Group Chief Executive's review

GROUP CHIEF EXECUTIVE'S REVIEW

GROWING DESPITE THE CHALLENGES

A clear strategy, supported by continuous improvement initiatives and the efforts of our people, has enabled us to deliver despite difficult market conditions.

The Group made good progress against its strategic and operational objectives in 2015/16 despite the tough macro market. Our core commercial waste markets in the Netherlands showed signs of improvement after a number of years of contraction. In addition, we made good progress with our self-help initiatives, although we were unable to offset fully the impact of a weakening macro-economic environment, particularly in the second half of our financial year.

With global energy and commodity prices at what appear to be cyclical lows, our plans for growth are based on current market conditions with no material expectation of recovery in the short term. Our own initiatives and newly commissioned capacity are expected to deliver growth, independent of any potential market recovery.

Group performance

Revenues from continuing businesses grew by 7% at constant currency to £615m, and by 2% at reported currency (2015: £601m). Trading profit grew by 4% (a reduction of 3% at actual rates) to £33.4m and underlying earnings per share grew by 1% at constant currency to 4.7p (2015: 5.0p). Exceptional items totalled £23.5m (2015: £42.2m).

Commercial Waste produced a strong performance in the year, growing trading profit by 18% at constant currency to €21.1m on revenues that grew by 1% to €406m. The Netherlands strongly increased trading profit by 37% to €13.7m while Belgium fell by 6% to €7.4m, as expected. The benefit of improving conditions in the Dutch construction market was countered by weaker recyclate and energy prices in the second half of the financial year. However, we were still able to deliver profit growth from our self-help initiatives and ongoing portfolio management.

Hazardous Waste delivered a robust performance despite difficult oil and gas markets, which represent over 50% of its revenues. Revenues increased by 6% at constant currency to €186m and trading profit increased by 1% to €21.2m. Record waterside and soil volumes were processed to offset intake and offtake pricing pressure, productivity pressure and lower sludge volumes.

Municipal had a challenging year, although revenue grew by 21% at constant currency to £190m as a result of the commissioning of new sites and construction activity in Surrey, Canada. However, trading profit fell by 15% at constant currency to £9.6m as a result of offtake, recyclate and energy price pressures, as well as higher insurance costs. As previously disclosed, the impact of changes in market conditions on our Cumbria PFI contract has caused us to take a £5m onerous contract provision. We were pleased to commission both the Barnsley Doncaster and Rotherham (BDR) and Wakefield flagship facilities during the year, both of which will contribute to profit and cash performance over the next 25 years.

Strong cash management and capital discipline continued in 2015/16, which we had highlighted as a year of peak capital investment in a range of strategic and long-term projects. We kept tight control of our operating cash flows, delivering an underlying free cash flow of £56.8m (2015: £23.4m). Our core net debt on 31 March 2016 was better than expected at £193m, representing a multiple of 2.6 times EBITDA, comfortably within our covenant level.

Market and macro-economic background

The weakening of the global macroeconomic environment in the second half presented new headwinds just as our commercial waste markets had begun to stabilise.

The key Netherlands construction market grew for the first time in four years, increasing by around 3% primarily driven by the residential sector, with commercial and infrastructure construction remaining subdued. This improvement remains at an early stage, not least because many of the major construction companies are themselves still recovering. The Dutch industrial and commercial waste segment experienced some price increases in a flat market following an increase in incinerator gate fees and the impact of the domestic incinerator tax of €13 per tonne implemented in January 2015. The outlook is for continued modest growth in construction and demolition waste, supported by a stable broader waste market.

This recovery in our core commercial market was, however, more than offset by the global weakening of the macroeconomic environment, especially in the second half, which led to further deterioration in oil and gas markets, falling commodity prices and lower energy prices.

The fall in oil and gas market prices impacts our Hazardous Waste Division in a number of ways. The first is that our oil and gas customers minimise their operational expenditure and cut back on exploration expenditure. This has included a reduction in the volume and the shape of refinery maintenance programmes and hence a significant impact on the productivity and profitability of our Dutch industrial cleaning business, Reym. The second is that the same cost pressures and reduced cleaning activities have resulted in around 15% less industrial waste sludges being delivered to our ATM facility for treatment. The third is that with virgin oil at very low prices, the market for waste oils, an output of our treatment process, has been significantly reduced both in volume and pricing.

We continue to believe that this reduced maintenance activity and the impact of low pricing is short-term in nature, but we are suitably cautious about forecasting the timing of the recovery.

The global fall in commodity prices also has a direct impact on recyclate prices, particularly metal and plastics. This impacted the Municipal and Commercial divisions by around £3m in the second half. The ferrous metal price fell by 40% in the third quarter of our financial year before stabilising in the fourth quarter. Other recyclate markets, including glass and wood, proved volatile but downside risks were somewhat mitigated through rapid adjustments to inbound and/or outbound pricing to maintain margin. Commodity prices appear to be towards the bottom of their normal cycles, but our growth plans are based on current levels with no expectation of material recovery in the short-term.

A consistent strategy for growth

Our vision is to be the most respected waste-to-product company. We exclusively focus on extracting value from waste, rather than on its disposal through mass burn incineration or landfill. We believe that our unique focus both addresses social and regulatory trends and offers the most capital-efficient solution to waste management.

Our strategy remains consistent, with three core divisional strategies to address the specific market opportunities that each of our Divisions serves. These divisional strategies are reinforced by three overarching strategies that apply across the Group. These are to:

  • Drive margin expansion across the Group through self-help initiatives such as commercial effectiveness, continuous improvement and offtake management;
  • Invest in infrastructure through the cycle in areas where we are structurally advantaged and can deliver superior returns; and
  • Manage our portfolio of assets and businesses, exiting those that are non-core or under-performing and recycling capital into segments where we can deliver increased returns and growth.
Driving margin expansion through self-help initiatives

We are driving margin expansion principally through a range of initiatives that address the key areas of our business model: intake, processing and disposal. Our success in driving these initiatives has been the main reason that we have been able to offset most of the impact of the global macroeconomic headwinds.

Our commercial effectiveness initiative has been focused on managing intake margin, at the front end of the business, particularly in our Commercial Division. Our sales force has shifted its emphasis towards margin from volume, focusing on profitable segments and exiting from loss-making contracts. New tools for managing both pricing and sales force activity have allowed us to more effectively manage market changes such as new taxes or movements in recyclate prices.

Our continuous improvement initiative made good progress in 2015/16, building on the successful completion of our structural cost programme last year. Lean conversions of two key sites, Van Vliet Groep and Ghent, have been successfully completed in the Commercial Division, identifying annualised savings of around €2m. This initiative will be rolled out across the rest of the Division, starting with most of our master plants in 2016/17. Continuous improvement has also been introduced in Municipal, with around £1m of savings identified and delivered at ELWA, and will be rolled out across the division in the coming year.

We additionally created a new initiative last year to manage our offtake, including the recyclates and the refuse derived fuel (RDF) that we produce throughout the Group. This initiative has delivered savings of over €700k through optimised pricing and disposal routes. Further savings are targeted for 2016/17.

Bringing infrastructure on line for future growth

A core part of our strategy has been to invest through the cycle in infrastructure where we are advantaged and where we can generate attractive returns. The 2015/16 and 2016/17 years will see our infrastructure investment peak and we are now increasingly focusing on profit and cash flow delivery.

During 2015/16 we successfully commissioned two flagship PFI facilities in the UK. The £100m Wakefield site provides a range of technology solutions to meet the diversion requirements of Wakefield’s residents. The insolvency late in construction of a major supplier led to a four month delay in full service commencement but the site entered full service on our revised target date in December and is performing as expected. The new £90m BDR facility is our largest mechanical biological treatment (MBT) facility and is capable of processing up to 265,000 tonnes of residual waste per annum with a diversion rate of 96.5%.

We also commissioned important new assets within our Hazardous Waste Division. Our new Shanks Total Care site at Theemsweg is located in the heart of the Europoort at Rotterdam. It combines a Reym cleaning depot with waste reception and storage facilities. This means that both Reym and other industrial customers in the Europoort can deliver their waste to Theemsweg instead of making the four hour round trip to our main ATM treatment site. This significant time saving benefits our customers and we then bulk up the waste for transfer by ship to ATM, reducing our internal costs. Additional processing assets were commissioned at ATM, including storage tanks, a jetty extension and water cooling technology. The increased capacity created on the site allowed record throughput to be processed, offsetting the reduction in intake of certain high margin waste streams.

Portfolio management for improved returns

In managing our portfolio, we have exited activities where we are unable to generate acceptable returns or which are non-core. This is driven by our commitment to increase our returns through the recycling of capital into higher growth areas. During 2015/16, we sold our loss-making Industrial Cleaning Wallonia business to a local player, allowing us to avoid future losses of over €700k per annum and also rationalise our divisional overhead, reducing costs by a further €1m. We also sold our non-core Shanks Nord business to a local player, exiting a business where we were sub-scale. During the year we acquired and integrated PRA, a small paper recycler within our core operational area of the Randstad.

Focus on cash

We have continued to focus on cash, especially given the higher than usual investment commitments of the Group during the year. The business generated an underlying cashflow of £56.8m before growth investments and exceptional costs, representing underlying free cash flow generation of 172% (2015: 69%).

Highlights of our cash management activities have included:

  • The sale in March 2016 of 100% of the subordinated debt and 49.99% of the equity in our Wakefield PFI special purpose vehicle for £30m, £26m of which was received by year end; ¤ A project to enhance working capital processes that has delivered benefits of around £5m in 2015/16;
  • The sale of certain accounts receivable in segments of the business with structurally longer days sales outstanding (DSO) to increase capital efficiency; and
  • The sale of Shanks Nord in France and our Kettering site for a combined value of £3m.

In addition, we were pleased to underpin and extend our long-term financing through the issuance of a €100m Green Bond to the Belgian retail market, the first Green Bond to be listed on the London Stock Exchange. This Green Bond has a coupon of 3.65%. During the period, we also redeemed shorter term and more expensive borrowings.

Measuring future performance
Divisions: Hazardous, Commercial, Municipal; Group: Driving Margin Expansion, Investing In Infrastructure, Managing the Portfolio
Strategic goals in 2016/17

While our strategy remains consistent, we will shift emphasis in the coming year as we come to the end of a period of particularly high capital investment.

Going forward, there will be greater focus on margin expansion initiatives. We will extend the roll out of our continuous improvement programme to reduce cost and increase productivity across all our divisions.

On the investment side, we plan to allocate future capital expenditure more to incremental projects that will enhance capacity or performance at existing sites rather than investing in new greenfield sites. This is due to most segments having sufficient capacity and low forecast volume growth. We will also focus heavily on delivering returns from our existing assets.

Finally, we continue to be alert to opportunities both to generate cash and improve returns through targeted disposals and to create value through suitable acquisitions whilst maintaining our capital discipline.

Building a winning team

Our strong performance has been made possible by our focus on developing our existing talent and bringing in new skills from other industries. Success in the waste industry requires a blend of entrepreneurial commercial flair and strong processing disciplines. We have continued to invest in evolving the capabilities of our people and our organisation from the Executive Committee to our front line employees. In particular, our continuous improvement programme will transform the capability of our operational teams. We also invested heavily in developing our teams at ATM to achieve the vital Seveso III safety standard that will allow safer operations at ATM and will increase the potential for further future expansion. I was particularly pleased that our second engagement survey had an 18% increase in response rate and that 80% of our work force confirmed that they were committed to the company.

Delivering responsibly

Sustainability and corporate responsibility are at the heart of Shanks’ vision to be the most respected waste-to-product company. Last year we laid out a demanding new five year programme for corporate responsibility and we have made good progress against our new targets. In particular, we were delighted to deliver yet another year of improved safety performance, with a 13% reduction in three day accidents and a new record low RIDDOR rate for the Group. We continue to engage closely with communities, regulators and employees, and are investing heavily in enhanced technologies to improve our recycling rates and to minimise our impact in the communities around us.

Outlook

Despite the current macro-economic environment, we remain well positioned to make progress and to meet our expectations for 2016/17. We continue to implement our self-help initiatives to drive margin expansion across all our divisions and significant new infrastructure assets are coming on stream. As we come to the end of a period of high capital investment in the coming year, we will focus even more intensively on delivering returns from our existing assets.

Longer term, the underlying growth drivers in our business remain attractive. Our vision, strategy and organisation are designed to increase customer focus, improve operational performance and deliver growth. Our portfolio management plans are also expected to increase returns and recycle capital into higher growth opportunities.

Peter Dilnot
Group Chief Executive

Important information:

On 28 February Shanks Group plc merged with Van Gansewinkel Groep BV to form Renewi plc. Information on this website is no longer being updated and is for historical reference only. Please visit www.renewi.com for latest information, or continue to the historic Shanks Group plc website.