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Biffa plc   -  BIFF   

Biffa plc Preliminary Results FY2019

Released 07:00 05-Jun-2019

RNS Number : 1576B
Biffa plc
05 June 2019
 

 

 

 

Biffa plc

 

5 June 2019

 

 

RESULTS FOR THE 52 WEEKS ENDED 29 MARCH 2019

 

Leading in UK Sustainable Waste Management

 

 

Michael Topham, Chief Executive of Biffa, said:

 

''I am pleased to report another year of strong performance by Biffa. We have delivered a good set of financial results for the year while making further strides in the delivery of our strategy.

 

Our I&C Division performed particularly well.  We've had another very strong year of organic and acquisition growth coupled with a further reduction in customer churn. When we combine this with our unrelenting focus on driving operational performance improvement, this feeds through to improved underlying I&C margins.

 

I&C completed seven acquisitions spread across a wide area of the country, demonstrating the strength of our platform into which we can consolidate acquisitions. We have now completed 17 acquisitions since our IPO in October 2016. The pipeline of potential targets remains strong, and we expect to make further acquisitions in the coming year.

 

We've also successfully weathered the headwinds associated with the Chinese import restrictions on commodities and the recent market impacts in our Municipal division. Both of these areas, which have put downward pressure on our financial performance, have now stabilised.

 

We are proud of our leading plastics recycling capabilities and are excited at the role we are playing in this area. Biffa Polymers has delivered another strong year of progress and through our industry leading HDPE food grade production plant, 85% of milk bottles in the UK now contain Biffa recycled material.  We're progressing with the PET plastic bottle recycling facility investment in Seaham, County Durham, and we can also announce today that we have committed to expand the capacity and scope of the project, increasing the total investment to £27.5m. This will take our combined plastics processing capacity to c.120,000 tonnes p.a.

 

Good progress has been made in evaluating the investment opportunities we have in energy from waste, alongside our partners Covanta, and we expect to be able to announce financial completion on both projects in the near term. The UK has a significant shortage of energy from waste treatment capacity and we are well placed to facilitate and invest in these much-needed facilities.

 

We support the ambition contained in the Government's recently announced strategy for our industry. The strategy is both supportive of our current business positioning and the direction of travel in which we are taking the company. We will continue to work closely with policy makers and are ready to help deliver the vision we all share.

 

Our strategic priorities are clear - growing our I&C collections business and investing in recycling and energy from waste assets - and in view of this I have decided to reorganise the Group into two divisions - Collections and Resources & Energy. This will provide a more efficient, focused structure and position us for growth in the areas where we have advantaged positions.

 

We are making significant progress in positioning the business for future success in an era where how we manage our waste has never been more important and I would like to thank the entire Biffa team for their continued hard work and dedication. We have made a solid start to the financial year and look forward with confidence.''

 

 

 

FINANCIAL HIGHLIGHTS

 

 

 

Group Results

 

52 weeks 2019

£m

53 weeks 2018

£m

Change

£m

Change

%

Statutory Revenue11

1,091.2

1,076.7

14.5

3.3*

Net Revenue1, 11

1,030.8

1,006.1

24.7

4.4*

Underlying EBITDA2

   150.7

  150.0

 0.7

0.5

Underlying EBITDA Margin3

  13.8%

   13.9%

 

 

Underlying Operating Profit4

     81.7

    81.2

 0.5

0.6

Underlying Operating Profit Margin3

       7.5%

      7.5%

 

 

Underlying Profit before Tax5

     64.0

    59.6

 4.4

7.4

Other items before tax

     (42.5)

  (21.3)

 

 

Statutory Profit before Tax

           21.5

   38.3

 

 

Tax

           (3.5)

    (7.2)

 

 

Statutory Profit / (Loss) after Tax

          18.0

   31.1

 

 

 

                                                                                                                       

Underlying EPS6

       20.6

19.2

 

7.3

Statutory EPS

       7.2

      12.4

 

 

Total dividend per share

          7.20p

     6.70p

 

7.5

Underlying Free Cash7 Flow

       47.8

44.4

3.4

7.7

Reported Net Debt8

     310.7

279.0

31.7

 

Reported Net Debt: EBITDA9

       2.1x

       1.9x

 

 

 

*Note: on a comparable 52 week period: 52 week period 

 Underlying performance measures are not defined within accounting standards and maybe applied differently by other organisations.

 

Performance Highlights:

 

Underlying growth in Net Revenue of 4.4% to £1,030.8m (2018: £1,006.1m). 1.5% organic* and 2.9%* acquired. Underlying growth in Statutory Revenue of 3.3%* to £1,091.2m (2018: £1,076.7m)

 

Growth in Underlying EBITDA of 0.5% to £150.7m, and Underlying Operating Profit of 0.6% to £81.7m; having successfully absorbed the impact of the China import restrictions on commodity prices and pressures in the Municipal division.

 

Underlying PAT up 7.5% leading to Underlying EPS of 20.6p (statutory EPS of 7.2p) and an increased final dividend of 4.9 pence per share. Reduction in statutory PAT and EPS primarily due to one off exceptional items in relation to onerous contracts, legacy loan amortisation and GMP provisions. 

 

Underlying Free Cash Flow up 7.7%. Following 7 acquisitions in the year, year-end Reported Net Debt up to £310.7m and leverage of 2.1x. Previously guided leverage range at 2.0-2.5x (on a pre-IFRS16 basis) Reported Net Debt : EBITDA remains unchanged.

 

The Board's expectations for the year ahead remain unchanged.

 

 

 

OPERATING PERFORMANCE

 

 

Industrial & Commercial

 

 

FY19

FY18

Change %

Revenue

608.3

574.0

8.0*

Underlying EBITDA

87.4

77.2

13.2

Underlying Operating Profit

55.6

48.1

15.6

Underlying Operating Profit Margin

9.1%

8.4%

 

  *Note: on a comparable 52 week period: 52 week period

 

·     

Another year of exceptional performance

·     

Underlying organic revenue growth of 3.2%* is ahead of both H1 run rate and last year, with new customer wins including Busy Bees, National Trust and Kingspan Group

·     

Key contract renewals include John Lewis Partnership, Stagecoach and Dairy Crest

·     

Further reduction in customer churn

·     

Underlying Acquisition revenue growth of 4.8% driven by 7 acquisitions in the year including Weir Waste Services Limited (c£16m annualised) and Specialist Waste Recycling Limited (c£40m annualised)

·     

Underlying Profit up 15.6% to £55.6m, driven by ongoing excellence in customer service and retention, delivery of acquisition synergies and optimisation of costs

·     

FY20 outlook of continued organic and acquisition revenue growth, ongoing focus on incremental margin improvement and a solid acquisition pipeline

 

 

Municipal

 

 

FY19

Restated

FY181

Change %

Revenue

164.6

174.8

(4.0)*

Underlying EBITDA

16.6

24.5

(32.2)

Underlying Operating Profit

4.7

11.2

(58.0)

Underlying Operating Profit Margin

2.9%

6.4%

 

  *Note: on a comparable 52 week period: 52 week period

1 FY18 has been restated to exclude the Leicester City Council contract which has been transferred to the Energy division with effect from the start of FY19

 

·     

Challenging year, but performance has stabilised

·     

Revenue and margin declined, principally as a result of contract attrition

·     

Underlying EBITDA and Operating Profit also impacted by contract attrition, as well as fuel and wage cost pressures and underperforming contracts

·     

Ongoing loss-making contracts require onerous contract provision per IAS 37

·     

FY20 outlook of market conditions stabilising at lower profitability levels, with underlying business performance expected to be broadly flat year on year. We are taking an extremely disciplined approach to new bids and we have recently seen Councils agreeing to fund capex in various bids

 

 

Resource Recovery & Treatment

 

 

FY19

FY18

Restated**

Change %

Revenue

215.4

220.3

(0.3)*

Net Revenue

154.9

149.7

5.5*

Underlying EBITDA

28.7

32.1

(10.5)

Underlying Operating Profit

11.1

13.7

(18.9)

Underlying Operating Profit Margin

5.2%

6.2%

 

   * Note: on a comparable 52 week period: 52 week period

**2018 net revenue has been restated to adjust for misstated internal Landfill Tax revenues which had led to net Revenue being understated

 

·     

Solid performance given external headwinds

·     

Underlying Net revenue growth of 5.5% was achieved primarily as a result of growth in the Polymers business

·     

Underlying profit margin decreased from 6.2 % to 5.2%, due to the China import restriction impact on commodity prices and expected landfill volume declines (partly site closures and partly normalised trend) being offset in part by a further year of progression in Polymers

·     

PET plant progressing well, and commissioning expected in Spring 2020 and we have committed to expand capacity and scope for a combined investment of £27.5m

·     

FY20 outlook of landfill remaining solid, underpinned by higher rail volumes, further run rate improvement towards positive EBITDA in the MRF's, strong progression in Polymers performance but with commodity prices remaining at lower than historic norms

 

 

Energy

 

 

FY19

Restated

FY181

Change %

Revenue

102.9

107.6

(2.5)*

Underlying EBITDA

32.9

32.3

1.9

Underlying Operating Profit

27.2

25.6

6.3

Underlying Operating Profit Margin

26.4%

23.8%

 

  *Note: on a comparable 52 week period: 52 week period

1 FY18 has been restated to include the Leicester City Council contract which has been transferred to the Energy division with effect from the start of FY19

 

·     

Solid performance boosted by ROC income

·     

The underlying reduction in Net revenue of 2.5%* was due to improved pricing and ROC income offset by expected reductions in both LFG volumes and WSCC disposal (pass-through) revenues

·     

Modest Underlying Profit improvement (rather than normal downward trend) due to ROC income levels

·     

Significant focus on EfW during the period and we expect to reach financial completion on both projects in the near term

·     

Ongoing loss making contract requires onerous contract provision per IAS 37

·     

FY20 outlook of continuing step down in LFG volumes in line with expectations being partially offset again by improved (hedged) pricing levels (92% sold @ £49.44/MWh)

 

 

PRESENTATION OF RESULTS

 

There will be a presentation of the results to analysts and investors at 0930 am today (5 June 2019) at Numis, 10 Paternoster Square, London EC4M 7LT. To register your attendance please contact ir@biffa.co.uk

 

A live audio webcast of the presentation will be available on Biffa's website. Please pre-register at www.biffa.co.ukThe presentation slides will be added to Biffa's website prior to the analyst meeting.

 

 

PUBLICATION OF ANNUAL REPORT

 

The Company will publish its Annual Report and Accounts 2019 on Tuesday 11 June 2019. This document will be available to view on the Company's website at www.biffa.co.uk and is also being submitted to the National Storage Mechanism for inspection at www.morningstar.co.uk/uk/nsm.

 

 

ENQUIRIES:

 

Michael Topham, Chief Executive Officer

 

Richard Pike, Chief Financial Officer

 

ir@biffa.co.uk

 

 

 

Houston PR                    0203 701 7660

Kate Hoare                     07949 944 496

Alexander Clelland         07583 973 647

Laura Stewart                 07717 535 033

Polly Fairbank                 07855 542 405

biffa@houstonpr.co.uk

 

 

 

 

Cautionary statement regarding forward-looking statements

This announcement contains certain forward-looking statements that are subject to the usual risk factors and uncertainties associated with the Company's business. Whilst the Company believes the expectations reflected herein to be reasonable in light of the information available to them at this time, the actual outcome may be materially different owing to factors beyond the Company's control or within the Company's control where, for example, the Company decides on a change of plan or strategy. Accordingly, no reliance may be placed on the figures contained in such forward-looking statements.

 

The forward-looking statements contained in this document speak only as of the date of this announcement, and Biffa does not undertake to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 

 

Use of Alternative Performance Measures

Throughout the release we use a number of alternative (or non IFRS) performance measures to provide users with a clearer picture of the performance of the business. This is in line with how management monitor and manage the business day to day. Further definitions and details are provided below

 

Technical Notes:

 

1 Revenue excluding Landfill Tax

2 Profit before depreciation and amortisation, exceptional items, impact of real discount rate changes to landfill provisions, finance costs and taxation

3 Calculated as a percentage of statutory revenue

4 Profit before exceptional items, amortisation of acquisition intangibles, impact of real discount rate changes to landfill provisions, finance costs and taxation

5 Profit before exceptional items, amortisation of acquisition intangibles, impact of real discount rate changes to landfill provisions, non-underlying net interest items and non-underlying taxation

6 Underlying profit after tax divided by weighted average number of shares in the year

7 Net increase/(decrease) in cash and cash equivalents excluding dividends, restructuring and exceptional items, acquisitions, movement in financial assets and movements in borrowings or share capital (but including finance lease principal payments)

8 Net debt excluding the EVP instrument

9 Represents 2.1x last 12 months Underlying EBITDA

10 Total Underlying Operating Profit includes central costs of £14.9m (£16.1 m in prior year)

11 IFRS15 Revenue from contracts with customers adopted in 2019.

 

Chairman's Statement

 

Well positioned for the future

 

My first full year as Chairman has been a busy one. I have extended my knowledge of our business by further visits to our operating locations, and there have been a number of Board changes, including the appointment of a new Chief Executive Officer and Chief Financial Officer, as outlined below, and preparations have been made for the revisions to the Corporate Governance Code.

1.   Board Changes

From 29 September 2018, Michael Topham, previously Chief Financial Officer, assumed the role of Chief Executive Officer when Ian Wakelin stepped down from the Board after eight years as the Chief Executive Officer. Michael Topham worked alongside Ian for a number of those years and together they played significant leadership roles during the IPO process in 2016. Together they were instrumental in developing the initial strategy of the business and so Michael is Ian's natural successor. The Board is hugely grateful for the contribution made by Ian during his tenure as Chief Executive Officer and we wish him well for the future. Richard Pike joined the Board as Chief Financial Officer at the time of Michael's promotion and he and Michael have both settled in well to their new roles.

I am delighted to report that we have been able to attract Carol Chesney and Gab Barbaro to the Biffa Board as new Non-Executive Directors. Carol had a long and successful career with Halma plc, latterly as their Company Secretary, and has become the Chair of the Audit Committee. Gab is a senior executive with Centrica. Both have settled in quickly to their roles and have brought greater diversity and balance of experience to the Board.

2.   Business and Markets

Efficient and sustainable waste management is important to us all. We have all seen the heightened publicity around the challenges we face in dealing with the growing amount of waste, especially the growth in plastic packaging. Core to the Biffa business is the efficient collection of industrial, commercial and domestic waste of different types and then, through various processes, to prioritise its recycling, and energy recovery, with disposal to landfill as a last resort. Biffa's service offerings and investments are designed to help its customers meet their own ever-increasing standards for environmental stewardship. This is a responsibility the Company and its senior management take seriously.

The markets in which we operate provide opportunities for modest overall organic growth broadly in line with the growth of the economy. There are also opportunities to expand the scope of existing services and introduce new service offerings to supplement underlying market growth. Our business model positions us well in the waste management ecosystem, achieving a good balance between essential collection services and recycling, energy recovery and landfill.

3.   Strategy and Capital Allocation

With Michael Topham's appointment as Chief Executive Officer Biffa has reviewed its business strategy. The overall strategy at the time of the IPO, with a focus on growth (organically and through acquisition), develop (new products and services) and optimise (systems and processes) remains in place. However, Michael, with the support of the Board, has brought some additional dimensions to it, identifying some new opportunities for growth and expansion of the business.

The Board monitors the implementation of strategy at Board meetings and periodic strategic reviews. An integral part of this is ensuring that the Group has the necessary financing and appropriate capital allocation. On the back of last years' performance and the recent refinancing, the Group continues to have the appropriate balance sheet and appetite to facilitate the various areas of growth and expansion available to it.

4.   Shareholder Returns

Our financial performance is discussed in some detail by Richard Pike, our Chief Financial Officer in the Financial Review. Despite the headwinds arising from the changes in China to the regulations relating to recycling of commodities, and the cost and margin pressures of some of the Municipal contracts, we have again delivered a good set of financial results, meeting or exceeding the market's expectations for revenue, profit, cash flow, net debt and Underlying Earnings per Share. The underlying intrinsic value of the business continues to grow steadily, and it is the Board's view that Biffa remains strongly positioned over the medium and long term to deliver growth in value. The Board has proposed a final dividend of 4.90 pence per share, bringing the total dividend for the year, to 7.20 pence representing a 3.2 % yield on the year-end share price of 223.5 pence.

5.   Health and Safety

 Biffa has an excellent record for Health & Safety among its peers. However, judging ourselves by our own high standards, we have been disappointed by the slight increase in the Lost Time Injury (LTI) rate this year. A renewed focus in this area aims to ensure a return to year-on-year improvement.

6.   Corporate Governance

Included in the Annual Report is a large section summarising the various processes and activities of the main Board Committees. We are conscious of the growing demands placed on the business by changes to the corporate governance regime and we will endeavour to implement the requirements in the most efficient and effective manner. As a general rule, we aim to strike the right balance between the strategic and entrepreneurial management of the business and the requirements for good corporate governance.

7.   Employees

I would like to thank our loyal employees for their hard work and commitment during the year. The success of our business is without doubt, dependent on their continued support. The Board was delighted to see further improvement in the overall scores of the employee engagement survey conducted recently. David Martin, our Senior Independent Director, has taken on the additional responsibility to oversee for the Board the new corporate governance requirements relating to increased workforce engagement.

8.   Looking to the Future

We have demonstrated during the year our resilience in managing the short-term challenges arising from the changing markets for recycled commodities. Biffa enjoys a leading competitive position in its markets and has a number of growth projects to progress. We have a clear strategy to achieve sustainable growth in value over time and a strong Board and Group Executive Team to implement it.

 

Ken Lever

Chairman

5 June 2019

 

 

Chief Executive Officer's Statement

Delivering on Strategy

Annual Performance Overview

I am delighted with the progress we have made over the course of the year. We have delivered good financial results whilst making significant progress in positioning the business for future success in an era where how we manage our waste has never been more important. We have helped our customers meet ever more demanding sustainability ambitions whilst continuing to reduce the impact our own business has on the environment. The Government has recently set out an ambitious strategy for our sector and we stand ready to help implement it. In short, it has been a year of tremendous progress for the Group and I would like to thank all of my colleagues for their commitment in achieving it.

Financial & Divisional Performance

I am very pleased with Biffa's performance. We have delivered another year of growth in underlying revenues and profitability, paying an increased dividend whilst maintaining a strong balance sheet. We have seen further organic and acquisition growth in our I&C business, which has more than offset the anticipated challenges in the international recycled commodity markets and the lower margins we are seeing in the Municipal market. Net Revenue grew by 4.4% (on a like-for- like basis) to £1,030.8m, Underlying Operating Profit grew by 0.6% to £81.7m and Underlying Profit after Tax grew by 7.5% to £51.5m, while leverage was 2.1x Underlying EBITDA at year-end. Our statutory revenue grew from £1,076.7m to £1,091.2m, while our statutory profit after tax reduced from £31.1m to £18.0m due to the impact of some non-recurring non-cash items, for example onerous contract and GMP equalisation.

Our I&C division again performed well, with strong organic and acquisition revenue growth, and operating margins increasing to 9.1% from 8.4% last year. This was achieved despite the business experiencing lower recyclate prices and cost pressures in labour and fuel. We had a record year of new business performance and again reduced our customer attrition levels. Acquisitions once again contributed to growth, with cost synergies being delivered to plan.

Our Municipal business had a somewhat more challenging time, with margins coming under pressure as a result of higher fuel and labour costs, the expiry of some higher-margin mature contracts, and difficulties with one of our newer contracts. Whilst we have been disappointed with the results for the year, we are encouraged by the stability we have seen in trading performance in the later stages of the year, and by recent contract wins.

As anticipated, in the RR&T division, we delivered reduced profits as we worked our way through challenging recycling markets. When we entered the year, commodity prices were very depressed as a result of the changes to the import regulations in China that have impacted global recycled commodity markets. This impacted our profitability throughout the year but, as expected, in the second half of the year we saw improved trading. We also experienced reduced landfill volumes in the year, in line with our medium-term expectations. Meanwhile we benefited from some of the recent investments that we have made in soil treatment and plastic recycling operations.

Finally, in our Energy division our operating performance was once again strong and financial results benefited from higher values for renewable energy subsidies.

Government's Resources & Waste Strategy

We were pleased to see the Government publish the ambitious new Resources & Waste Strategy (RWS) for how England manages its waste (other parts of the UK have similar plans in place). Recycling levels have stopped growing and we have been calling for some time for policy intervention to help ensure that valuable resources are not lost and to minimise the impact on the environment of the way we collect, treat and dispose of our waste. We expect that the strategy will result in greater demand for our collection services, such as separate food waste collections from households and businesses, and greater demand for high- quality recycled products, such as the recycled plastics Biffa manufactures. There is no doubt in my mind that dealing with plastic waste is rightly the key issue that society - and therefore Government - are motivated by and Biffa is already taking action in this space. It was also reassuring to see that the strategy is realistic in understanding that, whilst recycling must be prioritised, there is a clear need for energy from waste infrastructure, which provides reliable low-carbon energy from waste that cannot be recycled, as well as landfill disposal. In short, the Government's strategy aligns well with our key strategic priorities and we look forward to working further with policy makers to bring the strategy into action.

Acquisitions

Over the last few years we have been supplementing organic growth in our I&C business by acquiring smaller competitors which we are able to swiftly rebrand and integrate into our operating platform. Waste collection has become far more complicated in recent years and it is a business that unquestionably lends itself to scale. By growing through acquisitions, we are able to reduce our service delivery costs whilst offering greater service quality and flexibility to our customers, while the improved route density of our operations reduces the environmental impact of our activities. During the year we completed seven acquisitions, investing a total of £47m, to bring c.£64m of revenues into the division. The most notable transactions were of Weir Waste Services Limited (WWS), a Birmingham based collection business, and Specialist Waste Recycling Limited (SWR), a nationwide waste broker. We have a strong track record in this area, delivering transactions and integrating them in a disciplined manner. We intend to continue to pursue this strategy in the year ahead and as always, we have a good pipeline of opportunities.

Energy from Waste

Our objective is always to maximise the amount of our customers' waste that can be recycled. There remains, however, a substantial amount of waste that cannot be recycled, and for which the best disposal method is energy recovery through incineration (EfW). This is acknowledged in the Government's recent RWS. However, the UK currently does not have enough EfW facilities, meaning waste is either sent to mainland Europe for incineration or is landfilled in the UK, resulting in the loss of its inherent energy value. Our control of waste volumes gives us the opportunity to unlock the development of some of these much-needed facilities. We have been working with the US EfW developer and operator Covanta over the last two years to bring two projects to fruition, in Leicestershire and Cheshire. These projects have taken a little longer than planned to reach financial close, but we are pleased with the progress we are making and hope to be able to commence construction in the coming year. This will amount to a commitment by the Group of c.£70-80m over the coming three years. Once operational, these two facilities will treat just under 25% of the current residual waste that we control in our I&C business.

Further Investment in Plastics Recycling

The UK urgently needs to increase the amount of plastic that is recycled. Here in the UK Biffa is leading the way. We are a leading operator in closed loop plastic recycling in the UK, with an established presence in HDPE milk bottle recycling. We have been recycling post- consumer HDPE milk bottles back into food grade HDPE, which is used in the manufacture of new milk bottles, here in the UK for a decade. During the year we took the decision to build a PET plastic drinks bottle recycling facility. This project is attractive as it capitalises on our established capabilities in this field and the control of feedstock we enjoy through our collections and sorting activities. It comes at a time when demand for recycled food grade raw materials for plastic packaging is growing and is set to be further supported by recently announced Government policies such as a plastic tax and the introduction of deposit return schemes, which were key features of the Government's RWS. It is anticipated that this project will enter production during 2020 and will be another key step in the further growth of our Biffa Polymers business.

Sustainability Activities

In the last year we have made enormous progress both in making our own business activities more sustainable, and in delivering more sustainable solutions for our customers. For example, in terms of overall carbon emissions we have received from Carbon Saver their Gold Award for year-on-year carbon emission reductions for 12 successive years now, assisted by on-going diversion of biodegradable waste from landfill and routing and operational efficiencies achieved through business acquisitions.

Whilst there is always much more to do to improve the way the UK deals with its waste, we should reflect on how fortunate we are that we have well-developed waste management systems. That is not the case in much of the developing world and I am delighted that, at Biffa, we have recently been able to back the charity WasteAid, which helps communities in Africa manage their waste in a more sustainable manner.

Employee Satisfaction and Engagement

We are fortunate at Biffa that we have a clear purpose as an organisation, and my colleagues and I are motivated by the positive impact that our activities are having on the environment. I am determined to continue to make Biffa a better place to work and I am pleased with the progress we have made in the year.

Our safety performance in the past few years has improved significantly, and we remain a leader in our sector. It was disappointing that this year our safety performance as measured by our LTI rate deteriorated somewhat, but this trend belies the huge progress we are making in this area and I remain confident that as time passes, our safety performance will exceed past records.

Looking at the nations' demographic, I see a great opportunity for Biffa to enhance our gender and ethnicity diversity and I am committed to making an impact in this area. It may take us some time, but we will be setting ambitious targets for the business, a first for Biffa.

Securing and developing our people for future business requirements remains of strategic importance to us. As part our response to this, we have been pleased to see the number of employees on an increasing variety of apprenticeship programmes continue to grow.

Employee engagement is at the core of our People strategy. Every year we measure employee engagement through a confidential survey and put in place focused action plans to address emerging priorities.

Brexit

As the service we provide is predominantly delivered locally to UK-based customers, the impact of Brexit on our business is not as significant as it is to other businesses. Key risks for the Group include foreign exchange movements, imposition of tariffs and potential constraint of labour supplies. As a Board we will continue to closely monitor developments in the UK Government's Brexit plans and any potential impacts on the Group and so like most businesses we are keen to have certainty over how Brexit will be implemented.

 

Organisation Changes

I am fortunate to have taken over a business with a clear strategy that is delivering for all of its stakeholders. There is, however, a need to change the way that we are organised to ensure we best capitalise on the significant opportunities available to us. I have therefore implemented a more focused, two-division structure, with effect from FY20 comprising Collections and Resources & Energy.

Our Collections division, led by Jeff Anderson, incorporates all of our collection services, comprising I&C, Municipal and Hazardous Waste (which previously was part of our RR&T division). Its priorities are to continue to pursue the organic and acquisitive growth of the I&C business, to stabilise and selectively grow our Municipal offer and to grow our Hazardous Waste and other specialist services offers through cross-selling of services to our I&C customer base. All of our collections services will benefit from the same operational rigour that has underpinned the successful growth of the I&C business in recent years.

Our Resources & Energy division, led by Mick Davis, incorporates all of our waste treatment and disposal activities, including recycling, energy and landfill. Its priorities are to capitalise on the clear opportunities we have in plastic recycling and energy from waste.

I am confident that organising our business into these two divisions will provide clearer strategic prioritisation and capital allocation, accelerate our growth, and deliver operational best practice and Group synergy.

Biffa's Outlook

We have had a good year, growing our business and making progress in all of our key strategic priorities. We are set to grow our business further next year.

As we look further out, Biffa is well positioned to adapt as society and the economy evolve. At our core, we are a service business and stand ready to provide the services needed to ensure that our country receives the much-needed change in how it manages its waste. Our business model aligns us well with the ambitions of our customers and the Government.

As a Group we recognise that we have an important role to play in how our society and the economy function and that what we do matters to our stakeholders. To that end we have defined our purpose as:

"To change the way people think about waste."

This is what guides the team, and I am privileged to lead it.

 

Michael Topham

Chief Executive Officer

5 June 2019

 

Financial Review

Continued Strong Momentum

Group Performance

I am pleased in my first year as CFO to be able to present a good set of financial results. Whilst our headline statutory revenue paints a picture of modest growth, this belies the underlying picture. First, because the current year is a 52-week period versus a 53-week period last year. As such the headline growth rates are understated by around 2%. And second, because the business has had to cope with both the ongoing impact of the China import restrictions, which depressed commodity prices and the deterioration in Municipal performance. As such, we exit the year with a really solid performance.

Other Items

To enable a better understanding of business performance, certain items are excluded when calculating the Group's underlying measures of performance as follows:

(i)  Items recur most years but that we feel will aid the user by excluding from underlying performance - amortisation of acquisition intangibles, acquisition related costs, movement on landfill provisions as a result of discount rate changes and strategy related costs; and

 

(ii) Other one-off items which are considered exceptional - onerous contract provisions, GMP equalisations costs, and legacy loan amortisation write-offs.

In the second category, the onerous contract provision movement relates to the long-term contract with Leicester City Council, together isolated underperforming Municipal contracts.

 

A reconciliation from Underlying Profit After Tax to statutory profit after tax is set out below:

 

 

2019

£m

2018

£m

Underlying Profit after Tax

51.5

47.9

Acquisition related costs

(2.8)

(1.6)

Amortisation of acquisition intangibles

(16.5)

(16.8)

Impact of changes in real discount rate on landfill provisions

(1.6)

5.7

Other

(2.1)

(0.9)

Onerous Contracts

(10.2)

(5.2)

Pensions GMP equalisation

(3.1)

-

Finance charges

(6.2)

(2.5)

Taxation impact on other items

9.0

4.5

Statutory profit after tax

18.0

31.1

 

 

Finance Charges

Underlying financing costs fell significantly compared to the prior year, driven by lower average cost to loan borrowings and the natural decline of the number of older, more expensive finance leases. A breakdown in net finance charges is below:

 

2019

£m

2018

£m

Interest on net borrowings

9.9

11.9

Interest on finance leases

5.0

6.3

Bond premiums

1.8

1.7

Landfill provision discount unwind

2.0

2.2

Pension discount/surplus unwind

(1.0)

(0.6)

Net underlying finance charges

17.7

21.5

Discount unwind on EVP instrument
and IPO costs

2.4

2.5

Unamortised arrangement fees on old Facility

3.8

-

Net finance charges

23.9

24.0

 

Taxation

The Group's tax strategy is approved annually by the Board and is available on the Group's website. The Group remains committed to fully discharging its responsibilities in respect of all relevant tax legislation in a clear and transparent manner based on a collaborative relationship with all tax agencies.

The effective tax rate on underlying profits was 20% (prior year 20%), slightly higher than the prevailing rate due to certain charges being disallowed for UK corporation tax. Payments in respect of corporation tax in the year were £0.2m (prior year £1.7m). The Group's deferred tax balance of £2.1m includes balances totalling £48.7m in respect of Accelerated Capital Allowances, previously written off goodwill and losses which will continue moderate tax payments in future years.

Earnings per Share

Underlying Earnings per Share rose by 7.3% to 20.6 pence from 19.2 pence in the prior year. However, Total Earnings per Share reduced to 7.2 pence (prior year 12.4 pence) as a result of the higher exceptional, non-underlying items in the year.

Dividend

The Board continues to pursue a progressive dividend policy, aiming to distribute c.35% of Underlying Profit after Tax split approximately one-third (interim) and two-thirds (final). The Directors recommend a final dividend of 4.90 pence per share, bringing the total dividend payable in respect of the year to 7.20 pence per share (prior year 6.70 pence per share). The year-end dividend is expected to total £12.3m and, if approved, will be paid on 19 July 2019 to those shareholders on the register as at 28 June 2019.

Retirement Benefits

The Group operates defined pension schemes for certain employees. These are closed to new members and to future accrual (except for a small number of members who have protected entitlements under local Government contracts). At 29 March 2019, the net retirement surplus was £79.0m (prior year £51.3m). The Biffa Pension Scheme had an actuarial deficit of £29.2m at the time of the last valuation in March 2018 (compared to £66.7m in March 2015), and an inflation-linked annual payment of £4.0m has been agreed with the Trustee of the scheme.

Capital Allocation

The Group maintains a strong capital base in order to pursue its growth plans, whilst maintaining stakeholder confidence.

The Group seeks to balance the allocation of its discretionary capital between shareholder returns, acquisitions and organic growth. 

Acquisitions

The Group continued to deliver against its growth strategy by completing seven acquisitions for £47m during the year - WWS on 17 August 2018 for £16.1m, SWR on 12 March 2019 for £25.8m, and five smaller trade and assets acquisitions for a total consideration of £5.0m.

Cash Flow

Strong cash flow delivery in the year enabled further significant investment in acquisitions, together with a higher dividend.

A summary of the Group's cash flows is shown below:

 

 

2019

(£m)

2018

(£m)

Underlying EBITDA

150.7

150.0

Working capital movement

(3.4)

(3.3)

Net capex

(45.2)

(40.4)

Net interest paid

(16.0)

(19.5)

Finance lease principal payments

(33.0)

(35.3)

Pension deficit payments

(4.0)

(3.9)

Advance for purchase of own shares
for PSP awards

(1.4)

(1.5)

Tax paid re acquisitions

(0.2)

(1.7)

Underlying Free Cash Flow

47.8

44.4

Restructuring and exceptional items

(4.5)

(4.3)

Acquisitions

(41.6)

(41.0)

Changes in borrowings

(45.1)

(4.5)

Movement in financial assets

(4.4)

1.2

Dividends

(17.0)

(11.4)

Net increase/(decrease) in cash and cash equivalents

25.4

(15.6)

 

Underlying Free Cash Flow increased by £3.4m in the year, driven primarily by lower interest costs and finance lease payments partly offset by higher capex, whilst net cash flow has increased significantly as a result of higher RCF drawings, partly off-set by a higher dividend payment.

Net Debt and Financing Facilities

In March 2019, the Group refinanced its bank borrowings with a new unsecured revolving credit facility of £350m. This facility has an initial five-year term expiring in March 2024, but with an option to extend for up to a further two years. The RCF will provide the Group with a lower than average cost of debt, an increased maturity profile, and improved covenants. The refinancing will result in interest cost savings for the Group of around £3.5m per annum (being a combination of lower margin and lower arrangement fees for amortisation). Unamortised arrangement fees of £3.8m relating to the old facilities have been written off within non-underlying interest charges in the current year results.

 

Reported Net Debt at year-end breaks down as:

 

 

Net Debt (£m)

29 March 2019

30 March 2018

Actual

Actual

Actual

Cash

66.2

40.8

Loans

(248.0)

(194.7)

Finance leases

(122.6)

(118.8)

EVP preference instrument

(6.3)

(6.3)

Total

(310.7)

(279.0)

 

Reported Net Debt excludes £42.3m (prior year £39.9m) of EVP preference instrument liability in respect of the EVP Dispute. £6.3m of the EVP preference instrument liability is included in Reported Net Debt as it will be payable irrespective of the outcome of the dispute and is therefore considered core debt.

EVP Dispute

The Group is engaged in a dispute with HMRC concerning historic Landfill tax. The Upper Tax Tribunal hearing for this dispute is scheduled for November 2019.

Financial Reporting Council (FRC) Information Request

In February 2019 the Group received a request for information on the reporting treatment of certain areas from the FRC following a review of the Group's 2018 Annual Report and Accounts. The request focused on four main areas - alternative performance measures, landfill restoration and aftercare provisions, pension schemes, and service concession arrangements. The Group responded fully and on a timely basis to the FRC, enabling the FRC to close their enquiry in early May 2019. As a result of the enquiry the Group has made a number of small disclosure changes which it has adopted for the first time in this set of Financial Statements.

IFRS 16 Leases

The Group will be adopting IFRS 16 with effect from its new financial year. It does not intend to restate the current year financial statements. Adoption of IFRS 16 has no effect on how the business is run, nor on the cash flows for the Group.

Reporting Periods

The Financial Statements for 2019 have been prepared for the 52-week period ended 29 March 2019. The prior year was a 53-week period, to 30 March 2018. The upcoming year will also be a 52-week period, up to 27 March 2020.

 

 

Richard Pike

Chief Financial Officer
5 June 2019

 

 

BASIS OF PREPARATION AND DEFINITIONS

The financial information has been based on the Company's financial statements which are prepared with International Financial Reporting Standards (IFRS) as adopted for use in the EU. Whilst information contained in this preliminary announcement has been prepared in accordance with the measurement criteria of IFRS, this announcement does not itself contain sufficient information to comply with those standards. The Company expects to publish full financial statements that comply with IFRS in June 2019. The financial information has been prepared under the same accounting policies as the 2018 financial statements.

The financial information set out above does not constitute the Company's statutory accounts for 29 March 2019 or 30 March 2018 but is derived from those accounts. Statutory accounts for 2018 have been delivered to the Registrar of Companies and those for 2019 will be delivered following the Company's Annual General Meeting. The auditor has reported on those accounts; the reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s.498 (2) or (3) Companies Act 2006.

In considering the financial performance of our principal segments, we analyse them on the basis of their underlying performance. This is the principal measure used by management to assess the business performance of the Company's underlying activities. Underlying activities exclude exceptional and other items.

The Board believes that by presenting our financial performance using underlying performance it is easier to read and interpret financial performance between periods, as underlying profit measures are more comparable having removed the distorting effect of the excluded items. Those items are more clearly understood if separately identified and analysed.

Accounting Basis

·     Prepared in accordance with IFRS

·     FY19 represents the 52 weeks ended 29 March 2019; FY18 represents the 53 weeks ended 30 March 2018

Net Revenue

·    Statutory revenue excluding landfill tax, unless stated otherwise, 'revenue' refers to statutory revenue. Landfill tax is excluded as the rate is outside the Group's control

Organic Net Revenue Growth

·     The increase/(decrease) in net revenue in the period excluding net revenue from acquisitions completed in the period and net revenue from acquisitions completed in the prior period up to the anniversary of the relevant acquisition date, to the extent such net revenue falls in the current period

·     Organic net revenue growth can be expressed both as an absolute financial value and as a percentage of prior period revenue

Acquisition Net Revenue Growth

·   Acquisition Net Revenue Growth in any period represents the Net Revenue Growth in the relevant period from (i) acquisitions completed in the relevant period and (ii) acquisitions completed in the twelve months ended to the start of the relevant period up to the twelve-month anniversary of the relevant acquisition date (to the extent such Net Revenue falls in the current period). Acquisition Revenue Growth is calculated on the same basis, using revenue in place of Net Revenue.

Acquisition Net Revenue Growth Rate

·    Acquisition Net Revenue Growth Rate in any period represents the Acquisition Net Revenue Growth for the period expressed as a percentage of the prior period's Net Revenue. Acquisition Revenue Growth Rate is calculated on the same basis, using revenue in place of Net Revenue

Underlying EBITDA

·   Profit before depreciation and amortisation, exceptional items, impact of real discount rate changes to landfill provisions, finance costs and taxation

·      Divisional underlying EBITDA is stated after allocation of shared services costs

Underlying Operating Profit

·    Profit before exceptional items, amortisation of acquisition intangibles, impact of real discount rate changes to landfill provisions, finance costs and taxation

·    Divisional underlying operating profit is stated after allocation of shared service costs

Reported Net Debt

·     Net debt excluding contingent balances relating to EVP preference shares

Return on Capital Employed (ROCE)

·     Operating Profit excluding exceptional items and impact of real discount rate changes to landfill provisions divided by average of opening and closing shareholder's equity plus net debt (including finance leases), pensions and environmental provisions

Return on Operating

Assets (ROOA)

·     Underlying Operating Profit divided by average of opening and closing Property, Plant & Equipment, plus net working capital

Underlying Free Cash Flow

·     Net increase/(decrease) in cash and cash equivalents excluding dividends, restructuring and exceptional items, acquisitions, movement in financial assets and movements in borrowings or share capital (but including finance lease principal payments)

Consolidated Income Statement

 

 

 

 

52 weeks ended 29 March 2019

53 weeks ended 30 March 2018

 

 

Underlying activities

£m

Other items

£m

 

Total

£m

Underlying activities

£m

Other items

£m

 

Total

£m

Continuing operations

 

 

 

 

 

 

 

Revenue

 

1,091.2

-

1,091.2

1,076.7

-

1,076.7

Cost of sales

 

(959.0)

(34.5)

(993.5)

(945.0)

(17.9)

(962.9)

Gross profit

 

132.2

(34.5)

97.7

131.7

(17.9)

113.8

Operating costs

 

(50.5)

(1.8)

(52.3)

(50.5)

(0.9)

(51.4)

Operating profit

 

81.7

(36.3)

45.4

81.2

(18.8)

62.4

Finance income

 

1.5

-

1.5

0.6

-

0.6

Finance charges

 

(19.2)

(6.2)

(25.4)

(22.2)

(2.5)

(24.7)

Profit/(loss) before taxation

 

64.0

(42.5)

21.5

59.6

(21.3)

38.3

Taxation

 

(12.5)

9.0

(3.5)

(11.7)

4.5

(7.2)

Profit/(loss) for the period

 

51.5

(33.5)

18.0

47.9

(16.8)

31.1

 

 

 

 

 

 

 

 

Profit/(loss) attributable to shareholders of the parent Company

 

51.5

(33.5)

18.0

47.9

(16.8)

31.1

Basic and diluted earnings/(loss) per share (pence)

 

20.6

(13.4)

7.2

19.2

(6.8)

12.4

 

Other items includes exceptional items, the impact of real discount rate changes to landfill provisions and amortisation of acquisition intangibles.

 

 

Consolidated Statement of Other Comprehensive Income

 

 

 

 

52 weeks ended

29 March
 2019

£m

53 weeks ended

30 March 2018

£m

Profit for the period from continuing operations

 

18.0

31.1

Other comprehensive income/(loss)

 

 

 

Items from continuing operations that will not be reclassified subsequently to profit or loss:

 

 

 

Actuarial gain on defined benefit pension scheme

 

27.3

32.7

Tax relating to items that will not be reclassified subsequently to profit or loss

 

(4.9)

(4.1)

 

 

22.4

28.6

Items from continuing operations that may be reclassified subsequently to profit or loss:

 

 

 

Net loss on cash flow hedge

 

(0.4)

(0.3)

Other comprehensive income for the period, net of income tax

 

22.0

28.3

Total comprehensive income for the period

 

40.0

59.4

Attributable to shareholders of the parent Company

 

40.0

59.4

 

 

Consolidated Statement of Financial Position

 

 

 

 

As at

29 March 2019

£m

As at

30 March 2018

£m

Assets

 

 

 

Non-current assets

 

 

 

Goodwill

 

128.2

100.3

Other intangible assets

 

213.0

216.9

Property, plant and equipment

 

365.4

349.5

Long-term receivables

 

68.9

73.7

Deferred tax assets

 

2.1

14.5

Retirement benefit surplus

 

79.0

51.3

 

 

856.6

806.2

Current assets

 

 

 

Inventories

 

14.4

12.7

Trade and other receivables

 

196.2

184.9

Financial assets

 

15.7

9.4

Current tax assets

 

0.5

0.2

Cash and cash equivalents

 

66.2

40.8

Assets held for sale

 

0.1

0.1

 

 

293.1

248.1

Current liabilities

 

 

 

Borrowings

 

(31.7)

(31.1)

Derivative financial instruments

 

(0.7)

(0.1)

Trade and other payables

 

(249.6)

(233.9)

Provisions

 

(16.0)

(13.1)

Total current liabilities

 

(298.0)

(278.2)

Net current liabilities

 

(4.9)

(30.1)

 

 

 

 

Non-current liabilities

 

 

 

Borrowings

 

(387.5)

(328.6)

Trade and other payables

 

(13.7)

(13.0)

Provisions

 

(90.3)

(93.3)

Total non-current liabilities

 

(491.5)

(434.9)

Net assets

 

360.2

341.2

 

 

 

 

Equity

 

 

 

Called up share capital

 

2.5

2.5

Share premium

 

235.3

235.3

Hedging reserves

 

(0.4)

-

Merger reserve

 

74.4

74.4

Retained earnings/(deficit)

 

48.4

29.0

Total equity attributable to shareholders

 

360.2

341.2

 

 

Consolidated Statement of Changes in Equity

 

 

 

 

Called up share
capital

£m

Share premium

£m

Merger reserve

£m

Hedging
and other reserves

£m

Retained earnings/ (deficit)

£m

Total

equity

£m

As at 24 March 2017

 

2.5

235.5

74.4

0.3

(21.1)

291.6

Profit for the period

 

-

-

-

-

31.1

31.1

Other comprehensive (loss)/income

 

-

(0.2)

-

(0.3)

28.5

28.0

Total Comprehensive (loss)/income

 

-

(0.2)

-

(0.3)

59.6

59.1

Value of employee service in respect of share option schemes

 

-

-

-

-

1.9

1.9

Dividends paid

 

-

-

-

-

(11.4)

(11.4)

As at 30 March 2018

 

2.5

235.3

74.4

-

29.0

341.2

Adjustment in respect of IFRS 15 adoption

 

-

-

-

-

(6.2)

(6.2)

Restated opening position

 

2.5

235.3

74.4

-

22.8

335.0

Profit for the period

 

-

-

-

-

18.0

18.0

Other comprehensive (loss)/income

 

-

-

-

(0.4)

22.4

22.0

Total Comprehensive (loss)/income

 

-

-

-

(0.4)

40.4

40.0

Value of employee service in respect of share option schemes (net of tax)

 

-

-

-

-

2.2

2.2

Dividends paid

 

-

-

-

-

(17.0)

(17.0)

As at 29 March 2019

 

2.5

235.3

74.4

(0.4)

48.4

360.2

 

 

Consolidated Statement of Cash Flows

 

 

 

52 weeks ended

29 March 2019

£m

53 weeks ended

30 March 2018

£m

Cash flows from operating activities

 

 

 

Cash generated from operations

 

133.0

141.7

Restructuring and exceptional costs

 

(4.5)

(4.3)

Employee share scheme purchase

 

(1.4)

(1.5)

Net cash from operating activities

 

127.1

135.9

Income tax paid

 

(0.2)

(1.7)

Net cash inflow from operating activities

 

126.9

134.2

 

 

 

 

Cash flows from investing activities

 

 

 

Purchases of property, plant and equipment

 

(42.4)

(36.2)

Purchases of intangible assets

 

(3.7)

(7.0)

Purchase of business, net of cash acquired

 

(41.5)

(41.0)

Proceeds from the sale of property, plant and equipment

 

0.9

5.2

Interest received

 

0.3

0.1

Net cash used in investing activities

 

(86.4)

(78.9)

 

 

 

 

Cash flows from financing activities

 

 

 

Interest paid

 

(16.3)

(19.7)

(Repayment)/drawdown of borrowings

 

45.1

(4.4)

Finance lease principal payments

 

(33.0)

(35.3)

Receipt of funds held on long term deposit

 

6.1

-

Deposits made in respect of long-term bonds

 

-

(0.1)

Dividends paid

 

(17.0)

(11.4)

Net cash flow used in financing activities

 

(15.1)

(70.9)

 

 

 

 

Net increase/(decrease) in cash and cash equivalents

 

25.4

(15.6)

Cash and cash equivalents at the beginning of the period

 

40.8

56.4

Cash and cash equivalents at the end of the period

 

66.2

40.8

 

 

 

 

Principal Risks and Uncertainties

 

Risk title/description

Impact

Mitigating actions

Changes in year

Strategic objective

Movement in year

1.  Changes in Government policy and legal and regulatory compliance

The Group operates in a highly regulated industry and any changes to Government policy, standards or regulatory compliance requirements could have an adverse impact on the Group's operations and results.

 

Operational

Financial

Reputational

Regulatory

Environmental & External Affairs department, with experienced and qualified environmental support experts working across all operating divisions.

External affairs processes in place addressing Biffa representation on the ESA and external bodies; liaison with policy makers and regulators at national and local levels; responses to Government/regulatorconsultations and sustainability reporting.

Ongoing environmental compliance strategy in place including annually reviewed targets and actions at local, divisional and Group level.

Established compliance processes in place to manage other regulatory compliance risks, such as bribery and corruption, modern slavery, competition and vehicle operating licences.

Throughout the year we engaged with the Government on its new RWS, published in December 2018. We continue to engage and advise Government in relation to consultations on the key strategy elements launched in February 2019 and continuing through the year. The proposed strategy measures to boost recycling and stimulate more investment in UK infrastructure support our business strategy and are viewed as an area of opportunity.

During the year, we introduced training for senior leaders on modern slavery and refreshed our anti-bribery and corruption training.

Biffa became a founding member of the Slave-Free Alliance and introduced a number of initiatives, including a manager's guide to modern slavery, to raise awareness across the business.

Optimise

No change

2.  Health & Safety (H&S)

Biffa's operations present inherent H&S risks to our employees, our customers and the wider public.

Violations of H&S laws/ regulations could have a material adverse effect on Biffa's business and reputation.

 

 

 

Reputational
Regulatory
Financial

 

Group H&S function reports to the CEO.

Active and regular engagement by senior management including weekly reporting and calls with the Group Executive Team.

Inclusion of H&S targets and objectives within Group Balanced Business Plans (BBP) with one of the five pillars being 'Working together safely'.

Embedded policies, standards and procedures in place across Biffa for the systematic control of significant H&S risks.

Resourced H&S teams supporting operations and delivering a programme of independent assurance.

Primary Authority relationship with Hampshire Fire and Rescue Service enables access to advice and counsel on fire risk issues.

During the year we successfully completed the management system transition to ISO 14001: and ISO 9001:2015.

 

Optimise

No change

3.  M&A strategy and delivery

Biffa faces risks arising from its acquisition strategy, such as increased competition for acquisition targets or a lack of suitable targets. Additionally, acquisition integration risks and issues could arise, impacting the delivery of expected benefits, either within expected timeframes or to the extent anticipated.

 

 

Financial

Group delegated authorities in place to manage the review/approval of all material transactions by senior management and the Board.

Established M&A process in place with defined governance, including sponsors and project management for all transactions and engagement with all relevant subject matter experts to consider acquisition and integration factors.

Dedicated corporate finance expertise in place to manage M&A transactions together with experienced Biffa subject matter experts as senior stakeholders for the acquisition process.

Board and executive level review and update included in monthly Board report summarising pipeline of identified potential targets.

Due diligence undertaken for all M&A transactions, including use of external advisers depending on target value and complexity. A standardised approach using an established valuation model is in place with all transactions reviewed/ approved by the Investment Committee and (where appropriate) the Board.

Project team kept in place until integration phase completed. Post- acquisition reviews to track benefit delivery with financial benefits embedded within financial planning processes (e.g. forecasts and budgets).

The Group's funding arrangements contain flexibility designed to allow for expansion/relief in the event of material acquisitions.

During the year we have continued our M&A strategy to support growth and completed seven acquisitions of varying sizes, the largest acquisition being SWR.

We have continued to monitor and improve our M&A process, based on feedback, stakeholder engagement and post-acquisition reviews.

 

 

Grow

Develop

No change

4.  Long-term contracts and tendering

The Group is exposed to risks inherent in long-term fixed-price contracts, in particular in its Municipal division and related operations. Risks include inaccurate long-term cost estimates due to changes in the external operating environment and market dynamics that lead to material deviations from initial underlying assumptions.

 

Financial

Reputational

All material bids are subject to a detailed review and formal approval at divisional, Group and Board levels.

Material bids are compiled by dedicated development teams with significant expertise and experience. They are supported by subject matter experts as appropriate.

Protection from change of law or force majeure for unforeseen circumstances is designed into contracts.

Certain risks, such as excessive commodity price volatility exposure will not be accepted.

Our established governance and approval processes have remained in place. We focus on ensuring that they remain robust and fit for purpose and seek to reduce or eliminate trading risk within any new commercial tenders/contracts in line with corporate expectations.

Grow

Reduced risk

5.  Business continuity, cyber security and IT resilience

A significant disruption to Biffa's infrastructure, including IT systems, could potentially have an impact on the activity of the Group's customers, such as increased billing times, interruptions to collection operations and processing logistics, and additional costs.

Additionally, the theft, destruction, loss, misappropriation or release of sensitive and/or confidential information could result in business disruption, negative publicity or brand damage.

 

Financial Reputational Operational

Crisis management and emergency response plans in place for key sites and operations.

Server infrastructure supporting key IT services hosted in Microsoft Azure

Cloud providing resilience, failover and backup services.

ISO 27001 certification (Information Security) in place.

Externally hosted business continuity recovery sites in place for key administrative and support functions with a tri-annual testing programme in place.

Intrusion detection in place and a cloud-based 'always on' security service provided by Microsoft protecting against key cyber threats.

Web filtering, malware protection and regular penetration testing in place.

Cloud failover and resilience have been tested throughout the year and documentation and processes updated. Business continuity workplace recovery sites have been regularly tested throughout the year.

Further cyber security measures have been implemented during the year and cyber security education initiatives have taken place.

 

Optimise

No change

6.  Economic environment/

Brexit

Economic conditions in the UK may have an adverse impact on Biffa's operating performance, revenues and results of operations. The Group is exposed to political, social and macroeconomic risks relating to the UK's expected exit from the EU.

Any economic weakness that leads to reduced volumes of waste and recyclate will adversely impact the Group's business. Furthermore, a deterioration in macroeconomic conditions may also result in increased competitive pricing pressure and increased customer turnover.

Financial

A substantial proportion of our contractual relationships with customers give pricing flexibility offering a degree of protection against inflation or other cost pressures.

Biffa has revenues and costs that are either directly or indirectly impacted by the value of Sterling relative to key currencies such as the US Dollar or the Euro. This provides some degree of offset and natural hedge.

We enter into forward contracts for the sale of electricity and to mitigate short-term currency exposures, improving earnings visibility in the short term.

 

 

 

Whilst we continue to monitor this risk, Biffa provides services across the breadth of the UK economy and to customers in the public and private sectors.

The breadth of customers offers a degree of protection against economic pressures that may affect specific areas of the economy.

The Group has assessed the potential impact of certain Brexit scenarios on its activities and is satisfied that there is unlikely to be a net material impact on the Group should the UK leave the EU.

 

 

Grow

Optimise

No change

7.  People - attraction, succession, retention

The loss of the services of a number of Directors, senior management or key staff, or if the Group encountered labour shortages or was unable to attract people for core business roles, could have a material adverse effect on Biffa's business results, operations, financial condition and prospects.

The UK's exit from the EU may impact the availability and cost of EU labour which could affect our operations.

 

 

Operational

Financial

 

Overall Reward Framework for staff and managers competitively aligned to the market, including Performance Share Plan for senior personnel and Sharesave scheme available to all employees.

Review of terms and conditions for operational staff to ensure alignment to market.

Talent and management development programmes deployed at senior levels and progressively to other levels going forward.

Ongoing review of the recruitment and retention of drivers.

Established apprenticeship programme, which will continue to be further developed in the coming year.

Further strategic mitigations have been implemented this year. They include a new apprenticeship programme; a driver recruitment/retention project; and a strategic review of terms and conditions for core roles e.g. LGV drivers.

Although our reliance on non-UK EU labour remains relatively low, we continue to monitor the risk of macroeconomic factors such as Brexit and exchange rate volatility, which could impact the availability of the EU workers who support a number of our operations.

Grow

Develop

Optimise

No change

8.  Strategic project and implementation

Failure to deliver strategic projects, such as EfW and Project Fusion. Fusion is focused on our products and services, how they are sold and delivered, the technology used and the online services offered to customers. As with any such projects, there are risks that the project fails to deliver the anticipated improvements and/or benefits for the budgeted investment, adversely impacting reputation and operating results.

Operational

Financial

Board and Group Executive Team engagement and leadership for strategic projects.

Established Fusion Programme Management Office with ongoing risk and issue management.

Selected software is a proven 'off the shelf' product.

Change network in place to ensure line management ownership of Fusion transformational change.

Significant investment in Fusion training materials and resources.

Proven EfW technology, substantial UK and worldwide reference plants with >30 operational in the UK treating in excess of 10m tonnes per annum.

EfW Joint Venture providing complementary skill sets and experience to minimise risk.

Leading advisory team (legal, financial and technical) to provide due diligence.

Limited recourse project structure.

An independent programme assurance review of Project Fusion was undertaken, with its recommendations now being put in place, further strengthening the implementation and reducing the delivery risk.

A senior Microsoft sponsor at the VP level has joined the Fusion project board to support the programme.

Develop

Optimise

No change

9.  Finance availability/

investment

If the Group were to fail to comply with any of the financial or non-financial covenants in its credit facilities (due, for example, to deterioration in financial performance), it could result in an event of default and the acceleration of the Group's obligations to repay those borrowings, increased borrowing costs or cancellation of certain credit facilities.

 

Financial

Significant and flexible bank funding facility with substantial headroom to enable the Group to progress strategic priorities and accommodate any downside performance risk.

In addition to the bank funding facility, the Group has over £140m of finance lease facilities, with undrawn funding of over £20m at the end of the year.

Group Treasury function in place as part of Finance organisation.

Ongoing monitoring of financial and non-financial covenants with summary updates to the Board. Significant current headroom on all covenants.

Financial forecasting and modelling in place to test headroom under a number of reasonable worst-case scenarios, which in turn feeds into longer-term viability review.

Regular meetings held with key members of the Group's bank funding facility.

The Group agreed a new five year £350m unsecured revolving credit facility, expiring in March 2024 but with an option to extend for a further two years.

As at the end of the year, £99m of the facility was undrawn.

 

Grow

Develop

Optimise

No change

10.       Commodities market and pricing volatility

Biffa produces significant volumes of recycled commodities for re-sale. Commodities produced include various paper grades, card, plastics, and ferrous and non-ferrous metals.

Markets for these recyclate products have individual supply and demand dynamics impacting both price and availability of off-take.

China's Operation National Sword has had an impact on the sales price of recycled paper produced by the MRFs. China was the main recipient of our recycled paper and it has banned the import of mixed paper into the country since October 2017. We have sought alternative off-takers for our paper, but this is at reduced prices.

Biffa has been working towards a model of shared risk, with customers with, c.54% of the commodity price risk held by Biffa.

This has helped partially to mitigate the impact of falling paper prices. Biffa has worked closely with the local authority customers and has successfully negotiated a contribution from key customers towards the increased costs of meeting the new mixed paper quality standard.

Financial

Operational

Ongoing monitoring and improvements to product quality within recycling processes.

Off-taker strategy review to limit dependency, where able, on the Chinese market.

Commodity price risk sharing within long-term commercial contracts.

Working with key customers (e.g. Local Government) to agree gate fees to reflect any increased costs and also dual collection methods.

 

Biffa has successfully negotiated a number of customer contracts to gain a contribution towards increased costs of meeting revised quality standards.

 

Develop

Optimise

Reduced risk

11. Strategic/

competitive threat to business model

Market disruption from the application of new technology and the advent of new business models could change the waste supply chain and adversely impact Biffa's established operating asset base of a traditional collection network and processing facilities.

Financial

Operational

An internal business innovation group has been established to focus on market developments and act as an incubator for ideas and new business models.

Continual competitor analysis to consider threats and changes to the landscape.

Annual strategy review to ensure that Biffa business model remains current and competitive.

 

Continuing to invest in and improve the customer experience through digitisation, improved processes and management information.

Survey of customers to ensure that the Biffa offer remains relevant and compelling.

 

Grow

Develop

Optimise

No change

 

 

 


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Biffa plc Preliminary Results FY2019 - RNS