Final Results

RNS Number : 6149S
Shanks Group PLC
21 May 2009
 



21 May 2009 


Shanks Group plc - Final Results 2008/9


Shanks Group plc, Europe's largest listed independent waste management company, today issues its results for the year ended 31 March 2009.


Financial Highlights


FYE 31 March

08/09

07/08

Change

Revenue

£697m

£564m

24%

Group Trading Profit

£66.4m

£55.9m

19%

Group Operating Profit

£63.9m

£55.3m

16%

Underlying PBT

£48.5m

£44.8m

8%

Underlying EPS

14.5p

12.9p

12%


Resilient trading with organic sales growth of 3% despite challenging H2 conditions 

Solid underlying free cash flow of £37m (07/08: £45m); strong H2 working capital performance 

Core net debt of £290m; core net debt to EBITDA of 2.4x

New, increased, €360 million debt facility committed to April 2012

Proposed rights issue of £71.4m to strengthen balance sheet

No final dividend proposed; intention going forward to target 2.0x to 2.5x cover


Business Highlights

Strong performance from Dutch Hazardous Waste helping to mitigate softening Solid Waste volumes

Robust Belgian underlying results led by Hazardous Waste; Foronex profitability improving 

Rapid action taken to reduce UK cost base; Orgaworld launched in UK

Good progress with PFI pipeline; Cumbria contract worth £725m over 25 years (financial close expected shortly)

First Orgaworld facility in Canada now operational, second site in development

Management team strengthened with new Group Finance Director


Commenting on the results, Tom Drury, Group Chief Executive of Shanks Group plc, said:


'In the context of the unprecedented and extremely challenging market conditions that have affected the entire waste industry, we have responded swiftly by reducing our cost base going forward by £10m and right sizing the business for the current environment. In addition, we have prioritised cash generation and financial strength with actions taken to realise value from non-core activities and investments, as demonstrated by last Friday's announcement of the sale of our interest in Avondale. We will continue to manage the business tightly and prudently.


In the short term, trading in Belgium and the UK is expected to be satisfactory but challenging and our exposure to the Dutch construction sector will continue to negatively impact revenue and profitability of our Solid Waste business in the Netherlands.


Shanks remains well aligned with the legislative and regulatory trends that seek to accelerate the diversion of waste from landfill, and our longer term vision remains to make Shanks the preferred provider of sustainable waste management solutions. The cash generation and the further planned disposals of non-core activities should enable Shanks to take full advantage of attractive investment opportunities in our business. We will continue to develop our three key principal growth opportunities of Recycling, Organic Processing and UK PFI.'


financial highlights

 

2009

2008

Change





Revenue

£697m

£564m

24%





Operating profit

£63.9m

£55.3m

16%

Amortisation of acquisition intangibles1

£3.8m

£2.5m


Exceptional profit on disposals2

£(3.3)m

£(1.9)m


Exceptional restructuring charge2

£2.0m

£0.0m


Trading Profit3

£66.4m

£55.9m

19%





Profit before tax

£33.9m

£41.3m

-18%

Amortisation of acquisition intangibles1

£3.8m

£2.5m


Exceptional profit on disposals2

£(3.3)m

£(1.9)m


Exceptional restructuring charge2

£2.0m

£0.0m


Change in fair value of interest rate swaps2

£12.1m

£2.9m


Underlying profit before tax4

£48.5m

£44.8m

8%

Tax on underlying profit 29% (2008: 32%)

£(14.1)m

£(14.4)m


Underlying profit after tax5

£34.4m

£30.4m

13%

Amortisation of acquisition intangibles1 (net of tax)

£(2.8)m

£(1.9)m


Exceptional profit on disposals2

£3.3m

£1.9m


Exceptional restructuring charge2 (net of tax)

£(1.4)m

£0.0m


Change in fair value of interest rate swaps2 (net of tax)

£(8.7)m

£(2.1)m


Exceptional tax charge for loss of UK IBAs2

£(18.4)m

£0.0m


Profit after tax

£6.4m

£28.3m






Underlying basic earnings per share5

14.5p

12.9p

12%

Basic earnings per share

2.7p

12.0p


Dividend per share

2.1p

6.2p






EBITDA6

£113.1m

£92.7m

22%






March 09

March 08


Core net debt

£290m

£212m


PFI Companies and other project finance net debt7

£118m

£111m


Total Group net debt before fair value adjustment7

£408m

£323m


Fair Value of PFI interest rate swaps

£16m

£4m


Total Group net debt

£424m

£327m


1    Acquisition intangibles comprise intangible assets arising on acquisitions excluding landfill void and computer software

2    The Group considers these items as exceptional for the purposes of determining underlying profit (see note 1 of financial statements)

3    Before amortisation of acquisition intangibles, exceptional items, interest and tax

4    Before amortisation of acquisition intangibles, exceptional items and tax

5    Before amortisation of acquisition intangibles and exceptional items, net of associated tax

6    Earnings before interest, tax, depreciation and amortisation (EBITDA)

7    Excluding fair value of interest rate swaps


Chairman's Statement


The economic environment in which the Group operates changed dramatically during the second half of 2008, with all countries in the Eurozone now experiencing sharp declines in GDP. This has led to reductions in the amount of consumer and industrial waste produced and a fall in the value of materials recovered from waste. The speed and severity of this slowdown in economic activity impacted on all companies in the waste sector.  


Against this background, the financial results for the year demonstrate the robust make-up of our business portfolio. Underlying profit before tax rose 8% to £48.5m. This reflected growth of 13% in the first half year, slowing to 4% in the second half as a result of the progressively deteriorating economic conditions.  


People

The change in economic outlook during the year has required our people to adapt very rapidly. We have strong operational management across the Group and they have responded quickly and decisively to the challenges facing them. On behalf of the Board I would like to thank all of our employees for their commitment and creativity. We have achieved some major milestones during the year and they should all feel proud of these achievements.  


In April 2009 we announced the appointment of Chris Surch as Group Finance Director on the departure of Fraser Welham. Prior to joining Shanks, Chris held a number of senior positions for Smiths Group plc, most recently as Finance Director of the Specialty Engineering Division. Chris brings years of industry and operational expertise to Shanks from his time at Smiths Group and previously TI Group plc. On behalf of the Board I would like to record our appreciation to Fraser for everything he has done over the last thirteen years with the Group.  


Strategic Progress

The tougher external environment will require us to be even more focused and disciplined in the pursuit of our long term strategy for the Group.  


In response to the quite exceptional prevailing economic conditions, the stewardship of the Group's cash position has become a key strategic priority. We are taking action to realise value from non-core assets, and have initiated a range of cost saving measures across the Group. In addition, efforts to improve the efficient use of capital in the business have resulted in a marked reduction in expenditure on maintenance, and a sharply improved working capital performance.  


These actions confirm our determination to position the Group to participate in the market's transition to more sustainable waste management solutions. Despite the present economic climate, the environmental challenges facing society have not changed, and to meet these challenges the pace of legislative change has accelerated. In this context it was pleasing to see the UK Government's recent budget commitment to provide significant funding to support the PFI process and the decision to further increase landfill tax.  


With a portfolio offering proven landfill diversion and waste to energy technologies ranging from anaerobic digestion, biological treatment and incineration, Shanks is well positioned to selectively realise very attractive opportunities in our core markets.  


Financial Position

In April 2009 we announced the successful refinancing of the Group's £250m medium term bank facility. This was a significant achievement which secured an increase in funding from an expanded group of financial institutions, in a very difficult funding market.  


In this recessionary environment, capacity to continue to invest will be critical to the long term market positioning and profitability of the Group.  


Strengthening our capital structure

The Group has historically maintained what was considered to be an appropriate level of borrowings given the prevailing economic environment. Given the prospect of a difficult trading environment in 2009/10, we intend to continue our actions to preserve cash and reduce net debt. In order to further strengthen the position of the Group, the Board believes it is both appropriate and in the best interests of its shareholders to raise net proceeds of approximately £66.7 million equity via a Rights Issue which we announced on 21 May 2009.


We intend to use the net proceeds of this Rights Issue to reduce the level of indebtedness which in the short term will increase headroom and ensure balance sheet strength in case of any further unforeseen deterioration in market conditions. We have a clear growth strategy in place based around three key areas (Recycling, Organic processing (including Orgaworld), and UK PFI), and funding for these will be provided by the proceeds of targeted non-core disposals and also strong cash flow generation once economic conditions start to improve.


Dividend

The Company will not be recommending a final 2009 dividend. Following the Rights Issue, the Board expects to pay an interim and final dividend for the year to 31 March 2010, and then to implement a progressive dividend policy within a cover range of 2.0 to 2.5.


The Board

The Board has also had to adapt very quickly to the changing economic circumstances, and I would like to thank my Board colleagues for their unreserved commitment and professionalism in addressing the challenges facing the Group.  


For investors, these are also difficult times, and it is critically important that they have confidence in the qualification and decisions of the Board, and also that the Board can be held accountable for its decisions. In recognition of the need to strengthen this accountability the Board will present to the AGM in July a resolution proposing the annual re-election of all Non-executive Directors.  


Remuneration

The Board is mindful of the understandable public and investor focus on the remuneration of senior executives in the current climate, particularly in those companies where earnings are under pressure. The Remuneration Report in the Annual Report sets out the steps we have taken to demonstrate responsiveness to these concerns, whilst also ensuring the continued motivation of our senior management team in what are quite exceptional operating conditions.


Corporate Responsibility

Shanks operates in a sector which is increasingly seen to have an important role in managing the impact of climate change and improving the re-use of the world's finite resources. This year the Group will publish its first Corporate Responsibility Report, which sets out some clear commitments and reports progress on a number of important indicators. This will include a calculation of the Group's carbon footprint, together with the impact our activities can have on wider carbon emissions. We have also established a Group Corporate Responsibility Committee which reports directly into the Executive Committee to ensure a consistent and committed focus across the Group.


Outlook

The outlook for the near term is undoubtedly more challenging than twelve months ago. In the Netherlands our exposure to the construction sector has seen the profitability of our Dutch Solid Waste business reduce over recent months and other parts of the business have also been impacted. However, we have taken decisive action to reduce costs and conserve cash and the benefits of recent investments will come through during the current financial year.  


We expect the current year to remain challenging, but the Group is well positioned with strong market positions and proven technologies to deliver attractive earnings growth once the wider economic outlook improves.  




Chief Executive's Statement


My second year as Chief Executive of the Shanks Group takes place within a very different macroeconomic environment to the first. The credit crunch has led to negative GDP growth in all our markets, reduced the availability of capital and changed attitudes to gearing.


We have reshaped our priorities and business model to the changed environment whilst continuing to deliver our long term strategy. The fundamental regulatory and legislative drivers are undiminished and the opportunities available to the business remain. It is important that we pursue them at the right time. 


Following strong trading in the first half of the year, we have been active in the second half in both taking the short term measures necessary to mitigate the profit impact of a sharp economic downturn as well as reshaping our business model to continue developing our strategy through a recession.  


This has necessitated a reassessment of how we generate adequate cash flow for investment whilst volumes in our core markets are declining. Our response, outlined more fully below, has been to be tough on reducing operating costs, working capital and maintenance capital expenditure and to be more active in recycling capital from disposal of non-core assets. 


Progress during the year

Last year I set out the five key elements of our strategy for the Group and I am pleased to report progress against them.


Invest to drive organic growth where returns are greatest


Organic revenue growth in the first half year was 7%. This fell during the second half year leaving annual growth of 3%. This reflected principally the impact of a reduction in the level of waste arising in our industrial and commercial customer base and we expect the decline to continue during the coming year. Our strategy of investing to drive growth does however mitigate the impact of this decline and we expect the full year benefits of the investments we have made in 2008/9 to contribute £7m to trading profit during 2009/10.


Develop our infrastructure further to support sustainable waste management and conversion of waste to renewable energy


We have commissioned a number of capital projects to improve our ability to deliver sustainable waste management solutions. These include new sorting lines at two of our Dutch recycling businesses, the new recycling/solid recovered fuel (SRF) facilities and anaerobic digestion plant in Belgium, composting plants in Canada and the Netherlands and additional engines in our landfill power division. 


Assets under construction include a further composting plant in Canada, a wastewater and anaerobic digestion facility in Amsterdam, a steam turbine and combined heat and power (CHP) plant in Belgium, as well as a new recycling facility in Glasgow.  


The UK PFI market is an important opportunity for Shanks to help the UK government develop sustainable alternatives to landfill. We have sought to complement our powerful mechanical biological treatment (MBT) technology offering through our newly formed joint venture with Wheelabrator, a subsidiary of Waste Management Inc. This allows Shanks to offer an energy-from-waste proposition to those authorities who have chosen this as their preferred treatment technology. We are very pleased with the positive market response to the relationship with Wheelabrator and have been shortlisted on a number of authority tenders. Our pipeline is as full as it has ever been, reflecting our increased investment in bidding during the year.  


Share our core capabilities and technologies within the Group


This is an important cultural change for a Group that is used to operating in a decentralised way and inevitably takes some time to implement. However, we have made progress in launching the Orgaworld business in the UK which includes processing of food waste from Marks and Spencer's stores.


We are also working with our Benelux team in the design of our UK recycling facilities and have cross Group teams looking at a number of projects.


Maximise asset utilisation and minimise unit costs


We have taken steps to reduce our cost base during the year. In July 2008 we moved the Group Corporate Office from Bourne End to share the UK Head Office facility in Milton Keynes. During the year we announced approximately 100 redundancies in our UK and Belgian operations as a regrettable response to the downturn in trading. In all of our core operations we have been reducing variable costs as volumes reduce and cutting back on overhead expenditure. Our plans for 2009/10 include approximately £10m of savings in our fixed cost base to mitigate the profit impact of declining volumes.


Continue to use acquisitions to improve asset utilisation and re-orient the portfolio to high growth markets


In April 2008 we acquired the Foronex business in Belgium and despite difficult market conditions are pleased with trading in the final quarter as the benefits of our integration plan came through.  


To generate growth capital for our strategy we have been disposing of non core assets. In the UK we realised £5m from selling operations outside our strategic regions and have recently announced the sale of our interest in the Avondale landfill joint venture for a total consideration of up to £27.5m. The Group has also market tested a number of other smaller disposals but has avoided proceeding with transactions at depressed prices which it does not believe represent good value for shareholders. We will continue to review opportunities to realise value from our non-core assets and investments as appropriate.  


Culture

I retain my belief in the fundamentally decentralised structure within the Group as this allows us to remain responsive to our changing customer needs in this fast moving environment. However, we will continue to promote the sharing of best practice where it can deliver tangible benefits. We will also look to implement a more structured performance management framework to allow us to benchmark performance, actively share best practice, improve our forecasting and provide the tools and information to allow our entrepreneurial managers to do what they do best - develop their business in their local markets.



Performance

Given the difficult market conditions I believe the Group delivered a creditable performance in 2008/9. Our focus in 2009/10 will be to minimise the impact of the downturn on the business and maintain strong relationships with our customers so that our performance picks up strongly as economic conditions recover. 


Our priorities will remain in line with our vision of sustainable waste management focusing on the generation of energy from waste and recycling. We expect growth within this strategy to come from three main areas:

Recycling 

Organic processing, particularly through our Orgaworld technology

UK PFI opportunities



Business Review by Country


The Netherlands

Market

The Netherlands has had some of the most advanced environmental legislation in Europe in place for some time. They also have high levels of landfill tax (currently circa €90 per tonne). These, together with the geological characteristics of the country, have resulted in a low reliance on landfill, incineration being the predominant final disposal route. The higher cost and limited capacity of final disposal outlets has made sorting and recycling in the Netherlands more viable and it is not uncommon for recycling rates to be 70% or above.


The Group's business in the Netherlands splits into three divisions: Solid Waste, Hazardous Waste and Organic Treatment. The Solid Waste business comprises a number of large recycling sites, together with supporting collection vehicle fleets, which typically recycle and divert from landfill or incineration 80% of the waste they process. The business derives approximately half its trading profit from construction and demolition (C&D) waste, the other half being from more general I&C waste and other activities. There is limited work from the municipal sector. The business is principally based in the populous Randstad area to the west of the country where we have strong market positions; number one in the collection of C&D waste and number three in the collection of more general I&C waste. Our estimated national market shares are 7% and 11% respectively.


The Hazardous Waste business comprises two units: Afvalstoffen Terminal Moerdijk (ATM), a treatment plant and Reym, which focuses on industrial cleaning. ATM is one of the world's largest single site hazardous waste facilities, processing almost 1.5 million tonnes of low contamination hazardous waste per annum. There are three principal processes: thermal treatment of contaminated soils, pyrolysis of paint waste and biological and physio-chemical treatment of acqueous wastes. Reym supplies industrial cleaning services to the oil and gas, petrochemical and other industries. Again both these businesses have dominant market positions being market leaders in their respective activities. Market shares vary by activity: for industrial cleaning we have around 20%; for treatment this is estimated at 25% for soil cleaning with 40-50% for highly contaminated water treatment and paint waste.


Organic Treatment comprises the Orgaworld business which consists of a number of treatment facilities for organic wastes by wet or dry anaerobic digestion, or tunnel composting. These waste streams originate from industry, mainly from food processing companies and supermarkets, and source segregated organic municipal waste streams. Orgaworld is the number three player in the Netherlands with a market share of around 7%.


Strategy

The strategic goal for the Dutch operations is to maintain the strong operating margins we currently enjoy and, over the long term, grow both the Solid and Hazardous Waste businesses ahead of gross domestic product. This will be achieved by: 

maintaining the current decentralised structure and culture but seeking out greater benefits from collaboration between the business units;

upgrading existing recycling facilities to improve their efficiency and thereby maintain our market leadership in processing costs;

focusing on new niche mono-stream markets such as the depleted growth media from the Dutch greenhouse industry we already process;

continuing the successful track record of tuck-in acquisitions; and

maintaining the current strong cash generation from the business.


In addition the recent Orgaworld acquisition provides significant opportunities for higher rates of growth in the organic waste treatment sector not only in the Netherlands, but also in the UK, Belgium and Canada.


Operational Review


Table 1: Netherlands Revenue and Trading Profit by Activity
















Revenue




Trading Profit




2009

2008

Variance


2009

2008

Variance


€m

€m

€m

%


€m

€m

€m

%











Solid Waste

274 

269 

5 

2%


38.4 

42.6 

(4.2)

-10%

Hazardous Waste

151 

143 

8 

6%


18.8 

13.4 

5.4 

40%

Organic Treatment

12 

10 

2 

20%


2.1 

2.3 

(0.2)

-9%

Country Central Services

(5)

(4)

(1)

25%


(4.7)

(4.9)

0.2 

4%

Total (€m)

432 

418 

14 

3%


54.6 

53.4 

1.2 

2%

Total










(£m at average FX rate)

356 

295 

61 

21%


44.9 

37.7 

7.2 

19%



Table 2: Netherlands Trading Margins and Return on Capital Employed by Activity

(after allocation of Country Central Services)















Trading Margin



ROCE




2009

2008

Variance


2009

2008

Variance


%

%

%


%

%

%









Solid Waste

13 

15 

(2)


9 

10 

(1)

Hazardous Waste

11 

8 

3 


19 

13 

6 

Organic Treatment

15 

21 

(6)


5 

7 

(2)

Total

13 

13 

- 


11 

10 

1 



Trading profit in the Netherlands improved 19% to £44.9m (2008: £37.7m). Eliminating the impact of exchange, profits were up 2% year on year. A difficult second half in Solid Waste due to the economic downturn and harsh weather conditions was offset by a strong performance from Hazardous Waste.


In Solid Waste the full year effect of last year's four tuck-in acquisitions contributed some €1.1m (3%) of additional trading profit. Profits from the existing Solid Waste businesses have reduced by €5.3m (12%) principally due to the sharp downturn in the economy at the end 2008. This manifested itself in a number of ways. As mentioned previously Solid Waste derives around 50% of its business from the construction and demolition (C&D) sector. In the first quarter of 2009 we have seen reducing volumes in this market which have been further depressed by the unusually harsh winter. These reducing volumes have increased competitive pressure restricting our ability to raise prices at the beginning of 2009.  


Whilst not growing, the more general I&C market has been more stable in terms of volumes, however here too there is pricing pressure as competitors seek to replace falling C&D volumes.  


At the same time as these local economic issues, the collapse in commodity prices caused by the global downturn has driven down the value of recyclable materials. This has had a modest effect on the profitability of source segregated recyclable streams due to the pass through nature of the commercial arrangements. However, the impact on margins of general waste streams has been more material because it has not been possible to recover the falling contribution from recovered materials due to the pricing pressures mentioned above. Recovered metals are the main source of value which across the business total some 40,000 tonnes per annum.  The average sales prices achieved for recovered metals has fallen by 70% from its high in 2008.


These pressures on revenue have also been accompanied by adverse factors in the cost base. In January 2009 there was a 3.75% increase in labour costs for the majority of our employees as a result of national collective labour agreements. In addition the Amsterdam municipal incinerator, a major outlet for our sorting residues, significantly increased their prices. Finally, early in 2009 a major customer of our Smink groundworks business unexpectedly went into administration resulting in a €1m bad debt.  


In order to address the difficult trading conditions in the Solid Waste business a cost reduction programme - Fit for the Future - has been initiated which is targeting delivery of €7m of annual savings in addition to the €5m that will be removed from the cost base as a consequence of reducing volumes.


Our Hazardous Waste activities performed extremely well during the year showing a 40% year on year improvement. This was principally due to an extremely strong performance from our ATM treatment plant despite the unexpected disruption to the waste water treatment in July which caused a temporary shutdown and loss of capacity. As disclosed in our Interim Results, the financial impact of the shutdown of €2.7m was substantially offset by a favourable decision relating to a long running dispute on excise duties which resulted in a rebate of historic charges. Prices and volumes at ATM were up year on year by 2% and 4% respectively. Reym, our industrial cleaning business also had a good year, extending a significant oil industry contract to 2014. Both these businesses have, and continue to show, strong resilience to the economic downturn.


Our Organic Treatment activity, Orgaworld, continues to trade satisfactorily in its home market of the Netherlands. Work has started on the Greenmills project, a new 100,000 tonne per annum anaerobic digestion and 350,000 tonne wastewater treatment facility in Amsterdam. Construction of this facility is expected to complete in 2010.



Belgium

Market

In Belgium, environmental responsibility is devolved to the three Regions: Flanders, Wallonia and Brussels. Flemish environmental legislation and landfill tax levels are very similar to those in the Netherlands resulting in similar market characteristics; high levels of recycling, a reliance on incineration for final disposal and very little landfill.


In the Walloon Region landfill tax on I&C waste at an effective rate of €53 per tonne is sufficient to drive reasonably high levels of recycling. This rate will rise to €90 per tonne in 2010, which combined with a lack of incineration capacity will promote increased recycling and other forms of energy recovery. The effective cost of landfill tax is 52% higher than the actual tax because it is non-deductible for corporation tax purposes.


In January 2008 new legislation was introduced which has had a major impact on the municipal waste treatment sector. Prior to January 2008 a reasonable proportion of municipal waste was still landfilled as, unlike I&C waste, it attracted very little landfill tax. In January 2008 the Walloon Region adopted a strict interpretation of the Landfill Directive requirement for pre-treatment of non-hazardous waste which stopped residual waste collected from households from being landfilled without pre-treatment. At the same time landfill tax was introduced on other municipal waste streams at €20 per tonne. This is scheduled to rise to €60 per tonne from January 2010.


The Brussels Region has little landfill capacity. It has its own incinerator but beyond that it is reliant on the other Regions for final disposal.


The activities in Belgium are broken down into Solid Waste, Landfill & Power, Hazardous Waste and a Sand Quarry. The Solid Waste business is similar to that in the Netherlands, however the division is less reliant on the C&D sector and also includes the operation of municipal waste collection contracts, the largest being for the City of Liege under a ten year contract which was renewed in 2005.

 

The Landfill and Power operations are situated in Mont St Guibert in Wallonia where we have one of the largest landfills in the Walloon Region. A major source of income for this operation is from the generation of renewable electricity from the methane produced as the biodegradable waste decays. This landfill is unique within the Walloon Region in that its licence allows it to accept municipal waste from across the Region. This gives it a strong market position in the landfilling of municipal waste, a market which will almost disappear due to the legislative changes mentioned above.


The Hazardous Waste division is also similar to that in the Netherlands comprising industrial cleaning activities and a main treatment centre at Roeselare in West Flanders. The Industrial Cleaning businesses service the steel, cement, chemical and other large industries not only across Belgium, but also in northern France. The treatment facility specialises in the preparation of waste derived fuels and minerals for the cement industry which has major installations in both the east and west of Wallonia. Like ATM in the Netherlands, the treatment facility also treats highly contaminated waste water streams using physio-chemical and biological processes.


The Sand Quarry is adjacent to the landfill in Wallonia and is a profitable but non-core activity.


In terms of overall revenue Shanks Belgium is the number two player in the Belgian market. We estimate our market share in the solid and hazardous I&C markets to be 7% and 9% respectively. In terms of the municipal market our share is lower at around 3%, however a significant proportion of this market remains within the public sector.  


Strategy

In Belgium the strategy is to grow the I&C Solid Waste business to replace the declining contribution from landfill. By focusing on solid recovered fuel (SRF) production from I&C waste we will be able to create sustainable competitive advantage by securing long term energy from waste outlets at lower costs than landfill or mass burn incineration (approximately €120-€130/tonne in Flanders).


The acquisition of Foronex in April 2008 builds on this strategy by moving us into the European waste wood processing market which creates further opportunities in the biomass and co-generation areas with the potential for Shanks to both supply and invest in energy from waste projects.  


Further opportunities exist to invest in additional green energy production at our landfill and hazardous waste plants. These have already been partly realised through the development of a bio-digester to create green energy on the Roeselare site, which began commissioning during the last quarter.  


Operational Review


Table 3: Belgium Revenue and Trading Profit by Activity

















Revenue




Trading Profit




2009

2008

Variance


2009

2008

Variance


€m

€m

€m

%


€m

€m

€m

%











Solid Waste

154 

109 

45 

41%


9.7 

10.4 

(0.7)

-7%

Landfill & Power

27 

26 

1 

4%


12.1 

11.9 

0.2 

2%

Hazardous Waste

60 

58 

2 

3%


5.7 

4.7 

1.0 

21%

Sand Quarry

4 

3 

1 

33%


1.4 

1.0 

0.4 

40%

Country Central Services

(26)

(19)

(7)

37%


(5.3)

(5.0)

(0.3)

-6%

Total (€m)

219 

177 

42 

24%


23.6 

23.0 

0.6 

3%

Total










(£m at average FX rates)

180 

125 

55 

44%


19.5 

16.2 

3.3 

20%


Table 4: Belgium Trading Margins and Return on Capital Employed by Activity

(after allocation of Country Central Services)















Trading Margin



ROCE




2009

2008

Variance


2009

2008

Variance


%

%

%


%

%

%









Solid Waste

4 

7 

(3)


10 

18 

(8)

Landfill & Power

44 

44 

- 


n/a1

n/a1

n/a

Hazardous Waste

7 

5 

2 


23 

20 

3 

Sand Quarry

34 

30 

4 


n/a1

n/a1

n/a

Total

11 

13 

(2)


40 

60 

(20)

1 Due to provisions for environmental liabilities these activities have net liabilities so ROCE is not a valid measure


Overall trading profit in Belgium improved 20% to £19.5m (2008: £16.2m). Removing the benefit of exchange gains, this represents 3% growth over last year. Reductions in the contribution in Solid Waste and the landfill element of Landfill and Power were more than offset by improved performance from Power, Hazardous Waste and the Sand Quarry.


Solid Waste incorporates the Foronex group which was acquired in April 2008 for a gross consideration of €25m plus a €6m post acquisition injection of working capital. This combined with the full year effect of last year's acquisitions contributed €0.9m (9%) of additional trading profit.


Foronex collects and trades up to 1 million tonnes per annum of wood waste and by-products, making it the largest company in this field across France and Belgium. During the year considerable effort has been spent to transition the business from a family run organisation to part of an international group. We have made significant improvements to the operating procedures and management information used within the business, which has resulted in the renegotiation of a number of major input and output agreements. We expect the contribution from the business to increase going forward and for it to play an important role in growing the future development of the Belgian business.


One of the key attractions of the Foronex business is its ability to produce fuel for the biomass industry from the wood waste and by-products it handles. As a strategic supplier to new project funded energy plants, we also have the opportunity to participate directly in the special purpose vehicles (SPVs) created to build and operate these plants allowing us to share in the attractive returns that they generate. In October 2008 we took a 50% stake in the Vare project, a combined heat and power plant producing 5MW of green electricity and 12MW of steam, with specialist renewable energy investor Intrinergy Energy. The plant will be located near Liege in Belgium and will be fired by wood based biomass supplied by Foronex. It will use the heat produced to turn sawdust, also supplied by Foronex, into wood pellets for sale as a renewable fuel. Construction of the facility is now underway and it is expected to be operational in late 2010.  


Profits from the existing Solid Waste business have declined €1.6m (15%) due to the non repeat of a substantial industrial disposal job in the prior year which contributed €0.9m. The economic downturn in the second half has also impacted the business, however considerably less than experienced in the Netherlands due to the reduced exposure to the C&D sector and the higher involvement in municipal waste. Also recent investment in the business such as our solid recovered fuel production facility in Ghent completed during the period have made maiden contributions. This facility accepts mainly I&C waste and, following extraction of recyclable materials, produces a fuel which we dispose of via long term contracts with cement and other companies. The plant is operating as planned, having started up in June 2008, and is proving successful in attracting waste at competitive prices in the market.


In Landfill and Power, there was an 8% decline in contribution from the landfill element which was a better than expected performance. Following the ban in Wallonia on untreated municipal solid waste (MSW) going to landfill from January 2008, inputs from these sources ceased. However, we have been successful in attracting new sources of waste from both municipal (treatment residues) and commercial sources. Our current expectation, based on these new streams, is for there to be a more modest decline in volumes through calendar year 2009 with a significant step down from January 2010 as landfill tax is increased and further bans on municipal solid waste come into effect. The contribution from landfill power is unaffected by these developments, indeed it has increased during the period due to higher electricity prices and a favourable clarification of the qualification criteria for green electricity subsidies.


The strong growth in Hazardous Waste trading profit was due to increases in both volumes and prices at our treatment facility at Roeselare in Flanders. There has however, been a reduction in lower margin, labour intensive industrial cleaning work which has become more acute in the second half with the deterioration in the economic conditions. 


The construction of our new anaerobic digestion facility in Roeselare completed on schedule in early 2009. The treatment process is now being started up but it will take several months to reach full capacity due to its biological nature.


At the Sand Quarry activity levels have been stable with profits boosted by reduced restoration costs.



United Kingdom

Market

The UK's historical heavy reliance on landfill means that the imposition of the European Landfill Directive is having a major impact, particularly on the municipal sector. Implementation of the directive implies that some 14 million tonnes per annum of biodegradable municipal waste needs to be diverted from landfill between 2006 and 2020. In November 2006 DEFRA estimated that the investment in new infrastructure required to achieve this is between £9bn and £11bn. In an endeavour to secure least cost compliance the Government has introduced the Landfill Allowance Trading Scheme (LATS), a tradeable permit scheme between local authorities. Here authorities who overachieve against their landfill diversion requirements may sell their overachievement to an underachieving authority. Failure by an authority either to meet its diversion requirements or to secure the necessary LATS, results in a £150 per tonne penalty for the excess.


As part of the 2009 Budget, the Government has announced that it will strengthen the existing drivers for diverting I&C waste from landfill and provide further financial support for alternative ways to deal with waste (including reuse, recycling, energy from waste and anaerobic digestion). The key budgetary announcements include:

the standard rate of landfill tax will continue to increase by £8 per tonne on 1 April each year from 2011 to 2013. The current rate of landfill tax (since 1 April 2009) of £40 per tonne will therefore increase to £72 per tonne by 1 April 2013. The 2009 Budget also highlighted that Government is currently consulting on redefining what constitutes a taxable disposal of waste, so that a greater proportion of waste that ends up in landfill (including materials used for cover and in construction of a landfill site) is taxable. These measures will further encourage the use of and investment in more sustainable alternative to reduce reliance on landfill;

the Government will make £10 million of new grants available in 2009-2010 for UK businesses to deliver anaerobic digestion and in-vessel composting infrastructure;

the Government plans to commit more than £2billion of PFI credits to allow investment in waste handling projects through the Treasury Infrastructure Finance Unit, which was launched by the Treasury in March 2009; and

the Government highlighted that UK renewable and energy projects will stand to benefit from up to £4 billion of new capital from the European Investment Bank.


These initiatives will further support the Group's strategy to become the leading provider of waste management solutions in Europe.


Another driver for the I&C waste market is restriction of the type of waste that can be landfilled. A significant milestone of the European Landfill Directive is the restriction on landfilling of untreated non-hazardous waste. The government has introduced new legislation which required pre-treatment of non-hazardous waste prior to landfilling from October 2007. Whilst the authorities have taken a fairly soft handed approach to the enforcement of this legislation initially, it is expected it will be applied more rigorously in the future. 


Strategy 

In the UK the aim is to make Shanks the preferred alternative to landfill. In the I&C waste area we will build a resource management and reprocessing business with improved margins by importing more than ten years of Dutch know-how in this area. Initially we will focus on building density in the three regions where we already have critical mass, Scotland, the East Midlands and the Northern Home Counties. Having established an enabling platform of a strong regional business with a differentiated and profitable business model, we may then consider more aggressive consolidation options.


We will continue to bid for PFI residual waste contracts, using those that we win as a base from which to expand our I&C business. At the same time we intend to secure a share of the significant UK demand for anaerobic digestion and composting both in the municipal and I&C sectors using Orgaworld and other technologies as appropriate.


In recent years we have established ourselves as a leading player in the PFI market with the first mechanical biological treatment (MBT) plant in the UK operational since 2006. With a substantial number of opportunities coming to market that require alternative solutions we have improved our technical offering by entering into a strategic partnership with Wheelabrator Technologies Inc (WTI). This has enabled us to offer Energy from Waste solutions in addition to our MBT technology provided by EcoDeco. We have now been selected, with others, to tender for PFI contracts in Staffordshire, Suffolk, Merseyside and Belfast with WTI as our equity and operating partner.


In addition the Government has signalled its support for the treatment of separately collected kitchen wastes utilising anaerobic digestion to treat the waste and, in so doing, produce gas for energy generation and high quality compost for soil improvement. As with solid wastes our Dutch business (Orgaworld) has a track record in this aspect of waste treatment which enables us to deliver a proven solution to the market.


Operational Review


Table 5: United Kingdom Revenue and Trading Profit by Activity 

 












Revenue


Trading Profit


2009

2008

Variance


2009

2008

Variance


£m

£m

£m

%


£m

£m

£m

%











Solid Waste

73 

75 

(2)

-3%

 

6.3 

6.4 

(0.1)

-2%

Landfill & Power

16 

16 

- 

0%


5.6 

5.0 

0.6 

12%

Hazardous Waste

20 

11 

9 

82%


1.7 

1.7 

- 

0%

PFI Contracts

49 

43 

6 

14%


(0.4)

0.4 

(0.8)

-200%

Country Central Services

- 

- 

- 

 -


(5.4)

(5.7)

0.3 

5%

UK Operations

158 

145 

13 

9%

 

7.8 

7.8 

(0.0)

0%

PFI Bid Team

- 

- 

- 



(2.1)

(0.9)

(1.2)

-133%

TOTAL

158 

145 

13 

9%

 

5.7 

6.9 

(1.2)

-17%


Table 6: United Kingdom Trading Margins and Return on Capital Employed by Activity

(after allocation of Country Central Services)
















Trading Margin


ROCE



2009

2008

Variance


2009

2008

Variance



%

%

%


%

%

%










Solid Waste

 

4 

3 

1 

 

9 

5 

4 

Landfill & Power


34 

33 

1 


48 

48 

- 

Hazardous Waste


7 

11 

(4)


42 

47 

(5)

PFI Contracts


(4)

(2)

(2)


(2)

(1)

(1)

UK Operations

 

5 

5 

- 

 

10 

11 

(1)


Trading profit from operations was flat at £7.8m as difficult economic conditions in the second half impacted profitability and offset very good progress in the first.


In Solid Waste the full year effect of last year's acquisition of Wastecom contributed £0.1m (2%) of additional trading profit. Profits from the existing Solid Waste businesses have reduced by £0.2m (3%). Trading since November 2008 has been challenging due to the sharp fall in the value of recyclable materials and a slowdown in volumes. We took swift action to reduce the cost base which gave rise to a £1.5m exceptional restructuring charge. This is delivering approximately £2m of annualised cost savings going forward to help mitigate the challenging trading conditions. 


Our strategy for the Solid Waste business in the UK is to focus on our core regions of Scotland, East Midlands and Northern Home Counties and take advantage of rising landfill taxes to develop a recycling business using expertise from our Dutch operations. During the year, as part of focusing on these core regions, we sold our Liverpool and Swansea operations for consideration of £3m and £2m respectively. These transactions gave rise to exceptional disposal profits totalling £3.3m.


The downturn in the UK construction market has adversely impacted our Hazardous Waste activities which comprise our contaminated land services business. The number of site decontamination jobs from general construction activities is down substantially and we have reduced our headcount to reduce costs. On a more positive note, we handled 243k tonnes of soil from the 2012 Olympic site clean up offsetting the decline in profit from the underlying business.


The economic slowdown in construction activities has also impacted contaminated soil inputs into our joint venture landfills. Despite this slowdown, increased power generation and lower void costs at our Avondale joint venture (sold subsequent to year end) have delivered solid overall growth in trading profit for the Landfill and Power activity.


Profits from our existing PFI contracts were down as we incurred additional operating costs to ensure hitting certain performance targets which will release income supplements at ELWA. Going into next year we are on target to receive these supplements. The dramatic fall in the resale value of metal recovered from the waste stream has also reduced profits. Production of SRF is going well with record amounts being delivered to the cement kilns. There is also increasing interest from other off-takers.


Country Central Services costs were down £0.3m at £5.4m despite 2008 being net of disposal profits totalling £0.6m. Underlying costs were therefore down £0.9m (16%) year on year.

 

PFI bid costs were up £1.2m at £2.1m reflecting the increased bidding activity. Many authorities have or are about to start their procurement processes and we are actively pursuing this limited window of opportunity as the next two years will see a large number of deals being closed. We believe that our extensive experience in bidding combined with the enhanced offering mentioned in the Chief Executive's Statement positions us well to win our share.


Canada

Market

As part of the Orgaworld acquisition completed in April 2007 the Group acquired an operation in Canada. In Canada there is strong public opinion against landfill, which in some areas has led to a shortage of consented capacity. As in Europe there is a drive to reduce waste going to landfill. Orgaworld identified an opportunity in the Canadian market to offer biological treatment of source segregated organic municipal waste, a market which has significant potential in terms of volumes and to date has few competitors.


Operational Review

Trading profit in Canada increased £1.1m to £1.2m (2008: £0.1m) reflecting the increase in volumes at the first Orgaworld plant in London, Ontario. In March 2009 the District of York confirmed a 20,000 tonne per annum increase in their annual contract volumes and extended the term of their contract from ten to fifteen years. This plant is now operating at close to its capacity of 150,000 tonnes per annum. Construction work on our second facility in Ottawa is progressing on schedule with operations due to start in early 2010.


Group Central Services

Group Central Services costs reduced by £0.1m to £4.9m (2008: £5.0m).


Financial Review


Operating profit, which includes exceptional property disposals in the UK of £3.3m, exceptional restructuring charge and amortisation of acquisition intangibles has increased 16% to £63.9m (2008: £55.3m).


Table 7 - Summarised Group Income Statement

 

 

 







2009

2008

Variance


£m

£m

£m

%






Revenue

697 

564 

133 

24






Operating profit

63.9 

55.3 

8.6 

16

Exceptional profits on disposals

(3.3)

(1.9)

(1.4)


Exceptional restructuring charge

2.0 

- 

2.0 


Amortisation of acquisition intangibles

3.8 

2.5 

1.3 

52

Trading profit

66.4 

55.9 

10.5 

19

Net financial income from PFI

1.1 

0.7 

0.4 

57

Core finance charges

(19.0)

(11.8)

(7.2)

-61

Underlying profit before tax

48.5 

44.8 

3.7 

8

Tax - Underlying 29% (2008: 32%)

(14.1)

(14.4)

0.3 

2

Underlying profit after tax

34.4 

30.4 

4.0 

13

Exceptional profits on disposals

3.3 

1.9 

1.4 


Amortisation of acquisition intangibles (net of tax)

(2.8)

(1.9)

(0.9)


Exceptional restructuring (net of tax)

(1.4)

- 

(1.4)


IAS 39 adjustment (net of tax)

(8.7)

(2.1)

(6.6)


IBAs exceptional tax charge

(18.4)

- 

(18.4)


Profit for the year

6.4 

28.3 

(21.9)



Table 8: Revenue and Trading Profit by Geographical Region

 

 

 












Revenue


Trading Profit


2009

2008

Variance


2009

2008

Variance

 

£m

£m

£m

%

 

£m

£m

£m

%











Netherlands

356 

295 

61 

21%


44.9 

37.7 

7.2 

19%

Belgium

180 

125 

55 

44%


19.5 

16.2 

3.3 

20%

United Kingdom

158 

145 

13 

9%


5.7 

6.9 

(1.2)

-17%

Canada

5 

1 

4 

>100%


1.2 

0.1 

1.1 

>100%

Central Services

(2)

(2)

- 

0%


(4.9)

(5.0)

0.1 

2%

Total

697 

564 

133 

24%

 

66.4 

55.9 

10.5 

19%



The major factors impacting revenue, trading and underlying profit are summarised in table 9.

Table 9: Revenue, Trading Profit and Underlying Profit Bridge

 

 









Revenue

Trading Profit

Underlying PBT


£m 


£m 


£m 









2008

564 

100%

55.9 

100%

44.8 

100%

Organic growth (excluding Belgium landfill)

14 

3%

0.1 

0%

(2.4)

-5%

Current year acquisitions /divestments

30 

5%

0.4 

1%

(0.7)

-2%

Full year of prior year acquisitions

11 

2%

1.1 

2%

(0.3)

-1%

Belgium landfill decline

0 

0%

(0.4)

-1%

(0.4)

-1%

Exchange

78 

14%

9.3 

17%

7.5 

17%

2009

697 

124%

66.4 

119%

48.5 

108%


Details of the Group's trading performance and acquisitions are given in the country business reviews.


Table 10 shows the average and year end exchange rates used to translate our foreign currency denominated results. The Euro has strengthened significantly verses Sterling causing a 17% enhancement to Euro denominated profits. The impact on the Euro denominated year end balances is slightly less at 16%.


Table 10: Exchange Rates










2009

2008

Change






Euro:





Average

1.215 

1.419 

17%

Closing

1.080 

1.254 

16%






Canadian Dollar:




Average

1.826 

2.044 

12%

Closing

1.803 

2.039 

13%


Net Financial Income from PFI increased to £1.1m (2008: £0.7m). As shown in table 11 this comprises interest income on financial assets arising on the UK PFI contracts net of the interest charge on the PFI net debt before taking into account the International Accounting Standard (IAS) 39 change in market value of financial instruments (see below).


Table 11: Net Financial Income from PFI

 

 

 







2009

2008

Variance


£m

£m

£m

%






Interest income from financial assets

8.9 

8.8 

0.1 

1

Interest charge on PFI net debt1

(7.8)

(8.1)

0.3 

4

Net Financial Income from PFI

1.1 

0.7 

0.4 

>100


1    PFI net debt is the external net debt in the Special Purpose Vehicles set up to project finance the UK PFI contracts.


The £0.3m decrease in interest charge on PFI net debt reflects the lower average level of debt during 2009 than during 2008, despite the balance being higher at the year end than at the start of the year.


Core Finance Charges increased £7.2m to £19.0m (2008: £11.8m), the main components of which are given in table 12.


Table 12: Core Finance Charges













2009

2008

Change




£m

£m

£m








Finance charge on core borrowings

(17.0)

(10.7)

(6.3)


Discount unwind on deferred consideration

(1.3)

(0.9)

(0.4)


Loan fee amortisation

(0.5)

(0.9)

0.4 


Discount unwind on other long term provisions

(1.1)

(0.7)

(0.4)


Finance income from defined benefit pension schemes

0.9 

1.4 

(0.5)


Core Finance Charges

(19.0)

(11.8)

(7.2)




The major factors behind the increase in the finance charge on core borrowings are detailed in table 13.


Table 13: Finance Charge on Core Borrowings Major Factor Analysis








2009

2008

Change



£m

£m

£m






Finance Charge on Core Borrowings

(17.0)

(10.7)

(6.3)






Major Factors: 





Increase in core borrowing levels



(4.5)


Exchange



(1.8)

Total




(6.3)







The factors behind the increase in the level of core borrowing are covered in the cash flow section below. For reasons explained in the Treasury section below, a significant proportion of the Group's borrowings is in Euros and therefore attracts Euro denominated interest. The Sterling value of this has therefore increased due to the strengthening of the Euro.  


Under IFRS all long term liabilities and provisions, except for deferred tax, have to be stated at current value. This involves discounting the nominal value of a future liability which then unwinds as time progresses. The Group uses a 5% discount rate, this being an estimate of long term interest rates. The acquisition of Orgaworld in April 2007 included a €25m deferred element, €20m of which is dependent on achieving future profitability targets. The conditional element has been recognised in full at the acquisition date so is generating a significant finance charge even though the trading profits on which it depends will only arise in the future.


The average tax rate on underlying profit fell to 29% (2008: 32%). This was attributable to the flow through of recent tax reductions in both the Netherlands and the UK. The underlying rates of tax in the Netherlands, Belgium and the UK were 25.5%, 34% and 28% respectively. In Belgium the effective rate on landfill derived profits is higher as landfill tax is non-deductible for corporation tax. This is mitigated via a deduction for notional interest on Belgian equity. 


The exceptional disposal profits of £3.3m relate to the disposal of two surplus operations in the UK. These have been excluded from underlying profit due to their exceptional size. There was no tax payable on these disposals as the capital gains arising were sheltered by significant brought forward capital tax losses within the Group.


The IAS39 change in market value of financial instruments relates to interest rate swaps which fix the interest rate on PFI contract borrowing. At the financial close of a PFI contract the price of the service is determined by, inter alia, the long term interest rate available in the market. The Group therefore protects itself against future fluctuations in interest rates by entering into interest rate swaps to match its future cash inflows and outflows. Under IAS39 these swaps must be valued at current market value irrespective of the commercial reasons for entering into them. Revaluation of these swaps can lead to large accounting gains or losses but does not affect the long term profitability of the contract as the Group has matched its long term revenue and costs. Whilst IAS39 does allow these gains and losses to be taken directly to reserves, it is on the proviso that the actual cash flows remain in close correlation to those originally forecast. At the time of introduction of IAS39 there was a significant divergence of actual and originally forecast cash flows due to one years planning delays on ELWA, the Group's largest PFI project. Whilst commercially neither the funders nor the Group required the cash flows to be rehedged, this rendered the interest rate swaps ineligible to be matched to the underlying loans under IAS39. The resulting changes in fair value are excluded from our underlying profit. There was a £12.1m adverse (2008: £2.9m) change in the market value of these swaps during the year.


Cash Flow

Details of the Group's cash flow performance are summarised in table 14 below.


Table 14: Summarised Group Cash Flow

 

 

 

 

 

 












2009


2008




Core

Non Core1

Total


Total


Difference


£m

£m

£m


£m


£m









Trading profit

68 

(2)

66 


56 


10 

Depreciation & landfill provisions

47 

- 

47 


37 


10 

EBITDA

115 

(2)

113 


93 


20 

Working capital movement and other2

- 

1 

1 


3 


(2)

Net replacement capital expenditure

(46)

- 

(46)


(31)


(15)

Interest & tax

(31)

- 

(31)


(20)


(11)

Underlying free cash flow

38 

(1)

37 


45 


(8)

Dividends / issue of shares

(14)

- 

(14)


(12)


(2)

PFI cross funding

(7)

7 

- 


- 


- 

Net growth capital expenditure

(30)

(13)

(43)


(19)


(24)

Acquisitions (incl wkg cap injection)

(25)

- 

(25)


(48)


23 

Discontinued / restructuring

(2)

- 

(2)


- 


(2)

Net cashflow

(40)

(7)

(47)


(34)


(13)

Exchange

(38)

- 

(38)


(32)


(6)

Opening net debt3

(212)

(111)

(323)


(257)


(66)

Closing net debt3

(290)

(118)

(408)


(323)


(85)



1    Non core includes PFI and other project finance

2    Other comprises non-landfill provision movements and add back of share based payments.

3    Excluding fair value of interest rate swaps


The underlying free cash flow generated by the core business was £38m after net replacement capital expenditure of £46m. The £7m cross funding represents the net cash flow between the core and PFI and other project finance activities (including the PFI bid team). The £25m outflow on acquisitions relates principally to the Foronex acquisition in April 2008 and comprises the £10m paid, £10m of net debt in the acquired entities and a £5m post acquisition injection of working capital. This was due to the unsustainably low level of working capital at acquisition which had been identified in the due diligence process. There was a £38m adverse movement on the translation of Group's Euro denominated debt into Sterling, giving an overall increase in core net debt of £78m.


The non-recourse aggregated net debt in the PFI companies, excluding fair value of interest rate swaps, increased by £2m to £113m (2008: £111m); increases due to funding of ongoing capital investment principally at ELWA. The other project finance debt of £5m relates to the investment together with Intrinergy Energy in a combined heat and power plant in Belgium.  


Capital Expenditure

The Group spent £89m net on capital expenditure (2008: £50m) of which £76m was in the core business and £13m on PFI and other project finance contracts. The core business maintenance capital expenditure was £46m, net of disposal proceeds of £3m from assets being replaced. Gross expenditure on growth projects was £35m and proceeds from sale of surplus assets was £5m. Major projects in the core business included the installation of SRF production and anaerobic digestion facilities in Belgium, construction of tunnel composting facilities in Canada and The Netherlands and the expansion of a recycling centre in the Netherlands, and additional engines for landfill power.


The capital expenditure on PFI contracts comprised £16m (2008: £17m) of financial asset advances net of £10m (2008: £9m) of financial asset repayments. The financial asset advances related to the completion of recyclables sorting facilities and final payments for the EcoDeco MBT facilities at our ELWA contract.  


A further £7m has been spent on the combined heat & power plant in Belgium, being built in conjunction with Intrinergy.  


Treasury

The Group's treasury policy is to use financial instruments with a spread of maturity dates and sources in order to reduce funding risk. Borrowings are drawn in the same currencies as the underlying investment to reduce cash and net translation exposure on exchange rate movements. No other currency hedging mechanisms are used. The Group maintains a significant proportion of its debt on fixed rates of interest in order to protect interest cover.


At 31 March 2009, the Group's principal financing was a £250m multicurrency revolving credit facility with five major banks expiring in April 2010. This was replaced on 7 April 2009 by a €360m multicurrency term loan and revolving credit facility expiring in April 2012. At first drawing on 9 April 2009, this facility was approximately 79% utilised. The term loan of €270m equivalent was fully drawn in Euro, Sterling and Canadian Dollars on three month interest periods. Some €13m equivalent was drawn on the revolving credit facility in Sterling and Canadian Dollars on a one month interest period. Interest is based on LIBOR or EURIBOR for the relevant period. The facility contains a requirement for interest rates to be hedged and this was met by the Group entering on 15 May 2009 into a two year fixed interest swap with a principal of €180m from the three month LIBOR commencing 9 July 2009, underwritten at an effective interest rate of 1.87%. The definitions of the covenants of this facility exclude the results of PFI and other project companies and the results of joint ventures except where received in cash. The margin is fixed for the first six months and then varies on a ratchet fixed by the Debt:EBITDA ratio for the prior quarter on a rolling twelve month calculation. The financial covenants of this facility are principally the ratio of Debt:EBITDA of less than 3.00:1, interest cover of not less than 3.00:1 and a minimum net worth of £225m.


The 2001 notes issued under the Group's Pricoa private placement of €52m carry fixed interest at 6.9% and have repayments due July 2009 (€16m), April 2011 (€18m) and September 2013 (€18m). The financial covenants of this facility are principally the ratio of Debt:EBITDA of less than 2.75:1, interest cover of not less than 3.00:1 and a minimum net worth. The definitions of these covenants are fixed in UK GAAP as at 2001 and exclude the results of PFI and other project companies and the results of joint ventures except where received in cash. Under the terms of the notes, the Group's other principal lenders have moved to a level of Debt:EBITDA of 3.00:1, the Group can require Pricoa to also move to a Debt:EBITDA level of 3.00:1, whilst Pricoa has the option to adopt the financial covenants definition of the New Facilities.


The Group also has £29m of working capital facilities with various banks. Cashflows are pooled at a country level and each operation is tasked with operating within the limits of the locally available working capital facilities.


Each of the Group's PFI projects has senior debt facilities which contribute approximately 85% of the capital funding required. These facilities are secured on the future cash flows of the PFI companies with no recourse to the Group as a whole. Repayment of these facilities, and any equity bridge facility in respect of the remaining capital funding, commences when construction is complete and concludes one to two years prior to the expiry of the PFI contract period. As the Group currently holds 100% of the equity in its PFI companies, the net debt of £113m and the fair value of the interest rate swaps used to fixed interest rates of £16m are fully consolidated in the Group balance sheet. The maximum which could be drawn down under these facilities at 31 March 2009 is £3m. The interest rates on these loans vary with one month LIBOR during the construction period and three month or six month LIBOR in the post-construction period. In order to provide a fixed price to the client local authority varying only with inflation, interest rates are fixed at between 6.25% and 6.99% with a weighted average of 6.57% by means of interest rate swaps at the time of contract inception.


Insurance

The Group places all its insurance with leading insurance companies with sound financial credentials. For obligatory insurances, the policy is to obtain the necessary cover at competitive rates. For other areas, regular risk assessments are undertaken to identify and assess risks; where appropriate insurance is then used to mitigate these risks. The level of cover put in place will depend on the nature of the risks and the cost and extent of cover available in the market. The majority of our insurances are renewed annually.


The Group uses international brokers to advise on risk management, appropriate insurers, cover levels and benchmarking.


Insurance requirements for our UK PFI contracts are set out in the funding and project agreements.



Retirement Benefits

The Group uses IAS19 - Employee Benefits to account for pensions. The pension charge for the year has increased to £9.1m (2008: £7.7m). Using assumptions laid down in IAS19 there was a net retirement benefit deficit of £1.0m (2008: £9.4m surplus). This relates solely to the defined benefit section of our UK schemes. The defined benefit section of the UK scheme was closed to new members in September 2002 and new employees are now offered a defined contribution arrangement. 


The Group participates in several multi-employer schemes in the Netherlands. These are accounted for as defined contribution plans as it is not possible to split the assets and liabilities of the schemes between participating companies and the Group has been informed by the schemes that it has no obligation to make additional contributions in the event that the schemes have an overall deficit.


The pension arrangements within our Belgian operations are considered to be defined contribution in nature.






Notes:



1.

Management will be holding an analyst presentation at 9:15 a.m. today, 21 May at RBS's offices at 250 Bishopsgate, London, EC2M 4AA.


2.

A copy of this announcement is available on the company's website (www.shanksplc.co.uk) as will the presentation being made today to financial institutions.


3.

Copies of the Annual Report will be made available on the company's website later today, 21 May and will be posted to shareholders in June after which they will be available, on request from the Group Company Secretary at Dunedin House, Auckland Park, Mount Farm, Milton Keynes, Buckinghamshire, MK1 1BU, or on the Company's website.




For further information contact:



Shanks Group plc


Tom Drury, Group Chief Executive

Chris Surch, Group Finance Director

on 21 May: telephone: +44 (0) 207 678 0152

thereafter, telephone: +44 (0) 1908 650580



Tulchan Communications

on 21 May: telephone +44 (0) 207 678 0152

David Allchurch, John Sunnucks,    

thereafter, telephone: + 44 (0) 207 353 4200

Stephen Malthouse







Consolidated Income Statement

Year ended 31 March 2009


2009

2008


Note

£m

£m

Continuing operations




Revenue

2

696.5

563.7

Cost of sales before amortisation of acquisition intangibles


(567.3)

(456.0)

Amortisation of acquisition intangibles


(3.8)

(2.5)

Total cost of sales


(571.1)

(458.5)

Gross profit


125.4

105.2

Administrative expenses before exceptional items


(62.8)

(51.8)

Exceptional profit on disposal of properties


3.3

1.9

Exceptional restructuring charge


(2.0)

-

Total administrative expenses


(61.5)

(49.9)

Operating profit

2

63.9

55.3

Finance charges:




Interest payable 


(28.6)

(23.8)

Interest receivable


10.7

12.7

Change in fair value of interest rate swaps


(12.1)

(2.9)

Total finance charges

3

(30.0)

(14.0)

Profit before tax 

2

33.9

41.3

Tax before exceptional items


(9.1)

(13.0)

Exceptional tax


(18.4)

-

Total tax

4

(27.5)

(13.0)

Profit for the year


6.4

28.3









Dividend per share

5

2.1p

6.2p





Earnings per share




- basic

6

2.7p

12.0p

- diluted

6

2.7p

12.0p



Consolidated Statement of Recognised Income and Expense

Year ended 31 March 2009


2009

2008


Note

£m

£m

Exchange gain on translation of foreign operations

9

35.0

28.1

Actuarial (loss) gain on defined benefit pension schemes


(12.1)

16.0



22.9

44.1

Deferred tax in respect of defined benefit pension schemes


3.4

(4.7)

Net income recognised directly in equity


26.3

39.4

Profit for the year


6.4

28.3

Total recognised income and expense for the year

9

32.7

67.7



Consolidated Balance Sheet

At 31 March 2009


At 

31 March

2009

At 

31 March

2008


Note

£m

£m

Non-current assets




Intangible assets


314.7

273.7

Property, plant and equipment


388.2

287.5

Other investments and loans to joint ventures


2.5

1.6

Trade and other receivables


156.4

150.7

Retirement benefit assets


-

9.4

Deferred tax assets


12.6

3.7



874.4

726.6

Current assets




Inventories


10.4

7.7

Trade and other receivables


162.7

152.8

Current tax receivable


1.5

1.4

Cash and cash equivalents


27.0

53.2



201.6

215.1

Total assets


1,076.0

941.7

Current liabilities




Borrowings


(30.7)

(8.1)

Trade and other payables


(191.7)

(175.5)

Current tax payable


(12.2)

(16.2)

Provisions

8

(3.0)

(4.1)



(237.6)

(203.9)

Non-current liabilities




Borrowings


(420.6)

(371.8)

Other non-current liabilities


(18.0)

(18.5)

Deferred tax liabilities


(66.9)

(39.1)

Provisions

8

(32.3)

(28.3)

Retirement benefit obligations


(1.0)

-



(538.8)

(457.7)

Total liabilities


(776.4)

(661.6)

Net assets


299.6

280.1





Equity




Share capital

9

23.8

23.7

Share premium

9

99.2

97.4

Exchange reserve

9

64.2

29.2

Retained earnings

9

112.4

129.8

Total equity

9

299.6

280.1




Consolidated Cash Flow Statement

Year ended 31 March 2009


2009

2008


Note

£m

£m

Net cash from operating activities

10

91.2

87.1

Investing activities




Purchase of intangible assets


(0.5)

(0.5)

Purchases of property, plant and equipment


(91.5)

(47.7)

Disposals of property, plant and equipment


8.5

5.3

Financial asset capital advances


(16.1)

(17.1)

Financial asset capital repayments


10.2

8.8

Acquisition of subsidiary and other businesses


(20.5)

(47.5)

Income received from other investments


0.3

0.4

Net cash used in investing activities


(109.6)

(98.3)

Financing activities




Interest paid


(25.8)

(21.1)

Interest received


11.0

10.6

Proceeds from issue of shares


0.7

2.3

Dividends paid


(15.0)

(14.3)

Increase in borrowings


18.5

38.5

Increase in obligations under finance leases


2.5

3.8

Repayments of obligations under finance leases


(2.7)

(2.7)

Net cash flow from financing activities


(10.8)

17.1

Net (decrease) increase in cash and cash equivalents


(29.2)

5.9

Effect of foreign exchange rate changes


3.0

4.6

Cash and cash equivalents at beginning of year


53.2

42.7

Cash and cash equivalents at end of year


27.0

53.2




Notes to the Financial Statements


1    Basis of preparation of financial statements


    The figures and financial information for the year ended 31 March 2009 are extracted from but do not constitute the statutory financial statements for that year. The figures and financial information are audited. The income statement, statement of recognised income and expense and cash flow statement for the year ended 31 March 2008 and the balance sheet as at 31 March 2008 have been derived from the full Group accounts published in the Annual Report and Accounts 2008 which have been delivered to the Registrar of Companies and on which the report of the independent auditors was unqualified and did not contain a statement under either section 237(2) or section 237(3) of the Companies Act 1985.  The statutory accounts for the year ended 31 March 2009 will be filed with the Registrar of Companies in due course.


    The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as required by Article 4 of the European Union IAS Regulation and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS.  The Group has applied all accounting standards and interpretations issued relevant to its operations and effective for accounting periods beginning on 1 April 2008.  The IFRS accounting policies have been applied consistently to all periods presented and throughout the Group for the purposes of the consolidated financial statements.



    Shanks Group plc believes that trading profit, underlying profit before tax, underlying profit after tax and underlying earnings per share provide useful information on underlying trends to shareholders. These measures are used by Shanks for internal performance analysis and incentive compensation arrangements for employees. The terms 'trading profit', 'exceptional items' and 'adjusted' are not defined terms under IFRS and may therefore not be comparable with similarly titled profit measures reported by other companies. It is not intended to be a substitute for, or superior to GAAP measurements of profit. The term 'underlying' refers to the relevant measure being reported for continuing operations excluding exceptional items, financing fair value remeasurements and amortisation of acquisition intangibles, excluding landfill void and computer software. Trading profit is defined as continuing operating profit before amortisation of acquisition intangibles and exceptional items.


2    Segmental reporting


The Group operates in the Netherlands, Belgium, the United Kingdom and Canada. As discussed in the Business Review by country the waste markets are different in each member state of the European Union. As a result, the Group is organised and managed mainly by geographical location. Each geographical location can be analysed according to the following types of activity: 


Solid Waste

Non-hazardous solid waste collections, transfer, recycling and treatment

Landfill and Power

Landfill disposal (including contaminated soils) and power generation from landfill gas

Hazardous Waste

Industrial cleaning, hazardous waste transport, treatment (including contaminated soils) and disposal and contaminated land remediation

Organic Treatment

Anaerobic digestion and tunnel composting of source segregated organic waste streams

PFI contracts

Long term United Kingdom municipal waste treatment contracts

Sand Quarry

Mineral extraction


In addition to the waste activities detailed above we have small infrastructure and groundworks operations in Ghent in Belgium and Amersfoort in the Netherlands. Due to their small size the infrastructure and groundworks activities are reported as part of the Solid Waste activities.


The accounting policies of the reportable segments are the same as those of the Group, except that pension expense for the United Kingdom is recognised and measured on the basis of cash payments to the pension plan. The profit measure the Group uses to evaluate performance is trading profit. Trading profit is operating profit before the amortisation of acquisition intangibles excluding landfill void and computer software and exceptional items. The Group accounts for inter segment trading on an arm's length basis.  


2009

2008

Revenue


£m

£m

Netherlands

Solid Waste

225.6

189.5


Hazardous Waste

124.3

100.6


Organic Treatment

10.2

7.2


Intra-segment revenue

(4.3)

(2.6)



355.8

294.7

Belgium

Solid Waste

126.4

77.2


Landfill and Power

22.2

18.0


Hazardous Waste

49.0

40.9


Sand Quarry

3.2

2.2


Intra-segment revenue

(21.0)

(13.2)



179.8

125.1

United Kingdom

Solid Waste

72.6

75.1


Landfill and Power

16.3

15.2


Hazardous Waste

20.1

10.9


PFI Contracts

48.8

43.2



157.8

144.4

Canada

Organic Treatment

4.7

1.4

Inter-segment revenue

(1.6)

(1.9)

Total revenue


696.5

563.7

Group


674.2

547.3

Share of joint ventures

22.3

16.4

Total revenue


696.5

563.7





2009

2008

Profit before tax


£m

£m

Trading Profit1




Netherlands

Solid Waste

31.6

30.0


Hazardous Waste

15.4

9.5


Organic Treatment

1.7

1.6


Country Central Services

(3.8)

(3.4)



44.9

37.7

Belgium

Solid Waste

8.0

7.4


Landfill and Power

10.0

8.3


Hazardous Waste

4.7

3.3


Sand Quarry

1.2

0.7


Country Central Services

(4.4)

(3.5)



19.5

16.2

United Kingdom

Solid Waste

6.3

6.4


Landfill and Power

5.6

5.0


Hazardous Waste

1.7

1.7


PFI Contracts

(0.4)

0.4


PFI Bid Team

(2.1)

(0.9)


Country Central Services

(5.4)

(5.7)



5.7

6.9

Canada

Organic Treatment

1.2

0.1

Group Central Services


(4.9)

(5.0)

Total trading profit


66.4

55.9

Amortisation of acquisition intangibles

(3.8)

(2.5)

Exceptional profit on disposal of properties

3.3

1.9

Exceptional restructuring charge

(2.0)

-



(2.5)

(0.6)

Total operating profit


63.9

55.3

Group


58.0

50.1

Share of joint ventures


5.9

5.2

Total operating profit


63.9

55.3

Finance charges

Interest payable

(28.6)

(23.8)


Interest receivable

10.7

12.7


Change in fair value of interest rate swaps

(12.1)

(2.9)

Total finance charges


(30.0)

(14.0)

Profit before tax


33.9

41.3

1 Trading profit is operating profit before amortisation of acquisition intangibles excluding landfill void and computer software and exceptional items.


2009

2008

Net assets


£m

£m

Netherlands

Gross non-current assets

523.9

451.3


Gross current assets

84.1

78.8


Gross liabilities

(120.7)

(117.6)



487.3

412.5

Belgium

Gross non-current assets

113.1

55.0


Gross current assets

53.4

37.5


Gross liabilities

(80.7)

(62.6)



85.8

29.9

United Kingdom

Gross non-current assets

205.6

199.8


Gross current assets

34.1

43.5


Gross liabilities

(37.4)

(37.0)



202.3

206.3

Canada

Gross non-current assets

19.0

7.2


Gross current assets

1.1

0.4


Gross liabilities

(1.1)

(0.5)



19.0

7.1

Group Central Services

Gross non-current assets

0.2

9.6


Gross current assets

0.4

0.3


Gross liabilities

(6.1)

(8.7)



(5.5)

1.2

Total

Gross non-current assets

861.8

722.9


Gross current assets

173.1

160.5


Gross liabilities

(246.0)

(226.4)

Net operating assets


788.9

657.0

Current tax


(10.7)

(14.8)

Deferred tax


(54.3)

(35.4)

Net debt


(424.3)

(326.7)

Net assets


299.6

280.1



3    Finance charges

2009

2008


£m

£m

Interest payable:



Interest payable on borrowings wholly repayable within five years

17.6

12.8

Interest payable on other borrowings

7.8

8.1

Share of interest of joint ventures

0.3

0.3

Unwinding of discount on long term landfill liabilities

1.1

0.8

Unwinding of discount on deferred consideration

1.3

0.9

Amortisation of bank fees

0.5

0.9

Total interest payable

28.6

23.8

Interest receivable:



Interest receivable on financial assets relating to PFI contracts

(9.0)

(8.9)

Other interest receivable

(1.7)

(3.8)

Total interest receivable

(10.7)

(12.7)

Change in fair value of PFI interest rate swaps

12.1

2.9

Net finance charges

30.0

14.0



4    Tax


The tax charge (credit) based on the profit for the year is made up as follows:


2009

2008



£m

£m

Current tax:

UK corporation tax at 28% (2008:30%)




- Current year

3.2

5.5


- Prior year

(1.5)

(1.6)


Double tax relief

(2.9)

(2.9)


Overseas tax




- Current year

12.8

10.8


- Prior year

(1.4)

(2.1)

Total current tax


10.2

9.7

Deferred tax





- Current year

(1.1)

2.7


- Prior year

-

0.6


- Exceptional

18.4

-

Total deferred tax

17.3

3.3

Total tax charge (credit) for the year

27.5

13.0


As a result of changes enacted in the Finance Act 2008 there will be a phased withdrawal of industrial buildings allowances over a period of 4 years.  This has resulted in an £18.4m exceptional tax charge in the period. This principally relates to the non-discounted value of tax relief that would have been available on the PFI infrastructure towards the end of the 25 year PFI contracts.



5    Dividends

2009

2008


£m

£m

Amounts recognised as distributions to equity holders in the year:



Final dividend paid for the year ended 31 March 2008 of 4.2p per share (2007: 4.0p)

10.0

9.5

Interim dividend paid for the year ended 31 March 2009 of 2.1p per share (2008: 2.0p)

5.0

4.8


15.0

14.3

Proposed final dividend for the year ended 31 March 2009 of nil pence per share (2008: 4.2p)

-

9.9




6    Earnings per share

2009

2008

Number of shares



Weighted average number of ordinary shares for basic earnings per share

237.6

236.2

Effect of share options in issue

0.1

0.5

Weighted average number of ordinary shares for diluted earnings per share

237.7

236.7




Calculation of basic and adjusted basic earnings per share



Earnings for basic earnings per share being profit for the year (£m)

6.4

28.3

Change in fair value of interest rate swaps (net of tax) (£m)

8.7

2.1

Amortisation of acquisition intangibles (net of tax) (£m)

2.8

1.9

Exceptional restructuring charge (net of tax) (£m)

1.4

-

Exceptional profit on disposal of properties (net of tax) (£m)

(3.3)

(1.9)

Exceptional IBA tax charge (£m)

18.4

-

Earnings for adjusted basic earnings per share (£m)

34.4

30.4

Basic earnings per share (pence)

2.7p

12.0p

Adjusted basic earnings per share (pence) (see note below)

14.5p

12.9p




Calculation of diluted earnings per share



Earnings for basic earnings per share being profit for the year (£m)

6.4

28.3

Effect of dilutive potential ordinary shares (£m)

-

-

Earnings for diluted earnings per share (£m)

6.4

28.3

Diluted earnings per share (pence)

2.7p

12.0p


The Directors believe that adjusting earnings per share for the effect of the amortisation of acquisition intangibles (excluding landfill void and computer software) and exceptional items enables comparison with historical data calculated on the same basis.  Exceptional items are those items that need to be disclosed separately on the face of the income statement because of their size or incidence to enable a better understanding of performance. Changes in fair values of interest rate swaps that the Group is required to enter into in relation to its PFI arrangements are considered to be exceptional items.



7    Business combinations


(a)    On 1 April 2008 the Group acquired 100% of the share capital of the Foronex group in Belgium, for a consideration of £10.4m. Foronex is a leading player in the wood waste and by-products market in Benelux.  The goodwill recognised is attributable to Foronex's strong market position, growth potential and synergistic benefits.  From acquisition to 31 March 2009, Foronex contributed £38.0m to revenue and reduced profit after tax by £1.1m. The aggregate book value of the assets and liabilities acquired and the fair value to the Group were as follows:

Book 

value

Fair

 value

adjustment

Fair

 value


£m

£m

£m

Intangible assets

-

1.6

1.6

Property, plant and equipment

8.1

8.1

16.2

Investments

0.1

-

0.1

Inventories

1.8

-

1.8

Trade receivables

10.0

-

10.0

Other receivables

0.1

-

0.1

Trade payables

(10.6)

-

(10.6)

Other payables

(2.3)

-

(2.3)

Borrowings

(6.5)

(3.9)

(10.4)

Deferred tax liabilities

2.2

(2.0)

0.2

Provisions

(0.1)

-

(0.1)

Net assets acquired

2.8

3.8

6.6

Goodwill



3.8




10.4

Satisfied by:




Cash consideration



10.4


(b)    For acquisitions completed in the year ended 31 March 2008 there have been no amendments to the provisional fair values except for Wastecom Limited in the UK acquired for a consideration of £6.4m on 7 November 2007. Following the finalisation of the fair value of net assets on completion and a price adjustment of £1.0m, goodwill arising on the acquisition has been reduced by £1.0m.



8    Provisions 

Site restoration

and aftercare

Other

Total


£m

£m

£m

At 31 March 2008

25.6

6.8

32.4

Provided - cost of sales

0.4

0.8

1.2

Released - cost of sales

(1.5)

(0.1)

(1.6)

Released - administrative expenses

-

(0.2)

(0.2)

Finance charges - unwinding of discount

1.2

-

1.2

Utilised

(0.7)

(0.8)

(1.5)

Exchange 

3.4

0.4

3.8

At 31 March 2009

28.4

6.9

35.3

Current

0.4

2.6

3.0

Non-current

28.0

4.3

32.3

At 31 March 2009

28.4

6.9

35.3

Current

0.5

3.6

4.1

Non-current

25.1

3.2

28.3

At 31 March 2008

25.6

6.8

32.4



9    Statement of changes in shareholders' funds

Share

capital

Share

premium

Exchange

reserve

Retained

earnings


Total


£m

£m

£m

£m

£m

At 31 March 2007

23.5

94.0

1.1

105.1

223.7

Recognised income and expense for the year

-

-

28.1

39.6

67.7

Dividends paid

-

-

-

(14.3)

(14.3)

Share-based payments

-

-

-

0.8

0.8

Tax on share-based payments

-

-

-

(0.2)

(0.2)

Other reserves movement

-

-

-

(1.2)

(1.2)

Issue of share capital

0.2

3.4

-

-

3.6

At 31 March 2008

23.7

97.4

29.2

129.8

280.1

Recognised income and expense for the year

-

-

35.0

(2.3)

32.7

Dividends paid

-

-

-

(15.0)

(15.0)

Share-based payments

-

-

-

0.8

0.8

Tax on share-based payments

-

-

-

0.4

0.4

Other reserves movement

-

-

-

(1.3)

(1.3)

Issue of share capital

0.1

1.8

-

-

1.9

At 31 March 2009

23.8

99.2

64.2

112.4

299.6


The exchange reserve comprises all foreign exchange differences arising since 1 April 2005 from the translation of the financial statements of foreign operations as well as from the translation of liabilities that hedge the Group's net investment in foreign operations.



10    Notes to the cash flow statement

2009

2008


£m

£m

Net cash from operating activities



Operating profit

63.9

55.3

Amortisation of intangible assets

5.5

4.0

Depreciation of property, plant and equipment

45.9

34.3

Charge for long term landfill provisions

1.1

1.0

Exceptional gain on disposal of property, plant and equipment

(3.3)

(1.9)

Earnings before interest, tax, depreciation and amortisation ('EBITDA')

113.1

92.7

Non-exceptional gain on disposal of property, plant and equipment

(2.0)

(1.2)

Decrease in provisions

(6.1)

(1.7)

Share based payments

0.8

0.8

Operating cash flows before movements in working capital

105.8

90.6

Increase in inventories

(2.6)

(1.3)

Decrease (increase) in receivables

18.9

(14.0)

(Decrease) Increase in payables

(15.1)

20.2

Cash generated by operations

107.0

95.5

Income taxes paid

(15.8)

(8.4)

Net cash from operating activities

91.2

87.1



Consolidated movement in net debt

2009

2008


£m

£m

Net (decrease) increase in cash and cash equivalents

(29.2)

5.9

Increase in borrowings and finance leases

(18.3)

(39.6)

Amortisation of loan fees

(0.5)

(0.9)

Exchange loss

(37.5)

(31.8)

Change in fair value of interest rate swaps

(12.1)

(2.9)

Movement in net debt

(97.6)

(69.3)

Net debt at beginning of year

(326.7)

(257.4)

Net debt at end of year

(424.3)

(326.7)



Analysis of net debt

At 31 March

2009

At 31 March

2008


£m

£m

Cash and cash equivalents

27.0

53.2

Current borrowings

(30.7)

(8.1)

Non-current borrowings

(420.6)

(371.8)

Total Group net debt

(424.3)

(326.7)




At 31 March

2009

At 31 March

2008


£m

£m

Core Business net debt

(290.0)

(211.7)

PFI companies and other project finance net debt

(118.7)

(111.5)

Total Group net debt before fair value of interest rate swaps

(408.7)

(323.2)

Fair value of PFI interest rate swaps

(15.6)

(3.5)

Total Group net debt

(424.3)

(326.7)


11    Related party transactions

Remuneration of key management personnel

Key management comprises the Board of Directors and the managing directors of the country operations. The disclosures required by the Companies Act 1985 and those specified by the Financial Services Authority relating to Directors' remuneration (including pension benefits and incentive plans), interests in shares, share options and other interests, are set out within the Remuneration Report in the Annual Report. The aggregate emoluments paid to the country managing directors was £960,000.


12    Post balance sheet events


On 7 April 2009 the Group signed an agreement to re-finance its £250 million core bank facility. The new facility is a €360 million facility expiring in April 2012 provided by a club comprising six banks. The new facility is denominated in Euros, but can be drawn in Sterling or Canadian Dollars. The cost of the facility, both in terms of the up-front arrangement fees and interest margin over LIBOR, although significantly higher than in the past is in line with current market norms. The facility contains a requirement for interest rates to be hedged and this was met by the Group entering on 15 May 2009 into a two year fixed interest swap with a principal of €180m from the three month LIBOR commencing 9 July 2009, underwritten at an effective interest rate of 1.87%.


On 14 May 2009 the Group completed the sale of the 50% holding in Avondale Environmental Limited for a consideration of up to £27.5m, with £3m deferred for 12 months, £6m payable over the next seven years and £3m contingent on planning approval for an increase in the landfill void. As a part of the transaction, the Group has entered into a five year supply agreement with Avondale Environmental Limited which guarantees a certain minimum tonnage at a pre-agreed price which increases annually in line with the Retail Price Index. During the year to 31 March 2009 Avondale Environmental Limited made a pre-tax profit of £7.9m with net assets of £10.3m. In the year to 31 March 2009 the Group received total dividends of £1.5m.

    

On 21 May 2009, being the date of this announcement, the Company announced proposals to raise approximately £66.7m (net of expenses) by way of a 2 for 3 Rights Issue of 158,679,867 new ordinary shares at a price of 45p per new ordinary share. A prospectus detailing these proposals and convening an extraordinary general meeting will be published and posted to shareholders.


Appendix



The following additional information, summarised from the Shanks Group plc Annual Report and Accounts 2009, is disclosed in accordance with Disclosure and Transparency Rule 6.3.5.



1. Principal risks 


The performance of our Industrial and Commercial businesses (approximately 85% of revenue) is linked to the economic activity in the sectors we serve. We are therefore exposed to fluctuations in these sectors across our national markets. We mitigate this risk by diversifying our customer base where possible.


The sale of recyclable materials provides a significant source of income across the Group. As seen in the latter part of 2008 the level of global economic activity can have a dramatic effect on commodity prices and hence the value of these recyclables. Where the Group collects or processes segregated recyclables streams such as paper and cardboard, it endeavours to reduce the exposure to fluctuations in commodity prices by linking input prices directly to corresponding quoted commodity prices. Where the recyclables are recovered from residual waste streams their value is small compared to the costs of handling the stream, so is not separately identified in the overall price to the customer. However, the combined value of recyclables extracted from large volumes of residual waste can be significant and the impact of falling prices therefore becomes material. The Group seeks to limit exposure to fluctuations in commodity prices in the short to medium term by entering into agreements with off takers, however in the longer term fluctuations in the value of these streams have to be covered in the collection or gate fee to the waste producer. 


Borrowings are drawn, so far as possible, in the same currencies as the underlying investment to reduce translation exposure on exchange rate movements. However movements in exchange rates could have a negative impact on translations of the results of the Group's overseas subsidiaries into sterling.


In addition to the above economic risks there are a number of waste industry specific risks:


Environmental Legislation and its Interpretation

Regulation is a key driver of the waste market. The ability of individual countries, and indeed regions in the case of Belgium, to set their own legislation makes this a very complex field. This is further complicated by the rapid rate of change in legislation resulting from the increased profile of environmental issues. Changes in the legislation or its interpretation can have a significant and far reaching impact on markets. The Group endeavours to mitigate this risk by employing high quality management in each of our divisions to influence the evolving legislative framework. We therefore actively lobby for our interests at European, National and Regional levels.


Environmental Compliance

All operating sites and activities are regulated by environmental authorities in line with the requirements set out within licences and permits. These licences and permits are required to carry on the business, therefore the negotiation of, and compliance with, their terms is of paramount importance. Maintaining the highest environmental standards is also important to ensure continuing acceptance of operations by host communities, and to satisfy customers.  


Health and Safety

The waste management industry is recognised as one of the most hazardous sectors in which to work. Shanks' employees are the Group's most important and valuable asset and their health and safety is paramount. As a result Shanks devotes considerable management resource to ensure the highest health and safety practices are imposed and maintained.  


2. Directors' responsibility statement


The 2009 Annual report, which is available on our website today, contains a responsibility statement in compliance with DTR 4.1.12. This states that on 21 May 2009, the date of approval of the Annual Report, the Directors confirm that to the best of their knowledge:

the Group and Company financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and 

the 'Business Review by country' section in the Annual Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.


The Directors of Shanks Group plc are listed in the Group's 2009 Annual Report.





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