical wastes including high temperature incineration. There is also a significant activity in contaminated land and a portfolio of long term contracts treating municipal waste under the Private Finance Initiative. I am pleased to report that a very substantial improvement in performance has been delivered as trading losses of £4.5m have been turned into trading profits of £1.4m. The new combined UK operation, Shanks Waste Management, has substantially reduced overhead, delivered operating efficiencies and sold poorly performing businesses and surplus assets. An exceptional charge of £10.4m has been taken to cover the associated costs. As the rationalisation programme is continuing there should be further significant benefit in the current year. The largest improvement has been evident in our waste collections business where the performance of some depots is now at industry average. The remaining challenge is to bring all units to this level. Our contaminated land remediation business enjoyed a strong year as regulations continue to tighten on landfill disposal. Similarly the chemical treatment of hazardous waste has improved modestly. The incineration performance has however been disappointing with continuing harsh markets and unplanned maintenance shutdowns limiting throughput. Encouragingly however the contract with the Rural Payments Agency to dispose of Meat and Bone Meal from the BSE cattle crisis has been extended for a further 15 months to May 2006. Share of operating profits from joint venture activities has increased to £1.8m from £1.6m. The Group has now won three contracts for the long term management of municipal waste under the Private Finance Initiative. This year has seen significant investment in the existing Argyll & Bute and East London Waste Authority contracts. The investment programme in Argyll & Bute is nearing completion and construction at the first of two major facilities in East London is well advanced and operations should commence in 2006. Both projects are performing to their plans. During the year, a 25 year contract to serve Dumfries & Galloway reached financial close underscoring our confidence in Mechanical Biological Treatment (MBT) technology developed for these applications with our Italian partner, Ecodeco. The contract has a projected revenue of £6m in its first full year and is already contributing profits which will increase in a full year. Construction of the new MBT facilities has already commenced. Belgium Operations in Belgium are similar to those in the UK but exclude high temperature incineration and include specialist demolition, industrial cleaning and landfill. Trading profit in the year has risen to £16.3m from £15.7m in 2004. This is a creditable performance given the size of last year's outstanding contribution from contaminated land remediation. Following the repermitting of the extension to the landfill site at Mont Saint Guibert in early 2004, the site has been able to accept greater volumes of waste and, in particular, provide disposal capacity to the City of Brussels during the shutdown of its incinerator for major planned maintenance. Profits at the site from electricity generation from landfill gas also advanced whilst results from the processing of hazardous waste reduced as volumes declined in the current market. Netherlands Dutch operations are similar to those in Belgium but exclude landfill and demolition and include computer refurbishment. Trading profit for the year was broadly flat at £24.0m (2004: £24.2m). The recession in the all important construction industry continued resulting in pressure on prices and volumes in our solid waste business. This however was more than offset by improvements in our business serving the greenhouse market and by the overall performance in our ATM hazardous waste processing facility. Recent investments in soil cleaning and paint waste capacity resulted in enhanced throughput. Sludge treatment volumes were however less buoyant than in previous years. Our industrial cleaning unit Reym also performed well, a result which would have been still better if not for a single substantially loss making contract. The waste wood processing plant near Utrecht was commissioned during the year and is now operating successfully. Prospects Our continental businesses are performing well and have interesting expansion opportunities, including small tuck-in acquisitions. The first quarter's profits from the L&P disposal will not recur but it is expected that the continuing UK recovery and increases in PFI profits will result in an overall improvement in the current year. In the next 5 years some 30% of the UK market for municipal waste will be tendered as local authorities strive to meet the EU Landfill Directive targets. The innovative MBT technology is now proven as deliverable in the planning arena. The Group therefore intends to pursue these opportunities vigorously. The already announced Landfill Tax increases will further encourage new recycling and recovery technologies for commercial and industrial waste. The technologies currently employed in the Netherlands are transferable to the UK to meet this demand as it emerges. Overall the Group is well placed to compete in its growing markets. FINANCIAL DIRECTOR'S REVIEW Financial Results The Operating Review above covers the background to the Group's trading performance. The L&P business contributed £5.8m to trading profits in the first three months before its disposal and is classified as discontinued. It is estimated to have contributed £3m to headline profit, after taking into account its financial charges. Changes in the average euro exchange rate during the year had an adverse £0.4m effect on Group headline profit. Finance charges were much lower at £10.8m (2004: £20.7m) reflecting the L&P disposal proceeds received in July 2004. Goodwill amortisation fell by £1.6m to £10.0m (2004: £11.6m) due to the sale of the L&P and other businesses. Goodwill arising on the acquisition of the Dumfries & Galloway PFI contract has been provisionally estimated at £7.7m. This reflects the assumption of net liabilities (£3.8m) and bid costs incurred (£3.9m). The average tax rate on headline profit increased to 34% (2004: 31%) as a result of the proportion of profits from countries with higher tax rates. The underlying rates of tax in the countries where the Group operates were UK: 30%. Netherlands: 35% and Belgium: 34%. The Group suffers a higher charge in Belgium as landfill tax is non deductible for corporation tax purposes. Cash Flow Details of the Group's cash flow performance are shown in the table below: 2005 2004 Core PFI £m Business Business Total Total Change ----------------------------------------------------------------------- Operating Profit* 42 2 44 51 (7) Depreciation/ Landfill Provisions 38 1 39 53 (14) ----------------------------------------------------------------------- EBITDA* 80 3 83 104 (21) Working Capital (12) (4) (16) (5) (11) Net Capex and Acquisitions (33) (32) (65) (68) 3 Interest, Tax, Dividends and Other (39) (2) (41) (47) 6 ----------------------------------------------------------------------- Underlying Cash Flow (4) (35) (39) (16) (23) Business Disposals 190 - 190 - 190 Currency Translation (4) - (4) 5 (9) ----------------------------------------------------------------------- Group Cash Flow 182 (35) 147 (11) 158 ======================================================================= * before goodwill amortisation and exceptional items The underlying cash utilisation of the core business was £4m after net capital expenditure of £33m. The adverse working capital movement includes the £10m pension prepayment relating to the L&P disposal. The £190m net cash proceeds from business disposals, partially offset by the adverse £4m translation of the Euro denominated debt into its sterling equivalent, resulted in a reduction of £182m in core debt. The non-recourse aggregated debt in the PFICOs increased by £35m mainly due to the construction work-in-progress on the ELWA contract. Capital Expenditure/Acquisitions The Group spent £65m net on capital expenditure (2004: £68m) of which £33m was in the core business and £32m on PFI contracts. The core business growth capital projects include the purchase of land at Hoek van Holland, Brussels transfer station expansion, capacity increases at ATM and the new wood plant at Utrecht. The core business maintenance capital expenditure reduced to £21m (2004: £32m) due to the L&P disposal. The expenditure on PFI contracts mainly related to ELWA but includes costs of £4m in respect of the acquisition of Shanks Dumfries & Galloway Limited. Directly attributable interest on separately identifiable major capital projects is capitalised. As at 31 March 2005 the interest capitalised totalled £0.8m (2004: £0.2m). PFI Projects - Balance Sheet Treatment and Risk Matters The Group has already won three 25 year contracts to manage local authority waste arisings. The considerable opportunity to expand this business is set out in the Chairman's Statement and the Operating Review. A typical structure for these contracts is shown on the Group's website at www.shanks.co.uk although each one has its own small variations. A separate PFI company (PFICO) is created to contract with each local authority. The PFICO is typically financed by non-recourse senior debt (c.80%) from the Funders with an investment from the Group's subsidiary, Shanks PFI Investments, in the form of subordinated debt (c.19%) and pinpoint equity (c.1%). As all PFICOs have thus far been controlled by the Group, their non-recourse debt is consolidated onto the face of the Group balance sheet. The breakdown between the two debt categories of core and PFICO debt is shown in the financial statements. The Group's investment is initially provided by the Funders in the form of an equity bridge loan. This bridge is underwritten by an irrevocable letter of credit under the Group's core banking facility in the Funders' favour. The equity bridge is repaid when the major operating facilities have been constructed. Equity bridges totalling £27m in respect of ELWA and D&G are expected to be repaid in 2007. This will reduce PFICO debt and increase core debt correspondingly. A tripartite Project Agreement (PA) is negotiated with the local authority and the Funders which defines the PFICOs performance obligations and its liabilities in the event of non-performance. The PA is the master contract to which all other contracts are linked. In order for the PFICO to meet its obligations under the PA, it enters into two principal subcontracts with a Group subsidiary, Shanks Waste Management (SWM). The first contract is to Engineer, Procure and Construct (EPC) the process plants and ancillary facilities. Normal construction industry performance bonds are required by PFICO from SWM. SWM in turn obtains performance bonds from its sub-contractors (such as Ecodeco). The majority of the SWM risk is therefore passed down to experienced contractors. It retains only the residual risk relating to the contractors' credit worthiness and the interface risk between the various contractors. The second contract is for the Operations and Maintenance (O&M) of the local authorities' waste business. During contract negotiations SWM will agree with the PFICO, the Funders and the local authority appropriate performance levels and penalties in the event of SWM's non-performance. The Funders providing the debt, which is non-recourse to the Group, insist on being able to remove SWM for serious non-performance and, in extremis, may take control of the PFICO. The Group provides guarantees covering the performance of SWM under both the EPC and O&M contract to the PFICO up to the level of the agreed liability caps. If the project fails, the Group's equity investment in the PFICO could be at risk. However, it is important to note that waste management is the Group's core competence. These guarantees and risks are therefore in the normal course of business. Upon financial close PFICO assumes the substantial bid costs previously incurred by the Group. This means that PFICO debt increases and the core debt reduces correspondingly. As PFICO immediately takes over the existing local authority's waste facilities and associated liabilities under the PA contract, the transaction is accounted for under the rules for acquisition accounting. Goodwill arises from the net liabilities assumed and the bid costs incurred, and is written off over the life of the contract. Profit and positive cash flows accrue to the Group immediately after financial close from both the PA contractor (PFICO) and the O&M contract (SWM). Various planning permissions and permits under the EPC contract are then applied for and, upon their receipt, construction of the new facilities is commenced. Typically it can take five years before the EPC contract is complete. Although all PFICOs have historically been wholly owned by the Group, various alternative structures are being considered for the future. It is also possible that there will be subcontract agreements with non Group companies rather than with SWM. When the EPC contract is complete, the risk profile of the project is substantially reduced and consideration will be given to the sale of some, but probably not all, of the Group's equity in the PFICO. There is an emerging secondary market for low risk PFI equity investments which could allow the Group to reduce its equity holdings and provide funds for future PFI projects. The O&M subcontract will however be retained by SWM. Bid costs of £1.2m on PFI projects (2004: £1.0m) incurred prior to preferred bidder status were written off. At 31 March 2005 the prepaid post preferred bid costs amounted to £Nil (2004: £3.1m). Treasury and Risk Management Policy The treasury policy is to use financial instruments with a spread of maturity dates and sources in order to reduce funding risk. Borrowings are drawn in the same currencies as the underlying investment to reduce cash and net translation exposure on exchange rate movements. No other currency hedging mechanisms are used. The Group maintains a significant proportion of its debt on fixed rates of interest in order to protect interest cover. On receipt of the L&P proceeds, the Group repaid its syndicated borrowings and reduced its private placement facility from €131m to €52m before entering into a bank bridging loan. This bridge was repaid on 4 May 2005 from the proceeds of a new loan facility with five major banks. This is a £250m multicurrency revolving credit facility expiring in May 2010. The private placement maturity dates remain between 2009 and 2013. The Group also has £47m of working capital facilities with various banks. Insurance The policy on insurance is to secure the maximum cover available in the market at reasonable prices. The Group therefore carries catastrophe insurance, including pollution cover, but self-insures up to a maximum aggregate level of £2m. Pensions The Group continues to use SSAP24 - Pension Costs to account for pensions and has adopted the transitional arrangements permitted by FRS17 - Retirement Benefits. Under SSAP 24 the pension charge for year ended 31 March 2005 has decreased to £2.5m (2004: £5.1m) due in part to the L&P disposal. On the FRS17 basis, the net pension liability has reduced to £11.8m (2004: £19.7m) mainly as a result of a £10m payment made in March 2005 relating to the residual liabilities of the L&P employees who have become deferred pensioners in the UK defined benefit scheme (the Scheme). There is no additional charge against current year profits arising from this payment as the current charge already reflects the liability. The Scheme was closed to new members in September 2002 and new employees are now offered a defined contribution arrangement. The triennial actuarial valuation, based on the assets and liabilities as at 1 April 2003 showed a smoothed funding deficit of £12m. The Group raised its annual pension cash contributions by £1.4m with effect from 1 April 2004. The employee contribution rate was increased from 5% to 7% of relevant earnings with effect from 1 May 2004. Going Concern The Directors' having reviewed the Group's 2005/6 budget, its medium term plans and its new banking arrangements are satisfied that the Group has sufficient resources to continue operations for the foreseeable future. Accordingly they continue to adopt the going concern basis in preparing the financial statements. International Financial Reporting Standards (IFRS) For the year starting 1 April 2005, the Group results will be presented under IFRS for the first time. The Group has established a project team which is assessing the impact of implementation. IFRS standards are currently being reviewed and interpreted. Based on the work done to date the most significant adjustments arising from IFRS adoption are described below: IFRS 2 - Share-based Payments. This requires measurement of share based transactions with employees at fair value at the date of grant. This value forms the basis of the charge to profits over the period between grant and exercise. IFRS 3 - Business Combinations. Goodwill is carried at cost and subject to annual impairment reviews rather than amortisation as required by UK GAAP. On first-time adoption of IFRS, the Group will take advantage of the option not to restate past business combinations and to treat the carrying value of goodwill at the transition date as cost. IAS 10 - Events after the Balance Sheet. Proposed dividends are not recognised as a liability as they are subject to approval prior to payment. IAS 12 - Income taxes. Deferred tax assets and liabilities are recognised for all timing differences contained in the balance sheet. IAS 19 - Employee Benefits. Pensions liabilities are recognised based on actuarial valuations. Actuarial gains and losses will not be reflected in the income statement but taken through the Statement of Recognised Income and Expense. IAS 21 - The effect of Changes in Foreign Exchange Rates. Exchange rate variances on monetary items are included in the income statement unless they are part of a net investment or designated as a hedge. IAS 21 is more prescriptive in determining the designation of items, including intra-group loans. IAS 39 - Financial Instruments: recognition and measurement. The Group expects to apply hedge accounting for interest rate swaps and foreign exchange balance sheet hedges. The extent of increased volatility will depend on prevailing interest and currency rates in the relevant accounting period and the effectiveness of hedges. Note: Copies of the Annual Report and Accounts will be posted to shareholders by 27 June 2005, after which they will be available, on request, from the company at Astor House, Station Road, Bourne End, Buckinghamshire SL8 5YP. Subject to approval at the AGM, the proposed final dividend of 3.8 pence per share will be paid on 5 August 2005 to shareholders on the register at close of business on 15 July 2005. For further information contact: Shanks Group plc Ian Clubb; Chairman on 2 June, telephone: 07831 295348 Michael Averill; Group Chief Executive thereafter, telephone: 01628 524523 David Downes; Group Finance Director Citigate Dewe Rogerson telephone: 0207 2822945 Ginny Pulbrook Management will be holding an analyst presentation at 10:00am today, Thursday 2 June at ABN AMRO's offices at 250 Bishopsgate, London, EC2M 4AA. Consolidated Profit and Loss Account year ended 31 March 2005 Note 2005 2004 Continuing Discontinued Total Total £m £m £m £m ----------------------------------------------------------------------------------------------- Turnover: Group and share of joint ventures 475.9 37.9 513.8 596.7 Less: share of turnover of joint ventures (10.2) - (10.2) (8.6) ----------------------------------------------------------------------------------------------- Group turnover 2 465.7 37.9 503.6 588.1 Cost of sales (378.9) (30.5) (409.4) (482.3) ----------------------------------------------------------------------------------------------- Gross profit 86.8 7.4 94.2 105.8 =============================================================================================== Group operating profit before exceptional items and goodwill amortisation 36.4 5.8 42.2 49.4 Exceptional operating costs 3 (10.4) - (10.4) - Goodwill amortisation (9.6) (0.4) (10.0) (11.6) ----------------------------------------------------------------------------------------------- Group operating profit 2 16.4 5.4 21.8 37.8 Share of operating profit of joint ventures 1.9 - 1.9 1.6 ----------------------------------------------------------------------------------------------- Total operating profit 2 18.3 5.4 23.7 39.4 Non-operating exceptional items: - net profit on disposal of operations 4 51.5 - ----------------------------------------------------------------------------------------------- Profit before finance charges and tax 75.2 39.4 Finance charges - interest 5 (9.7) (17.9) Finance charges - other 6 (1.1) (2.8) ----------------------------------------------------------------------------------------------- Profit on ordinary activities before tax 2 64.4 18.7 Tax 7 (4.2) (9.5) ----------------------------------------------------------------------------------------------- Profit on ordinary activities after tax and profit for the period 60.2 9.2 Dividends 8 (13.3) (13.3) ----------------------------------------------------------------------------------------------- Retained profit (loss) transferred to reserves 46.9 (4.1) =============================================================================================== Earnings per share - basic 9 25.7p 3.9p - adjusted basic before exceptional items and goodwill amortisation 9 9.4p 8.9p - diluted 9 25.6p 3.9p Dividend per share 8 5.7p 5.7p =============================================================================================== Consolidated Balance Sheet at 31 March 2005 Note 2005 2004 £m £m £m £m ------------------------------------------------------------------------------------------------------------------ Fixed assets Intangible assets 150.1 183.8 Tangible assets 229.5 356.2 Investments in joint ventures: Share of gross assets 13.2 12.8 Share of gross liabilities (7.6) (8.1) --------------- --------------- Share of net assets 5.6 4.7 Loans to joint ventures 3.2 3.9 --------------- --------------- Total investment in joint ventures 8.8 8.6 Other unlisted investments 1.0 1.1 ------------------------------------------------------------------------------------------------------------------ Total fixed assets 389.4 549.7 Current assets Stocks 9.1 8.1 Debtors 11 124.7 137.7 Cash at bank and in hand 32.1 30.3 --------------- --------------- 165.9 176.1 --------------- --------------- Creditors: amounts falling due within one year Borrowings (0.7) (15.8) Other creditors 12 (135.7) (165.9) --------------- --------------- (136.4) (181.7) --------------- --------------- Net current assets (liabilities) 29.5 (5.6) ------------------------------------------------------------------------------------------------------------------- Total assets less net current assets 418.9 544.1 Creditors: amounts falling due after more than year Borrowings (193.7) (323.6) Other creditors (0.1) (8.4) --------------- --------------- (193.8) (332.0) Provisions for liabilities and charges 13 (30.4) (74.8) ------------------------------------------------------------------------------------------------------------------- Net assets 194.7 137.3 =================================================================================================================== Capital and reserves Called up share capital 23.4 23.4 Share premium account 93.2 93.1 Profit and loss account 78.1 20.8 ------------------------------------------------------------------------------------------------------------------- Equity shareholders' funds 194.7 137.3 =================================================================================================================== Consolidated Cash Flow Statement year ended 31 March 2005 Note 2005 2004 £m £m £m £m ------------------------------------------------------------------------------------------------------------------- Net cash flow from operating activities 14(a) 60.3 95.3 Returns from investments and servicing of finance Interest paid (14.2) (21.2) Interest received 2.2 1.1 --------------- --------------- (12.0) (20.1) Tax paid (9.3) (8.7) Capital expenditure and financial investment Purchase of tangible fixed assets (66.1) (68.3) Sale of tangible fixed assets 6.8 4.1 --------------- --------------- (59.3) (64.2) Acquisitions and disposals Purchase of subsidiaries and other businesses 14(b) (3.9) (1.5) Disposals of subsidiaries and other businesses 14(c) 189.4 - Movement in loans to joint ventures and sale of subsidiaries and joint ventures 1.0 - --------------- --------------- 186.5 (1.5) Equity dividends paid (13.3) (13.3) -------------------------------------------------------------------------------------------------------------------- Net cash flow before use of liquid resources and financing 152.9 (12.5) Financing Issue of ordinary share capital 0.1 - Debt financing 14(d) (135.9) 13.0 -------------------------------------------------------------------------------------------------------------------- Increase in net cash 17.1 0.5 ==================================================================================================================== Reconciliation of net cash flow to movement in net debt 14(e) Increase in net cash in the year 17.1 0.5 Debt financing 14(d) 135.9 (13.0) -------------------------------------------------------------------------------------------------------------------- Change in net debt resulting from cash flows 153.0 (12.5) Inception of new finance leases (1.6) (1.5) Financing assumed with acquisitions - (2.3) Amortisation of loan fees (0.3) (0.7) Exchange rate (loss) gain on net debt (4.3) 5.4 -------------------------------------------------------------------------------------------------------------------- Movement in net debt in the year 146.8 (11.6) Net debt at 31 March 2004 (309.1) (297.5) -------------------------------------------------------------------------------------------------------------------- Net debt at 31 March 2005 (162.3) (309.1) ==================================================================================================================== Net debt represents total borrowings less cash in hand. Analysis of Net Debt At 31 March 2005 At At 31 March 31 March 2005 2004 £m £m -------------------------------------------------------------------------------------------------------------------- Principal Group net debt 99.5 280.9 Private Finance Initiative company net debt 62.8 28.2 -------------------------------------------------------------------------------------------------------------------- Total Group net debt 162.3 309.1 ==================================================================================================================== Reconciliation of Movements in Shareholders' Funds at 31 March 2005 Note 2005 2004 £m £m -------------------------------------------------------------------------------------------------------------------- Profit for the period 60.2 9.2 Equity dividends 8 (13.3) (13.3) -------------------------------------------------------------------------------------------------------------------- Retained (loss) profit transferred to reserves 46.9 (4.1) Issue of share capital 0.1 - Currency translation gain (loss) 4.6 (4.0) Movements in goodwill: currency translation adjustment (1.5) 1.6 Goodwill previously written off to reserves and now charged to the profit for the period on disposal of operations 7.3 - -------------------------------------------------------------------------------------------------------------------- Net movement in equity shareholders' funds 57.4 (6.5) Opening equity shareholders' funds 137.3 143.8 -------------------------------------------------------------------------------------------------------------------- Closing equity shareholders' funds 194.7 137.3 ==================================================================================================================== Statement of Total Recognised Gains and Losses at 31 March 2005 2005 2004 £m £m ------------------------------------------------------------------------------------------------------------------- Profit for the period 60.2 9.2 Currency translation (loss) gain on net investments (including goodwill) 8.9 (9.4) Currency translation gain (loss) on borrowings (4.3) 5.4 ------------------------------------------------------------------------------------------------------------------- Total recognised gains and losses relating to the period 64.8 5.2 =================================================================================================================== Notes to the Financial Statements 1 Status of financial statements The figures and financial information for the year ended 31 March 2005 are extracted from but do not constitute the statutory financial statements for that year. Those financial statements have not yet been delivered to the Registrar, but include the auditors' report which was unqualified and did not contain a statement under Section 237 (2) or (3) of the Companies Act 1985. The figures and financial information for the year ended 31 March 2004 included in the preliminary announcement are extracted from but do not constitute the financial statements for that year. Those financial statements have been delivered to the Registrar and included the auditors' report which was unqualified and did not contain a statement under Section 237 (2) or (3) of the Companies Act 1985. 2 Segmental analysis The Group operates in one segment, Waste Management, in the United Kingdom, Belgium and The Netherlands. 2005 2004 £m £m ----------------------------------------------------------------------- (a) Turnover by origin and by destination of service United Kingdom 161.7 153.7 Belgium 100.9 102.7 The Netherlands 203.1 200.4 --------------------------------------------------------------- Continuing operations 465.7 456.8 Discontinued operations 37.9 131.3 --------------------------------------------------------------- Group turnover 503.6 588.1 =============================================================== Share of joint venture turnover 10.2 8.6 =============================================================== (b) Operating profits Trading profits: United Kingdom 1.4 (4.5) Belgium 16.3 15.7 The Netherlands 24.0 24.2 Central Services (3.4) (4.1) ---------------------------------------------------------------- Continuing operations 38.3 31.3 Discontinued operations 5.8 19.7 ---------------------------------------------------------------- Operating profit before exceptional items and goodwill amortisation 44.1 51.0 Exceptional operating items - UK reorganisation costs (10.4) - Goodwill amortisation (10.0) (11.6) ---------------------------------------------------------------- Total operating profit 23.7 39.4 ================================================================ United Kingdom (9.8) (5.9) Belgium 15.7 15.1 The Netherlands 16.2 16.3 Central Services (3.8) (4.3) ---------------------------------------------------------------- Continuing operations 18.3 21.2 Discontinued operations 5.4 18.2 ---------------------------------------------------------------- Total operating profit 23.7 39.4 Non-operating exceptional net profit 51.5 - ---------------------------------------------------------------- Profit before finance charges and taxation 75.2 39.4 Finance charges - interest (9.7) (17.9) Finance charges - other (1.1) (2.8) ---------------------------------------------------------------- Profit on ordinary activities before taxation 64.4 18.7 ================================================================ At At 31 March 31 March 2005 2004 £m £m ----------------------------------------------------------------- (c) Net assets United Kingdom 69.9 98.5 Belgium 23.7 22.0 The Netherlands 240.2 229.6 Discontinued operations - 115.4 ----------------------------------------------------------------- Net operating assets 333.8 465.5 Unallocated net assets (liabilities): Assets under the course of construction 29.7 14.8 Net debt (162.3) (309.1) Other unallocated net liabilities (6.5) (33.9) ----------------------------------------------------------------- Net assets 194.7 137.3 ================================================================= Other unallocated net liabilities include debtors and creditors relating to taxation, dividends and pensions. 3 Operating exceptional items The exceptional reorganisation cost of £10.4m relates to the integration and reorganisation of the Group's business in the United Kingdom. It includes £3.3m for the impairment of tangible fixed assets. The remaining charge relates to redundancies and other closure costs. This charge has no effect on the current tax charge and increases the deferred tax credit by £3.1m. 4 Non-operating exceptional items 2005 2004 £m £m ---------------------------------------------------------------------- Profit on disposal of United Kingdom landfill and power operations 52.5 - Net loss on disposal of other operations (1.0) - ---------------------------------------------------------------------- Net profit on sale of subsidiaries and other operations 51.5 - ====================================================================== The profit of £52.5m on disposal of the United Kingdom landfill and power operations is stated after charging £7.3m of goodwill previously written off to reserves. The profit was principally tax free but associated costs have increased the deferred tax credit by £4.1m. There is no tax associated with the loss on disposal of other operations. 5 Finance charges - interest 2005 2004 £m £m ----------------------------------------------------------------------- Net interest payable: Interest payable on bank loans and overdrafts repayable within five years 7.8 12.0 Interest payable on other loans 4.5 7.0 Share of interest of joint ventures 0.2 0.2 ----------------------------------------------------------------------- 12.5 19.2 Interest receivable (2.2) (1.1) Interest costs capitalised as part of tangible fixed assets (0.6) (0.2) ----------------------------------------------------------------------- 9.7 17.9 ======================================================================= 6 Finance charges - other Other finance charges relate to the unwinding of the discount on long term landfill liabilities of £0.8m (2004: £2.1m) and the amortisation of bank fees of £0.3m (2004: £0.7m). 7 Taxation The taxation charge (credit) based on the profit for the year is made up as follows: 2005 2004 £m £m ----------------------------------------------------------------------- Current tax: United Kingdom corporation tax at 30% (2004: 30%) - current year 2.8 2.7 Double taxation relief (2.8) (3.0) Overseas tax - current year 7.6 10.1 - prior year 1.2 - ----------------------------------------------------------------------- 8.8 9.8 Deferred tax (5.2) (0.7) Joint ventures 0.6 0.4 ----------------------------------------------------------------------- 4.2 9.5 ======================================================================= 8 Equity dividends 2005 2004 £m £m ----------------------------------------------------------------------- Interim dividend of 1.9p per ordinary share (2004: 1.9p) 4.4 4.4 Proposed final dividend of 3.8p per ordinary share (2004: 3.8p) 8.9 8.9 ----------------------------------------------------------------------- Total dividend of 5.7p per ordinary share (2004: 5.7p) 13.3 13.3 ======================================================================= The proposed final dividend will be paid on 5 August 2005 to shareholders on the register at close of business on 15 July 2005. 9 Earnings per share Basic earnings per share are calculated by dividing the profit after tax for the period by the weighted average number of shares in issue during the period. 2005 2004 ----------------------------------------------------------------------- Calculation of basic earnings per share Profit for the period (£m) 60.2 9.2 Exceptional items (net of tax) (£m) (48.3) - Goodwill amortisation (£m) 10.0 11.6 ----------------------------------------------------------------------- Earnings before exceptional items and goodwill amortisation (£m) 21.9 20.8 ======================================================================= Average number of shares in issue during the period 234.1m 234.0m Basic earnings per share (pence) 25.7p 3.9p Adjusted basic earnings per share before exceptional items and goodwill amortisation (pence) 9.4p 8.9p ======================================================================= Calculation of diluted earnings per share Average number of shares in issue during the period 234.1m 234.0m Effect of share options in issue 0.6m 0.4m ----------------------------------------------------------------------- Total 234.7m 234.4m ======================================================================= Diluted earnings per share (pence) 25.6p 3.9p ======================================================================= The Directors believe that adjusting basic earnings per share for the effect of exceptional items and goodwill amortisation enables a comparison with historical data calculated on the same basis. 10 Acquisitions and disposals (a) On 26 November 2004, the Group completed the acquisition of Shanks Dumfries and Galloway Limited to operate a 25 year waste management contract in the United Kingdom. The book value of the net assets acquired and their provisional fair value to the Group, pending completion of the evaluation of the business acquired, were as follows: Book value Fair value Total £m £m £m ----------------------------------------------------------------------- Tangible fixed assets - 1.2 1.2 Other creditors - (0.3) (0.3) Provisions - (6.4) (6.4) Deferred tax asset - 1.7 1.7 ----------------------------------------------------------------------- Net liabilities assumed (3.8) Provisional goodwill 7.7 ----------------------------------------------------------------------- Estimated cash consideration (including costs) 3.9 ======================================================================= (b) During the year the Group completed its evaluation of the businesses acquired in the year ended 31 March 2004. No adjustments to the provisional fair values and goodwill arise following this evaluation. (c) On 1 July 2004, the Group disposed of its United Kingdom landfill and power operations. During the year, other disposals included the sale of Hirt Combustion Engineers Limited, the Bradford operations and a surplus property. The book value of the net assets disposed of were as follows: ----------------------------------------------------------------------- Intangible assets (goodwill) 35.3 Tangible fixed assets 151.0 Stocks 1.3 Debtors 28.0 Creditors (36.8) Provisions (53.4) Goodwill previously written off to reserves 7.3 ----------------------------------------------------------------------- Net assets disposed of 132.7 Other provisions - net movement 5.2 Net profit on disposal 51.5 ----------------------------------------------------------------------- Estimated cash consideration (net of costs) 189.4 ======================================================================= 11 Debtors 2005 2004 £m £m ----------------------------------------------------------------------- Amounts due within one year: Trade debtors 94.3 111.8 Amounts owed by joint ventures 0.1 - Other debtors 12.2 17.1 Pensions debtor 10.1 - Prepayments and accrued income 5.0 7.6 Corporation tax 3.0 1.2 ----------------------------------------------------------------------- Total 124.7 137.7 ======================================================================= 12 Other creditors - amounts falling due within one year 2005 2004 £m £m ----------------------------------------------------------------------- Trade creditors 63.6 65.3 Corporation tax payable 3.7 2.4 Other creditors 4.5 5.2 Taxation and social security 9.8 10.3 Landfill tax 0.2 16.5 Accruals and deferred income 37.4 49.2 Unprocessed waste 7.5 8.0 Government grants 0.1 0.1 Dividends payable 8.9 8.9 ----------------------------------------------------------------------- Total 135.7 165.9 ======================================================================= 13 Provisions for liabilities and charges Site Deferred restoration Aftercare Leachate Other taxation Total £m £m £m £m £m £m ---------------------------------------------------------------------------------------------- At 31 March 2004 24.4 30.4 1.2 0.7 18.1 74.8 On purchase of businesses 6.0 0.2 - 0.2 (1.7) 4.7 On disposal of businesses (19.9) (27.9) (0.5) - (5.1) (53.4) Provided - cost of sales 2.2 0.9 - - - 3.1 - finance charges 0.3 0.5 - - - 0.8 - exceptional - - - 13.7 - 13.7 - tax - - - - (5.2) (5.2) Utilised (1.3) - (0.7) (6.6) - (8.6) Exchange rate movements 0.1 0.1 - - 0.3 0.5 ---------------------------------------------------------------------------------------------- At 31 March 2005 11.8 4.2 - 8.0 6.4 30.4 ============================================================================================== 14 Notes to the cash flow statement 2005 2004 Pre-exceptional Exceptional Total Total £m £m £m £m ---------------------------------------------------------------------------------------------------------- (a) Net cash flow from operating activities Total operating profit 34.1 (10.4) 23.7 39.4 Amortisation of intangible assets 10.0 - 10.0 11.6 Operating depreciation of tangible fixed assets 36.2 - 36.2 46.7 Operating impairment of tangible fixed assets - 3.3 3.3 - Operating impairment of joint venture investment - - - 0.5 Provision for aftercare and site restoration 3.1 - 3.1 6.1 ---------------------------------------------------------------------------------------------------------- Earnings before interest, taxation, depreciation and amortisation (EBITDA) 83.4 (7.1) 76.3 104.3 Profit on sale of fixed assets (1.4) - (1.4) (0.6) Increase in stocks (2.3) - (2.3) (1.1) Increase in debtors (13.2) - (13.2) (8.8) Decrease in creditors 0.1 2.8 2.9 8.7 Other provision charge 1.3 0.6 1.9 0.1 Utilisation of provisions (2.0) - (2.0) (5.7) Share of profits of joint ventures (1.9) - (1.9) (1.6) ---------------------------------------------------------------------------------------------------------- Net cash flow from operating activities 64.0 (3.7) 60.3 95.3 ========================================================================================================== (b) Subsidiary undertakings and businesses purchased during the year (see note 10(a)) Tangible fixed assets 1.2 2.1 Financing assumed with acquisition - (2.3) Other creditors (0.3) - Provisions (6.4) - Deferred tax asset 1.7 - ---------------------------------------------------------------------------------------------------------- Net liabilities acquired (3.8) (0.2) Provisional goodwill 7.7 1.7 ---------------------------------------------------------------------------------------------------------- Estimated cash consideration (including costs) 3.9 1.5 ========================================================================================================== (c) Subsidiary undertakings and businesses disposed of during the year (see note 10c)) Intangible fixed assets 35.3 - Tangible fixed assets 151.0 - Stocks 1.3 - Debtors 28.0 - Creditors (36.8) - Provisions (53.4) - Goodwill previously written off to reserves 7.3 - ---------------------------------------------------------------------------------------------------------- Net assets disposed 132.7 - Other provision - net movement 5.2 - Net profit on disposal 51.5 - ---------------------------------------------------------------------------------------------------------- Estimated cash consideration (net of costs) 189.4 - ========================================================================================================== (d) Analysis of financing Short term loan repayments (0.1) (0.3) Long term loan advances 53.9 34.0 Long term loan repayments (189.3) (20.0) Finance lease net payments (0.4) (0.7) ---------------------------------------------------------------------------------------------------------- Net cash flow from debt (135.9) 13.0 ========================================================================================================== (e) Analysis of net debt in the balance sheet At At 31 March 31 March 2004 Cash Non cash 2005 £m £m £m £m -------------------------------------------------------------------------------------------- Cash at bank and in hand 30.3 1.8 32.1 Overdrafts (15.3) 15.3 - --------------- 17.1 --------------- Debt due within one year (0.3) 0.1 (0.2) Debt due after more than one year (322.3) 135.4 (4.6) (191.5) Finance leases (1.5) 0.4 (1.6) (2.7) --------------- 135.9 ---------------------------------------------------------------------------------------------- Total (309.1) 153.0 (6.2) (162.3) ============================================================================================== Non cash items comprise the amortisation of loan fees of £0.3m, the exchange loss on translation of long term loans in currencies other than sterling of £4.3m and the inception of new finance leases of £1.6m. 15 Contingent liabilities Under the terms of the Sale & Purchase Agreement with Terra Firma for the disposal of the Group's landfill and power operations, the Group has given a number of indemnities and warranties relating to the disposed operations, including one in respect of the Greengairs mineral rights claim that was disclosed as a contingent liability in the Group's financial statements for the year ended 31 March 2004, which has now been settled. 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