Augean plc ("Augean" or the "Group")

Final results for the year ended 31 December 2018

Augean, one of the UK's leading specialist waste management businesses, is pleased to announce its preliminary results for the year ended 31 December 2018

Financial highlights

From continuing operations and excluding exceptional items and share based payments¹:

·      Adjusted¹ revenue excluding landfill tax increased by 22% to £68.8m (2017: £56.3m)

·      Adjusted profit before taxation¹ increased by 69% to £11.4m (2017: £6.8m)

·      Adjusted¹ basic earnings per share increased by 56% to 8.52 pence (2017: 5.47p)

·      Sale of loss-making Colt and Colt Property for £2.2m and AIS for £4.0m in 2018

·      East Kent sale completed in January 2019 for £3.35m

·      Net cash position of £8.2m at year end (2017: net debt of £10.8m), at 15 February 2019 further improved to £12.5m with additional £2.3m to come from sale of East Kent

Operational Highlights

·      Excellent progress on business optimisation programme with cost savings exceeding the target

·      Sales growth in all sites with Treatment & Disposal up 24% and North Sea 19%.

·      Double digit growth from residues from Energy from Waste (EfW) plants despite customers having a disproportionate amount of "downtime" and no new municipal EfW plants opening in 2018.  Recovery in the market position for soils reflecting a more focused team from the end of H1 - overall volumes up by around a third for the full year despite being down one third in H1

·      Continued diversification in North Sea into industrial services, decommissioning and waste management more than offsetting reduced drilling volumes resulting in profit more than doubling. The forward contract base is secured with a major contract renewal and new significant decommissioning contract out of Dundee

·      Contracts renewed in January 2019 representing one third of 2018 Group profit and new contract awards with EfW plants expected to start late 2019 with full impact by 2021

HMRC

·      The Group maintains its dialogue with HMRC with respect to landfill tax and has received final assessments in respect of two Group companies - Augean North and Augean South

·      Hardship has been granted for the assessments received by Augean North, confirming that no cash payment will be required for this Company before the conclusion of any tribunal.  The Group is legally challenging these assessments through tribunal

Outlook

·      Further growth targeted in the core key markets of Energy from Waste and North Sea Decommissioning

·      Strong start to initial trading in the first months of 2019 with results well ahead of prior year and in line with expectations.  The Board is confident in the Group's prospects for the year

Commenting on the Results, Jim Meredith, Executive Chairman, said:

"2018 was a pleasing year as the Group continued to make significant changes to streamline activities, enhance performance and focus on both cash generation and retention. Strong trading in the Group's underlying business, the exit from unprofitable businesses, good cash control and cost savings have enabled the Group to report a cash balance of £8.2m compared to the £10.8m debt position reported last year.  The Group is currently experiencing strong initial trading for the start of 2019 and the Board is confident in the Group's prospects for the year. Our focus will continue to be on cash control and so improving our cash position."

There will be a meeting for analysts at 9.00am today at the offices of N+1 Singer, 1 Bartholomew Lane, London EC2N 2AX

¹ From continuing operations and before exceptional items and share based payments.  Prior year comparatives have been restated to exclude operations discontinued in the current year.  A reconciliation between statutory and adjusted measures is included in note 10 to this announcement.

Executive Chairman's statement

During 2018, the Group continued to make significant changes to streamline activities, enhance performance and focus on both cash generation and retention. As a result, the adjusted profit before tax (note 10) increased 69% to £11.4m due to strong trading in the Group's underlying business, the exit from unprofitable businesses, cost savings which exceeded target and good cash control (capex and working capital). 

The Group is currently trading in line with expectations for 2019 with a continued focus on cash control being reflected in our net cash position.

At an operational level, the Group has achieved a number of key strategic goals including the disposal of the AIS business for a final consideration of £4.0m and the closure of the loss-making Colt business with the sale of the associated assets for a total of £2.2m.  Post year end, in January,  the Group also disposed of its site at East Kent, shown as an asset held for sale in this report, for £3.35m.  The Group continues to secure further contracts with top-tier customers and maintained double digit growth in Energy from Waste (EfW) volumes despite some delays in plants coming online.  The Group has maintained its investment in processing solutions to generate the most environmentally beneficial outcomes for our customers whilst ensuring that the associated cost base has been balanced to generate appropriate cash and profit.

Health and safety continues to remain the highest priority for the Board, management and employees across the Group. The management team has continually improved the safety environment by enhancing hazard recognition, risk evaluation and learning from incidents. As such, the number of accidents resulting in injuries in 2018 has reduced by 41%. The Board continues to recognise the risks faced by our people, who work in environments moving, treating and disposing of hazardous waste.

Protecting the environment is not only a matter of compliance with permits but encompasses our broader responsibilities to society and future generations. The Group diligently monitors its performance in this regard, the results of which are regularly reported to the Board. The majority of our sites in England are ranked by the Environment Agency as Category A or as "Excellent" by the Scottish Environmental Protection Agency.

The Board recognises that our business success is dependent on the quality, diligence and hard work of all Augean's employees and I would like to take this opportunity on behalf of the Board to thank everyone who has contributed to the Group's strong progress during a challenging year. 

Although the Group's balance sheet and operating cash flow have strengthened considerably in 2018 the Board will maintain its position of not paying a dividend for 2018 (2017 final: nil) whilst the HMRC matter is being resolved.  The Group maintains its dialogue with HMRC with respect to landfill tax and has received final assessments in respect of two Group companies.

We maintain our position that we have correctly collected and paid the appropriate landfill tax, based on legal advice received and will robustly defend against the assessments.  We have not provided against the assessments and have received notification,  in relation to the final assessment which has been issued for Augean North, that we will not need to make a cash payment until the outcome of the tax tribunal is known.  I look forward to giving shareholders further clarity and certainty with respect to the Group's position in 2019.

As in previous years, I am pleased to note the addition of new shareholders to our register during the year and again I am thankful for the continued support from all of our investors.  After making significant contribution to the Board, Rod Holdsworth leaves the Board in 2019.  I thank him for his contribution whilst with the Group. 

The Group set ambitious targets for the 2018 year which it met, and indeed in many instances pleasingly exceeded. Undoubtedly 2019 contains uncertainties for the UK economy as a whole whilst the Brexit scenario plays out, but with limited direct exposure to EU, coupled with a strong start to 2019 trading, the Board feels confident in the Group's prospects for the forthcoming year. 

I look forward to updating shareholders on our progress during the current financial year.

Jim Meredith

Executive Chairman

25 February 2019

Operating Review

Introduction

The Group's core strategic markets within its reported segments are Energy from Waste, treatment, nuclear decommissioning and North Sea decommissioning. As previously announced, in order to facilitate cost savings and to focus on profitable cash generative growth in these core markets the Group has amended its business unit infrastructure for 2018 as follows:

Adjusted revenues exclude intra segment trading, discontinued operations and landfill tax.  Adjusted operating profit excludes exceptional items, share based payment charges and loss from discontinued operations.  A reconciliation of these adjusted metrics is shown in note 10. 

Business performance

The Group operated through two business units during 2018 being Treatment & Disposal and North Sea Services; a change from the five business units reported in 2017.  The new structure reflects the operational management of the business subsequent to the reduction in cost base implemented in 2017. 

Treatment and Disposal

The principal activity of this business unit is the treatment and disposal of waste from Energy from Waste (EfW) incinerators, construction and industrial sites. The largest waste stream by revenue and profit is the disposal of ash from EfW sites which comprises bottom ash and ash from the burning of biomass and municipal waste to generate energy. The largest waste stream by tonnage is contaminated waste materials and soils (including asbestos), mainly from the manufacturing and construction sectors. A key growth market in Treatment and Disposal is low level radioactive waste decommissioning. 

Adjusted revenues, excluding landfill tax, increased by 24% to £47.1m (2017: £38.1m), with growth across landfill and treatment inputs. Ash inputs increased 29% to 189,000 tonnes (2017: 147,000). This was despite no new municipal EfW plants coming online in the year and the high downtime experienced by some EfW customers due to operational challenges.  Radioactive waste volumes were improved on 2017 with an increase from 6,000 tonnes to 10,600 tonnes. 

The adjusted operating profit of Treatment and Disposal increased to £10.9m (2017: £7.9m) due to the increased sales as well as previously announced cost savings.

The Treatment and Disposal strategy is to continue to win new treatment contracts, optimise the use of our treatment plants, and maximise the market opportunity from growth in EfW ash waste volumes, nuclear decommissioning and construction sector wastes. As announced, the Group signed a three-year framework agreement with Land & Water Ltd, the market leading specialist for dredging of inland waterways, to preferentially treat and landfill hazardous materials arising from their dredging activities in February 2019.

North Sea Services (NSS)

The NSS business unit operates in the North Sea Oil & Gas market. The primary revenue streams are from drilling waste management (DWM), including the rental of offshore engineers and equipment to customers, production waste management, onshore & marine industrial services, decommissioning and water treatment.

NSS revenue increased by 19% to £21.7m (2017: £18.2m) on new customer wins in Industrial Services and Waste Management.  This segment saw an increase in adjusted operating profit to £2.1m (2017: £0.7m) due to revenue increase, cost savings, better mix and the impact of increased decommissioning activity in the North Sea.  Reduced drilling volumes were more than offset by diversification into industrial services, decommissioning and waste management.

The NSS strategy continues to gain traction as the business moves up the supply chain, dealing directly with Oil & Gas operators and top-tier customers, so providing opportunities to widen its service scope more directly with those customers. The NSS facility at the Port of Dundee for the management of waste arising onshore from the decommissioning of offshore assets is now fully operational.  This enhances the opportunity for Augean to service the growing North Sea decommissioning market, a multi-billion pound programme decommissioning hundreds of offshore assets which is expected to be active for over 20 years.  NSS actively markets these facilities alongside other operators at the port, which in turn cements its international position as a decommissioning facility for the North Sea.  At the end of 2018 the Group was awarded a decommissioning contract with Shell for the Curlew vessel; a significant milestone for both Dundee Port and Augean.

Discontinued operations

Augean Integrated Services (AIS) and Colt Industrial Services

AIS was sold on 16th March 2018 to Regen Holdings for total cash consideration of £4.0m. The fixed assets of the Colt business were sold to Future Industrial on 22nd June 2018 for £1.0m and the freehold land and buildings associated with the Colt business was sold for £1.2m on 21 December 2018 in cash consideration. The total consideration of £6.2m has been used to reduce net debt.

East Kent Incinerator

A review of this asset was completed in 2018 and the Group decided that the facility would be mothballed early in the New Year. The assets associated with the facility less committed costs to prepare for sale are therefore classified as an asset held for sale in this report.  The previously recognised impairment to the assets associated with this site has been reversed in 2018.  On 25 January 2019 the Group sold the land, buildings and plant associated with East Kent High Temperature Incinerator for a total cash consideration of £3.35m.

HMRC assessment

Two Group companies are currently in receipt of final assessments from HMRC for Landfill tax (LFT).  As previously announced, Augean has maintained positive discussions with HMRC in an effort to resolve the matter and since the initial pre-assessment notifications the quantum of the assessment has reduced significantly although the basis for assessment is not entirely clear.  The amounts for which Augean has been assessed (excluding interest and penalties) total approximately £30.0m.

The Group will now robustly challenge the LFT Assessments that it has or may receive from HMRC, through the tax tribunal system.  No payments have been made as a result of the assessments and hardship has been granted in relation to the received final assessment for Augean North, meaning that no payments will fall due for this Company until the outcome of the tax tribunal is completed. The Group remains hopeful that any application for hardship in relation to Augean South Limited will be similarly granted.

The Group intends to account for the legal costs of the dispute with HMRC as an exceptional item but does not intend to make a provision for assessments received to date based on the strength of independent legal and professional advice. 

Augean continues to work with stakeholders in the waste and other affected industry sectors on the broader adverse implications for the treatment of hazardous waste. Further announcements will be made at the appropriate time.

Legislative environment

Regulation underpins the demand for Augean's services and accordingly the business follows closely the development of legislation and guidance and engages proactively with policy makers and regulators.  The Department for Environment, Food and Rural Affairs (DEFRA) confirmed in 2017 that there is no clear justification or environmental benefit for removal of the derogations supporting the Augean practice for safe treatment of air pollution control residues.  This means that the Group continues to treat and landfill these residues in the safest and most appropriate manner.

Planning and permitting

The current site planning permissions extend to 2026 in the case of East Northants Resource Management Facility (ENRMF), 2034 for the Thornhaugh site and for a period of more than 50 years in the case of Port Clarence. 

Financial performance

Group overview

A summary of the Group's financial performance, from continuing operations and excluding exceptional items, is as follows.  The 2017 comparative has been re stated where appropriate to exclude operations discontinued in 2018.

Adjusted metrics exclude intra segment trading, discontinued operations and landfill tax.  Adjusted operating profit excludes share based payments, exceptional items and loss from discontinued operations.  A reconciliation between the adjusted and statutory metrics is shown in note 10 to the accounts.

A consideration of the operational factors affecting performance is included in the operating review.

Exceptional items are detailed below.

Trading, adjusted operating profit and EBITDA

Adjusted revenue from continuing operations, excluding landfill tax, for the 12 months ended 31 December 2018 increased by 22% to £68.8m (2017: £56.3m).

Adjusted operating profit increased by 60% to £12.2m (2017: £7.6m) and adjusted profit before tax increased by 69% to £11.4m (2017: £6.8m), on the same basis.

Adjusted earnings before interest, taxation, depreciation and amortisation (EBITDA), from continuing operations and before exceptional items, is determined as follows:

Exceptional items

Exceptional items in 2018 totalled a net profit of £3.3m before taxation.  £0.3m exceptional expense related to continuing operations, being £0.2m of net landfill tax legal costs and £0.1m of other costs.  £3.6m exceptional profit related to discontinued operations, being the profit on the sale of AIS after fees and internal costs of £0.7m, a profit on disposal of Colt assets of £0.2m and a reversal of impairment in relation to the held for sale East Kent incinerator assets of £2.7m.

Finance costs

Total finance charges were £0.7m (2017: £0.9m) including the interest on bank debt, other financial liabilities and the non-cash unwinding of discounts on provisions.

Earnings per share

Adjusted basic earnings per share (EPS), from continuing operations and excluding exceptional items, increased by 56% to 8.52 pence (2017: 5.47 pence) due to the increased sales and lower costs.

The Group made an adjusted profit after taxation of £9.4m (2017: £6.4m), all of which was attributable to equity shareholders.

The total number of ordinary shares in issue increased during the period from 102,948,036 to 103,786,792 with the weighted average number of shares in issue increasing from 102,808,863 to 103,408,043 for the purposes of basic EPS due to the issue of share to satisfy options granted in previous years.

Dividend

Due to the HMRC position, the Board has decided not to declare a dividend (2017 interim and final: Nil). 

Cash flow and net debt

Adjusted net operating cash flows were generated from continuing trading as follows:

The cash flow of the Group is summarised as follows:

Adjusted net operating cash flow as a percentage of EBITDA was 84% in 2018 (2017: 87%).

The operating cash flow of the Group of £16.0m was used to pay down debt and fund the future growth of the Group, with Capital investment in property, plant & equipment and intangible assets made by the Group totalling £3.4m (2017: £8.8m), split between maintenance capital (to lengthen the productive life of existing assets) of £2.0m and expansion capital (for targeted future growth) of £1.4m.

Post-maintenance free cash flow, as set out in the table above, represents the underlying cash generation of the Group, before any investment in future growth or the payment of dividends to shareholders.

As a result of the above net cash inflow, net cash was at £8.2m at 31  December 2018 compared with net debt of £10.8m at 31 December 2017. Gearing, defined as net debt divided by net assets, is therefore nil (31 December 2017: 22%). The ratio of net debt to EBITDA, from continuing operations and before exceptional items, was negative 0.4 times (2017: 0.8 times).

Financing

During 2018, the activities of the Group were substantially funded by a bank facility, comprising a revolving credit facility and bank overdraft. That facility was renewed on 21 March 2016 with HSBC Bank plc at a level of £20m.The maturity of the facility is October 2020 and the overdraft is reviewed annually. HSBC has, at 31 December 2017 and without expiry, waived breach of the taxation clause of the bank credit facility which requires potential liabilities associated with tax disputes to be less than £0.1m. 

Balance sheet and return on capital employed

Consolidated net assets were £60.3m on 31 December 2018 (2017: £50.1m) and net tangible assets, excluding goodwill and other intangible assets, were £40.5m (2017: £30.0m), of which all was attributable to equity shareholders of the Group in both years. 

Return on capital employed, defined as adjusted operating profit divided by average capital employed, where capital employed is net assets excluding net cash or net debt, increased to 21.6% in 2018 (2017: 9.4%).

Impairment reviews

In accordance with IAS36 'Impairment of Assets', an annual impairment review was carried out for each cash-generating unit (CGU) to which significant goodwill is allocated and also any other CGU where management believed there may have been an indication of potential impairment to the carrying values of assets in those CGUs.

For the continuing operations of the Group, this exercise was completed for the CGUs within the Treatment & Disposal and North Sea Services reportable segments.

Based on these reviews, no impairments were noted and no reversal of prior year impairments was required.

The cash flows for all CGUs were discounted using a pre-tax discount rate of 8.0% (2017: 8.2%).

Employees

The Group employed an average of 385 staff (2017: 469) over the course of the year.  The number of employees in the Group has declined during 2018 reflecting the full year impact of the re-positioning of the cost base of the Group and elimination of the business unit structure.

Brexit

The Group is focussed on trading in Britain and uses disposal infrastructure almost entirely based in the UK.  Where disposal routes in mainland Europe are used the financial impact of different scenarios which could result from this external change have been modelled.  The impact of Brexit on these routes is difficult to predict but the position is being closely monitored with the Group board having access to expert advice.  Coupled with UK Government advice that current waste movement structures will be rolled over in most EU States and the Group's work to establish alternatives, the risk of significant business disruption as a result is expected to be limited.

Key performance indicators

The Augean plc Board of Directors, Group Management Board and local management teams regularly review the performance of the Group as a whole along with the performance of individual business units. This includes the use of a balanced scorecard for applicable key performance indicators (KPIs) to monitor progress towards delivery of the Group's principal targets. These KPIs are consistent with those reported in 2017.  The Group regard the performance in 2018 compared to their benchmark, which is the prior year performance, to be satisfactory.

The focus of the Group is in three priority areas.

1.     Health & safety: monitored through near miss incidents and the number of accidents incurred;

2.     Compliance with regulations, in particular Environment Agency and Scottish Environment Protection Agency audit results; and

3.     Financial performance.

⁽¹⁾       The number of total reported accidents, that has resulted in injury, including those resulting in damage to plant or equipment. This is an absolute figure which has not been normalised for changes in employee numbers.

⁽²⁾       The total number of incidents reported which could have resulted in an accident or injury or damage to property.

⁽³⁾       The average of audit scores notified during the year by the Environment Agency (EA) in England or the Scottish Environment Protection Agency (SEPA) in Scotland. The EA notifies results on the scale A-F and SEPA notifies on the scale Excellent-Very Poor

⁽⁴⁾       Group profit before taxation, from continuing operations and excluding exceptional items and IFRS 2 charges

⁽⁵⁾       Net operating cash flows, from continuing operations and excluding exceptional items, less maintenance capital expenditure

⁽⁶⁾       Calculated as operating profit, from continuing operations and excluding exceptional items, divided by average capital employed, where capital employed is the consolidated net assets of the Group excluding net debt.

Outlook

The Group made significant progress against delivering its strategy during 2018 including generating £18.8m of cash and growing Profit before tax by 69%, therefore providing a stable platform for future growth.  A strong start to initial trading has been made in the first months of 2019 with results well ahead of prior year.  The Board is confident in the prospects of the Group for the full year.

Consolidated statement of comprehensive income 

for the year ended 31 December 2018