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CFO's review


The strength of our combined Group, and our plans for growth through synergy gains and investment, will help to build on increases in underlying revenue and trading profit.

Overall Group underlying revenue increased by 27% in 2016/17 to £779.2m. Excluding the one month of trading from Van Gansewinkel Groep (VGG), revenue increased by 4% at constant currency to £715.4m. Trading profit on continuing businesses, before non-trading and exceptional items, increased by 9% to £36.5m at reported rates (9% decrease at constant currency). For the post-merger period of March 2017, VGG generated a trading profit of £3.9m on revenue of £71.5m.


Continuing operations Mar 17
Mar 16
Variance reported % Variance % CER Mar 17
Mar 16
Variance reported % Variance % CER
Commercial 347.6  297.3  17% 2% 22.6  15.4  47% 27%
Hazardous 160.2  136.2  18% 3% 19.3  15.6  24% 9%
Municipal 207.6  187.7  11% 8% (2.6) 9.4  N/A N/A
Group central services - -     (6.7) (7.0) 4% 4%
  715.4  621.2  15% 4% 32.6  33.4  -2% -19%
VGG 71.5  -     3.9  -    
Inter-segment revenue (7.7) (6.4)     - -    
Total 779.2  614.8  27% 14% 36.5  33.4  9% -9%
*CER = at constant exchange rate
Revenue in 2016 excludes the impact of the non-trading item of £1.0m
  Trading profit margins1 £m Return on operating assets1 %
2017 4.5 10.9
2016 5.4 12.0
2015 5.7 12.2
2014 7.2 15.1
2013 6.2 11.4
1 All values quoted are for Shanks legacy businesses only

To enable a better understanding of underlying performance, certain items are excluded from trading profit and underlying profit due to their size, nature or incidence.

Total non-trading and exceptional items from continuing operations amounted to £87.1m (2016: £23.5m). These items are explained further in note 4 to the financial statements and include:


  • Merger related transaction and integration costs of £38.2m (2016: £0.8m) which include all deal related fees and the costs of the arrangement of the new financing facility
  • Amortisation of intangible assets acquired in business combinations of £2.1m which has increased due to the VGG merger and the identification of intangibles as part of the fair value exercise (2016: £1.8m)


  • As previously advised, Municipal UK onerous contract provisions of £28.2m (2016: £5.0m) include increases relating to Cumbria and D&G contracts given market changes in the year and new provisions against Barnsley, Doncaster and Rotherham (BDR), Wakefield and Derby commissioning
  • Impairment of assets of £9.2m (2016: £nil), principally plant and equipment at the Westcott Park anaerobic digestion facility and other UK Municipal intangible assets
  • Other items of £6.9m (2016: £4.9m) including contractual issues in Municipal UK caused by delays at the Derby contract due to the insolvency of a major contractor, incremental third party and waste disposal costs at Wakefield following on from the subcontractor insolvency in the prior year and incremental costs relating to the East London fire in 2014 that could not be claimed from the insurers


  • Restructuring charges and associated costs of £2.4m (2016: £2.4m) relating to the previously announced close out of structural cost reduction programmes started in the prior year;
  • Portfolio management activity net loss of £0.1m (2016: £8.7m) following the sale of the groundworks business in Netherlands and the Industrial Cleaning business in Wallonia along with disposals of surplus land and other assets; and
  • Financing fair value measurements of £nil (2016: credit of £0.1m). The operating loss on a statutory basis, after taking account of all non-trading and exceptional items, was £39.0m (2016: profit of £9.8m).
Net finance costs

Net finance costs, excluding the change in the fair value of derivatives and exceptional deal related finance charges, were £0.6m lower year on year at £12.8m. Given the equity fundraising early in the second half of the year and the delayed completion of the merger, lower borrowing levels have resulted in reduced interest charges. The decline in finance income is driven by the disposal of 49.99% of the equity in the Wakefield SPV in March 2016 which has resulted in equity accounting for our remaining interest as a joint venture. There is a corresponding reduction in the level of interest charge for PFI/PPP non-recourse net debt.

Share of results from associates and joint ventures

The significant increase year on year is attributable to the strong performance from our joint venture in the anaerobic digestion facility in Scotland following recent investments and positive operational performance.

Loss before tax

Loss before tax from continuing operations on a statutory basis, including the impact of non-trading and exceptional items, was £61.4m (2016: £2.5m).


Taxation for the year on continuing operations was a credit of £0.5m (2016: charge of £1.5m). The effective tax rate on underlying profits has increased to 23.0%, as a result of the change in mix of profits with higher profits in the Netherlands and Belgium. It should be noted that the underlying tax charge in the prior year included a £2.2m credit from the recognition of tax losses in Belgium as a result of greater certainty of utilisation following the restructuring completed as part of the sale of the Industrial Cleaning business. Excluding this credit the effective tax rate on underlying profits was 21.4% in the prior year. There is a tax credit of £6.4m arising on the non-trading and exceptional items of £87.1m as a significant proportion of these are non-taxable.

Looking forward, we anticipate an underlying tax rate of around 25%, reflecting increasing profits in regions with relatively higher tax rates.

The Group statutory loss after tax and including all discontinued and exceptional items was £61.4m (2016: £3.9m).

Earnings per share (EPS)

Underlying EPS from continuing operations, which excludes the effect of non-trading and exceptional items, decreased by 12% to 3.7p per share (2016: 4.2p as adjusted for the equity raise). As noted above, the tax charge in the prior year benefited from increased deferred tax recognition in Belgium which has not been repeated this year. Basic EPS from continuing operations was a loss of 11.3p per share compared to a loss of 0.9p per share (as adjusted) in the prior year.


The Board is recommending a final dividend per share of 2.1p. This final dividend and the total dividend for the year of 3.05p represent an unchanged dividend after adjusting for the bonus factor of the rights issue. Subject to shareholder approval, the final dividend will be paid on 28 July 2017 to shareholders on the register on 30 June 2017. Total dividend cover, based on earnings before non-trading and exceptional items from continuing operations, is 1.2 times (2016: 1.3 times).

Discontinued operations

The loss from discontinued operations of £0.5m (2016: profit of £0.1m) relates to the UK solid waste activities.

Cash flow performance

A summary of the total cash flows in relation to core funding is shown in the table below.

Free cash flow conversion decreased year on year as a result of the higher level of replacement capital spend and the non-repeat of the working capital benefit from the sale of certain trade receivables in Belgium and Hazardous Waste in the prior year. Replacement capital spend included the final build out of the Vliko relocation project and a number of compliance and catch up projects across all Divisions. The ratio of replacement capital spend to depreciation increased from 52% last year to 85% this year, as the prior year was favourably impacted by the receipt of proceeds from the sale of the old Vliko site with the cash being spent in this financial year.

The growth capital expenditure of £4.2m related to spend on operator enhancements for Municipal contracts and which is classified as an intangible asset. This included investment in balers to enable the business to access broader recovered fuel markets. The scheduled £17.5m subordinated debt funding into the Derby project was made on 31 March 2017. The Canada Municipal funding reflects the construction spend on the Surrey facility.

The VGG acquisition net outflow includes the total monies paid to the vendors including the settlement of vendor funding together with the finance leases and cash acquired. The other acquisition and disposal spend includes the deferred consideration from the March 2016 sale of 49.99% of the equity in the Wakefield SPV completed in August and other disposals net of the acquisition in August of the commercial waste activities of the City of Leiden. The prior year inflow reflected the Wakefield PFI sub-debt divestment.

The “Other” category includes the funding for the closed UK defined benefit pension scheme, the onerous contract provision spend in UK Municipal and other non-trading cash flows.


  March 17 (£m) March 16 (£m)
EBITDA 80.4  68.2 
Working capital movement and other (4.3) 24.8 
Net replacement capital expenditure (38.2) (18.6)
Interest and tax (14.8) (17.6)
Underlying free cash flow 23.1  56.8 
Growth capital expenditure (4.2) (9.9)
UK PFI funding (20.1) (53.9)
Canada Municipal funding (19.6) (10.3)
VGG acquisition:    
Net cash out (277.9) -
Deal related fees (19.2) -
Other acquisitions and disposals (3.3) 27.8 
Equity raise (net of costs) 136.4  -
Dividends paid (15.1) (13.7)
Restructuring spend (1.9) 2.6 
Other (17.8) (15.2)
Net core cash flow (213.0) (21.0)
Free cash flow conversion 63% 172%

All numbers above include both continuing and discontinued operations.
Free cash flow conversion is underlying free cash flow as a percentage of trading profit.
Net core cash flow reconciles to the movement in net debt of £227.3m in note 30 to the financial statements after taking into account movements in PFI/PPP non-recourse net debt, amortisation of loan fees and foreign exchange

Sources and uses of funds

The transaction was valued at €440m on a cash-free debt-free basis when the deal was agreed in principle in May 2016, although this increased with our share price to €488m at close on 28 February 2017. Inclusive of the cash acquired in VGG, the total transaction cost was €580m.


Sources Uses
Net rights issue and placing funds 156 Equity issued to vendors 212
Equity issued to vendors 212 Consideration paid to vendors 29
Increase in debt financing 212 Repayment of VGG Syndicated loan 339
  580   580
Future reporting units

As noted in the CEO’s Statement, we will report from 1 April 2017 on four trading divisions: Commercial Waste (disclosing Belgium and Netherlands operations separately), Hazardous Waste, Municipal (disclosing UK and Canada operations separately) and Monostreams (disclosing the four main business units separately).

Value capture targets

Value capture includes cost, revenue and cash synergies of which we have only quantified cost as it is separable and reportable.

We remain confident we can deliver €40m of ongoing cost synergies over the first three full years of ownership. We expect to deliver €12m in 2017/18 increasing to €30m in 2018/19 and €40m in 2019/20. Cash costs to achieve the €40m synergies are expected to be approximately €50m. Non-cash costs arising from site closures, for example, have not yet been calculated.

The cost synergies are expected to arise from three main areas:

  • €12m from direct savings such as site closures and route optimisation;
  • €8m from scale savings such as improved procurement costs; and
  • €20m from indirect cost savings in management and overheads.

In addition, we believe there is an opportunity for revenue synergies in the form of cross-selling of services, internalisation of waste treatment and the deployment of our commercial effectiveness initiative into VGG. The benefits from these activities will be hard to distinguish from underlying trading and so will not be reported on separately as a synergy.

Cash synergies will include better effective utilisation of trucks, thereby postponing capital investment, and optimised treasury operations.

Transaction and integration costs

We have grouped the costs relating to the transaction into three segments:

  • Transaction costs: relating to the acquisition and related financing;
  • Value capture costs: relating to the delivery of the €40m cost synergies; and
  • Integration costs: relating to the successful merger and integration of the two businesses.

Transaction costs have been incurred in full and amount to £35.6m. These include advisers’ fees, financing costs and other deal related expenditure. The total costs are slightly higher than originally expected primarily due to the length of time taken to complete the transaction and the complexity of the anti-trust filings. Costs of £5.1m have been taken to equity as they were directly attributable to the equity raise with the balance of £30.5m accounted for as non-trading and exceptional items in the appropriate line items of the Income Statement.

Value capture costs include the costs of site closures, redundancies and other reorganisation costs. They are forecast to total €50m and will be accounted for in the year incurred as non-trading and exceptional items. £4.5m (€5.3m) was incurred in 2016/17 and we expect the split of future costs to be approximately €20m in 2017/18, €20m in 2018/19 and €5m in 2019/20.

Integration costs include advisers’ fees, the transitional costs arising from merging the two organisations and certain IT and rebranding costs that cannot be capitalised. These are expected to total €22m, with £2.9m (€3.4m) incurred in 2016/17 and we expect approximately a further €11m in 2017/18, €6m in 2018/19 and €2m in 2019/20.

Both value capture and integration costs will be reported as non-trading and exceptional costs in subsequent periods.

Finally, we expect to incur some integration-related capital investment. This is expected to include investment in rebranding of around €12m over two years (signage, truck respraying, etc.), up to €45m over three years in truck replacements within the relatively older VGG fleet, and an investment in new IT platforms for growth for the merged business.

Purchase price accounting

The merger has been accounted for in accordance with IFRS 3 (Revised) Business Combinations which requires a full fair value exercise for the assets and liabilities acquired as at 28 February 2017. This exercise is provisional at this stage as permitted under accounting standards. The review has resulted in a step down in value of trucks and other tangible assets of over €20m, the recognition of acquisition intangibles of €52m, alignment of discount rates for long-term landfill provisioning and the recognition of appropriate legal and tax provisions. Given that the completion date fell so close to the year end, we have not been able to undertake a full valuation of all real estate assets acquired and these have been included at their original book value in the acquired balance sheet. A full valuation exercise will be performed in the coming months and any adjustment reported as part of the September 2017 reporting. The step down in the value of property, plant and equipment will result in reduced depreciation charges in VGG of c€2m which is mostly attributable to the Netherlands operations.

Investment programme

The Group has a stated strategy of investing in sustainable waste management infrastructure with a target pre-tax trading profit return of 15–20% on fully operational assets (post-tax return of 12–15%). At 31 March 2017, the fully operational proportion of the investment portfolio delivered a pre-tax return of 17.4% (2016: 19.5%). The portfolio as a whole delivered a pre-tax return of 13.1% (2016: 16.1%). Going forward we shall cease reporting on this metric which related to legacy Shanks only.

The investment in the Municipal programme has continued with progress in construction at the Canadian plant in Surrey and delays at Derby following the insolvency of a principal contractor. For the year ended 31 March 2017, the PFI financial assets increased by £20.2m to £178.8m due to further construction spend in Surrey net of repayments on other contracts.

There will be further modest investments in the Surrey plant in the new financial year. Construction is largely complete and we have started commissioning and are working through completion matters with the constructors with a view to receiving first waste later this year, slightly behind schedule. The investment on the Derby contract is not reflected in financial assets as we hold our interest in this contract in a joint venture.

The Group’s underlying expectation for replacement capital remains around 75- 80% of depreciation, however 2017/18 is a year of catch up and the ratio is expected to be c90%. This level may from time to time be supplemented with larger scale replacement projects. Over the next two to three years we expect to spend €5m on a new stone crushing line near Rotterdam, €2m to complete a new packed chemicals warehouse in Hazardous Waste, €15m to replace and upgrade major components of Hazardous Waste’s soil treatment line and €2m for the digestate dryer at Roeselare. As noted earlier in this report, we also expect some rebranding capital investment and some additional catch-up investment in trucks. Growth capital expenditure is likely to be limited to around £5m, being investments in Hazardous Waste.

Group return on assets

For the legacy Shanks businesses only, the Group return on operating assets (excluding debt, tax and goodwill) from continuing operations decreased from 12.0% at 31 March 2016 to 10.9% at 31 March 2017. The Group post-tax return on capital employed was 5.5% compared with 6.3% at 31 March 2016 for the legacy Shanks businesses only.

Core net debt and gearing ratios

The net core cash outflow of £213.0m along with an adverse exchange effect of £16.5m on the translation into Sterling of the Group’s Euro and Canadian Dollar denominated debt and loan fee amortisation has resulted in a core net debt increase to £423.9m which was slightly lower than expected due to the timing of transaction related payments and despite the £17.5m scheduled equity injection into the Derby project at the end of March. This represents a covenant leverage ratio of 2.8 times net debt:EBITDA which is well within our banking limits of 3.5x.

Debt structure and strategy

At the time of the announcement of the merger on 29 September 2016, the Group entered into a new five year €600m multicurrency facility with a syndicate of banks, comprising both a term and revolving credit facility. Some €575m of the facility, including the whole term loan and part of the revolving credit facility mature in five years on 29 September 2021 (in each case subject to two one year extension options). The remaining €25m of the revolving credit facility matures in two years on 29 September 2018. At the end of March 2017, £279.2m was drawn at an initial margin of 2.15%. The new facility has been hedged with a €125m interest rate cap and two cross currency swaps totalling £75.0m at fixed Euro interest rates of 2.2%. The Group also has two retail bonds each of €100m due for repayment in July 2019 and June 2022 with an annual coupon of 4.23% and 3.65% respectively. Following the merger the Group has £45.2m of finance leases and £216.4m of guarantees.

Debt borrowed in the special purpose vehicles (SPVs) created for the financing of UK PFI/PPP programmes is separate from the Group core debt and is secured over the assets of the SPVs with no recourse to the Group as a whole. Interest rates are fixed by means of interest rate swaps at contract inception. At 31 March 2017 this debt amounted to £87.1m (31 March 2016: £91.1m).

Directors’ valuation of PFI/PPP portfolio

The Directors’ PFI/PPP valuation was established a number of years ago to demonstrate the value primarily from assets not yet built or commissioned. It comprised a valuation of the UK Municipal Division’s operating contracts, which can be seen in the divisional trading performance upon commissioning, and also the value of financial investments in the SPVs used to fund the contracts and into which the company has often invested in the form of subordinated debt and equity.

The Directors consider that with almost all assets now commissioned there is no benefit to continuing to provide a valuation of the operating contracts, a valuation which is in any case subject to volatility in the current market environment. However, there is still a purpose in providing a valuation of the financial assets, the benefits of which are not easily assessed from the financial statements. As at 31 March 2017 the Directors believed that these amounted to £45m (2016: £30m).

Retirement benefits

The Group operates a defined benefit pension scheme for certain UK employees which is closed to new entrants. At 31 March 2017, the net retirement benefit deficit relating to the UK scheme was £15.5m compared with £8.8m at 31 March 2016. The increase in the deficit reflected the fall in the yield on corporate bonds which resulted in a lower discount rate of 2.6% at March 2017 compared to 3.5% at March 2016. The most recent actuarial valuation of the scheme was carried out at 5 April 2015 and a funding plan of £3.1m per annum for a further five years has been agreed with the trustees. VGG also operates a number of defined benefit pension schemes for employees in the Netherlands and Belgium which had a net retirement benefit deficit of £6.1m at 31 March 2017.

Toby Woolrych
Chief Financial Officer