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Hargreaves Servs PLC (HSP)

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Tuesday 09 August, 2016

Hargreaves Servs PLC

Preliminary Results

RNS Number : 6031G
Hargreaves Services PLC
09 August 2016
 

For Immediate Release

9 August 2016

 

HARGREAVES SERVICES PLC

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

 

Preliminary results for the year ended 31 May 2016

 

Hargreaves Services plc (AIM: HSP) announces its preliminary results for the year ended 31 May 2016.

 

Key Financials


Year ended
31 May
2016

Year ended
31 May

2015

Change
%

Continuing Revenue

£340.7m

£662.2m

(48.6)

Continuing Operating Profit(1)

£5.2m

£38.1m

(86.4)

Continuing Underlying Operating Profit(2)

£4.6m

£42.8m

(89.3)

Exceptional Costs(3)

£(12.4)m

£(12.2)m

(1.6)

Continuing (Loss)/Profit Before Tax

£(10.6)m

£24.9m

(142.6)

Continuing Underlying Profit Before Tax(4)

£3.0m

£40.3m

(92.6)

Continuing Diluted EPS

(30.0)p

64.2p

(146.7)

Continuing Underlying Diluted EPS(4)

5.6p

93.9p

(94.0)

Dividend (including proposed final dividend)

2.3p

30.0p

(92.3)

Net Debt(5)

£32.3m

£1.0m

3,130.0

 

Highlights

 

·      The Group has delivered Continuing Underlying Operating Profit of £4.6m

·      Trading since Interim results in line with management's expectations

·      Coal production and trading successfully reduced and now focussing on speciality markets

·      Decision taken to shorten mine life at the Tower project with mining due to finish March 2017; the Group expects full repayment of loans after write off of equity investment and other balances of £4.7m

·      Charge of £12.4m for exceptional costs arising from re-structuring activities

·      Successful acquisition of CA Blackwell in January 2016 broadens Group's Services operations and delivers significant heavy plant synergies

·      Establishment of Property & Energy Division to drive £35-50m of value creation in next five to seven years

·      Aggressive targets set for new business for Industrial Services operations in face of accelerated UK coal fired station closures

·      Coal stocks built to £26.0m in face of negligible demand from UK coal stations, confident of sale of surplus stocks this financial year

·      Balance sheet remains strong and well financed to allow orderly run-out of £60m of coal stocks and other legacy assets which include land, property, equipment, stocks and loans, into cash

·      Final dividend of 2.3 pence in line with Group's 40% pay-out ratio target

 

Commenting on the results, Chairman David Morgan said:

"After two challenging years, we have a clear opportunity in front of us to develop and deliver significant shareholder value. The Group's core business operations have been enhanced following the acquisition of CA Blackwell. Our portfolio of property and energy projects offer an exciting platform for significant value creation that is incremental to that created from our Distribution & Services operations. We have targeted £35-50m of incremental value creation from development and energy projects related to these property assets. The £60m of legacy assets that we aim to convert to cash will strengthen a balance sheet that is already strong and allow consideration of a wide range of options to return value or capital to shareholders."

 

(1) Continuing Operating Profit is stated before exceptional costs of £12,378,000 (2015: £9,130,000).

(2) Continuing Underlying Operating Profit is stated excluding the exceptional costs, the impact of the Biomass conversion project settlement, the amortisation of acquired intangibles and impairment of goodwill, impairment of non-current assets, and including share of profit in associates and joint ventures before tax.

(3) Exceptional costs for the year ended 31 May 2015 are stated after including an amount of £3,080,000 in respect of unrealised fair value losses on derivative financial instruments.

(4) Continuing Underlying Profit before Tax and Continuing Underlying Diluted EPS are stated excluding the exceptional costs, the impact of the Biomass conversion project settlement, the amortisation and impairment of acquired intangibles, impairment of non-current assets and gain on disposal of subsidiaries.

(5) Net debt comprises cash and cash equivalents, bank overdrafts and other interest bearing loans and borrowings.

 

 

Hargreaves Services plc

Gordon Banham, CEO

Iain Cockburn, Finance Director

 

 

0191 373 4485

Buchanan (Financial PR)

Mark Court  / Sophie Cowles

 

0207 466 5000

N+1 Singer (NOMAD and Joint Corporate Broker)

Sandy Fraser / Nick Owen

 

020 7496 3000

Investec (Joint Corporate Broker)

Sara Hale / Rob Baker

020 7597 4000

 

 

CHAIRMAN'S STATEMENT

 

Results

 

The period just ended has once again seen a significant transition in our business and this is reflected in these results. Underlying Profit before Tax from Continuing Operations decreased by £37.3m from £40.3m to £3.0m. The reported Loss before Tax from Continuing Operations was £10.6m after a net exceptional charge of £12.4m arising from the continuing restructuring, the accelerated closure of a number of significant customer sites and the decision to impair our equity investment in the Tower project. Underlying Diluted EPS from Continuing Operations decreased from 93.9p to 5.6p.

 

Net debt increased by £31.3m to finish the year with net debt of £32.3m.  The Blackwell acquisition accounted for £13.4m of this increase in net debt. The collapse in thermal coal demand in the UK resulted in an unplanned build of coal stocks which we are confident will be cleared in this financial year.

 

Strategy

 

Faced by very challenging market conditions we have spent the last two years making changes to the very nature of the Group and have been successful in achieving a fundamental re-positioning. In the year ended 31 May 2014, the Group generated revenues of £761.0m and operating profit of £49.3m from coal and coke production and trading where we produced and traded over seven million tonnes.  In the year to 31 May 2016 revenues and operating profits/losses from coal and coke trading and production fell to £179.3m and a £0.9m loss respectively.  We produced or traded less than two million tonnes and are on track to reduce activity further as we respond to reduced thermal coal demand and consequently focus greater efforts on specialised coal products and markets.

 

The management team have been proactive and have responded well to these challenges. Excellent progress has been made and a clear strategy has been set out to develop long term value through a portfolio of complementary Services businesses and through the development of value in a property and energy project portfolio that is rich with opportunity.  Over the last two years, we have established a strong team with a focus on developing and delivering value from that portfolio. Looking forward, we will start to see that investment generating and demonstrating value. The acquisition of C.A. Blackwell Group Limited ("Blackwell") in January 2016 was an exciting and positive step to building our long term Services offering.

 

Throughout this process, we have maintained a strong balance sheet and as we move forward the business will utilise this to generate significant amounts of cash from the realisation of various assets related to our legacy operations. These steps are outlined in more detail in the Strategic Report, which is included within the Annual Report and Accounts.

 

Dividend

 

The Board proposes a final dividend of 0.6p, consistent with the targeted 40% pay-out ratio. If approved at the Annual General Meeting, this will result in a dividend for the full year of 2.3p compared with 30.0p in the previous year, an overall decrease of 92.3%.  The proposed final dividend will be paid on 21 October 2016 to all shareholders on the register at the close of business on 23 September 2016.

 

People

 

Our staff will always play a key role in the development and operation of the Group. This last financial year has been another tough and challenging year during which further significant redundancies have been necessary. Whilst such redundancies are highly regrettable, the Group's restructuring programme is fundamentally complete and the acquisition of Blackwell demonstrates the Group's ability and appetite to invest in the future. I would also like to make special note of the contribution and achievements by our team in Hong Kong as their skills and teamwork have increased our revenues from that operation by 104% to £11.0m.

 

Board

 

During the year there were a number of Board changes.  I assumed the role of Chairman following the retirement of Tim Ross after the AGM on 7 October 2015. I would like to thank Tim for his contribution to the Group since its flotation in 2005.  As a result of my planned succession to Chairman, Nigel Halkes joined the Board on 21 August 2015. I would like to welcome Nigel Halkes to the Board as Non-executive director and Chair of the Audit Committee. I am pleased to see how quickly Nigel has integrated into the Board and developed his understanding of the Group's operations.

 

Summary

 

In the last two years the Group has been through a radical restructuring and re-positioning programme, undertaken in the face of tumultuous market conditions. With the restructuring and re-positioning of the Group fundamentally complete, our objective and priority is to demonstrate the intrinsic value of the business as reflected in the Group's considerable asset base. We now have a clear strategy to generate significant shareholder value through the development of a profitable services offering that leverages our core skills, as well as the significant value that can be unlocked in our property and energy portfolio. As we recently announced, our target is to generate between £35m and £50m of incremental value from our property and energy project portfolio over the next five to seven years. Across the transition the Group has protected and maintained its strong balance sheet. The successful conversion of over £60m of legacy assets into cash will further improve the Group's flexibility and allow us to consider strategic options to enhance shareholder value.

 

 

David Morgan

Chairman

8 August 2016

 

 

GROUP BUSINESS REVIEW

 

Results

 

Group revenues decreased from £662.2m to £340.7m, reflecting the actions taken to reduce the scale of our coal production and coal trading activities. Underlying Continuing Group Operating Profit reduced from £42.8m to £4.6m reflecting the reduction in coal trading volumes and the impact of falling coal prices on the profits of our residual mining activity. Underlying Continuing Profit before Tax fell in line with Operating Profit from £40.3m to £3.0m. The transformation of the Group has required significant actions, which in the period incurred exceptional costs of £12.4m. These charges related to scaling down the Group's mining activities, the impairment of the Group's equity investment in the Tower joint venture and provisions taken for redundancy and contract demobilisation costs at a number of client sites following early closure announcements. These exceptional costs are reviewed in more detail in the Financial Review below. The reported Continuing Loss before Tax was £10.6m compared with a Profit before Tax of £24.9m in the prior year.

 

Coal Exposure Successfully Reduced

 

Our key focus in the last two years has been to reduce exposure to thermal coal production, trading and related ancillary services. The recent power station closure announcements, continuing falls in coal prices and low UK demand has hastened our scaling-down of operations. The reductions in gas prices and the increases in UK carbon taxes have significantly reduced electricity generation from coal and have precipitated the announcement of the early closure or changes to operating regimes that will significantly reduce coal usage. Stations closed or otherwise likely to be burning less coal include Longannet, Rugeley, Fiddlers Ferry, Eggborough and Ferrybridge. A strengthening of Government sentiment against coal fired generation increases the probability of further closures.

 

Whilst these developments have presented more challenges to us in the last year, they have also validated our decision to reduce our exposure to the thermal coal markets through trading and production operations. Although coal prices have firmed slightly over the last few months, helped by the weakening of Sterling following the "Brexit" vote, we see no evidence of any market trends in coal price or market demand that would cause us to re-consider the decisions we have taken.

 

Strategy

 

In the last year we have started to see the benefits materialise from two years of restructuring, simplification and repositioning. On the 27 April 2016 we published an update on the progress we had made with repositioning the Group; this statement marks an important turning point for the Group. Following the actions taken, we are now focused on developing and demonstrating the value within the Group.

 

As outlined in the recent update, we now have three clear areas of focus to generate value:

 

·      Distribution & Services

·      Property & Energy

·      Legacy Asset Realisation

 

These focus areas clearly identify the long term, on-going business opportunities which offer medium term development and value creation opportunities and the short term process to release cash from the significant amount of legacy assets which we have protected as our businesses have been closed or activities stepped down.

 

Reflecting the anticipated momentum and importance of Property and Energy, this will become a segment in its own right from the start of this financial year 1 June 2016. It is currently reported under the Coal Distribution Division. Profits and losses and cash flows related to legacy assets will also be reported in a separate Legacy segment, until such times as these have run to a de minimis level. From 1 June 2016, we will also separately report central group overhead and this will no longer be allocated between individual operations and will also not be allocated between Distribution & Services, Property & Energy and Legacy Asset Realisation. Central group overhead spend was £6.1m in the year ended 31 May 2016 compared with £7.1m in the prior year. The reductions made during the year should reduce the overhead to around £5.0m in the next financial year.

 

We believe this enhanced segmentation will provide greater transparency on profits, cash flows and capital allocation leading to a clearer understanding of the development of underlying business and the release of cash from legacy asset realisations.

 

DISTRIBUTION & SERVICES

 

Supplementing our Coal Distribution operation, we have a portfolio of three complementary Services businesses. We have set ourselves the aspiration of achieving an Operating Profit of between £10m and £15m from these operations in the medium term. These businesses are reviewed in more detail below.

 

Specialist Earthworks Services

 

Our heritage in coal production left us with the skills and plant necessary to undertake contract mining and earthworks projects.  The acquisition of Blackwell, which was completed in January 2016, complements that capability and provides a significant step forward in the Group's transition plan. The acquisition establishes our new Specialist Earthworks Division and offers an important opportunity for the Group to grow its Services operations in the UK. A new internal team was established to manage and optimise the utilisation of heavy plant across the Group. The synergies between Blackwell's operations and the Group's mining and restoration experience are very compelling and give us confidence that we can grow the size and scale of our activities in this area. The backing and financial support available from the Group will allow Blackwell to tender, resource and deliver larger scale projects that were not possible as a standalone operation.   

 

Logistics Services

 

Our Logistics business had a difficult year, however we are confident it is a business with long term profit potential. The recent acquisition of Blackwell offers both synergies and a number of joint bidding opportunities. In the period the business was impacted by a combination of low coal movements and a major change in waste flows following an HMRC landfill tax ruling.  These pressures are continuing but the team are working hard to re-build routes and flows. Logistic volumes have not returned to the level enjoyed in the previous financial year and it is unlikely that these will fully recover before the end of this financial year, however the team is confident that the opportunity is there to re-build revenues and profits. In the meantime, every effort is being made to manage overheads and optimise fleet operations to protect profits in the short term. We are encouraged by recent trading.  A lease signed in April on a new depot in Harlow, Essex presents a first opportunity for the Division to start to build significant operations in the South East.

 

Industrial Services

 

The Industrial Services Division operates a number of key contracts at coal power stations, steel-works and ports in the UK, Hong Kong and South Africa. Although UK coal fired generation has been facing a limited life for a number of years, the recent announcements of closure or reductions in coal burn have been earlier than expected.

 

Over recent years the Industrial Services Division has made good progress with its strategy of expanding its international activities; in particular its operation in Hong Kong generated revenues of £11.0m in the year. The establishment of Hargreaves South Africa (Pty) Limited in 2014, which followed the Algol acquisition, provided a foothold in the South African steel sector, a market that offered long-term opportunities to deploy the Division's skills. Over the last twelve months the world steel sector has faced considerable challenges, therefore we have decided to suspend any further capital investment to support a larger market share in the steel market in South Africa until the outlook becomes more stable.

 

The key focus for Industrial Services is to deliver quality services from an efficient cost base. The division has set itself an ambitious target of delivering £2.0m of operating profit from new business in the next financial year to replace the business lost through recent closures. This represents a significant challenge and every care will be taken to ensure that business is only taken on if the risk weighted return is deemed acceptable. The outlook for the Division's operations in Hong Kong and other key Asian markets is encouraging and development of these operations is key to achieving the Division's new business target.

 

Coal Distribution

 

The Coal Distribution operation will focus on the supply of specialist coal and coal products (briquettes) into the speciality markets. These markets include:

·      Domestic home heating

·      Space heating (including prisons, schools and hospitals operating coal boilers)

·      Industrial markets

·      Cement manufacturers

·      Steam railways

 

For a long time the Group has been the leading supplier of specialist coals to markets in England and Wales. Our geographical reach was increased three years ago by the acquisition of the Scottish mining assets that provided a platform to supply parts of the Scottish market. Although we have more work to do to align overheads with activity levels and we see significant short term challenges in disposing of inferior coals that arise from the production of speciality coals, we also see potential for sustaining a profitable distribution business servicing these diverse specialist coal markets. The Group expects to that losses on disposal of inferior coals in the current challenging market could reduce profitability of speciality coal trading by around £2m per annum in current market conditions. Fixed costs of around £1m will add further pressure until leases and other fixed overheads can be cut.

 

The Group will work to minimise the cost of the coal that we supply into these markets through our expertise in coal sourcing and carefully managing the balance between indigenous and imported coals.  The Group will also work to minimise the amount of inferior coal that arises from the production and preparation of speciality coals and the investment at KIlloch in improved coal preparation equipment is a key action.  The coal that we supply into the specialist markets will be from a combination of sources; our own mining operation at the House of Water site in East Ayrshire, other UK producers and imported coal. The average cost of acquiring specialist coal will increase for several reasons. These reasons include, the loss of bulk coal volumes over which fixed overheads can be recovered and the reduced value of non-speciality coal that arises in the process, particularly in the current difficult thermal coal markets.

 

Imported coal is generally cheaper but can generate significant quantities of lower grade finer coals that may prove difficult to sell in the UK given the challenges of low demand in the thermal sector.  Although we will retain the ability to import significant volumes of coal, we will continue to seek to manage and optimise our fixed cost base that supports coal imports. These efforts to reduce the fixed cost base and finding channels to dispose of the non-speciality coal that arises will continue through the current financial year, with the Group working to have an optimal cost structure in place before the start of the financial year ended 31 May 2018 to support a speciality focussed business.  Although we believe that the speciality coal markets offer a long term return that justifies the capital deployment, we are aware that the visibility of prices, costs and margins in the next two years is very low.

 

We expect the House of Water site in East Ayrshire to offer a supply of around 350,000 tonnes of coal for at least the next five years. An investment of £1.0m was made at our railhead in Killoch to improve the processing of speciality coals.

 

 

PROPERTY & ENERGY PROJECTS

 

As a legacy of our coal operations we have a diversified 18,500 acre portfolio of property, which includes a range of agricultural and development land including a number of sites with grid connections. We have built a team to focus on the development of value in that portfolio with a view to optimising the conversion of these assets into cash over the next five to seven years and have set ourselves the target of creating between £35m and £50m of value over and above the £24.9m book value of these assets.  The initial focus will be on developing value and realising cash from the assets we currently own.

 

We have been working on this portfolio over the last two years and we are confident that there is very significant value that will be delivered. We will continue to challenge the allocation of capital but we are confident that the returns from development more than justify the cost of holding these sites and taking them through at least the early stages of the development cycle. We are confident that the incremental return on capital compared with an outright sale would far exceed our hurdle rate and compare very favourably with the 10-15% Return on Capital Employed ("ROCE") rate found in typical property development operations.

 

The Blindwell site, East of Edinburgh, represents a particularly exciting development opportunity. A planning application for a major residential scheme is currently under consideration by the local authority.  The table below lists some of the key development sites that present the greatest immediate opportunity for value creation through development:

 

Project

Location

Acres

Development Focus

 

Blindwell

East Lothian

390

Large scale residential development

 

Westfield

Fife

390

Renewable energy through EfW and mixed industrial

 

St Ninians

Fife

1,155

Leisure led, mixed use development

 

North Killingholme

Lincolnshire

33

Industrial

 

Eggborough

Yorkshire

10

Energy, including existing consent for a EfW plant

 

Maltby

Yorkshire

84

Mixed residential and Industrial development

Monckton

Yorkshire

35

Mixed residential and Industrial development

 

 

In the energy space, the key focus of development effort at this time is around the two flagship Energy-from-Waste (EfW) projects, where we continue to progress planning and development; one at the Earls Gate Energy Centre at Grangemouth and one on the Westfield site. These projects are complex but offer a very significant value creation opportunity for the Group. Both projects have been carefully appraised and the Board is confident that they are both well founded and deliverable.

 

In addition, our energy team continue to appraise carefully the opportunities for the 75MW of grid connections that are owned by the Group. Our portfolio also includes 70MW of consented wind energy in South Lanarkshire and we have a number of other sites that offer significant wind potential. All of these key sites benefit from high wind speed and whilst market conditions and prices do not allow commercial development at this time, if onshore sites do become financeable, many of these sites will be very attractive. Like most other operators, we have suspended the bulk of speculative investment in solar and onshore wind whilst the market evolves.

 

 

LEGACY ASSET REALISATION

 

The Group also owns a portfolio of surplus assets obtained through our coal and coke trading and extensive mining operations. All of these assets are marketable and represent an opportunity to generate a significant amount of cash for the Group. Many of the markets into which these assets are sold are however depressed or illiquid at this time.

 

These assets comprise largely of stock, plant and equipment and loans to the Tower joint venture and are held on the balance sheet at the lower of cost and net realisable value. The estimated net realisable value is based on our assessment of the fair market value that could be expected from the sale of these assets in an orderly manner. Whilst the realisation of cash is likely to be lumpy, the recent weakness of Sterling should improve prospects for a speedy realisation.

 

The carrying value of legacy assets as at 31 May 2016 was £60.1m, following the £4.7m impairment of the Tower equity investment and other asset balances. The translation of these assets into cash is a key priority for the Group and we see this as an area of focus over the remainder of the project.

 

The most significant balances are the £22.4m of loans and balances relating to the Tower joint venture and £19.7m of coal and coke stocks. It is our current view that as Tower completes its final seven months of mining and two years of restoration, the joint venture will generate enough cash to repay these loans. A large proportion of these loan repayments will be achieved through the sale of plant, equipment and land. We are currently looking at options to achieve plant sales as early as possible, both to pay down debt and reduce the interest cost to the Tower joint venture itself.

 

 

SHAREHOLDER VALUE

 

As we manage these areas of activity we will remain focussed on shareholder value. At this time, we believe that the operational and value generation objectives we have set ourselves can be achieved with relatively little incremental investment.  The cash that we will realise from legacy assets will create significant opportunity to look at delivering shareholder value through dividends, special dividends or share-buy backs. The Board remains open to the re-investment of capital should the right opportunities arise and provided such opportunities clearly offer a better investment return compared with the return of surplus capital to shareholders.  As we review options, we will be careful to maintain a strong balance sheet position with an appropriate level of leverage.

 

 

OUTLOOK

 

The reduction in thermal coal distribution and production combined with our exit from coke production and coke and coking coal trading has significantly reduced the risk and volatility of the business. Whilst the streamlining process has been long and hard and the profitability of the Group has significantly reduced, the Group emerges from this process with a clear strategic and operational focus and a strong balance sheet.

 

The biggest challenge to delivering our profit expectations for the coming year is the need for our Industrial Services Division to contract new business to replace that lost in the UK through the early closure of its customers' sites. Pleasingly, the Division is already making good progress in this regard. Compensating that risk, we have an exciting opportunity to grow the Specialist Earthworks Division. Whilst many of our recent statements have focussed on the challenges around the wider coal markets, the specialist coal markets have consistently remained robust. The operational opportunities presented by these markets in the coming years should not be overlooked and we will work hard to maximise the profit opportunity. We have budgeted for profits from Property & Energy and Industrial Services to be second half weighted.

 

Turning to the balance sheet, the net assets at the end of the year were £131m, equivalent to £3.96 pence per share.  As noted above, we have set ourselves the medium term target of adding £35m to £50m of value to the property assets included within these net assets and at the same time converting our legacy assets into cash. Whilst, by their nature, the delivery of the increased development value and legacy cash realisations is likely to be lumpy, we are confident that very significant value can be delivered. This represents an exciting opportunity to create significant shareholder value that is very material in the context of the size and scale of the Group.

 

 

Gordon Banham

Group Chief Executive

8 August 2016

 

REVIEW OF OPERATING PERFORMANCE BY BUSINESS UNIT

 

Review of Underlying Performance

 

Revenues from Continuing Operations during the year reduced by £321.5m from £662.2m to £340.7m, reflecting the significant decrease in coal sales caused by low UK coal demand for both imported and indigenous coals and through the cessation of supply of metallurgical coals following the closure of Redcar Steelworks.  Underlying Group Operating Profit from Continuing Operations for the year reduced by £38.2m from £42.8m to £4.6m. Underlying Profit before Tax was £3.0m, a decrease of £37.3m on the prior year, due largely to the impact of reduced trading volumes on revenues and margins in Coal Distribution. Reported Profit before Tax of the Group reduced by £35.5m from £24.9m to a loss of £10.6m after exceptional costs totalling £12.4m. The bulk of the exceptional costs related to the early closure of a number of mining sites to support a move towards a single operating site model and redundancy and contract demobilisation costs following the closure of major steel, coal and port sites at which the Group provided industrial services as well as impairment of the equity investment and other assets in Tower.

 

The commentary below reflects the continuing underlying performance of the four Divisions.

 


Industrial Services

2016

£000

Logistics

2016

£000

 

Specialist Earthworks

2016

£000

Total Services
2016
£000

 

Coal Distribution

2016

£000

 

Total

2016

£000

Segment Continuing Operating Profit/(Loss)

3,297

1,173

1,076

5,546

(341)

5,205

Intangible amortisation/impairment

-

-

-

-

584

584

Share of loss in jointly controlled entities (net of tax)

-

-

-

-

(1,792)

(1,792)

Share of tax in associates and jointly controlled entities

-

-

-

-

628

628

Underlying Continuing Operating Profit/(Loss)

3,297

1,173

1,076

5,546

(921)

4,625

Net financing costs - Continuing Operations

(211)

(356)

(71)

(638)

(994)

(1,632)

Underlying Continuing Profit/(Loss) before Tax

3,086

817

1,005

4,908

(1,915)

2,993









Industrial

Services

2015

£000

Logistics

2015

£000

 

Specialist Earthworks

2015

£000

Total Services
2015
£000

 

Coal Distribution

2015

£000

 

Total

2015

£000

Segment Continuing Operating Profit

3,260

2,267

-

5,527

32,547

38,074

Intangible amortisation/impairment

-

-

-

-

143

143

Impact of Biomass conversion project settlement

2,400

-

-

2,400

-

2,400

Share of profit in jointly controlled entities (net of tax)

-

-

-

-

1,504

1,504

Share of tax in associates and jointly controlled entities

-

-

-

-

634

634

Underlying Continuing Operating Profit

5,660

2,267

-

7,927

34,828

42,755

Net financing costs - Continuing Operations

(609)

(421)

-

(1,030)

(1,435)

(2,465)

Underlying Continuing Profit before Tax

5,051

1,846

-

6,897

33,393

40,290

 

 







Coal Distribution Division

 

As the Group's coal mining activities reduced, the focus of the Division shifted last year to Coal Distribution. The table below shows the breakdown of operating profit within the Coal Distribution Division by key activity.

 


Bulk

Industrial and Domestic

Total


2016

2015

2016

2015

2016

2015

Third Party Traded Volumes ('000s tonnes)

602

4,157

556

515

1,158

4,672

Profit per tonne (£)

0.89

1.39

9.26

16.78

4.91

3.09

Third Party Trading (£'000)

534

5,792

5,147

8,644

5,681

14,436

Mining Operations (£'000)





(8,089)

19,972

Germany (Associate) (£'000)





1,776

663

Property and Energy (£'000)





395

767

Monckton (£'000)





(341)

(139)

Other (£'000)





(343)

(871)

Division Underlying Continuing Operating (Loss)/Profit (£'000)





(921)

34,828

 

 

Coal Distribution revenues fell from £485.9m to £179.3m principally due to the lower volumes of third party coal being traded, as demand for coal in the steel and thermal markets fell significantly. Following the decisions to reduce levels of thermal coal imports and to cease importing metallurgical coals, third party bulk coal volumes traded by the Division fell from 4,157,000 tonnes to 602,000 tonnes. The Operating Profit generated from coal trading fell from £14.4m to £5.7m.

 

The volume of speciality coal traded was 556,000 tonnes compared with 515,000 tonnes, whilst the average Operating Profit per tonne achieved fell from £16.78 to £9.26 in the comparative year. The pressure on margins reflected the impact of a number of factors including strong competition in the cement sector, a significant quantity of stock remaining unsold in the market following the closure of Kellingley Colliery by its operator UK Coal and a second successive exceptionally mild winter. The Board expects market supply and demand balance to improve in the coming years and is focussed on managing the future acquisition cost of speciality coals to support the Coal Distribution business.

 

Revenues from coal production activity also fell sharply, from £96.4m to £46.0m, as the Group scaled down its production activity in the face of low coal prices. Mining Operations recorded a £8.1m operating loss during the year ended 31 May 2016 compared with £20.0m operating profit in the prior year. This performance reflected the impact of lower coal prices combined with the decision to reduce output levels in response to the low coal prices. The mining operations supplied 126,000 tonnes of speciality coal to support the Third Party Trading operations.

 

Coal production was 506,000 tonnes compared with 1,399,000 tonnes in the prior year. The Division started the year producing coal at six sites and finished the year producing coal at only two; Glenmuckloch and House of Water. Production activity at Glenmuckloch will be concluded by the end of September 2016 due to low coal prices and low demand, at which time the only active coal production site operated by the Group will be House of Water. During the year, coal production ended at Netherton, Duncanziemere and St Ninians. Following the announcement of Longannet's closure the decision was taken to cease mining early at Muir Dean. The Group incurred an exceptional charge of £4.0m to support the early closure of Glenmuckloch and Muir Dean. As the mining operations have reduced in scale, mining operations will no longer be separately reported and instead will be reported as part of the residual Coal Distribution operation.

 

The Group retains options and planning permissions over a number of sites. These sites represent the best and most cost effective options available to the Group. The balance sheet contains £2.1m of development costs in respect of these sites and options which are held as strategic assets and represent reserves of approximately 4.1 million tonnes.

 

The Group continues to provide mining services to Tower Regeneration Limited ("TRL"), a joint venture in which the Group owns a 35% beneficial stake. Mining operations at Tower performed satisfactorily last year and 813,000 tonnes of coal were sold compared with 713,000 tonnes in the previous year.  TRL, however, had a challenging year due to low coal prices and posted a loss of £8.4m. The Group's 35% share of that loss was £2.9m. Overall, the Tower project contributed a net profit at the operating level of £0.3m compared with £5.5m in the prior year.

 

Although the UK and European steel sectors continue to face significant challenges, our European associate performed well last year and exceeded its targets. The European operation generated revenue of £89m from the trading of 652,000 tonnes of product compared with £64m of revenue from 304,000 tonnes in the prior year. The Group's 86% share of Operating Profit increased from £0.7m to £1.8m.  Revenue visibility remains low but we note that the operation continues, as it always has, to manage its fixed cost base closely.

 

Property and Energy

 

The Property and Energy results for the year ended 31 May 2016 were reported within the Coal Distribution Division and are shown in the table above. The Property team generated an Operating Profit in the year ended 31 May 2016 of £0.4m. This figure was lower than the £0.8m reported in the prior year simply due to the timing of sundry non-core property sales.

 

Beyond the Operating Profit generated, the Group has continued to invest in the development of its Property and Energy portfolio. The team supporting these development projects has been grown from eight to twelve. The operation delivered a net Operating Profit of £0.4m, arising from sundry trading property sales. The key focus of the Property team has been the development of seven key sites listed in the table in the Group Business Review. Investment of £2.1m on property and project development was capitalised during the year. 

 

The Group is pleased with the progress being made in the development of the Earls Gate Energy Centre project in the last financial year and notes that the planning application was formally submitted in May 2016. The project aims to deliver a 75MW replacement Combined Heat and Power plant using refuse derived fuels at a chemical complex in Grangemouth in Scotland.

 

The Group has continued to complete and formalise their consents for the three wind projects that have received planning consent in the last twelve months. These are Dalquhandy, Broken Cross and Poniel and total 70MW. Financial investment in these projects in the prior year was negligible and restricted to the formalisation of the planning permissions to preserve the option value in these schemes. 

 

 

Specialist Earthworks Division

 

On 11 January 2016, the Group completed the acquisition of Blackwell, establishing the Group's Specialist Earthworks Division. In the four and a half months between acquisition and 31 May 2016, the Division reported an Operating Profit of £1.1m from revenues of £31.3m. The performance was slightly ahead of management's expectations.  Since the acquisition, good progress has been made with the Blackwell team in developing the short term contract pipeline. The Board was encouraged by the news in April that the Division has been selected as the preferred provider for the earthworks related to two sections of the Government's £1.5 billion A14 improvement scheme.

 

 

Industrial Services Division

 

The Industrial Services business faced a number of significant challenges in the UK in the last financial year as a consequence of the pressures in the coal and steel sectors. The last year also saw announcements or closure decisions at a number of key client sites including Liverpool Bulk Terminal and Ferrybridge. Changes in operating regimes that will result in reduced coal burn have taken place at both Fiddlers Ferry and Eggborough.

 

In October 2015, the Redcar steelworks was forced to close whilst both the Scunthorpe and Port Talbot steelworks were the subject of sale processes during the year. We continue to provide services at Port Talbot and Scunthorpe, however the closure of the Redcar operation resulted in an exceptional charge for the Group of £1.6m in respect of redundancies and other contract demobilisation costs. Excellent stewardship and structuring of trading arrangements ensured that bad debts and losses on stock positions were avoided.

 

Revenue for the Division reduced by £44.3m from £127.8m to £83.5m in the prior year. The table below shows the split of revenue by geography. The challenges in the UK market were reflected by a £51.9m reduction in revenues rising from the various site closures. Excellent progress and development in the Hong Kong operation saw revenues increase by £5.6m or 104% from £5.4m to £11.0m.

 

Total revenue by destination

£m

FY14

FY15

FY16

UK

119.8

120.9

69.0

Hong Kong

2.8

5.4

11.0

Other

-

1.5

3.5

Total

122.6

127.8

83.5

 

 

The bulk of the reduction in UK revenue was attributable to the closure of Redcar Steelworks and Liverpool Bulk Terminal. Orders for additional works at coal power stations and other steel sites were also lower than the prior year due to the economic and business challenges faced by many of our key customer sites and operations.

 

Six key customer sites were closed or announced closure in the last financial year. These operations contributed £20.2m of revenue and £2.1m of gross margin in the year ended 31 May 2016.  In addition to the loss of revenue and profits, the closures resulted in exceptional charges in respect of redundancy and other contract demobilisation costs which are outlined in the Financial Review.

 

Offsetting the challenges faced by the UK business, good progress was made in developing operations in Hong Kong. Revenues in Hong Kong grew from £5.4m to £11.0m, an increase of 104%. The operating profit generated from international operations accounted for £0.3m. Efforts continue to develop the business, particularly in Hong Kong where ambitious targets have been set for growth.

 

Logistics Division

 

The Logistics Division had a challenging year. Revenues for the operation fell from £68.3m to £54.5m. £7.3m of that fall related to Imperial Tankers which was disposed of in the prior year. The balance of the reduction in revenues stemmed from a major change in the movement of waste flows following a clarification of waste classification for landfill tax purposes by HMRC. The Division's activity levels were also impacted by very low seasonal flows of coal and rock salt following the mild winter. As a result of reduced activity levels and the disruption to established waste routes, Operating Profit for the Division fell by £1.1m from £2.3m to £1.2m.

 

Safety, Health and the Environment

 

Our vision is to create an environment where all employees can work with zero harm to them. To achieve this, the Group takes a proactive approach to Safety, Health and the Environment and remains committed to the highest practicable standards of safety and health management and the minimisation of adverse environmental impacts.

 

The Board ensures that Health and Safety issues for employees, customers and the public are of foremost concern in all Group activities. The Group Chief Executive, supported by external advice, is charged with overall responsibility. All divisions have formulated safety management systems. We continue with the programme to achieve OHSAS 18001 Occupation Health and Safety Assessment Series for health and safety management systems and ISO 14000 environmental management.

 

During the previous year, we continued to strengthen our approach to behavioural safety training, with emphasis on raising the awareness and understanding of our supervisory staff, who form the 'front line' in delivering our standards within the workplace. This is being achieved through internal safety champions and external accredited training providers.

 

We have also developed our Senior Manager Safety Engagement Programme to deliver leadership across our operating sites. This Programme is led by the Board members and involves all senior managers undertaking site based safety visits, engaging directly with the workforce to discuss issues that impact on them. This Programme has proved to be effective in delivering a consistent approach across the Group and will continue to be a cornerstone of our safety strategy.

 

 

 

It is disappointing to report that, despite our best efforts, our safety performance deteriorated slightly during the year, as measured by Lost Time Incident Frequency Rate ("LTIFR"). This performance was in some part influenced by the period being a year of transition for the Group, with a number of operating units closing and others downsizing their workforce. Notwithstanding these influences, this remains a disappointing result and addressing the challenges of the changing environment remains a key focus for the Group.     

 

 

Iain Cockburn

Group Finance Director

 

Gordon Banham

Group Chief Executive

8 August 2016

 

 

FINANCIAL REVIEW

 

Revenue

 

The Group has continued to be faced with significant challenges within the coal sector in the UK with continued coal price weakness and lower levels of demand for power station grade coal, arising from the accelerated programme of coal generation plant closures. These market pressures together with the Group's decision to scale down its coal activities have resulted in a reduction in revenue of £321.5m from £662.2m to £340.7m in the current year.

 

Operating Profit and Margins

 

Underlying Operating Profit from Continuing Operations reduced by £38.2m from £42.8m to £4.6m, mainly driven by a reduced contribution from our Third Party Trading business, due to the aforementioned challenges within the coal markets. Additionally, underlying operating profit within the Industrial Services division has reduced in the year, linked to the closure of Redcar Steelworks and the accelerated closure programme of many UK coal power generation plants.

 

The initial period of operation within the newly established Specialist Earthworks division has been promising, delivering an Underlying Operating Profit of £1.1m in the first period of operation. This contribution has helped to offset the reduction in Underlying Operating Profit of £1.1m delivered by our Logistics division. The Logistics division was impacted by a reduction in coal and rock salt volumes combined with some significant challenges within the waste sector. These factors contributed to the reduction in Underlying Operating Profit from £2.3m in the prior year to £1.2m in the year ended 31 May 2016.

 

Reported Group Continuing Operating Profit before exceptional costs fell from £38.1m to £5.2m whilst Continuing Profit before Tax fell more sharply from £24.9m to a loss of £10.6m reflecting £12.4m of exceptional costs as the Group continues to transition the business away from thermal coal exposure within the UK.

 

Acquisition of Blackwell

 

On 11 January 2016, the Group completed the acquisition of Blackwell for a consideration of up to £11.85m.  The consideration was settled by a net cash payment of £8.5m and the transfer to the Blackwell shareholders of a property at Earls Colne with a market value of £3.35m. The property was owned by Blackwell. Of the £8.5m net cash payment, £5.25m was placed in escrow pending the settlement of a number of historic claims and the realisation of proceeds from the disposal of two other investment properties, which will be marketed post-acquisition. These property disposals are expected to be completed by 31 December 2016. The net debt of Blackwell at the date of the acquisition was £4.9m.

 

In our calculation of fair value, we have impaired the value of assets to which the escrow relates and assumed that the balance of £5.25m is returned to the Group. This has resulted in the establishment of a £5.25m debtor and an investment of £6.6m. The value of net assets acquired was £5.8m, resulting in goodwill of £0.8m.

 

Following the acquisition of Blackwell, a new Specialist Earthworks Services Division was established and will be managed and reported as a new separate business segment. The operation will continue to trade as "Blackwell".

 

Exceptional Costs

 

The Group continued its re-structuring to reduce exposure to thermal coal volatility and production within the UK. The various port, power station and steel plant closures that were announced last year required further steps to restructure and reduce costs. As a direct result of this, the Group has incurred non-recurring costs relating to redundancy and asset write downs of £12.4m. Included within these exceptional costs in the year to 31 May 2016 is a one off impairment on the Tower project of £4.7m. This impairment has arisen following the announcement from Aberthaw power station to cease the purchasing of Welsh coal at the end of the current contract, which has in turn led to the decision to shorten the mine life at Tower.

 

Item

£m

Impairment of investment and other assets relating to the Tower project

4.7

Redundancy and related site closure cost at Redcar Steelworks

1.6

Redundancy and related site closure costs in Industrial Services

1.1

Cost associated with early closure of certain mining operations

4.0

Cost attributable to the acquisition of Blackwell

0.7

Redundancy costs from central overhead cost reduction programme

0.3


12.4

 

As a result of the strategic move to transition away from exposures to thermal coal, in light of continued price and volume pressures, the Group took the decision in the prior financial year to cease operations at a number of our mining sites in Scotland. This led to a write off of mining assets and associated redundancy costs. The Group will now only operate coal extraction from a single site at House of Water.

 

These costs do not form part of the Group's ongoing activities, are considered exceptional by size and nature, and are therefore excluded from the Group's underlying result.

 

Interest

In the year to 31 May 2016, continuing net finance expenses for the Group reduced by £0.9m from £2.5m to £1.6m. This is driven partially by the success of the simplification programme in the prior year, which has led to a reduced level of average net debt.

 

Taxation

The income tax credit for the year is £1.1m compared with a tax charge of £3.6m for the year ended 31 May 2015; including the share of tax of equity accounted investees of £0.6m (2015: £0.6m) this results in a total tax credit of £0.5m (2015: charge of £4.2m). Whilst this credit represents a reported effective tax rate for the Group of 4.5% (2015: 16.4%), this rate is affected by a number of exceptional costs that are not tax deductible, including the write off of certain Tower balances and acquisition of Blackwell.

 

Dividend

The Board is proposing a final dividend of 0.6p per share (2015: 20.0p), bringing the dividend for the full year to 2.3p per share (2015: 30.0p). Whilst this reflects a decrease of 92.3% in the total dividend for the year, this increases the dividend pay out ratio to 40%  (2015: 31.9%) of underlying diluted earnings per share. The proposed final dividend will be paid on 21 October 2016 to all shareholders on the register at the close of business on 23 September 2016.

 

Share buybacks

The Group has continued the programme of purchasing its own shares as a means of returning value to shareholders. In the year to 31 May 2016 the Group purchased 175,000 (2015: 1,053,072) shares for a total consideration of £0.6m (2015: £6.3m). The Group now holds 1,228,072 of its own shares in treasury.

 

Pensions

Our former deep mining operation at Maltby Colliery was a member of two industry wide defined benefit pension schemes. Whilst our operations at the mine have ceased, the obligation to fund the schemes remains within the Group, and the Directors remain committed to funding the schemes.

 

In addition to the two industry wide defined benefit pension schemes, Maltby Colliery also operates an unfunded concessionary fuel scheme. The combined liability of both elements as at 31 May 2016 is £5.7m, increased from £5.5m at 31 May 2015. Contributions in the year of £1.2m (2015: £2.1m) have been offset by interest and expenses of £0.3m (2015: £0.3m) and a net re-measurement loss of £1.0m (2015: £2.1m).

 

In the prior year, the Group also maintained a concessionary fuel scheme for former employees of The Monckton Coke & Chemical Company Limited. As noted in the prior year Annual Report and Accounts, the scheme has ended and a final settlement was made in June 2015. The Group has no further obligation in relation to this scheme.

 

Earnings per Share

Reported basic earnings per share from Continuing Operations decreased from 65.3p to a loss of 30.0p reflecting the impact of the reduced underlying profits and the exceptional costs. Underlying diluted earnings per share decreased by 94.0% from 93.9p to 5.6p. The weighted average diluted number of shares reduced slightly during the year from 33.1m to 32.3m. The share buy-back programme, which was approved on 5 November 2014 resulted in the purchase of 1,228,072 shares as at 31 May 2016, and therefore reduced the weighted average number of shares.

 

Net Debt

Net debt increased by £31.3m from £1.0m at 31 May 2015 to £32.3m at 31 May 2016. The net debt figure has increased following the Group's acquisition of Blackwell, as well as plant and mining asset investment.

 

Group net assets decreased from £148.5m at 31 May 2015 to £131.4m at 31 May 2016. Gearing (measured as net debt compared with net assets) at the end of May 2016 was 24.6%, compared with 0.7% at 31 May 2015.

 

Movement in Net Debt

 

Item

2016
£m

2015
£m

EBITDA

14.9

46.1

Movement in working capital

5.3

22.9

Cash from operating activities before interest and tax

20.2

69.0

Interest payable

(4.0)

(1.4)

Taxation payable

(6.7)

(4.7)

Net capital expenditure

(13.5)

(8.3)

New finance leases

(3.5)

(2.1)

Business combinations

(13.7)

26.9

Dividends received

0.8

2.2

Dividends paid

(6.9)

(8.7)

Purchase of own shares

(0.6)

(6.3)

Discontinued cash flows

(3.4)

1.2

Total movement in cash and cash equivalents

(31.3)

67.8




 

Net cash flow from continuing operating activities before interest and tax generated a cash inflow of £20.2m during the year. This cash generation reflected positive EBITDA of £14.9m, despite the significant pressures faced across the group on profits. The cash impact of exceptional costs in the year, included within the £14.9m was £2.9m.

 

The movement within the Group's working capital balances was a £5.3m inflow. Reductions in coking coal, coke and PCI coal, following the closure of Redcar Steelworks offset the impact of increased coal stocks in Scotland. The release of working capital was lower than expected in the last year due to the lack of demand last winter. The Group is confident that these stocks will be saleable during the coming year, although visibility of demand remains low.

 

Interest payments included amounts of £3.0m in respect of the cash settlement of ineffective derivative financial instruments, for which the cost had been provided within the previous year's Income Statement.

 

Tax payments in the year included £6.3m in respect of a disclosable tax planning scheme implemented in 2011. An additional amount of £5.2m was paid in June 2016. Following this payment the Group has no further cash payment obligations in relation to the scheme. The Group and its advisors, KPMG are still confident that the scheme was sound and lawful. Should HMRC ultimately accept the Group's view on how this arrangement should be treated for corporation tax purposes, the £11.5m of cash paid will be repaid by HMRC. As previously reported, no profit benefit was taken at the time the scheme was enacted. No provision has been made for approximately £1m of interest that would be payable should to planning not be successful.

 

Net capital expenditure in the last financial year was £13.5m (2015: £8.3m) and includes disposal proceeds of £1.6m (2015: £2.9m). Gross cash on capital expenditure was £15.1m (2015: £11.2m) and related to investment of £8.5m to supplement our existing plant fleet and further investment in mine development assets across our Scottish operations of £3.0m to develop the House of Water site. The Group have also continued to invest in its property portfolio as assets are developed for future use or sale.

 

The acquisition of Blackwell resulted in an increase in net debt of £13.4m. This was made of cash payments to settle the acquisition consideration of £6.6m, an amount of £5.25m paid into escrow, net debt included in the acquisition balance sheet of £4.9m, less the £3.35m received in relation to the disposal of the head office property.  Additionally, the Group also acquired Earls Gate Energy Centre Limited for net cash of £0.3m.

 

In addition to the cash flows described above, the Group paid dividends totalling £6.9m, reflecting the prior year final dividend of 20.0p and the current year interim dividend of 1.7p. The Group have also purchased a number of shares as part of the share buy back programme for £0.6m (2015: £6.3m) and reduced the long term loans balance by £1.6m (2015: £53.9m).

 

Coal stocks are expected in to increase by around 100k tonnes in the first half of the current financial year before sales commence in earnest during next winter. The Group also expects to offer stocking deals to coal merchants of around £6m in the first half, in line with normal practice.

 

Capital Management and Bank Facilities

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.

 

The Group's current UK banking arrangements consists of a £70m borrowing base facility ("BBF") and a £40m revolving credit facility ("RCF"). The arrangement was concluded with a three bank group comprising of HSBC, Lloyds and Barclays and is committed through to August 2018. The change in structure of the facility has resulted in improved pricing, which has had a positive impact on the net finance expense for the year. The new structure was also designed to provide a greater degree of flexibility for the Group in financing working capital. This was judged to be important given the reductions that were anticipated to occur with Group EBITDA. Although the Group's RCF is subject to a Debt:EBITDA leverage covenant maximum of only 2:1, the Group's BBF facility sits outside the leverage test and leverage test parameters as it is secured against the underlying working capital assets.

 

As a result of this innovative arrangement the Group benefits from a flexible facility structure, and with the reduced need to finance significant coal stocks and plant assets, the Board does not foresee any covenant stress or pressure, in light of the reduced current profitability.

 

Summary of Net Debt

 


2016

£000

2015

£000

Cash and cash equivalents

(21,161)

(43,853)

Interest bearing borrowings

37,593

32,772

Finance lease liabilities

15,906

12,049

Net Debt

32,338

968

 

 

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

8 August 2016



 

Consolidated Statement of Profit and Loss and Other Comprehensive Income

for year ended 31 May 2016

 

Continuing operations

Note

2016

£000

2015

£000

Revenue

2

340,665

662,161


(299,764)

(588,390)





Gross profit


40,901

73,771

Other operating income


265

733


(48,339)

(45,560)

Operating (loss)/profit


(7,173)

28,944





Analysed as:




Operating profit (before exceptional costs)


5,205

38,074





Exceptional costs - Cost of sales


(3,473)

-

Exceptional costs - Administrative expenses


(8,905)

(9,130)

Exceptional costs


(12,378)

(9,130)





Operating (loss)/profit (after exceptional costs)


(7,173)

28,944





Financial income


1,153

1,152

Financial expenses


(2,785)

(3,617)

Unrealised fair value gains and losses on derivative financial instruments


-

(3,080)

Share of (loss)/profit in associates and joint ventures (net of tax)


(1,792)

1,504





(Loss)/profit before tax


(10,597)

24,903

3

1,082

(3,554)





(Loss)/profit for the year from continuing operations


(9,515)

21,349





Discontinued operations

 





(940)

(779)






(10,455)

20,570





Other comprehensive income/(expense)




Items that will not be reclassified to profit or loss




Remeasurements of defined benefit pension plans


(1,098)

(1,733)

Tax recognised on items that will not be reclassified to profit or loss

3

181

368

Items that are or may be reclassified subsequently to profit or loss




Foreign exchange translation differences


149

(1,766)

Effective portion of changes in fair value of cash flow hedges


1,119

(4,769)

3

(40)

862






311

(7,038)






(10,144)

13,532

 



 

 


Note

2016

£000

2015

£000

(Loss)/profit attributable to:




Equity holders of the Company


(10,498)

20,454


43

116






(10,455)

20,570





Total comprehensive (expense)/income attributable to:




Equity holders of the Company


(10,187)

13,416


43

116






(10,144)

13,532





Basic earnings per share (pence)

4

(32.96)

62.91

Diluted earnings per share (pence)

4

(32.96)

61.88

Basic earnings per share from continuing operations (pence)

4

(30.01)

65.31

4

(30.01)

64.24





Non GAAP Measures

 




Basic underlying earnings per share from continuing operations (pence)


5.70

95.41


5.63

93.85

 



 

 

Consolidated Balance Sheet

at 31 May 2016

 



Group

 



2016

£000

2015
£000

Non-current assets




Property, plant and equipment


68,095

57,144

Investment property


5,126

5,126

Intangible assets


9,475

9,472

Investments in associates and joint ventures


1,043

5,963


3,207

2,512


86,946

80,217





Current assets




Assets held for sale


5,040

5,040

Inventories


46,983

57,803

Derivative financial instruments


32

1,088

Trade and other receivables


117,310

108,750


21,161

43,853


190,526

216,534


277,472

296,751





Non-current liabilities




Other interest-bearing loans and borrowings


(46,098)

(7,165)

Retirement benefit obligations


(5,699)

(5,516)

Provisions


(4,189)

(5,762)

Derivative financial instruments


(66)

(1,308)

 

 


(56,052)

(19,751)





Current liabilities




Other interest-bearing loans and borrowings


(7,401)

(37,656)

Trade and other payables


(75,096)

(73,078)

Income tax liabilities


(6,271)

(13,414)

Provisions


(867)

-


(430)

(4,351)


(90,065)

(128,499)


(146,117)

(148,250)


131,355

148,501

 

 



 



Group

 



2016

£000

2015

£000

Equity attributable to equity holders of the parent




Share capital


3,314

3,314

Share premium


73,955

73,955

Other reserves


211

211

Translation reserve


(3,582)

(3,731)

Merger reserve


1,022

1,022

Hedging reserve


(62)

(1,141)

Capital redemption reserve


1,530

1,530


54,582

72,999



130,970

148,159


385

342


131,355

148,501

 

 

 

 

 

 



 

Consolidated Statement of Changes in Equity

for year ended 31 May 2016

Group

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 2014

3,309

73,952

(1,965)

2,766

211

1,530

1,022

69,073

149,898

226

150,124

Total comprehensive income for the year












Profit for the year

-

-

-

-

-

-

-

20,454

20,454

116

20,570

Other comprehensive income/(expense)












Foreign exchange translation differences

-

-

(1,766)

-

-

-

-

-

(1,766)

-

(1,766)

Effective portion of changes in fair value of cash flow hedges

-

-

-

(4,769)

-

-

-

-

(4,769)

-

(4,769)

Remeasurements of defined benefit pension plans

-

-

-

-

-

-

-

(1,733)

(1,733)

-

(1,733)

Tax recognised on other comprehensive income

-

-

-

862

-

-

-

368

1,230

-

1,230

 

Total other comprehensive expense

-

-

(1,766)

(3,907)

-

-

-

(1,365)

(7,038)

-

(7,038)

 

Total comprehensive (expense)/income for the year

-

-

(1,766)

(3,907)

-

-

-

19,089

13,416

116

13,532

























Transactions with owners recorded directly in equity












Issue of shares

5

3

-

-

-

-

-

-

8

-

8

Equity settled share-based payment transactions

-

-

-

-

-

-

-

(89)

(89)

-

(89)

Dividends paid

-

-

-

-

-

-

-

(8,744)

(8,744)

-

(8,744)

Purchase of own shares

-

-

-

-

-

-

-

(6,330)

(6,330)

-

(6,330)

Total contributions by and distributions to owners

5

3

-

-

-

-

-

 

(15,163)

 

(15,155)

-

 

(15,155)













Balance at 31 May 2015

3,314

73,955

(3,731)

(1,141)

211

1,530

1,022

72,999

148,159

342

148,501

 



 

Group

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 2015

3,314

73,955

(3,731)

(1,141)

211

1,530

1,022

72,999

148,159

342

148,501

Total comprehensive (expense)/income for the year












Loss for the year

-

-

-

-

-

-

-

(10,498)

(10,498)

43

(10,455)

Other comprehensive income/(expense)












Foreign exchange translation differences

-

-

149

-

-

-

-

-

149

-

149

Effective portion of changes in fair value of cash flow hedges

-

-

-

1,119

-

-

-

-

1,119

-

1,119

Remeasurements of defined benefit pension plans

-

-

-

-

-

-

-

(1,098)

(1,098)

-

(1,098)

Tax recognised on other comprehensive income

-

-

-

(40)

-

-

-

181

141

-

141

 

Total other comprehensive income/(expense)

-

-

149

1,079

-

-

-

(917)

311

-

311

 

Total comprehensive income/(expense) for the year

-

-

149

1,079

-

-

-

(11,415)

(10,187)

43

(10,144)













Transactions with owners recorded directly in equity












Equity settled share-based payment transactions

-

-

-

-

-

-

-

520

520

-

520

Dividends paid

-

-

-

-

-

-

-

(6,924)

(6,924)

-

(6,924)

Purchase of own shares

-

-

-

-

-

-

-

(598)

(598)

-

(598)

Total contributions by and distributions to owners

-

-

-

-

-

-

-

(7,002)

(7,002)

-

(7,002)













Balance at 31 May 2016

3,314

73,955

(3,582)

(62)

211

1,530

1,022

54,582

130,970

385

131,355

 

 

 

 

 

 



 

 

 

Consolidated Cash Flow Statement

for year ended 31 May 2016

 



Group



2016

£000

2015

£000

Cash flows from operating activities




(Loss)/profit for the year from continuing operations


(9,515)

21,349

Adjustments for:




Depreciation of property, plant and equipment


9,261

10,009

Impairment of property, plant and equipment


-

10,078

Depreciation of mining assets


7,263

8,901

Amortisation and impairment of goodwill and intangible assets


1,026

5,567

Net finance expense


1,632

2,465

Share of loss/(profit) in associates and joint ventures (net of tax)


1,792

(1,504)

Impairment of Tower investment and other balances


4,302

-

Profit on sale of property, plant and equipment


(265)

(733)

Profit on disposal of subsidiaries


-

(16,253)

Equity settled share-based payment expenses


520

(123)

Income tax (credit)/expense


(1,082)

3,554

Loss on derivative financial instruments


-

3,080

Translation of non-controlling interest and investments


(5)

(298)



14,929

46,092

Change in inventories


15,541

37,627

Change in trade and other receivables


10,696

11,257

Change in trade and other payables


(21,775)

(22,666)

Change in provisions and employee benefits


754

(3,334)



20,145

68,976

Interest paid


(4,011)

(1,362)

Income tax paid


(6,702)

(4,716)





Net cash from continuing operating activities


9,432

62,898

Net cash from operating activities in discontinued operations


(3,156)

1,055





Net cash from operating activities


6,276

63,953





Cash flows from investing activities




Proceeds from sale of property, plant and equipment


1,613

2,927

Dividends received


839

2,153

Disposal of subsidiaries


-

24,807

Acquisition of subsidiaries (net of cash acquired)


(4,110)

(637)

Acquisition of property, plant and equipment


(15,075)

(11,263)





Net cash from investing activities in continuing operations


(16,733)

17,987

Net cash from investing activities in discontinued operations


-

1,677





Net cash from investing activities


(16,733)

19,664





Cash flows from financing activities




Proceeds from the issue of share capital (net of directly attributable expenses)


-

8

Payment of finance lease liabilities


(6,591)

(5,636)

Payment of other loan balances


(2,890)

-

Dividends paid


(6,924)

(8,744)

Purchase of own shares


(598)

(6,330)

Proceeds from/(repayment of) Group banking facilities


5,000

(48,000)

Net cash from financing activities in continuing operations


(12,003)

(68,702)

Net cash from financing activities in discontinued operations


(282)

(1,578)





Net cash from financing activities


(12,285)

(70,280)





Net (decrease)/increase in cash and cash equivalents


(22,742)

13,337

Cash and cash equivalents at 1 June


43,853

30,768

Effect of exchange rate fluctuations on cash held


50

(252)





Cash and cash equivalents at 31 May


21,161

43,853



 

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 2016 or 2015. Statutory accounts for 2015 have been delivered to the Registrar of Companies, and those for 2016 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 auditor 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 8 August 2016.

 

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 strategic decisions about allocation of resources.

 

The sectors distinguished as operating segments are Coal Distribution, Industrial Services, Logistics and Specialist Earthworks. Specialist Earthworks has been identified as a new operating segment following the acquisition of Blackwell during the year ended 31 May 2016. A short description of these sectors is as follows:

 

·      Coal Distribution: Provides coal, coke, minerals, smokeless fuel and biomass products to a range of industrial, wholesale and public sector energy consumers.

·      Industrial Services: Provides quality assured contract management services to clients in materials handling and a wide range of other industrial sectors.

·      Logistics: Provides bulk logistics to customers across the UK.

·      Specialist Earthworks: Provides earth moving, civil engineering and infrastructure services across the UK.

These segments are combinations of subsidiaries, jointly controlled entities and associates. They have separate management teams and provide different products and services. The four operating segments are also reportable segments.

 

Transactions between divisions are carried out at rates that do not give a competitive advantage to a particular division of the Group.

 

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 (loss)/profit, which is reconciled to (loss)/profit before tax in the tables below:

 


Industrial Services

2016

£000

Logistics

2016

£000

Specialist Earthworks
2016
£000

Total

 Services

2016
£000

 

Coal

 Distribution

2016

£000

 

Total

2016

£000

Revenue







Total revenue

83,512

54,512

31,338

169,362

179,316

348,678

Inter-segment revenue

(2,333)

(4,680)

(5)

(7,018)

(995)

(8,013)

Revenue from external customers

81,179

49,832

31,333

162,344

178,321

340,665








Underlying operating (loss)/profit

3,297

1,173

1,076

5,546

(921)

4,625

Amortisation of intangibles

(256)

-

-

(256)

(328)

(584)

Taxation on associates and joint ventures

-

-

-

-

(628)

(628)

Net financing costs

(211)

(356)

(71)

(638)

(994)

(1,632)

Profit/(loss) before taxation (pre-exceptional)

2,830

817

1,005

4,652

(2,871)

1,781

Exceptional costs






(12,378)

Loss before taxation






(10,597)

Depreciation charge

(2,411)

(2,674)

(1,013)

(6,098)

(12,860)

(18,958)

Capital expenditure

2,172

4,573

-

6,745

11,969

18,714

Net assets







Segment assets

37,816

23,095

42,789

103,700

162,520

266,220

Segment liabilities

(20,755)

(12,178)

(30,662)

(63,595)

(46,760)

(110,355)

Segment net assets

17,061

10,917

12,127

40,105

115,760

155,865

Associates and joint ventures

-

-

-

-

1,043

1,043

Segment net assets including share of associates and joint ventures

17,061

10,917

12,127

40,105

116,803

156,908

Unallocated net assets






(25,553)

Total net assets






131,355

 

 

Unallocated net assets include goodwill and intangibles (£9.5m), Group banking facilities liability (£37.6m), cash and cash equivalents (£4.5m liability), derivative financial instruments (£0.4m liability), deferred tax asset (£3.2m) and other corporate items (£4.2m).


2   Segmental Information continued

 


Industrial Services

2015

£000

Logistics

2015

£000

Specialist Earthworks
2015
£000

 

Total

 Services

2015
£000

 

Coal Production & Distribution

2015

£000

 

Total

2015

£000

Revenue







Total revenue

127,769

68,309

-

196,078

485,948

682,026

Inter-segment revenue

(6,840)

(11,693)

-

(18,533)

(1,332)

(19,865)

Revenue from external customers

120,929

56,616

-

177,545

484,616

662,161








Underlying operating profit

5,660

2,267

-

7,927

34,828

42,755

Loss on Biomass conversion project

(2,400)

-

-

(2,400)

-

(2,400)

Amortisation of intangibles

-

-

-

-

(143)

(143)

Taxation on associates and joint ventures

-

-

-

-

(634)

(634)

Net financing costs

(609)

(421)

-

(1,030)

(1,435)

(2,465)

Profit before taxation (pre-simplification)

2,651

1,846

-

4,497

32,616

37,113

Simplification costs






(9,130)

Unrealised fair value gains and losses on derivative financial instruments






(3,080)

Profit before taxation






24,903

Depreciation charge

(3,427)

(2,411)

-

(5,838)

(13,120)

(18,958)

Capital expenditure

397

1,864

-

2,261

11,163

13,424

Net assets







Segment assets

46,012

17,111

-

63,123

186,300

249,423

Segment liabilities

(23,150)

(10,649)

-

(33,799)

(67,929)

(101,728)

Segment net assets

22,862

6,462

-

29,324

118,371

147,695

Associates and joint ventures

-

-

-

-

5,963

5,963

Segment net assets including share of associates and joint ventures

22,862

6,462

-

29,324

124,334

153,658

Unallocated net assets






(5,157)

Total net assets






148,501

 

Unallocated net assets include goodwill and intangibles (£9.5m), revolving credit facility (£32.8m), cash and cash equivalent (£19.8m) derivative financial instruments (£4.6m liability), deferred tax asset (£2.9m) and other corporate items (£1.2m).

 

Information About Key Customers

Included in revenue is an amount of £12,751,000 (2015: £95,236,000) arising from sales to the Group's largest customer, relating to the Coal Distribution division.

 

The following table analyses revenue by significant category:

 


2016

£000

2015

£000

Sale of goods

178,321

484,616

Rendering of services

131,011

177,545

Construction contracts

31,333

-

 

 

340,665

662,161

               



 

3. Taxation

 

Recognised in the Income Statement

 


2016

£000

2015

£000

Current tax (credit)/expense



Current year

213

5,777

Adjustments for prior years

(738)

(107)

 

Current tax (credit)/expense

(525)

5,670




Deferred tax credit



Origination and reversal of temporary differences

(831)

(2,262)

Adjustments for prior years

(128)

56

Reduction in tax rate

402

90




Deferred tax credit

(557)

(2,116)




Tax (credit)/expense in income statement (excluding share of tax of equity accounted investees)

(1,082)

3,554

 

Share of tax of equity accounted investees

628

634




Total tax (credit)/expense from continuing operations

(454)

4,188

Tax expense/(credit) from discontinued operations

199

(1,605)

Total tax (credit)/expense

(255)

2,583

 

Recognised in Other Comprehensive Income

 


2016

£000

2015

£000

Deferred tax (expense)/income



Effective portion of changes in fair value of cash flow hedges

(40)

862

Remeasurements of defined benefit pension plans

181

368





141

1,230

 

Reconciliation of Effective Tax Rate

 


2016

Rate

2016

£000

2015

Rate

2015

£000

(Loss)/profit for the year from continuing operations


(9,515)


21,349

Total tax (credit)/expense from continuing operations (including tax on equity accounted investees)


(454)


4,188






(Loss)/profit excluding taxation from continuing operations


(9,969)


25,537






Tax using the UK corporation tax rate of 20.0% (2015: 20.83%)

20.0%

(1,994)

20.8%

5,319






Effect of tax rates in foreign jurisdictions

(2.8%)

276

0.4%

95

Unrecognised tax losses

(3.9%)

389

-

-

Non-deductible (income)/expenses

(6.4%)

644

(5.4%)

(1,376)

Reduction in tax rate on deferred tax balances

(4.2%)

417

0.4%

90

(Over)/under provided in prior years

1.9%

(186)

0.2%

60






Effective tax rate and total tax (credit)/expense

4.6%

(454)

16.4%

4,188

 

The UK corporation tax rate reduced to 20% on 1 April 2015, giving an effective base rate of 20% (2015: 20.83%).

 

Factors That May Affect Future Current and Total Tax Charges

Reductions in the UK corporation tax rate from 23% to 21% (effective from 1 April 2014) and 20% (effective from 1 April 2015) were substantively enacted on 2 July 2013.  Further reductions to 19% (effective from 1 April 2017) and to 18% (effective from 1 April 2020) were substantively enacted on 26 October 2015.  A reduction to 17% has been announced but has not been substantively enacted.  This will reduce the Group's current tax charge accordingly.  The deferred tax balances at 31 May 2016 has been calculated based on the rate of 18% substantively enacted at the balance sheet date.

 

4. Earnings per Share

 

 


2016

 

2015

 


Continuing and discontinued

Continuing

Discontinued

 

Continuing and discontinued

Continuing

Discontinued

 

Ordinary Shares







Basic earnings per share

(32.96)p

(30.01)p

(2.95)p

62.91p

65.31p

(2.40)p

Diluted earnings per share

(32.96)p

(30.01)p

(2.95)p

61.88p

64.24p

(2.40)p

 

 

The calculation of earnings per share is based on the (loss)/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.


2016

 

2015

 


Continuing and discontinued

Continuing

Discontinued

 

Continuing and discontinued

Continuing

Discontinued

 

(Loss)/profit for the year attributable to equity holders (£000)

(10,498)

(9,558)

(940)

20,454

21,233

(779)

Weighted average number of shares

31,851,053

31,851,053

31,851,053

32,511,083

32,511,083

32,511,083

Basic earnings per share

(32.96)p

(30.01)p

(2.95)p

62.91p

65.31p

(2.40)p

 

 

The calculation of weighted average number of shares includes the effect of own shares held of 1,228,072 (2015: 1,053,072). The calculation of diluted earnings per share is based on the (loss)/profit for the year and 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 is 400,444 (2015: 540,262)); effect on earnings per ordinary share is nil p (2015: 1.03p). Effect on continuing earnings per ordinary share is nil p (2015: 1.07p). The effect on earnings per ordinary share and continuing earnings per ordinary share is nil p in the year due to the loss reported.

 

 


2016

 

2015

 


Continuing and discontinued

Continuing

Discontinued

 

Continuing and discontinued

Continuing

Discontinued

 

(Loss)/profit for the year attributable to equity holders (£000)

(10,498)

(9,558)

(940)

20,454

21,233

(779)

Weighted average number of shares

32,251,497

32,251,497

32,251,497

33,051,345

33,051,345

33,051,345

Diluted earnings per share

(32.96)p

(30.01)p

(2.95)p

61.88p

64.24p

(2.40)p

 

Continuing underlying basic and diluted earnings per share are calculated on the diluted weighted average number of shares of 32,251,497 (2015: 33,051,345) and on underlying (loss)/profit after tax, as reconciled below:

 


2016

£000

2015

£000

(Loss)/profit for the year attributable to equity holders from continuing operations

(9,558)

21,233

Amortisation/impairment of intangibles/goodwill

584

143

Exceptional items

12,378

12,210

Loss on Biomass conversion project settlement

-

2,400

Tax effect of above items

(1,587)

(4,967)

Underlying Profit after Tax from Continuing Operations

1,817

31,019

 

 

 

 

5. Dividends

The aggregate amount of dividends comprises:

 


2016
£000

2015
£000

Final dividends paid in respect of prior year but not recognised as liabilities in that year
(20.0p per share (2015: 16.7p))

6,382

5,534

Interim dividends paid in respect of the current year (1.7p per share (2015: 10.0p))

542

3,210





6,924

8,744




Proposed dividend (0.6p per share (2015: 20.0p))

191

6,417

 

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

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
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