Commercial

Business model

The commercial waste market covers the collection, sorting, treatment and ultimate disposal of waste materials from a range of sources. The market can be divided into three main sources of waste: Construction and Demolition (C&D), Industrial and Commercial (I&C), and Municipal (where the latter has not been tied up in a long-term PFI-type contract). In addition, the Division includes our organic waste processing assets in Belgium and the Netherlands.

Shanks’ unique business model in this market is to focus primarily on the sorting and treatment phases of the cycle. We generally collect where necessary to secure waste volumes, and we dispose only of the residues that we are unable to convert into a reusable product or recyclate. In this way, we ‘make more from waste’ both environmentally and economically. Our general business model is set out in the graphic below.

We operate businesses in the Netherlands and Belgium. Each has a different profile in terms of the source of waste, which affects its current financial performance and competitive strategy as outlined in the following sections.

Market overview

The 2015/16 year saw some long-awaited stability and pockets of growth in our end markets. In particular, the construction market in the Netherlands grew by 3% after a number of years of severe contraction. This was primarily led by growth in residential construction, with broadly flat conditions in commercial and infrastructure construction. While this return to growth is welcome, it remains fragile, not least because many of the larger Dutch construction companies are still recovering from the impact of the recession. The Dutch commercial market saw some recovery in pricing on the back of rising incinerator gate fees and the introduction of a €13 per tonne incinerator tax. This is expected over time to have a modest positive second order impact on Dutch recycling rates. The Belgian market
remained broadly flat at relatively depressed levels, especially in Wallonia which has experienced long-term structural decline in industrial activity. Changing waste tax rates across Belgium also caused some firming of prices from July.

Recyclate markets proved more challenging in the face of the macroeconomic weakening of commodity prices towards cyclical lows. Metal prices fell sharply in the second half, with ferrous metal pricing falling by 40%. There was also significant pressure in paper pricing and some disruption to the supply/demand balance in the glass and wood segments that was largely offset by swift pricing adjustments.

SOLID WASTE BUSINESS MODEL

Products and technologies

The Commercial Waste Division operates a number of technologies in order to recycle the waste it sources into usable products. Waste may be delivered to a transfer station, where it is collected and subjected to a rough sort before being sent on for further treatment. The core technology is the material recycling facility (MRF) which combines automated sorting technologies (such as magnets, eddy current separators and optical sorters to remove recyclates) along with manual sorting lines.

In Ghent, solid recovered fuel (SRF) is being produced to create a clean fuel for incinerators or cement kilns. C&D waste passes through heavier duty processes, including stone crushers to produce rubble. Our Icova site further processes specifically collected (dry) commercial waste into high calorific ICOPOWER® pellets which can be used in power stations or cement plants. Shanks also operates businesses that focus on mono-streams, such as glass (Van Tuijl), wood (Shanks Wood Products) and paper, or cardboard (Kluivers). The division further operates a number of composting and AD facilities to process organic waste. It also operates a hazardous waste business in Belgium, one landfill in each country and a sand quarry in Belgium.

The key products are as follows:

  • Recyclates (commodities): ferrous and non-ferrous metals, glass, plastics, cardboard, paper, wood chips.
  • Industrial products: rubble, aggregate, compost, building materials.
  • Power: gas from the AD facilities and landfills, ICOPOWER® pellets, SRF for cement kilns or high energy-generating incineration.

Recycling rates for the division are over 75% and over 95% for the C&D businesses. The Commercial Waste Division also has a minority share, along with other leading waste companies, in an incinerator in Wallonia.

Strategy

The core strategy of the Commercial Waste Division is to:

  • Return the division to attractive profitability levels;
  • Drive cost efficiency through structural cost reduction together with procurement and continuous improvement initiatives;
  • Invest in optimising our commercial effectiveness to take advantage of market opportunities; and
  • Streamline the portfolio to increase returns.

Our businesses are managed separately in Belgium and the Netherlands, but work together closely to preserve synergies.

Financial performance

The Commercial Division performed strongly in 2015/16, delivering 18% trading profit growth to €21.1m on revenues up by 1% to €406m. Trading margin increased by 70bps to 5.2% and the return on operating assets rose to 9.6%.

The Netherlands grew revenues by 5% to €254m and trading profit by 37% to €13.7m. Trading margins improved by 130bps to 5.4%. All regions showed both revenue and profit growth, with a particularly strong performance in the Northern Region. Volumes were broadly flat, with reductions in rubble and soil/ sludge offset by growth in more profitable mixed construction waste. Recyclate
revenues were also broadly flat over the year. Strong growth in volumes was offset in the second half by a fall in recyclate prices, particularly metal pricing which impacted the Netherlands business by €1.8m compared to prior year.

Belgium revenues fell by 4% to €153m and trading profit by 6% to €7.4m in line with expectations. As reported last year, revenue in the first half was impacted by weak sales of solid recovered fuel (SRF) and wood dust due to market challenges. Sales of both picked up in the second half and a second shift of SRF production resumed in the fourth quarter. Wood dust sales will be severely disrupted again in 2016/17 due to the main customer switching from coal to biomass fuel. Profitability of the landfill continued to decline as expected, further impacted by the introduction of an environmental tax on the remaining incoming valorised waste streams from July 2015. However, we were delighted to be granted a 400k tonne extension to the permit for the receipt of valorisation waste streams at the landfill site. This will extend the operation of the site by a further three to four years and will assist in the creation of an optimised shape to the landfill prior to its eventual closure, reducing long-term capping and aftercare costs.

Operational review

The initial focus of the Commercial Waste Division in the year was to bed down the reorganisation which took effect on 1 April 2015 and which led to the Netherlands and Belgian organisations being separately managed, and then to implement our self-help initiatives in order to deliver profit growth despite subdued end markets. Both the Dutch and Belgian businesses achieved these goals with a broad range of successfully implemented projects.

The reorganisation announced last year was completed smoothly and with no material disruption. The Belgian business has clearly benefited from additional focus on its regional needs: waste streams are being rerouted to optimise recycling rates and profitability and significant progress has been made in tidying the portfolio and reducing overhead cost. The Orgaworld organic treatment facilities in the Netherlands have been integrated into the remainder of the Division and overhead has been reduced, saving around €0.4m.

The commercial effectiveness programme continued to be rolled out across the Netherlands during 2015/16, with a focus on developing the skills and driving the activities of the sales force. The division effectively managed pricing in a dynamic environment of rising incinerator gate fees, falling recyclate prices and regional supply/demand imbalances in the wood and glass monostreams. Commercial effectiveness was also rolled out in Belgium, helping the business to ensure that margins were maintained following the unexpected increase in waste taxes in July 2015.

Continuous improvement was also introduced in the form of full lean conversions of our Van Vliet Groep and Ghent sites. Savings of up to €2m have been identified. The introduction of 'lean' is empowering for front line staff and has been enthusiastically adopted by our businesses. As at year end we were already rolling out the next lean conversion to Smink, Van Vliet Groep’s neighbour in the Central region. Performance continued to improve at Icova and van Tuijl where specific continuous improvement projects were carried out in the prior year.

SOLID WASTE BUSINESS MODEL

The C&D sorting line installed at Van Vliet Contrans late in 2014/15 performed strongly through the year, delivering high volumes of good quality recyclates for a reduced operating cost per tonne. At Icova, we opened up our waterside quay, with the support of the Port Authority of Amsterdam who dredged the approach. This allowed us to construct a storage shed by the quay to store our Icopellet production prior to direct shipment of Icopellets to our customer in Sweden with whom we have signed an extended long-term contract. At the same time, we have started to receive baled RDF from our ELWA facility in the UK for onward shipment to the Amsterdam AEB incinerator. Construction of our new €11m Vliko and Kluivers depot is well underway at Zoeterwoude. In Belgium, we commissioned a new shredder at Kortemark that has helped to increase our RDF volumes at an improved cost.

The Belgian business made good progress in focusing its portfolio of assets. In July 2015 the business sold its small non-core operation in France, Shanks Nord, for €0.6m. In November 2015 it sold the non-core and loss-making Industrial Cleaning Wallonia business to a local player. This exit from a challenged business not only eliminated operating losses, but it will also facilitate a broader reduction in overhead of up to €1m across the Division. The Dutch business acquired and integrated a small paper recycler, PRA, that operated within the core Randstad area.