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CEO's review

A new era

We delivered a robust performance during a transformational year. We expect 2017/18 to be a successful year of transition and integration and believe that Renewi has an exciting future ahead.

It is with great pleasure that we are reporting on the first set of financial results for Renewi plc. The creation of Renewi has brought together two of Europe’s leading recycling companies, Shanks and Van Gansewinkel (VGG), resulting in a waste-to-product business with an unrivalled range of recycling capabilities for commercial and municipal customers in its core Benelux markets and with further operations in Europe and North America.

The merger of Shanks and VGG has taken place against a backdrop of modestly improving markets in the Benelux, representing over 80% of pro forma Group revenue, and a strong underlying performance from the Benelux businesses of both companies. This underlying progress in the year ended 31 March 2017 has been offset by very challenging market conditions and operational challenges in our Municipal Division, particularly in the UK. A recovery plan for this business is being implemented and key actions are already beginning to deliver improvements.

Overall, Renewi is well positioned to deliver sustained growth and attractive returns going forward.

A TRANSFORMATIONAL MERGER
Compelling strategic and commercial rationale

The strategic and commercial rationale for the merger of Shanks and VGG is compelling. It brings together two similar businesses with complementary visions, organisations, product portfolios and geographic footprints. The merger will deliver significant synergies, yet is about more than just cost reduction: the new Group plays an important role in the growing circular economy to meet the increasing needs of its customers, regulators and society.

Rebranding as Renewi

The rebranding of Shanks and VGG to Renewi indicates to our stakeholders that we have completed a merger of equals and that we intend to create something new and better, drawing on the heritage and the strengths of both legacy organisations. The Renewi brand itself reflects our waste-to-product business model and our role at the centre of the circular economy. We have been encouraged by initial reactions to our new brand from both the market and from our people.

Our vision and strategy

Our vision is to be the leading waste-to-product company, a vision that has been retained from the former Shanks business. This differentiates Renewi as a company that does more than act as a collection service for waste generators and one that focuses on extracting value from waste, rather than on its disposal through mass burn incineration or landfill. Our vision positions us higher on the waste hierarchy in an area that is being driven by increasing environmental legislation, particularly in the European Union where we have the majority of our activities. We believe that our unique focus both addresses social and regulatory trends and offers the most capital-efficient solution to waste management.

The name Renewi captures our purpose: we give new life to used materials. The circular arrows in the logo show how we represent something new at the centre of the circular economy. This positioning is important for society as we protect the world from contamination and we preserve the world’s finite raw materials by reintroducing former waste products into the supply chain. For us, waste is an attitude and the materials we receive are an opportunity to create new value. We are also uniquely placed for our customers: to help them meet their sustainability objectives in reducing waste produced or to provide them with the materials they need for their production processes.

The “i” at the end of Renewi represents our commitment to innovate with new products, services and technologies. This will increase the range of products that can be brought back into economic use. The colours reflect the merger of the VGG blue and the Shanks green.

We have retained the “Waste No More” strapline from VGG as this has strong brand equity and resonance in our markets. It also demonstrates continuity from VGG into the new organisation.

Our strategy has remained consistent, with the addition of one new division – Monostreams – and one new overarching strategic initiative – to deliver the merger benefits. Each of our four core divisions have strategies to address opportunities in the specific markets that they serve. These divisional strategies are reinforced by four overarching strategies that apply across the Group. These are to:

  • Drive margin expansion across the Group through self-help initiatives such as commercial effectiveness, continuous improvement and off-take management
  • Invest in infrastructure through the cycle in areas where we are structurally advantaged and can deliver superior returns
  • Manage our portfolio of assets and businesses, exiting those that are non-core or underperforming and redeploying capital into segments where we can deliver increased returns and growth
  • Deliver merger benefits which include €40m of annual cost synergies in 2019/20.
Our compelling offering to the market

The creation of Renewi will improve the range of products and services we can offer to our combined customer base. As a result of the merger we also have an expanded geographical footprint across the whole of the Benelux and into new European countries.

To ensure we retain customer intimacy while simultaneously gaining the benefits of our increased scale, we have carefully designed a target operating model that has local accountability coupled with strong divisional capabilities. This divisional operating model is further reinforced by Renewi’s broader international expertise, coordinated Group-wide margin expansion initiatives, and lean and effective central support functions.

A new divisional structure

As previously announced, we have created a new divisional structure that is both market-facing and customer-focused and which will allow best access to available synergies and growth opportunities.

The Commercial Waste Division – 63%

The Commercial Waste Division, representing around 63% of Renewi’s pro forma revenues and operating in the Benelux, addresses the high volume waste segments of industrial & commercial, construction & demolition and municipal collection. The Division broadly comprises the former Shanks Commercial Division along with the former VGG Collection Division. This Division operates in markets that are showing signs of recovery and our focus is on margin expansion and on delivering the significant cost synergies. For operational reasons, the Belgian and Dutch Commercial operations are run separately, with certain common overheads, and we shall report on the progress of each country within the Commercial Waste Division going forwards.

The Hazardous Waste Division – 12%

The Hazardous Waste Division, representing around 12% of Renewi’s pro forma revenues and operating in the Netherlands and Germany, is broadly the former Shanks Hazardous Waste Division with the addition of Van Gansewinkel Industrial Services (VGIS). The VGIS industrial cleaning business is approximately one quarter of the size of Shanks’ Reym industrial cleaning business and the resulting integration is already well underway. We have a unique proposition in the market, providing a full-service offering to our customers.

The Municipal Division – 14%

The Municipal Division, representing around 14% of Renewi’s pro forma revenues, is unchanged from the Shanks Municipal Division and focuses on long-term contracts providing waste treatment solutions for local authority customers in the UK and Canada.

The new Monostreams Division – 11%

Finally, the new Monostreams Division, which operates in the Benelux, France, Germany, Hungary and Portugal, includes the three former businesses of the Recycling Division of VGG (Coolrec, Maltha and Minerals) together with the Dutch Orgaworld business from Shanks. The new division represents around 11% of Renewi’s pro forma revenues and focuses on specialist markets which produce valuable products for the emerging circular economy such as glass cullet, plastic chips/granulates and fertilisers.

Ensuring focus continues on delivering performance in a period of integration

Throughout the integration process we are maintaining a consistent focus: keeping our people safe, serving our customers well and delivering our commitments. We have moved swiftly to ensure that the new organisation is well positioned to meet its plans for underlying growth.

Executing our planned integration

We are executing our carefully prepared integration plans at pace. The positive energy across the combined business has remained after the successful launch of the Renewi brand. We have created a new Executive Committee, combining talent and leadership from Shanks and VGG, reinforced by high quality new leaders from outside the business. The first phase of reorganisation has proceeded smoothly, with the creation of the Monostreams Division and the transfer of VGG Industrial Services to Hazardous Waste. We have also brought the Netherlands and Belgium Commercial legacy businesses together under unified Renewi leadership. Our organisation design based on the new ‘Target Operating Model’ is well underway and, subject to Works Council advice, we expect to put in place the next two layers of organisation beneath the Executive Committee before the summer. Other programmes to harmonise our finance and IT systems are also being developed.

Delivering our synergy commitments

While the strategic rationale for the merger is both broader and longer term than simply cost synergies, the delivery of the committed €40m of synergies underpins the expected value creation of the merger and will create a stronger and more cash generative enlarged business. We have detailed synergy delivery plans and are committed to delivering €12m of cost synergies in 2017/18, increasing to €30m in 2018/19 and €40m in 2019/20. Over €4m has been secured already and we are confident that we will meet our commitments.

During this early period of integration we have been working on benefiting from the merger in the form of “quick wins”. We have made a number of these right across Renewi and some examples are listed below:

  • In the Netherlands Commercial Division we have combined our expertise with large tenders and we are exchanging containers on routes to improve our offering;
  • In the Belgium Commercial Division we have swapped outlets for combustible waste to benefit from lower transport costs and taxes;
  • In Hazardous Waste we are benefiting from the integration of Van Gansewinkel Industrial Services (VGIS) through greater productivity and less outsourcing;
  • In Municipal we are using our broader scale to negotiate better off-take terms; and
  • In our Monostreams Division we have identified potential benefits for commercial contracts.
Addressing the issues in the Municipal Division

The market conditions and operational challenges facing the Municipal Division have had a material impact on the profitability of the business and the future profit trajectory of these assets. We have responded decisively to these challenges with a recovery programme that will drive operational performance and increase the capability of the Division to improve its fuel off-take costs over time. We have also appointed experienced and high-calibre new management with the right skills and determination to drive the recovery programme.

The key recovery initiatives are to:

  • Implement urgent plans to bring existing facilities up to full capacity and to maximise power generation. This will particularly focus on generating gas at Wakefield and Westcott Park and increasing throughput at BDR;
  • Adjust our operations to create higher quality fuels, focusing on Cumbria and East London (ELWA) where upgrades to fuel quality can increase access to the better-priced SRF market;
  • Negotiate off-take terms and secure better priced outlets across all our facilities for both refuse derived fuel (RDF), solid recovered fuel (SRF) and certain recyclates where appropriate;
  • Improve productivity and plant uptime by optimising maintenance and equipment reliability to reduce unplanned stoppages;
  • Negotiate improvements to local municipal contracts where possible; and
  • Bring the Surrey and Derby facilities into full operation.

These initiatives are expected to improve underlying performance, although this will be offset, inter alia, by a reduced contribution from the Derby contract. Overall, the Division is expected to show a modest net improvement during this financial year and for this to continue steadily thereafter.

MEASURING FUTURE PERFORMANCE

DIVISIONS

COMMERCIAL HAZARDOUS MUNICIPAL MONOSTREAMS
To deliver growth through further implementation of self-help initiatives and through capturing market recovery To deliver growth through optimisation of new assets and waste flows To deliver recovery plan optimising assets and improving off-take costs To deliver growth through improving product quality and optimised operations
GOALS 2017/18
  • Implement new Target Operating Model across the division and move towards one way of working
  • Deliver synergy commitments while remaining focused on external markets and performance delivery
  • Increase margins through extension of commercial effectiveness programme.
  • Manage volatility in downstream markets, including wood off-take
  • Secure strong incoming soil volumes and maintain current throughput levels
  • Secure new soil off-take options to de-risk future operations
  • Optimise waterside volumes and seek additional sludges
  • Manage Reym productivity and cost base to meet expected market demand
  • Commission Surrey and Derby projects on time
  • Improve operational performance of BDR and Wakefield contracts
  • Open new off-take contracts and markets at improved prices
  • Address challenges in less profitable contracts
  • Commission powder line at Dintelmond and continue to deliver growth through operational improvement
  • Increase margins at Coolrec through dynamic pricing and a focus on optimised product quality
  • Secure extension for Maasvlakte landfill
  • Drive growth in Orgaworld through improving end markets

GROUP:

DRIVING MARGIN EXPANSION INVESTING IN INFRASTRUCTURE MANAGING THE PORTFOLIO SYNERGY DELIVERY
GOALS 2017/18
  • Roll out Commercial Effectiveness (CE) programme into former VGG entities to increase margins
  • Maintain current Continuous Improvement initiatives in former Shanks entities and prepare for broader based roll out in FY19
  • Ensure enlarged Group takes advantage of scale opportunities with regard to group-wide coordinated management of off-take disposal
  • Commission major remaining Municipal projects and improve performance of BDR and Wakefield
  • Complete expansion of chemical waste storage shed in Hazardous and begin renovation of soil treatment line
  • Begin reinvestment in ex-VGG logistics fleet in a targeted way, in line with acquisition model
  • Complete IT strategic roadmap to support integration and drive efficiency in the coming years
  • Continue to release value from under-performing or non-core assets to recycle capital
  • Remain alert for expansion opportunities through accretive M&A, exercising capital discipline
  • Deliver €12m of synergies in FY18
  • Be on track to deliver €30m of synergies in FY19 and €40m in FY20
  • Drive programmes to secure revenue synergies from cross-selling, waste internalisation and commercial effectiveness
POSITIVE FUTURE OUTLOOK
Divisional prospects

The Commercial Division is expected to make underlying commercial progress next year, albeit offset by some integration-related disruption which will slow the delivery of projects as the two business models are merged. We expect these factors to balance out and the delivery of the expected initial cost synergies in 2017/18 to drive overall progress in the year, with further progress in the following years as the full synergies are realised.

The Hazardous Waste Division is also expecting to make progress during 2017/18, supported by an encouraging pipeline of is expected in the oil and gas markets and we remain cautious on industrial cleaning activity levels.

As outlined above, the Municipal Division is expected to deliver a modest improvement during 2017/18, reflecting some significant operational performance uplift from the recovery plan, offset by the end of the Derby interim services contract and the non-recurrence of certain central cost savings.

The Monostreams Division is expected to make progress during 2017/18, with growth and operational improvement opportunities in all four of its operating businesses.

Overall

Having successfully completed the merger with VGG, our key priorities for the year ahead are to integrate our legacy businesses and to generate growth from strong underlying trading and successful synergy delivery. In parallel, we will fix the Municipal Division and build up momentum for sustained growth and earnings accretion in 2018/19. Whilst alert to macroeconomic developments, the Board remains confident that 2017/18 will be a year of good progress, in line with its expectations. Current trading for the year to date and the initial stages of the integration process support this view.

Looking forward, our growth drivers remain strong. Renewi plays an important role in the emerging circular economy, a market that is expected to grow rapidly in the coming years with the support of European Union and government legislation. Moreover, the fully integrated Renewi has a compelling offering for customers, combining local service, international expertise and an unrivalled breadth of products. This strong positioning, coupled with synergy delivery and the roll-out of our proven margin expansion initiatives across Renewi, will deliver sustainable growth, enhanced margins and attractive returns.

ACTIVELY MANAGING THROUGH MARKET UNCERTAINTIES
Market and macroeconomic background

The Brexit vote and significant weakening of Sterling during the year resulted in a material positive translation of our Euro-denominated earnings, slightly offset by a negative profit impact on the Municipal Division.

More generally, Renewi experienced stable or modestly improving market volumes, pricing and recyclate income across its Benelux businesses during 2016/17. However, some of these positive trends for our Commercial Division had a negative impact on our Municipal Division.

The Belgian and Dutch economies both grew modestly during the year, with small increases in waste volumes. There was stronger growth in our key Dutch construction market, where mixed C&D waste volumes increased 11.3% in a second consecutive year of growth, again driven primarily by a recovery in the challenged residential sector.

Dutch and neighbouring German incinerators continued to be largely full in 2016/17, with limited spot capacity available and generally higher prices for contract renewals or extensions. This trend is expected to continue for the next two or three years, with waste flows from neighbouring European Union countries, as well as from the UK, making up shortfalls in the domestic supply of waste. The rising incinerator prices have underpinned improved inbound waste pricing for recyclers in the Dutch market, supporting modest price recovery in the Commercial Division. However, the same price increases, exacerbated by the weakening of Sterling, have had a material negative impact on the profitability of our smaller Municipal Division.

The global commodities markets also stabilised and showed some recovery after the sharp falls in the second half of2015/16. Metal prices increased steadily in the second half of 2016/17 and paper prices were also particularly strong. In contrast, supply/demand imbalance in the wood market has caused the income received on sale of wood chips to fall sharply, even becoming a cost at times, with corresponding pressure on profits from this waste stream. Energy prices also showed some recovery with increased revenue for the Group from electricity derived from our bio-gas production plants.

As expected, the oil and gas market remained subdued through most of 2016/17. Demand for industrial cleaning services and the consequent supply of highly contaminated waters and sludges for treatment at our ATM facility remained at low levels.

The PFI sector in the UK has continued to face significant challenges for market participants. An increasing number of PFI contracts across the country have come under pressure as a result of austerity measures, poor performance or because the contracts are inappropriate in the current market environment. Within this unfavourable market background, our Municipal Division’s portfolio of assets has been vulnerable contractually to the volatile recovered fuel markets, rising incinerator gate fees and the weakness of Sterling.

The unexpected outcome of the Brexit vote on 23 June 2016 has created some uncertainties in the waste market. The short-term impact has been limited to the flow through of a weakened Sterling on our results, both transactional and reported. Through the Brexit process, we expect the export of waste from the UK to continue for some time, as there is a strong economic incentive for both the Netherlands and the UK to do so. Longer term, we believe the impact on the Dutch market is likely to remain limited. This is because an ultimate reduction in UK imports was already expected due to the commissioning of incinerator capacity in the UK and also new waste imports into the Dutch incinerators are being identified to take up any vacated capacity. Providing that there is no significant degradation in Dutch incinerator utilisation and pricing, the impact of Brexit on our Benelux Divisions is therefore likely to be limited. We also believe that the UK Government will continue to drive environmental policies that will encourage recycling after the exit from the European Union. We further expect the impact on our Municipal Division to reduce progressively as we are de-risking the operating model by seeking to agree longer term contracts for the fuels that we produce.

TRADING IN 2016/17: DELIVERING OUR COMMITMENTS
Group performance

As previously announced, we have reported the combined business of VGG as one business unit for the purposes of the 2016/17 financial year, given that we owned the business for just one month. Going forward, Renewi will report in the new four division structure as set out on page 7 of our Annual Report.

Total underlying revenues grew by 27% to £779m at reported currency or 14% at constant currency. On a like-for-like basis excluding VGG, revenue growth was 15% at reported currency. Trading profit at £36.5m was up by 9% on the prior year at reported currency or down 9% at constant currency. On a like-for-like basis excluding VGG, trading profit fell by 2% at reported currency. Underlying earnings per share fell by 12% to 3.7p (2016: 4.2p as adjusted for the bonus factor) as a result of a higher taxation rate as the prior year benefits do not repeat. Exceptional items totalled £87.1m (2016: £23.5m) as previously advised, reflecting the transaction and initial synergy delivery costs of the merger in addition to charges reflecting the market and operational challenges in Municipal.

Commercial Waste produced another strong performance in the year, growing trading profit by 27% at constant currency to €26.9m on revenues that grew by 2% to €414m. Margins increased by 130bps to 6.5%. The Netherlands increased trading profit strongly by 39% to €19.1m, while Belgium also grew profits for the first time in five years, increasing by 5% to €7.8m. Ongoing contributions from our successful self-help initiatives and portfolio management were reinforced by improving end markets.

Hazardous Waste also delivered a strong performance despite continuing subdued oil and gas markets. Revenues increased by 3% at constant currency to €191m and trading profit increased by 9% to €23.1m. Margins increased by 70bps to 12.1%. Waterside volumes from ships and strong throughput on the soil cleaning line offset ongoing weakness in higher-priced contaminated water volumes and lower sludge intake. As previously reported, Municipal, which operates in the UK and Canada, had a difficult year. Revenue grew by 8% at constant currency to £203m as a result of the full year effect of commissioning the Wakefield and Barnsley, Doncaster and Rotherham (BDR) facilities and construction activity in Surrey, Canada. However, the Division recorded a trading loss for the year of £2.7m at constant currency (2016: profit of £9.4m), primarily as a result of ongoing off-take cost pressures as outlined in the market section above. There were also operational challenges getting to full optimisation with the two new sites. The second half showed a deterioration on the first half, primarily as a result of recovered fuel pricing and mix and a number of exceptional charges have been recorded. New management are in place and making rapid progress in implementing the plan for recovery, with operational and commercial improvements already being secured.

During our one month of ownership in March 2017, VGG delivered revenues of €84m, up 16% on the prior year, and trading profit of €4.5m which was significantly up on the same period last year. As previously reported, VGG turned around its performance during 2016, delivering a strong improvement of 23% in EBITDA to €91m for the 12 months to December 2016 on the back of commercial effectiveness and cost reduction activities.

Strong cash management has continued through the year. We delivered an underlying free cash flow of £23.1m (2016: £56.8m) which was down on the prior year due to increased spend on replacement capital and the non-repeat of favourable inflows from the sale of receivables in Netherlands and Belgium last year. Our core net debt at 31 March 2017 was better than expected at £424m, representing a multiple of 2.8 times pro forma EBITDA, comfortably within our covenant level of 3.5x.

Implementing our strategy

We have three overarching strategic self-help initiatives, the success of which has been an important part of the strong performance in our Commercial and Hazardous Waste divisions.

These three initiatives drive margin expansion by addressing the key areas of our business model: intake, processing and disposal. Our progress offsets inflationary cost pressures and other headwinds and allows us to maximise opportunities to increase margins where possible.

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

Our continuous improvement (CI) programme made good progress in 2016/17, despite some inevitable merger related activities. The roll-out of ‘lean conversion’ has continued to include Icova, Van Vliet Contrans, Mont St Guibert and Seraing (Liege) with potential annualised savings of around €3m being identified. The introduction of CI at our ATM facility is planned for 2017/18, and, in advance of that, targeted progress was made with underlying operational improvement programmes, such as the reduction of chemical usage during treatment. The ATM facility has also secured the highest level BRZO standard to ensure operations meet stringent quality and safety standards.

Our off-take initiative has continued to ensure that we optimise the flows and the revenues arising from our recyclates, recovered fuels and other products across the Group. Successes have included co-ordinated management of a volatile market for waste wood to minimise negative impacts on the Group and the opening up of Belgian solid recovered fuel (SRF) opportunities for our Municipal Division. Looking forward, Renewi will build on the strong capabilities from Van Gansewinkel in this area and will have a Product Sales Department with leadership reporting into the Chief Executive Officer as a member of the Executive Committee.

Focus on commissioning new assets

As reported last year, our focus for the deployment of capital into infrastructure has been shifting from the construction of large new sites to the commissioning of the sites already underway. The focus for future investment is also primarily in new or improved production capabilities in existing facilities (to increase capacity or quality and to reduce cost) rather than building new sites.

The new Vliko facility for Commercial Waste Netherlands was commissioned on time and on budget in October 2016 and is performing well. In the Hazardous Waste Division we are expanding our storage capacity for packed chemical waste, a project that is on track for completion in quarter two of 2018. The Theemsweg facility in Hazardous Waste also performed strongly in its first year, exceeding our expectations. In contrast, and as previously reported, the first full year in production of our Wakefield and BDR facilities in the UK was challenging from an operational perspective and the related recovery plan is detailed below.

We have two remaining greenfield sites under construction. Construction of our new bio-gas facility in Surrey, Canada is largely complete, we have started commissioning and we are working through completion matters with the constructors with a view to receiving first waste later this year, slightly behind schedule. This is a flagship project for the City of Surrey under which bio-gas extracted from the city’s organic waste will be used to operate the city’s waste collection fleet in a closed loop. The Derby PPP facility has experienced major challenges, as previously reported, as a result of the insolvency during 2016 of a core technology supplier to the EPC contractor Interserve plc. Interserve is working hard to implement a recovery plan but there has been an unavoidable consequent delay to the project and the facility is not expected to be fully operational until late in 2017/18. As the operator, rather than the constructor, the financial consequences for Renewi are limited and appropriate provisions for incremental costs have been taken as an exceptional item this year.

Portfolio management for improved returns

In addition to the merger with VGG, we have continued to invest in growth opportunities and to exit those activities which are noncore or where we are unable to generate acceptable returns. During 2016/17, we sold our low margin Smink Groundworks business to a local operator, while we acquired and integrated the commercial waste activities of the City of Leiden into our Vliko facility.

Delivering responsibly

Sustainability and corporate social responsibility (CSR) are at the heart of our vision to be a leading waste-to-product company. In 2015 Shanks laid out a five year programme for CSR with a broad range of targets. Van Gansewinkel had also set itself stretching CSR targets. In many areas these targets are compatible, and where possible we have already set ourselves merged objectives to 2020. As our performance shows, we are making progress. Our lost time accident frequency has improved by more than 5% over the year, our green electricity production is up by more than 25% and our total carbon avoidance exceeds 3 million tonnes. This is only the beginning and Renewi will launch a full set of CSR targets during 2017 to reflect the ambitions and capabilities of the combined Group.

Peter Dilnot
Chief Executive Officer