Preliminary Results

RNS Number : 1834O

Hargreaves Services PLC

14 September 2011

 



14 September 2011

HARGREAVES SERVICES PLC

(the "Company" or the "Group")

Preliminary results for the year ended 31 May 2011

Hargreaves Services plc (AIM:HSP), the UK's leading energy support services provider announces its preliminary results for the year ended 31 May 2011.

Highlights of the year

	Year ended  31 May 2011	Year ended 31 May 2010	Change %
Revenue	£552.3m	£459.8m	+20.1%
Operating Profit	£43.1m	£35.2m	+22.2%
Underlying Operating Profit (1)	£46.7m	£38.7m	+20.7%
Profit Before Tax	£36.9m	£30.7m	+20.2%
Underlying Profit Before Tax (2)	£40.5m	£34.3m	+18.1%
Diluted EPS	90.5p	75.6p	+19.7%
Underlying Diluted EPS (2)	103.7p	88.8p	+16.8%
Proposed Full Year Dividend	15.5p	13.5p	+14.8%
Net Debt	£66.0m	£88.2m	-25.2%

Operating Highlights

·      New working patterns and fifth shift implemented at Maltby

·      Strong growth in Europe, operating profit increased 106% to £9.9m

·      Coke and coal markets remain strong

·      Tower project planning recommendation received

·      Management contract and coal off-take contract signed with Hatfield Colliery Limited

Commenting on the results, Chairman Tim Ross said:

"This has been another year of success at Hargreaves. The Group has delivered a strong set of results and is well positioned to grow and develop further.  We continue to view the long-term future with confidence."

(1) Underlying Operating Profit is stated excluding the amortisation of acquired intangibles and including share of profit in jointly controlled entities

(2) Underlying Profit Before Tax and EPS are stated excluding the amortisation of acquired intangibles

Hargreaves Services Gordon Banham, CEO Iain Cockburn, Finance Director 0191 373 4485 Buchanan Communications Tim Anderson / Catherine Breen/ Jessica Fontaine 0207 466 5000 Brewin Dolphin Matt Davis / Nick Owen 0845 213 1000 RBS Hoare Govett Limited Stephen Bowler / Harry Nicholas 020 7678 8000

Chairman's Statement

Results

This has been another successful year for Hargreaves. Underlying profit before tax for the year increased 18.1% from £34.3m to £40.5m. Revenues increased by £92.5m, from £459.8m to £552.3m.  Underlying diluted EPS increased by 16.8% from 88.8p to 103.7p. We are pleased to report that growth in our European operations is on track and was indeed a major contributor to this year's growth in Group profitability. Operating profit from our European operations increased 106% from £4.8m to £9.9m in the year ended 31 May 2011. We were also pleased to announce in July that we had obtained a recommendation from Rhondda Cynon Taf County Borough Council ("RCT") to approve the Tower Colliery project.

Dividend

The Board continues to balance the progressive dividend policy with the requirement to support the growth potential of the business. The Board has recommended a final dividend of 10.4 pence per share, bringing the dividend for the year to 15.5 pence per share, an increase of 14.8% on the previous year. The final dividend is proposed to be paid on 16 November 2011 to all shareholders on the register at the close of business on 14 October 2011.

People

Our staff remain key to the business and I would again like to thank them for their loyalty and hard work. A group as diverse and specialised as Hargreaves needs a strong and coordinated senior management team and we are fortunate in this regard.

Board

There were no changes in the Board composition during the year ended 31 May 2011. However, in September 2011, we announced that Peter Gillatt was appointed to the Board as a non-Executive Director. Peter brings many years of experience in a number of industry sectors that are very relevant to Hargreaves including waste, recycling, renewables and coal mining. At the same time we also announced that Nigel Barraclough would be stepping down from the Board as a non-Executive Director and assuming a full time operational role within the business. I would like to thank Nigel for his seven years of service to the Board and look forward to working with Peter.

Outlook

The Board remain very excited by the Group's positioning and opportunities available to grow the business. All production from Monckton and Maltby is contracted until at least 2012, with the average contract price comfortably below the current market prices for coke and coal. We remain particularly excited by the prospects of the Group in Europe and at Tower. Whilst we will carefully monitor the short-term economic volatility we will also continue efforts to invest to grow our operations in Europe and further afield.

Tim Ross                                                                                                                                                              
Chairman                                                                                                                                              14 September 2011

Group Business Review

Overview

The Group extended its strong track record of growth since the flotation six years ago. Last year was another period of significant achievement. We are pleased with both the Group's financial results and the foundations for growth that have been laid down. This would not have been possible without the skill and hard work of our staff and management and I would like to take this opportunity to thank them all for their help and support over the last 12 months.

As a Group we continue to operate in four distinct divisions, each of which is the market leader or a major player in its sector. The success of each division is testimony to the strength and depth of each of the management teams in the Group.  Not only are the individual efforts of each division important, the way they interact as a team is unique in the energy sector and sets Hargreaves apart from its competitors.

Progress against Targets

Last year, we set ourselves four main goals. The first was to demonstrate the cash generative nature of our business model whilst the other three related to delivering growth in three areas; Europe, Renewables and the Tower project.  

Our cash generation was in line with targets last year. Following a period of heavy investment at Maltby last year saw our capital expenditure drop back in line with depreciation. Despite a rise in commodity prices, we managed our working capital tightly and we were able to achieve the targets we had set ourselves.

Looking at our performance in delivering growth in Europe, I am delighted to report that the European business grew strongly last year. Operating profit increased from £4.8m to £9.9m, growth of over 100%. This was driven by success in trading both coke and specialised coal as we expand our already successful UK model into the significantly larger markets of Europe. We believe the European market offers significant potential for the Group and will continue to be a core element of our growth strategy.

In contrast to progress made in Europe, as we indicated last year, further investment by the Group in renewable energy projects such as Rocpower is on hold as we await the outcome of the Government's policy review and for the results of that policy review to be passed into primary legislation.  We will be undertaking a strategic review of the opportunity and strategy in the renewable sector once the next round of legislative review is completed. Nigel Barraclough in his new executive role will be leading that review.

At Tower, although the planning decision took longer to deliver than we had targeted, we are delighted to have received the positive recommendation. We are excited by the prospects offered by the Tower project, not just because of the attractiveness and scale of the site but also due to the potential high quality of the coal that will be extracted. The Group is well placed to help the joint venture, offering significant synergies through the marketing of production into the power station and specialist niche markets.  Once the planning permission is finalised, we are confident that the project will contribute significant profits for many years to come and it is discussed in more detail below.         

The Future for Coal

Solid fuels of many types play an important role in our business. Whilst we wait for biomass and waste derived fuels to assume a greater market share, coal remains a key profit generator for the Group so it is worth summarising our view on the outlook for coal.

In the Energy & Commodities Division, although it is likely that the coal consumption by UK power stations will decline significantly over the coming years we expect the market that will exist for the foreseeable future will be of sufficient size to allow us to maintain our current level of activity well into the next decade, if not beyond. Although the decline in traditional non-abated coal fired generation is inevitable, we are encouraged by our work over the last twelve months with 2Co Energy who are looking to develop the UK's first carbon capture power station at Hatfield, which, if successful could be the precursor for many similar projects.

Although the power station market is important to our Energy & Commodities Division, more than 90% of the Division's profits arise from the sale of speciality coals. Across these markets there is a mixed outlook. Coal used for space heating and steam generation in hospitals, schools, prisons and heavy industrial units will continue to decline and the demand is likely to largely disappear by the end of the decade. The domestic heating market has also been in long-term decline, although the increased adoption of multi-fuel stoves is arresting that decline by creating a new demand for coal and coal-based briquettes. By contrast there are many other markets we serve where coal is not set to decline. These are wide ranging, from the many industrial processes where coal is used as an essential raw material to heritage steam railways.

Alongside these existing markets, the increased adoption of Pulverised Coal Injection ("PCI") technology by steel producers is creating a new demand for high grade coal. Current coke and coking coal prices make PCI a key technology for steelmakers to reduce the production costs through substituting a proportion of expensive coke with less expensive PCI grade coal. This is an exciting new market that has great relevance for our portfolio. Based on our current projections we expect that this market will potentially grow to 1m tonnes in the UK alone in the next 12-18 months. We believe we are well placed to service this market in both the UK and Europe.

In the Industrial Services Division, we do not expect the closure of older coal-fired power stations to impact our Industrial Services operations until after 2015 by which time our strategy of targeting the steel sector will more than mitigate any impact of the initial closures. Our skills around coal, coke and mineral handling are easily transferable from the coal power station sector to the steel sector. We also see opportunities to provide services in the rapidly growing and developing Asian markets thus underpinning our growth targets for the Division in the medium term.

In respect of the Transport Division, the reduction of coal volumes in the UK seems unlikely to impact activity levels as the majority of coal in the UK is transported by rail. By contrast road-borne volumes of biomass and waste derived energy products are likely to grow. As you would expect we are already involved in various potential opportunities in this area.

Finally, in our Production Division, fortunate key strength for us is that half of Maltby's output is of the right quality to be earmarked for the coke and ferro-alloy markets whilst the other half is high quality power station fuel, the marketing of which is helped by our proximity to the Aire Valley power stations. We are confident that we will continue to enjoy strong demand for this output.  Additionally, we expect the output from Tower to be good quality and easily marketable to the power generation and PCI markets.

In mainland Europe, we believe there are many opportunities that exist to develop a competitive PCI offering into the steel sector and also to develop into the thermal coal market, especially in Germany as a result of both the planned closure of their existing deep mines over the coming few years, together with the closure of the country's older nuclear facilities and the abandonment of plans to build a fleet of new nuclear stations. 

Beyond Europe, urbanisation and industrialisation in Asia is being powered in a large part by coal. We believe that our expertise and relationships built up over many years in the UK and Europe, combined with our access to capital, will position us well to play a significant role in these markets.

Strategy and Goals for Current Year

Our strategic goals remain consistent with those we discussed last year. We will continue to use our strong UK business base to fund and drive growth into new markets and geographies, with a particular emphasis on three opportunities - Europe, Asia and the Steel Sector.

Europe

Given the size and opportunity of the European market we will continue our investment in this region. In the last year we have successfully traded our first cargoes into Poland and we will look to establish larger operations and stockyards in the country in the coming months. Up until now our European focus has been on speciality coal markets and we are now keen to expand our operations to encompass thermal and PCI coal. To facilitate this development we are currently in discussions with a large supplier about setting up an operation similar to Immingham in Europe. We do not anticipate that either of these initiatives will involve significant fixed capital investment although the strong growth will require investment in additional working capital. As opportunities arise, such investment will be carefully measured against the need to maintain prudent gearing levels and we will continue to develop the business in a measured way.

Asia

In contrast to Western Europe, coal consumption and demand in markets such as China and India are set to continue to increase for the foreseeable future. Hargreaves is well placed to expand its activities into these markets, leveraging our customer and supplier relationships, skills and expertise around the sourcing, processing and distribution of coal and other bulk energy related products. We plan to increase our development activity in markets outside of Europe and we would anticipate increasing business development spend up to a rate of £1m per annum by the end of this current year. Although this investment will not produce significant revenues and profits for some time, we are certain that the long-term potential will far outweigh any short-term impact on profits in Industrial Services.

Steel Sector

We made note in the interim statement that the Industrial Services Division was working to secure its first contracts in the steel sector. We are pleased to report that the first contract has been signed and that additional tendering activities are progressing.

In Europe we have always had a strong focus on the steel sector through the supply of coke either from our own production site at Monckton or sourced through our trading activities. In the last financial year we have successfully traded our first cargoes of PCI coal for use in steel making.  These cargoes were traded on an agency basis from Russia to South America.  The further development of PCI trading flows is a major opportunity and objective for the Group, both in Europe and the UK. We are also hopeful that a large proportion of the output from Tower Colliery will be of an ideal specification for use as a PCI coal and it is our intention to contract both the PCI and thermal element of Tower's output within the next few months on long-term contract.

In summary, the coal markets in the UK still offer a positive outlook and even though some areas will decline, the wider market will continue to offer many opportunities to grow into new niches or consolidate our market position. Europe and the supply of PCI coal to the steel sector are opportunities that provide near-term growth prospects. By beginning to develop and invest in our presence now, Asia offers an exciting development opportunity that could drive strong growth in the longer term.

The Economic Environment

Whilst our business model seeks to minimise risk, we do operate in a sector that exposes us to a mix of economic, commodity price and counterparty risks. We will continue to minimise open positions in our trading activities through hedging and the use of back-to-back contracts, whilst the use of long-term contracts protects our fixed production assets from any short-term price weakness. As we move into new markets we will manage our risk by continuing to carefully select our counterparties. Although our business model provides us with protection from any significant falls in commodity price levels, we are exposed to fluctuations in the volumes of products traded, particularly in the European coke markets where purchasing activities are generally conducted using spot instead of long-term contracts. 

Health and Safety

We continue to recognise the potentially hazardous nature of the work undertaken across all of its divisions and is determined to ensure that it provides safe systems of work throughout its diverse range of operations. The health and safety of employees, customers and the public are of the highest priority to the Board and management.

I take an active role as a Group Health and Safety champion, working alongside the Health & Safety team, to drive high quality health and safety performance throughout the business, not just in terms of developing processes and systems, but in ensuring substance in terms of actions and culture underpin the processes and systems.

The Group has health and safety management systems in place that are either internally or externally audited to the highest standard. We continue to manage health and safety at a division and business unit level, allowing us to identify trends and take account of the different operational environments in which we operate. Although we focus on safety at the business unit level, we have a Group Health and Safety manager to promote communication and coordination across the Group.

Health and safety statistics continue to be monitored at a divisional and business unit level, with regular main Board Review, as well as pro-active health and safety strategies in place at each division. Areas identified where additional training or improved working practices would be beneficial are promptly addressed.

We are pleased to note that the accident rate, defined as the number of lost time accidents per 100,000 man hours worked, reduced by 18% in the year ended 31 May 2011 from 2.2 to 1.8.

Future Strategy and Outlook

Although there clearly remains potential for further volatility in demand and price levels for energy related commodities, we remain certain that the combination of the Group's capital, skills and business model offers an established and unique platform for long-term growth into new markets. We believe the Group is well placed to achieve its aspirations and look forward to the future with great excitement and optimism. Any sudden and harsh economic downturn should it arise, may impact on our European operation's short-term trading volumes but we are confident that it will not impact the Group's medium- and long-term development plans.

Gordon Banham                                                                                                                                                  
Group Chief Executive                                                                                                                       14 September 2011

Review of Operating Performance by Business Unit

Group Overview

Revenues for the full year increased by 20.1% from £459.8m to £552.3m driven mainly by activity in the Energy & Commodities Division. Group underlying operating profit increased by 20.7% from £38.7m to £46.7m. Reported operating profit increased from £35.2m to £43.1m. Group underlying operating margin increased from 8.4% to 8.5% despite an increase in underlying commodity prices.

Reconciliation of operating profit to underlying operating profit, by segment is as follows:

		Production	Energy & Commodities	Transport	Industrial	Total
		2011	2011	2011	2011	2011
		£000	£000	£000	£000	£000
Segment operating profit		12,606	24,260	3,450	2,748	43,064
Intangible amortisation		-	1,629	393	1,569	3,591
Share of profit/(loss) in jointly controlled entities		46	(23)	-	-	23
Underlying operating profit		12,652	25,866	3,843	4,317	46,678

		Production	Energy & Commodities	Transport	Industrial	Total
		2010	2010	2010	2010	2010
		£000	£000	£000	£000	£000
Segment operating profit		8,496	20,727	3,761	2,255	35,239
Intangible amortisation		-	1,630	393	1,569	3,592
Share of loss in jointly controlled entities		(107)	(52)	-	-	(159)
Underlying operating profit		8,389	22,305	4,154	3,824	38,672

Energy & Commodities Division

Our Energy & Commodities Division encompasses our solid fuel trading activities, including power station coal and other more specialised carbon-based energy products such as sized coals, coke and biomass. Power station coal is a fairly commoditised product offering low margin potential. More specialised products such as sized coals for the domestic and commercial heating markets and industrial customers in the cement, steel and ferro-alloy sectors continue to offer greater opportunity to add value to the product and hence generate higher margins.

The Energy & Commodities Division had another very strong year. Gross revenues increased by £66.9m from £263.9m to £330.8m, reflecting increases in commodity prices and an increase of 6.0% in the overall tonnes supplied. Underlying operating profit increased from £22.3m to £25.9m driven largely by the £5.1m growth in European operating profit from £4.8m to £9.9m.

The table below provides a breakdown on volumes and margins within the Energy & Commodities Division.

2011	UK	Rest of Europe		Total		Power Station Coal	Other Products		Total
Tonnes sold (000s)	1,592	802		2,394		931	1,463		2,394
Operating profit per tonne (£)	10.07	12.31		10.82		2.12	16.36		10.82
Operating profit from trading (£m)	16.0	9.9		25.9		2.0	23.9		25.9
JCE & non-trading (£m)				-					-
Total segment underlying operating profit (£m)				25.9					25.9
2010	UK	Rest of Europe		Total		Power Station Coal	Other Products		Total
Tonnes sold (000s)	1,635	623		2,258		1,067	1,191		2,258
Operating profit per tonne (£)	10.16	7.75		9.50		2.69	15.59		9.50
Operating profit from trading (£m)	16.6	4.8		21.4		2.9	18.5		21.4
JCE & non-trading (£m)				0.9					0.9
Total segment underlying operating profit (£m)				22.3					22.3

Note: Operating profit per tonne included profits on handling third-party product volumes through port operations.

Overall, volumes traded increased from 2,258k tonnes to 2,394k tonnes. An increase in the proportion of speciality product relative to the lower priced thermal grade coal saw operating profit per tonne improve from £9.50 per tonne to £10.82 per tonne. Operating profit margin declined slightly from 8.5% to 7.8% due to the increase in underlying commodity prices. Operating profit from trading activities increased from £21.4m to £25.9m, accounting for the increase in the overall divisional profits.

UK volumes of speciality product increased from 568kt to 660kt, mainly due to a one-off opportunity to supply incremental volumes of lower grade coal to industrial users. This contributed positively to profits and volumes but resulted in a slight reduction in the average UK profit per tonne. As expected, the volumes of power station coal supplied dropped slightly from 1,067k tonnes in 2010 to 931k tonnes in the year ended 31 May 2011. Average operating profit per tonne also reduced from £2.69 per tonne to £2.12 per tonne reflecting strong pricing pressures from power station customers and slightly lower third party handling fees.

European volumes increased by 29% from 623k tonnes to 802k tonnes. Average operating profit per tonne improved from £7.75 per tonne to £12.31 reflecting strong margin opportunity in the coke markets last year and a maturing and strengthening of our position in the European speciality coal markets. Our presence at the Port of Ghent was strengthened by the acquisition of Belgium registered Mekol NV, from RWE Rheinbraun for £0.7m. Mekol operates a coal wash plant on land adjoining the Ghent coal terminal and will bring additional processing and stockholding flexibility and capacity to the European coal operations. In June 2010 we acquired an additional 5% of Hargreaves Raw Materials Services GmbH for £0.4m. This represented net asset value and was settled in cash in July 2011 and took our share to 77.5%.

The position in Rocfuel has not changed from the previous year. The volume of biomass traded through Rocfuel to external customers was negligible as many operators have deferred and delayed renewable projects. We still believe that biomass will have an important role to play in UK electricity generation and Rocfuel remains active and will be a key part of our proposed review of strategic opportunities in the UK renewable sector.

In June 2008 we reported that we had combined our handling operation at Immingham into a joint venture with Oxbow Coal Limited ("Oxbow") called Eastgate Materials Handling Limited. Oxbow is a subsidiary of Oxbow Inc, the leading US mineral trading company. After the year end, in July 2011 we completed the acquisition of Oxbow's share in the joint venture for a cash payment of £1.8m which provides us with additional flexibility and control to develop operations at Immingham. Eastgate Materials Handling will continue to provide Oxbow with handling services under a two-year contract.

Production Division

The Production Division results for the year ended 31 May 2011 encompassed the operations at Maltby Colliery, Monckton Coke Works, MRT, and Rocpower. Once operational the activities at Tower Colliery will also be included in the Production Division and an update on the Tower project is provided below.  The Production Division was  instrumental in winning the management contract for Hatfield Colliery Limited. Although the contract is essentially a services contract, as the resources are being drawn from Maltby Colliery or the wider Production Division management team it will be reported under Maltby Colliery.

Gross revenues for the Division increased by £23.8m from £86.3m to £110.1m. Underlying operating profit increased by £4.3m from £8.4m to £12.7m.

Total saleable production at Maltby increased by 460kt from 1,057k tonnes to 1,517k tonnes. This increase was largely accounted for by an increase of 414k tonnes in the amount of coal fines harvested and conditioned to support the new blending activities. The quantity of coal fines harvested increased to a very impressive 644k tonnes. Although underground production improved from 827k tonnes to 873k tonnes production was inconsistent and resulted in the implementation of new working practices, including the hire of an additional 80 staff to provide a fifth shift.

All standard power station coal produced at Maltby continues to be sold to Drax under the current long-term contract. Coking coal is processed into coke at Monckton. External coal sales from Maltby generated £53.1m of revenue compared to £38.9m in the prior year. Increased coal sales and an improvement in the average selling price from £52.37 to £59.75 resulted in coal (non-fines) revenues increasing from £34.3m to £40.6m. The improved sales price reflected higher market prices for the surplus coking coal and an improvement in the average sales price to Drax. Sales of coal fines generated £12.5m of revenue. Costs at Maltby increased due to a combination of factors including the new working practices, the production challenges and the increased rate of pond fine harvesting.

Production at Monckton remained consistent and revenues increased by £4.8m from £42.8m to £47.6m. Coke sales increased by £4.3m from £39.1m to £43.4m, whilst the sale of by-products improved by £0.4m from £3.7m to £4.1m reflecting improving prices.

The average coke price was £199 per tonne on the sale of 217k tonnes compared to £171 per tonne on 229k tonnes sold in the prior year with volumes from the previous year benefiting from the sale of the excess stock. As previously announced, the average sales price benefitted from higher market prices working through into current sales contracts.

MRT, our tyre recycling operation, has continued to make good progress and contributed £0.3m of profit compared to an operating loss of £0.3m in the previous year. In the year to 31 May 2011, Rocpower generated an operating profit of £0.2m. At the time of writing this report we are still awaiting the outcome of the Government's policy review. We will be considering opportunities and strategies for Rocpower and MRT as part of our strategy review of the renewables and recycling sector and will provide updates on progress at the appropriate time.

Tower Project Update

We were pleased to announce the recommendation from RCT Council for approval of planning permission for the Tower project in July 2011. We continue to work with RCT to finalise the details of the planning permission and associated contracts. We expect these discussions to be completed in the near future.

The joint venture vehicle, Tower Regeneration Limited, is 50% owned by the Group and 50% owned by Tower Colliery Limited. Under the joint venture agreement Hargreaves will receive 35% of the profits from the marketing of the coal, with the remaining 65% going to Tower Colliery Limited.

Profits from the regeneration and development of the property will be shared equally between Hargreaves and Tower Colliery Limited. These profits are not expected to arise until the end of the project.

Hargreaves will operate the site under a contract with the joint venture for which it is proposed that the Group will be paid on a cost plus 10% basis. Hargreaves intends to provide finance for approximately 20% of the estimated £38m of plant and equipment required to operate the site, with the balance being financed by the joint venture company. It is proposed to include the revenue and profits from this activity in the Production Division along with the Group's share of the joint venture result.

Once the site is fully operational we will be targeting production at a rate of approximately 1 million tonnes per annum. The site is expected to operate for approximately 7 years and will produce both coal that is suitable for power generation and coal that may be suitable for use in PCI for steel making. Although we expect all tonnage to be placed in the UK market, any surplus will be exported to Europe.

Although the average selling price will be discounted from international coal prices in line with all other indigenous coal production in the UK, the absence of low priced legacy contracts and the projected lower stripping ratios should ensure profitability that is above the average level for UK surface mining projects. The site should be fully operational by the end of the current financial year. Although we are disappointed not to have been able to complete the preparation of the site over the spring and summer months, we are confident that production and revenues arising in the current financial year will at least cover start up costs.

As at 31 May 2011, under the terms of the joint venture agreement, the Group had advanced £3.6m of loans to Tower Regeneration Limited, in addition to the payment of £1m to secure participation in the joint venture. Following the grant of final planning permission the Group is due to fund a final £6m loan.  These loans, totalling £9.6m, will be repayable to the Group and are projected to be repaid within three years.

Hatfield Colliery Contract

Under the terms of its management agreement the Group has contracted to provide management services to Hatfield Colliery Limited for an initial minimum period of 12 months. The contract is being managed by and reported in the Production Division. Although a significant amount of effort and cost will be expended in the first year it is expected that the contract will deliver a modest contribution to the fixed cost base. We can also announce that we have agreed with Hatfield's owner, ING Bank NV that we will be awarded 10% of the equity of Hatfield Colliery Limited with the ability to earn a further 15% for the delivery of financial targets over a three year period.

In addition to, and separate from the management contract, the Energy & Commodities Division will market the output from Hatfield under a 24 month contract. This contract should provide the Division with an additional 1.8 million tonnes to market to power station customers. Although the margin will be lower than the Group average, we are confident that by working with Hatfield Colliery we will be able to develop the opportunities to our mutual benefit.

Industrial Services Division

The Industrial Services Division delivered another steady year, once again benefiting from the good visibility provided by its long-term contract base. Gross revenues increased by £9.1m from £60.4m to £69.5m. Underlying operating profit increased from £3.8m to £4.3m.

Despite continuing budgetary pressures in the power stations sector, the Division has continued to make steady progress with key contract wins and renewals.  Amongst these the Group is pleased to report its first contract for material handling and transport services with a major UK steel producer. This contract will be worth approximately £10m in revenues over five years. A significant number of other tenders are being pursued and the Group is hopeful that these will result in further contract announcements in the coming months.

Following the financial year end, the Division achieved two contract wins in the power station sector, one from a current customer, International Power, and one from a new station, Scottish and Southern Energy's Fiddlers Ferry Power Station. These wins help to consolidate our strong position and reflect our excellent reputation for flexibility and high quality standards. These wins will help to offset the continuing soft demand from power station customers for incremental project and contract spend.

The Group continues to provide consulting services in two Asian markets and is hopeful that the first contract for support services will be won in the current financial year. Although this contract is not expected to contribute significantly to profits, it would mark an important first step and as a result, the Division has received authority from the Board to continue to invest in developing its presence in Asia.

The Division continues to demonstrate its high service levels and operational excellence. In the year ended 31 May 2011, eight of the Division's site locations achieved 5-star ratings from the British Safety Council for their Health and Safety programmes.

In the coming year our focus will be to continue to provide our customers with the highest standard of service whilst expanding on business development activities as outlined above.

Transport Division

The Transport Division's gross revenues increased by £6.0m from £72.7m to £78.7m due principally due to increased Tanker revenues. Underlying operating profit decreased by £0.3m from £4.1m to £3.8m. Tanker operations have continued to perform strongly in the year accounting for £3.4m of the revenue increase and contributing an additional £0.2m of profit compared to the prior year. The Tankers business unit continues to build a strong reputation providing a high quality and reliable service to its customers.

Although revenues in Bulk and Waste Transport recovered slightly rising £2.6m from £43.7m to £46.3m, profits were impacted by £0.5m of additional costs resulting from restructuring of the operation and, as reported in the Interim Report, from the disruption during last year's exceptionally poor weather. The aim of the restructuring, which was ongoing at the year end, is to streamline the management of the division, simplify the operation and to focus capital and resource where the Group can leverage its service levels to achieve higher margin opportunities and contracts.

Gordon Banham                                                                                                                                                  
Group Chief Executive

Iain Cockburn

Group Finance Director                                                                                                                                    14 September 2011

Financial Review

Results Overview

Group revenue for the year was £552.3m compared to £459.8m for the previous year, an increase of 20.1%. The key drivers of organic growth came from the Energy & Commodities Division Europe.

Underlying profit before tax increased from £34.3m to £40.5m. Reported profit before tax increased from £30.7m to £36.9m.

Interest

The net interest charge for the Group was £6.2m compared to £4.4m for the previous year. The increase in interest costs reflects the higher average debt levels and an additional £0.3m of amortisation of the facility fees relating to the September 2009 re-financing.

Taxation

The tax charge in the year was £10.1m compared to £9.4m in the previous year. The UK mainstream Corporation Tax rate reduced from 28% to 26% in April 2011, giving an average UK mainstream rate for the year of 27.67%. The Group's effective tax rate for the year decreased from 30.5% to 27.4% reflecting the benefit of the falling UK mainstream corporation tax rate and the resulting impact on deferred tax liabilities.

Earnings Per Share

Basic earnings per share for the year were 91.9 pence (2010: 77.5 pence) and diluted earnings per share were 90.5 pence (2010: 75.6 pence). Underlying diluted earnings per share, after adding back amortisation of acquired intangibles, increased by 16.8% from 88.8 pence to 103.7 pence.

Dividend

The Board has recommended a final dividend of 10.4 pence (2010: 9.1 pence) bringing the proposed dividend for the full year to 15.5 pence, an increase of 14.8% in the total dividend for the year. The proposed dividend is covered 5.9 times by underlying earnings (2010: 5.7 times).

Net Assets

Net assets increased by £24.8m from £89.8m at 31 May 2010 to £114.6m at 31 May 2011.

Property, plant and equipment increased by £1.5m from £85.6m to £87.1m as a result of net fixed asset additions of £18.6m offset by a depreciation charge for the year of £17.1m (2010: £14.6m). Capital expenditure was concentrated in the second half driven by the timing of the expenditure at Maltby for the T15 face.

Working capital increased by £8.4m in the year to £92.8m. Working capital in the UK and Europe amounted to £54.5m and £38.3m respectively. Inventories increased by £23.9m in total across the Group. Europe accounted for £10.7m of this increase.

The decrease of £3.0m in goodwill and intangibles arose from amortisation of acquired intangibles totalling £3.6m, offset by goodwill and intangibles arising from the acquisition of Mekol NV of £0.6m.

Net Debt

Group net debt, comprising cash and cash equivalents, bank overdraft and other interest-bearing loans and borrowings was £66.0m at 31 May 2011, a decrease of £22.2m from the £88.2m reported at 31 May 2010. The gearing ratio of the Group at 31 May 2011 was 58% compared to 98% at 31 May 2010.

Cash Flow

Earnings before interest, tax, depreciation and amortisation and other non-cash items was £64.5m for the year ended 31 May 2011 compared to £52.6m in the previous year.

The Group continues to manage working capital levels and efficiency closely. Stocks increased by £23.9m to £105.9m largely reflecting the impact of higher commodity prices on stock levels. As an indicator of commodity price trends the API2 coal price increased by over 20% in sterling terms over the year.

Group stock days, measured against forward sales reduced by 5.2 days from 68.9 as at 31 May 2010 to 63.7 as at 31 May 2011. Group trade creditor days increased by 7.1 days, from 34.6 days at 31 May 2010 to 41.7 days at 31 May 2011 reflecting an additional £3.0m of trade creditors relating to capital projects at Maltby and benefitting from coal purchases of £6.0m that were received into stock at the end of May but paid for at the beginning of June. Group debtor days reduced by 1.7 days, from 29.5 days to 27.8 days.

There will continue to be both seasonality and natural variability in our working capital levels, with a tendency to build coal stocks over the first half of the year, and reduce stocks over the second half. Significant movements in commodity prices will affect the net value of working capital positions. The timing of larger vessels and customer orders will always create volatility in working capital positions, particularly in the European business.

In Europe however we will continue to invest in physical stock to grow the business, as and when required, particularly in support of Poland and the development of thermal and PCI product flows.

Total capital expenditure for the year (net of disposal proceeds of £1.4m) was £18.0m compared to £26.6m in the prior year. Of the capital expenditure, £6.7m was financed through finance leases and £11.3m was paid in cash. The depreciation charge for the year was £17.1m (2010: £14.6m).

Looking at acquisitions and other investments, the Group advanced a further £0.7m to the Tower joint venture during the year to 31 May 2011. The only acquisition activity that impacted cash was the acquisition of Mekol NV for a cash consideration of £0.8m. £1.8m of cash was expended after the end of the year following the acquisition of Eastgate Materials Handling Limited.

The Group benefitted by £7.0m from the timing difference in cash tax payments arising from a sale and leaseback scheme.

Borrowings and Facilities

During the year, the Group was financed by a mixture of cash flows from operations, trade credit, short-term borrowings, longer-term borrowings and finance leases. Operating leases are used in conjunction with asset financing to balance the flexibility afforded by asset ownership and the efficient use of capital. 

In September 2009, the Group completed a new 3-year multi-bank committed facility consisting of a £35m invoice finance facility and an £80m revolving credit facility ("RCF"). At the end of the year these had a credit balance of £3.2m and were drawn £43.0m respectively.

The Group continues to be able to borrow at competitive rates and is operating comfortably within its banking covenants. The key covenants on the RCF are interest cover and leverage, measured as a ratio of net debt to EBITDA. As at 31 May 2011 interest cover was 11.7 times, comfortably over the covenant minimum of 4 times and leverage was 1.5 times, comfortably under the maximum 2.5 times permitted.

The European business continues to operate on a facility of £48m (€55m) from Commerzbank. At the end of the year the net debt on this facility was £8.9m.

Capital Management

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern, whilst maximising the return to shareholders. The capital structure of the Group consists of debt, which includes borrowings, cash and cash equivalents, and equity attributable to equity holders of the parent, comprising capital, reserves and retained earnings.

The capital structure is reviewed regularly by the Group's Board of Directors. The Group's policy is to maintain gearing at levels appropriate to the business. The Board principally reviews gearing determined as a proportion of debt to earnings before interest, tax and depreciation. The Board also takes consideration of gearing determined as the proportion of net debt to total capital. It should be noted that the Board reviews gearing taking careful account of the working capital needs and flows of the business. In the trading businesses, where working capital cycles are regular, predictable and generally less than 90 days, the Board is comfortable to maintain higher levels of debt and gearing as measured against EBITDA.

Going Concern

After making enquiries, the Directors have formed the opinion at the time of approving the financial statements, that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the Directors continue to adopt the going concern basis in preparing the financial statements.             

Iain Cockburn                                                                                                                                                     
Group Finance Director                                                                                                                        14 September 2011

Consolidated Statement of Comprehensive Income

for year ended 31 May 2011

							2011	2010
						Note	£000	£000
Revenue						2	552,259	459,779
Cost of sales							(468,045)	(385,393)
Gross profit							84,214	74,386
Other operating income							469	1,593
Administrative expenses							(41,619)	(40,740)
Operating profit						2	43,064	35,239
Financial income							1,443	2,031
Financial expenses							(7,602)	(6,394)
Share of profit/(loss) in jointly controlled entities (net of tax)							23	(159)
Profit before tax						2	36,928	30,717
Income tax expense						4	(10,108)	(9,370)
Profit for the year							26,820	21,347
Other comprehensive income
Foreign exchange translation differences							705	(781)
Effective portion of changes in fair value of cash flow hedges							(1,418)	1,486
Actuarial gains and losses on defined benefit pension plans							891	(3,028)
Tax recognised on other comprehensive income							17	434
Dividend waived							-	(15)
Other comprehensive income for the year, net of tax							195	(1,904)
Total comprehensive income for the year							27,015	19,443
Profit attributable to:
Equity holders of the company							24,600	20,560
Non-controlling interest							2,220	787
Profit for the year							26,820	21,347
Total comprehensive income attributable to:
Equity holders of the company							25,090	18,760
Non-controlling interest							1,925	683
Total comprehensive income for the year							27,015	19,443
Basic earnings per share (pence)						5	91.85	77.53
Diluted earnings per share (pence)						5	90.50	75.61

Consolidated Balance Sheet
at 31 May 2011
					2011	2010
					£000	£000
Non-current assets
Property, plant and equipment					87,120	85,605
Intangible assets					31,616	34,607
Derivative financial instruments					-	3
					118,736	120,215
Current assets
Inventories					105,944	81,956
Derivative financial instruments					266	517
Trade and other receivables					66,072	62,371
Cash and cash equivalents					17,243	16,983
					189,525	161,827
Total assets					308,261	282,042
Non-current liabilities
Other interest-bearing loans and borrowings					(51,190)	(73,265)
Retirement benefit obligations					(3,886)	(6,177)
Provisions					(8,815)	(8,986)
Derivative financial instruments					(168)	(770)
Deferred tax liabilities					(3,883)	(5,823)
					(67,942)	(95,021)
Current liabilities
Bank overdraft					(23,994)	(24,189)
Other interest-bearing loans and borrowings					(8,059)	(7,729)
Trade and other payables					(79,205)	(59,889)
Income tax liabilities					(11,788)	(4,489)
Derivative financial instruments					(2,623)	(941)
					(125,669)	(97,237)
Total liabilities					(193,611)	(192,258)
Net assets					114,650	89,784
Equity attributable to equity holders of the parent
Share capital					2,683	2,660
Share premium					31,490	30,429
Other reserves					211	211
Translation reserve					550	(31)
Merger reserve					1,022	1,022
Hedging reserve					(1,759)	(690)
Capital redemption reserve					1,530	1,530
Retained earnings					74,158	51,813
					109,885	86,944
Non-controlling interest					4,765	2,840
Total equity					114,650	89,784

Consolidated Statement of Changes in Equity

for year ended 31 May 2011

			Trans-			Capital			Total	Non-
	Share	Share	lation	Hedging	Other	redemption	Merger	Retained	parent	controlling	Total
	capital	premium	reserve	reserve	reserves	reserve	reserve	earnings	equity	interest	equity
	£000	£000	£000	£000	£000	£000	£000	£000	£000	£000	£000
Balance at 1 June 2009	2,639	29,434	646	(1,762)	211	1,530	1,022	35,792	69,512	2,157	71,669
Total comprehensive
income for the year
Profit for the year	-	-	-	-	-	-	-	20,560	20,560	787	21,347
Other comprehensive income
Foreign exchange
translation differences	-	-	(677)	-	-	-	-	-	(677)	(104)	(781)
Effective portion of changes
in fair value of cash
flow hedges	-	-	-	1,486	-	-	-	-	1,486	-	1,486
Actuarial gains and losses on
defined benefit pension plans	-	-	-	-	-	-	-	(3,028)	(3,028)	-	(3,028)
Tax recognised on other
comprehensive income	-	-	-	(414)	-	-	-	848	434	-	434
Dividend waived	-	-	-	-	-	-	-	(15)	(15)	-	(15)
Total other comprehensive
income	-	-	(677)	1,072	-	-	-	(2,195)	(1,800)	(104)	(1,904)
Total comprehensive
income for the year	-	-	(677)	1,072	-	-	-	18,365	18,760	683	19,443
Transactions with owners
recorded directly in equity
Issue of shares	21	995	-	-	-	-	-	-	1,016	-	1,016
Equity settled share-based
payment transactions	-	-	-	-	-	-	-	948	948	-	948
Dividends	-	-	-	-	-	-	-	(3,292)	(3,292)	-	(3,292)
Total transactions with owners	21	995	-	-	-	-	-	(2,344)	(1,328)	-	(1,328)
Balance at 31 May 2010	2,660	30,429	(31)	(690)	211	1,530	1,022	51,813	86,944	2,840	89,784

	Share capital £000	Share premium £000	Translation reserve £000	Hedging reserve £000	Other reserves £000	Capital redemption reserve £000	Merger reserve £000	Retained earnings £000	Total parent equity £000	Non-controlling interest £000	Total equity £000
Balance at 1 June 2010	2,660	30,429	(31)	(690)	211	1,530	1,022	51,813	86,944	2,840	89,784
Total comprehensive
income for the year
Profit for the year	-	-	-	-	-	-	-	24,600	24,600	2,220	26,820
Other comprehensive income
Foreign exchange     translation
differences	-	-	581	-	-	-	-	-	581	124	705
Effective portion of changes
in fair value of cash
flow hedges	-	-	-	(1,418)	-	-	-	-	(1,418)	-	(1,418)
Actuarial gains and losses on
defined benefit pension plans	-	-	-	-	-	-	-	891	891	-	891
Tax recognised on other
comprehensive income	-	-	-	349	-	-	-	(332)	17	-	17
Total other comprehensive
income	-	-	581	(1,069)	-	-	-	559	71	124	195
Total comprehensive income
for the year	-	-	581	(1,069)	-	-	-	25,159	24,671	2,344	27,015
Transactions with owners
recorded directly in equity
Issue of shares	23	1,061	-	-	-	-	-	-	1,084	-	1,084
Equity settled share-based
payment transactions	-	-	-	-	-	-	-	1,067	1,067	-	1,067
Dividends	-	-	-	-	-	-	-	(3,892)	(3,892)	-	(3,892)
Total contributions by and distributions
to owners	23	1,061	-	-	-	-	-	(2,825)	(1,741)	-	(1,741)
Changes in ownership interests
Acquisition of non-controlling interest
without a change in control	-	-	-	-	-	-	-	11	11	(419)	(408)
Total transactions with owners	23	1,061	-	-	-	-	-	(2,814)	(1,730)	(419)	(2,149)
Balance at 31 May 2011	2,683	31,490	550	(1,759)	211	1,530	1,022	74,158	109,885	4,765	114,650

Consolidated Cash Flow Statement

for year ended 31 May 2011

		2011	2010
		£000	£000
Cash flows from operating activities
Profit for the year		26,820	21,347
Adjustments for:
Depreciation		17,120	14,565
Amortisation of intangible assets		3,592	3,592
Net finance expense		6,159	4,363
Share of (profit)/loss in jointly controlled entities		(23)	159
Profit on sale of property, plant and equipment		(469)	(624)
Profit on sale of investments		-	(969)
Equity settled share-based payment expenses		1,067	948
Income tax expense		10,108	9,370
Translation of non-controlling interest		124	(104)
		64,498	52,647
Change in inventories		(22,936)	(22,099)
Change in trade and other receivables		(5,540)	(8,135)
Change in trade and other payables		21,248	7,613
Change in provisions and employee benefits		(1,732)	(1,966)
		55,538	28,060
Interest paid		(6,083)	(4,030)
Income tax paid		(4,732)	(11,484)
Net cash from operating activities		44,723	12,546
Cash flows from investing activities
Proceeds from sale of property, plant and equipment		1,452	1,947
Proceeds from sale of investments		-	1,750
Dividends received		-	127
Acquisition of subsidiaries, net of cash acquired		(730)	(1,304)
Acquisition of property, plant and equipment		(12,777)	(19,712)
Acquisition of other investments		(44)	-
Acquisition of trade and assets		-	(1,743)
Net cash from investing activities		(12,099)	(18,935)
Cash flows from financing activities
Proceeds from the issue of share capital		1,084	35
Proceeds from new loan		1,593	-
Repayment of borrowings		-	(21,811)
Payment of finance lease liabilities		(10,068)	(7,511)
(Repayment of)/proceeds from invoice discounting facility		(9,827)	9,027
Dividends paid		(3,892)	(3,292)
Repayment of promissory notes		-	(21,874)
(Repayment of)/proceeds from revolving credit facility		(10,857)	52,628
Net cash from financing activities		(31,967)	7,202
Net increase/(decrease) in cash and cash equivalents		657	813
Cash and cash equivalents at 1 June		(7,206)	(8,424)
Effect of exchange rate fluctuations on cash held		(202)	405
Cash and cash equivalents at 31 May		(6,751)	(7,206)

1 Basis of preparation and status of financial information

The financial information set out above has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards as adopted by the EU (Adopted IFRSs).

The financial information set out above does not constitute the Group's statutory accounts for the years ended 31 May 2011 or 2010. Statutory accounts for 2010 have been delivered to the Registrar of Companies, and those for 2011 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

These results were approved by the Board of Directors on 14 September 2011.

2 Segmental information

The following analysis by industry segment is presented in accordance with IFRS 8 on the basis of those segments whose operating results are regularly reviewed by the Board of Directors (the Chief Operating Decision Maker as defined by IFRS 8) to make strategic decisions.

The sectors distinguished as reportable segments are Production, Energy & Commodities, Transport and Industrial Services. A short description of these sectors is as follows:

·         Production: produces coal and coke and also recycles tyres for customers throughout the UK and Europe;

·         Energy & Commodities: provides coal, coke, minerals, smokeless fuel and biomass products to a range of industrial, wholesale and public sector energy consumers;

·         Transport: provides bulk logistics to UK customers; and

·         Industrial Services: provides quality assured contract management services to the power generation, utilities, chemicals and minerals industries.

These segments are combinations of subsidiaries and divisions, have separate management teams and offer different products and services.

The segment results, as reported to the Board of Directors, are calculated under the principles of IFRS.

The table below sets out information for each of the Group's reportable segments. 

		Energy &		Industrial
	Production	Commodities	Transport	Services	Total
	2011	2011	2011	2011	2011
	£000	£000	£000	£000	£000
Revenue
Total revenue	110,119	330,814	78,690	69,452	589,075
Inter-segment revenue	(15,870)	(7,232)	(11,082)	(2,632)	(36,816)
Revenue from external customers	94,249	323,582	67,608	66,820	552,259
Segment operating profit	12,606	24,260	3,450	2,748	43,064
Share of profit in jointly controlled entities	46	(23)	-	-	23
Net financing costs	(2,698)	(2,042)	(829)	(590)	(6,159)
Profit before taxation	9,954	22,195	2,621	2,158	36,928
Depreciation charge	(11,168)	(1,101)	(3,261)	(1,590)	(17,120)
Amortisation of intangibles	-	(1,630)	(393)	(1,569)	(3,592)
Capital expenditure	10,889	842	5,061	2,681	19,473
Net assets
Segment assets	94,373	133,687	30,396	16,165	274,621
Segment liabilities	(36,391)	(63,750)	(17,773)	(17,160)	(135,074)
	57,982	69,937	12,623	(995)	139,547
Segment net assets
Jointly controlled entities	-	-	-	-	-
Segment net assets including share of jointly controlled entities	57,982	69,937	12,623	(995)	139,547
Unallocated net assets					(24,897)
Total net assets					114,650

Unallocated net assets include goodwill and intangibles (£31.6m), revolving credit facility (£43.0m), derivative financial instruments (£2.5m), and other corporate items (£11.0m).

Included within revenue is £175.0m (2010: £109.0m) of revenue which originates in Europe. All other revenue originates in the UK.

		Energy &		Industrial
	Production	Commodities	Transport	Services	Total
	2010	2010	2010	2010	2010
	£000	£000	£000	£000	£000
Revenue
Total revenue	86,256	263,949	72,746	60,358	483,309
Inter-segment revenue	(5,800)	(7,269)	(10,100)	(361)	(23,530)
Revenue from external customers	80,456	256,680	62,646	59,997	459,779
Segment operating profit	8,496	20,727	3,761	2,255	35,239
Share of loss in jointly controlled entities	(107)	(52)	-	-	(159)
Net financing costs	(1,653)	(1,784)	(663)	(263)	(4,363)
Profit before taxation	6,736	18,891	3,098	1,992	30,717
Depreciation charge	(9,179)	(531)	(3,260)	(1,595)	(14,565)
Amortisation of intangibles	-	(1,630)	(393)	(1,569)	(3,592)
Capital expenditure	23,199	721	4,349	1,998	30,267
Net assets
Segment assets	93,091	107,053	29,488	14,029	243,661
Segment liabilities	(38,220)	(62,856)	(17,167)	(12,699)	(130,942)
Segment net assets	54,871	44,197	12,321	1,330	112,719
Jointly controlled entities	-	-	-	-	-
Segment net assets including share of jointly controlled entities	54,871	44,197	12,321	1,330	112,719
Unallocated net assets					(22,935)
Total net assets					89,784

Unallocated net assets includes goodwill and intangibles (£34.6m) revolving credit facility (£53.1m), derivative financial instruments (£1.2m) and other corporate items (£3.2m).

3 Acquisition of subsidiaries

On 15 March 2011, the Group acquired 100% of the share capital of Mekol NV through Hargreaves Carbon Products NV for £700,000 satisfied in cash.  The company owns and operates a coal wash plant facility at Ghent coal terminal, Belgium.

On 16 March 2011 the Group acquired 80% of the share capital of Hargreaves Carbon Products Polska Sp Zo.o.  This acquisition has been combined in the table below as it is not material.

The result that these acquisitions contributed to the consolidated profit after tax for the 2 and a half months following acquisition was immaterial.

	Pre-acquisition		Recognised
	carrying	Fair value	values on
	amounts	adjustments	acquisition
	£000	£000	£000
ASSETS
Non-current assets
Property, plant and equipment	158	-	158
Current assets	49	-	49
LIABILITIES
Current liabilities
Trade and other payables	(100)	-	(100)
Net identifiable assets and liabilities	107	-	107
Satisfied by:
Consideration paid			710
Goodwill on acquisition			603

In April 2011, the remaining £20,000 of deferred consideration was paid in relation to the acquisition of DWL Engineering Services Limited.

The acquisition of the non-controlling interest comprises the acquisition in June 2010 of a further 5% of Hargreaves Raw Material Services GmbH at its net asset value of €467,000.

On 2 November 2009, the Group obtained total control of Forward Sound Limited, a jointly controlled entity with Evans & Reid Coal Company Limited, satisfied by £85,000. The company is a holding company.

In the seven months to 31 May 2010, Forward Sound contributed profit after tax of £45,000 to the consolidated profit after tax for the year. If the acquisition had occurred on 1 June 2009, Group revenue would have been an estimated £459.8m and profit after tax would have been an estimated £21.3m. In determining these amounts, management has assumed that any fair value adjustments that arose on the date of acquisition would have been the same if the acquisition occurred on 1 June 2009.

	Pre-acquisition		Recognised
	carrying	Fair value	values on
	amounts	adjustments	acquisition
	£000	£000	£000
ASSETS
Non-current assets
Intangible assets	1,000	-	1,000
Deferred tax assets	23	-	23
LIABILITIES
Current liabilities
Trade and other payables	(584)	-	(584)
Net identifiable assets and liabilities	439	-	439
Share of Forward Sound owned			(492)
Goodwill on acquisition			138
Net purchase consideration and costs of acquisition			85
Satisfied by:
Consideration paid			85

In October 2009, the Group acquired certain assets from Stiller Tankers Limited and in March 2010 acquired the trade and assets of DWL Engineering Services Limited. These acquisitions have been aggregated in the table below as they are deemed to be individually immaterial.

It is impracticable to determine the result these acquisitions have contributed to the consolidated profit after tax for the year as they have been integrated into existing businesses.

	Pre-acquisition		Recognised
	carrying	Fair value	values on
	amounts	adjustments	acquisition
	£000	£000	£000
ASSETS
Non-current assets
Property, plant and equipment	1,716	-	1,716
Current assets
Inventories	5	-	5
Trade and other receivables	123	-	123
LIABILITIES
Current liabilities
Trade and other payables	(93)	(362)	(455)
Interest-bearing loans and borrowings	(51)	-	(51)
Net identifiable assets and liabilities	1,700	(362)	1,338
Goodwill on acquisition			374
Net purchase consideration and costs of acquisition			1,712
Satisfied by:
Consideration paid			1,442
Deferred consideration			270
			1,712

4 Taxation

Recognised in the statement of comprehensive income

	2011	2010
	£000	£000
Current tax expense
Current year	8,727	7,849
Adjustments for prior years	(1,131)	(451)
Foreign tax - current year	4,435	1,416
Current tax expense	12,031	8,814
Deferred tax (credit)/expense
Origination and reversal of temporary differences	(1,617)	94
Adjustments for prior years	275	462
Reduction in tax rate	(581)	-
Deferred tax (credit)/expense	(1,923)	556
Tax expense in income statement (excluding share of tax of equity accounted investees)	10,108	9,370
Share of tax of equity accounted investees	81	(122)
Total tax expense	10,189	9,248
Tax recognised in other comprehensive income
	2011	2010
	£000	£000
Deferred tax
Effective portion of changes in fair value of cash flow hedges	349	(414)
Actuarial gains and losses on defined benefit pension plans	(332)	848
	17	434

Reconciliation of effective tax rate

	2011	2010
	£000	£000
Profit for the year	26,820	21,347
Total tax expense (including tax on equity accounted investees)	10,189	9,248
Profit excluding taxation	37,009	30,595
Tax using the UK corporation tax rate of 27.67% (2010: 28%)	10,240	8,567
Effect of tax rates in foreign jurisdictions	734	218
Unrecognised tax losses	44	-
Non-deductible expenses	602	452
Reduction in tax rate on deferred tax balances	(581)	-
(Over)/under provided in prior years	(850)	11
Total tax expense (including tax on equity accounted investees)	10,189	9,248

The UK corporation tax rate reduced to 26% on 1 April 2011, giving an effective base rate of 27.67% (2010: 28%).

Factors that may affect future current and total tax charges

On 22 June 2010 the Chancellor announced that the main rate of UK corporation tax will reduce from 28% to 27% with effect from 1 April 2011.  On 23 March 2011 the Chancellor announced a further reduction in the main rate of UK corporation tax to 26% with effect from 1 April 2011.  As these changes in tax rate were substantively enacted prior to the year end, their effect on the deferred tax balances at 31 May 2011 have been included in the figures.

The Chancellor also proposed changes to further reduce the main rate of corporation tax by one per cent per annum to 23% by 1 April 2014, but these changes were not substantively enacted during the year and therefore are not included in the figures above. 

5 Earnings per share

All earnings per share disclosures relate to continuing operations as the Group had no discontinued operations in either 2010 or 2011.

Earnings per share for the ordinary shares are as follows:

	2011	2010
Ordinary shares
Basic earnings per share	91.85p	77.53p
Diluted earnings per share	90.50p	75.61p
The calculation of earnings per share is based on the profit for the year attributable to equity holders and on the weighted average number of shares in issue and ranking for dividend in the year.
Ordinary shares
	2011	2010
	£000	£000
Profit for the year attributable to equity holders	24,600	20,560
Weighted average number of shares	26,782,240	26,519,310
Earnings per ordinary share	91.85p	77.53p

The calculation of diluted earnings per share is based on the profit for the year and on the weighted average number of ordinary shares in issue in the year adjusted for the dilutive effect of the share options outstanding (effect on weighted average number of shares: 399,664; effect on earnings per ordinary share: 1.35 pence).

	2011	2010
	£000	£000
Profit for the year attributable to equity holders	24,600	20,560
Weighted average number of shares	27,181,904	27,192,323
Diluted earnings per ordinary share	90.50p	75.61p

6 Dividends

The aggregate amount of dividends comprises:

		2011	2010
		£000	£000
Final dividends paid in respect of prior year but not recognised as liabilities in that year		2,525	2,122
Interim dividends paid in respect of the current year		1,367	1,170
		3,892	3,292
Proposed dividend of 10.4p per share (2010: 9.1p)		2,790	2,421

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

7 Subsequent events

On 1 June 2011 the Group acquired the remaining 50% of Eastgate Materials Handling Limited for a consideration of £1.8m.

8 Annual report

The annual report will be posted to shareholders on or around 11 October 2011 and copies will be available from the Company Secretary, Hargreaves Services plc, West Terrace, Esh Winning, Durham, DH7 9PT, or from the Investor Relations section of the Group website at www.hargreavesservices.co.uk

 

END

 

 

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