Hargreaves Services : Preliminary Results

HARGREAVES SERVICES PLC

(the "Company" or the "Group" or "Hargreaves")

Preliminary results for the year ended 31 May 2014

Hargreaves Services plc (AIM: HSP), the UK's leading supplier of solid fuel and bulk material logistics, announces its preliminary results for the year ended 31 May 2014.

Highlights of the year

·Underlying profit before tax from continuing operations increased by 6% to £55.1m

·Strong UK trading volumes and successful expansion of production activities

·Positive end to the year for surface mining with excellent production run rates after earlier delays and exceptional weather conditions

·Five year Industrial Services contract secured with China Light and Power in Hong Kong

·Maltby closure progressing in line with plan

·Strong operating cash flows - net debt  reduced to £68.8m at year end

·Recommended full-year dividend increased 24.4% to 25.5p

·      Group review and simplification strategy underway

·      Disposal of Imperial Tankers for a cash consideration of £26.9m now announced

Commenting on the results, Chairman Tim Ross said:

"This year was challenging for Hargreaves. In difficult market conditions it is testament to the strength of the Group that we are able to announce a 6% increase in profits.  The Group achieved strong profitability on all measures. The review of strategy that the Board has commenced will ensure the Group is positioned to minimise risk and optimise shareholder value in response to rapidly evolving markets. The disposal of Imperial Tankers for £26.9m, completed earlier this month, is an encouraging first step."

(1) Continuing Underlying Operating Profit is stated excluding the amortisation of acquired intangibles and impairment of goodwill, impairment of non-current assets, and including share of profit in associates and jointly controlled entities before tax,

(2) Continuing Underlying Profit before Tax and EPS are stated excluding the amortisation and impairment of acquired intangibles, impairment of non-current assets and gain on disposal of subsidiaries

(3) Net debt comprises cash and cash equivalents, bank overdrafts and other interest bearing loans and borrowings

Chairman's Statement

Results

Underlying Profit before Tax from Continuing Operations increased by £2.9m from £52.2m to £55.1m. Reported Profit before Tax was £52.1m compared with £43.1m in 2013. All divisions performed robustly in the financial year, which was despite a slow start for our surface mining operations in Scotland, exacerbated by poor weather and by the impact of challenging coke markets on profits of the Monckton and German coke trading operations.

Underlying Diluted EPS from Continuing Operations decreased by 7.3% from 134.6p to 124.8p, following the issue of equity in April 2013.

Review of Strategy

Over the years Hargreaves has developed to become the most successful and profitable coal operator in the UK and has established a unique range of skills and services. The diversification of the business to encompass trading, production, industrial services and logistics has provided a resilient base for the Group since it was listed in 2005. The focus on diversification beyond thermal coal into industrial, domestic and steel markets has helped broaden and diversify the Group's footprint. However, it has also added to the complexity of the Group and has required significant working capital investment.

The coal and coke markets in the UK have continued to be volatile and uncertain. International coal and coke prices are at their most depressed levels for many years. Although we are confident that markets for coal will continue in the UK, the Board has elected to take a proactive stance and to set about reviewing strategy. On 1 September 2014 we announced the sale of Imperial Tankers (Imperial) and the implementation of a new strategy to focus the Group on its core strengths; simplifying operations and ensuring that the business is optimally placed to respond as market conditions continue to evolve.

These actions are being undertaken with shareholder value firmly in our minds.  The sale of Imperial is the first step and the Board and management team have been working intensively for months considering strategy and assessing risks and opportunities of various options. Several of these were outlined in our announcement on 1 September 2014. These are set out again in the report below and we will update shareholders on progress as appropriate.

Dividend

In view of the strong underlying performance from Continuing Operations the Board has confidence in recommending an increase of 23% in the final dividend from 13.6p to 16.7p. This will bring the dividend for the full year to 25.5p compared with 20.5p in the previous year, an overall increase of 24.4% for the year. The proposed final dividend will be paid on 21 November 2014 to all shareholders on the register at the close of business on 24 October 2014.

This increase in dividend is in line with the intention we outlined last year to progressively increase the dividends over a three year period to bring the dividend cover down to around 4 times. The Board will continue to review this policy in light both of progress in underlying trading and any developments arising from the ongoing actions to refocus the Group operations.

People

As always, our staff remain key to the business and once again I would like to thank them for their loyalty and hard work. I am pleased to note that we have achieved our stated target of creating or safeguarding at least 500 jobs in our surface mining operations in Scotland. Whilst shareholder value remains a primary focus for us, our employees will always be a key stakeholder group. We respect the loyalty and commitment of our staff and will ensure that we take appropriate consideration of their interests as we progress through the review. We recognise a strong and profitable Group is in the common interest of all stakeholders.

Board

Following the resignation of Peter Gillatt from his Non-Executive Director role on the Board when he assumed a full time executive role as Managing Director of the Production Division, we were pleased to announce the appointment of Peter Jones to the Board on 6 June 2014. Peter is already bringing significant commercial acumen to the Board alongside his experience and knowledge around ports and logistics.

Outlook

Whilst there remain challenges ahead, particularly due to the uncertain economic climate and its knock-on effects on the major coal users in the power generation and steel sectors, we believe that the Group's resilience leaves it better positioned than any other coal operator to work through the current market volatility and support the sector in the longer term. It is very early in the year and although we await the commencement and development of winter trading, recent trading in the UK has been encouraging. We also note recent improvements, albeit modest, in the Sterling value of international coal prices.

Tim Ross

Chairman

8 September 2014

Group Business Review

Review of Strategy

On 1 September 2014 we announced the disposal of Imperial and the implementation of a new strategy for the Group. The disposal of Imperial is a first step in implementing a new strategy to focus the Group on its core strengths, simplify operations and ensure the business is optimally placed to respond to changes in market conditions.

The low current coal and coke prices and the ongoing market volatility has prompted the Board to reassess Group strategy and look for opportunities to minimise earnings risk and volatility. This process has identified a number of earnings streams where we feel that the rate of return and longer term prospects does not justify the capital deployed. The review will identify opportunities to generate cash through the release of working capital or the sale or closure of operations that are not clearly core activities. These objectives when taken together will result in the generation of cash and will deliver a more simplified and streamlined group.

As the review progresses and the outcome of the current strategic initiatives take shape, the Board will consider the optimal capital structure and distribution policy for the Group, ensuring that they are properly aligned to the long term expectations and requirements of both shareholders and the Group. It is anticipated that any capital that is liberated by the review may be utilised to reduce debt, distribute to shareholders or re-invest in the business depending upon the opportunities identified. Any re-investment would be focussed on attractive and value enhancing projects related to the Group's core business activities. In the event that no appropriate investment opportunities are identified then the Board is currently minded to pursue a strategy of running the UK operation to maximise cash returns with a view to distributing these to shareholders.

In terms of any other investment opportunity or requirement, the Group's short and medium-term priority will continue to be focused on securing and under-pinning the core UK coal trading, production and distribution businesses. The Group is actively reviewing and seeking a number of opportunities to obtain control over at least 4 million tonnes of annual thermal coal flows and exposure to a degree of clean dark spread to help manage the impact of coal price risk on the Production activities. The Group has expended significant time and effort to date, in parallel with consideration of the simplification and streamlining initiative. We continue to actively identify and review opportunities to acquire more direct control over significant outlets for coal, by contract, acquisition or joint venture. Long term coal supply contracts underpin our coal production and coal trading operations by providing greater long term visibility over coal off-take. In turn, this will help underpin the ability and control that we have over the core UK coal operations to deliver future cash returns.

Outside of the UK, the Group will continue to carefully grow its Industrial Services business, building on its recent contract wins, which include a five year contract with China Light and Power, and its increased credentials and experience in the steel sector.  The Group does not expect to need to deploy significant capital to support this initiative.  

In assessing the Group's wider activities, the Board has already identified a number of additional areas where it sees opportunity to release and redeploy capital.

The Group produces and trades coke through its Monckton coke plant. As we have previously reported, coke markets and pricing have been very volatile and this continues to hamper Monckton's activities. Difficulties in the financial and commercial position of some producers and customers are adding to the challenging trading conditions. The Group has always recognised the importance of balancing risk with maximising return on capital employed and is aware of the high levels of working capital already invested at Monckton and in its wider coke trading activities.  We remain committed to minimising operational risk wherever possible, by avoiding significant open contractual positions. Against this background, the Board will, in the coming weeks, review whether Monckton can achieve sufficient contractual certainty in current market conditions to justify the level of working capital deployed to support the operation. At the end of May 2014 the coal and coke stocks at Monckton amounted to £17.5m. The Group will also look for opportunities to cut working capital levels in our German associate by reducing trading levels until normal market conditions resume.

The Group views its UK coal trading businesses as an important part of the Group and highly synergistic with its coal production activities. Although there will continue to be a key focus on developing production, trading and distribution activities in the UK, the Group does recognise that coal trading poses very intensive working capital demands. Opportunities will be sought to focus trading activities on core streams where the Group is best placed to add value, optimise its return on capital and maximise synergies and profits from its thermal and speciality coal markets. To achieve this focus, we currently envisage reducing bulk trading volumes by around 1.5m tonnes per annum and reducing working capital accordingly. A key focus of the Group will be to protect our market share and margins from the supply of coal into the thermal and speciality markets.

Other non-core activities are also under review, including the tyre crumbing operation, the joint venture with MIR Trade in Europe and the Rocpower operation. Notice has already been given to our joint venture partners to seek to wind down the activities of MIR Trade joint venture in an orderly fashion. The Group has recently received early stage interest from a third party in the acquisition of Rocpower's Commonside Lane facility and grid connection. In light of the decision to streamline the Group, the Board is willing to consider a disposal of the Rocpower assets and has written down the value of the assets in the Group balance sheet accordingly.

The Board expects this set of initiatives to liberate substantial cash resources, which will be available to enhance returns for shareholders.

Disposal of Imperial Tankers

The Board was very pleased to announce the disposal of Imperial on 1 September 2014. Imperial has been part of the Group since it was acquired in 2007 for a total consideration of £6.3m. Our existing tanker fleet at the time was integrated into the Imperial fleet. The overall book value of Imperial in the Group accounts at the time of the disposal was approximately £9.5m. The tanker operation had grown steadily under the Group's ownership and has been consistently profitable. However it offered limited synergies with other Group operations and fell outside the Group's core activities. Imperial generated profit after tax of approximately £1.6m on revenue of £29.7m during the year ended 31 May 2014. EBITDA in the year ended 31 May 2014 was approximately £4m. The business unit has been sold inclusive of cash balances of £1.6m and £2.7m of asset finance debt, resulting in an effective enterprise value and reduction in overall net debt of £28.1m.

Imperial is a quality business and the Board would like to commend and thank the staff and management for their hard work and commitment in developing Imperial into one of the strongest tanker brands in the country. The very favourable valuation reflects the quality of the business and strong recent growth. We are pleased that the business has been sold to a high calibre operator who is seeking to invest in expansion and is well placed to drive synergies from the business, which the Hargreaves Group is unable to access. This is a good outcome both for the Group and for the management and employees of Imperial. Following the disposal we are left with the fleet of dry bulk vehicles; which remains a key part of the Group, offering synergies with our trading and production activities.

Commodity Prices

Recent significant falls in the international coal price have been compounded by a strengthening of Sterling against the US Dollar. The effect of this has been to reduce the sterling price of thermal coal in the UK to around £46 per tonne. The Board remains of the opinion that current price levels are unsustainably low and expects some recovery in the foreseeable future.

Hargreaves has always adopted a business model where we attempt to eliminate or at least smooth the impact of changing commodity prices. In the Energy & Commodities business, where we buy and sell coal and coke, we continue to minimise open positions in our trading activities through hedging or, more commonly, through the use of back-to-back purchase and sale contracts. This business model provides significant profit-protection when rapid or major price-changes are being experienced. A falling or even a volatile coal price does not therefore present a significant problem for our trading operation, with the exception that a low or falling coal price reduces the value of pond fines that are added to a coal blend.

In the Production Division, coal price has a very direct impact on profitability. At its current level the coal price presents near term challenges to investment in and the development of the Production Division's surface mining operations. Since acquiring the surface mining assets of Scottish Coal Company Limited and Aardvark (TMC) Limited, the Sterling price of coal, as measured by the API 2 Index, has fallen from around £55 per tonne to £46 currently. These surface assets were acquired at prices that represent good long term value for the Group and the Group remains committed to the development of surface mining opportunities in the UK and building on its strong pipeline of sites.

The table below shows the current mining reserves for the Group.

To date, for existing sites, the impact of the falling coal price has been minimised by hedging or fixing the price of the coal that was planned to be extracted. In the longer term, for new and future sites, the challenge of low coal prices can be partially mitigated through re-designing mining schemes to focus on the lower cost of recovery coals that exist within our extensive pipeline of sites, reducing production costs but also reducing the total amount of coal that can be extracted. Whilst this will reduce absolute production levels it will assist in protecting the profitability of the coal that is produced. The Group will only commence operations at new sites if the output can be fixed or hedged at an economic level.

In the current financial year we are targeting to maintain a production rate of just under 2 million tonnes of profitable coal, in addition to the coal produced at the Tower joint venture.  The financial results of the current year ending 31 May 2015 will benefit from the contracts and hedges that were put in place to protect the value of coal extracted from these sites. The contracts and hedges add between £8m and £9m of value when compared to the current average market coal prices for the year ending 31 May 2016. Over the coming months, the Board will monitor the coal price and consider various mining plan scenarios to mitigate this impact. The Board is committed to keeping its surface mining operations active and viable as the Board believes that there is considerable value in mining reserves.

Indigenous coal will continue to be an important fuel for UK power generation and therefore the surface mining pipeline is a core strategic asset and store of long term value for the Group. The strength of the Group's position in surface mining leaves it uniquely placed to capitalise on any future upturn in coal prices and coal fired power generation.

We will not commence production of a site and hence create a restoration liability without having sufficient certainty of the price at which the coal can be sold. Such a practice would expose the Group to significant market risks that could exceed the impact of merely reducing mining levels and potentially mothballing some sites and equipment.

UK Coal and Coke Markets

In our report last year we outlined our view as to how the coal markets would develop in the UK. We expressed an opinion that coal fired generation will remain an important element of the UK energy mix well into the second half of the 2020's and probably even beyond. Today our view has not changed and we are still of the opinion that forecasts of the rapid demise of coal usage in the UK are not well founded and depend on assumptions about the rate of additional new capacity being added, whether in renewable, gas or nuclear, that are simply unrealistic and will not occur.

Whilst that core view on longer term coal demand and requirement in the UK has not changed, the markets in which we operate and to which we are exposed continue to be volatile and uncertain. Government policy around the UK Energy sector remains unclear and this uncertainty is exacerbated by the prospect of an upcoming general election.

The steel sector in the UK and Europe continues to face significant challenges and difficult market conditions. This continues to significantly impact coke demand across Europe. Supply imbalance in Europe has been exacerbated by exports of surplus coke from China. This has resulted in significant falls in coke prices and a disconnect between coking coal and coke prices. These conditions have resulted in very difficult trading conditions for our associate German coke trading operation and continue to present challenges in managing Monckton coke output to ensure that coking coal input prices and coke output commitments and prices are appropriately aligned to minimise open positions.

The drive towards renewable energy and the reduction of CO2 emissions continues to present uncertainty about the quantity of coal that will continue to be burned by power generators to satisfy UK energy market demands. Although recent substantial and unexpected falls in short-term gas prices have significantly reduced current coal burn and despite the imposition of carbon taxes and the upcoming impact of the Industrial Emissions Directive, the Board remains of the opinion that coal and in particular indigenous coal will continue to be an important constituent of the UK energy mix for many years to come. Indigenous coal will continue to be an important element of this mix. Current data indicates that the UK coal market, principally led by the demand of power generators, will remain of sufficient size to support comfortably the Group's plans for its UK coal production and distribution businesses in the medium-term.  The Board remains confident that Hargreaves can add value and generate profit from this market.

In the nearer-term, increasing uncertainty around Government policy, the weakness in international coal prices and current volatility in gas prices, and hence coal burn, are leading UK generators to delay purchase contracts or source coal on shorter-term contracts. This reduces revenue visibility in the Energy & Commodities Division and creates longer-term challenges for the Production Division, where substantial contract visibility is required to underpin longer term investment decisions in the Group's surface mining activities. 

Other changes are also affecting the supply and demand for coal products. Uncertainty still exists over the future of the operations of the former UK Coal PLC, both in terms of the deep and surface mines, whilst proposed changes in Irish government policy could also reduce demand for domestic coals.

Strategic Outlook & Priorities

Our priority remains the creation and protection of shareholder value. We are experts in the markets in which we operate and will continue to carefully monitor not only current market conditions but also future opportunities, risks and trends. Our view is that the level of risk and volatility in our markets necessitates a thorough review of our business and, alongside that, our strategy to deliver value to shareholders. We remain committed to the production, trading and distribution of thermal and specialty coals and the development of complementary services and logistics operations. All other activities will be subject to careful and stringent review.

The sale of Imperial and the announcement of the process to review and streamline our operations is a proactive step that demonstrates that we are acting decisively to respond to market changes. We will look carefully for opportunities to protect shareholder value through either, or a combination of, seeking to maximise cash generation to improve returns to shareholders or seeking investment opportunities that help us further protect the value in our core UK activities by better positioning the Group to deal with challenging market conditions. We will also ensure that the Group remains well placed to capitalise on any improvements in coal prices and market conditions. In that respect we are encouraged by the significant mining reserves that we have access to in Scotland and the platform we have in Europe to rapidly resume and expand trading activities when market conditions normalise.

Gordon Banham

Group Chief Executive

8 September 2014

Review of Operating Performance by Business Unit

Revenues from Continuing operations for the full year increased by 3.1% from £843.3m to £869.2m, reflecting a strong performance in our Energy & Commodities ("E&C") division and the first full year of our Scottish surface mining operations. Underlying Group operating profit increased by £3.8m from £55.7m to £59.5m. Underlying profit before tax was £55.1m, an increase of 5.6% on the prior year with robust performances across all of our divisions.

PRODUCTION DIVISION

Production Division revenues increased by £64.5m from £103.2m to £167.7m reflecting a full year of surface mining in Scotland, with Scotland coal revenues contributing £50.5m during the year.

Whilst Scotland contributed significantly to the Division's result during the year, underlying operating profit for the division remained at £16.7m reflecting reduced profits at Monckton. Mining profits from our Tower joint venture were below our original expectations, affected by adverse weather conditions.

Surface mining

Although it has been a challenging year for our surface mining operations on a number of fronts we are pleased with the progress made in developing our Scottish operations. As previously reported, a slower than anticipated start in commencing operations in Scotland resulted in a shortfall in production output during the first half. This shortfall was expected to be recovered through the second half as the Group became operational across the planned seven sites shortly after the end of the first half of the year. However, as previously announced, the exceptional rainfall in December, January and February significantly hampered operations in the second half such that it was not possible to fully recover all of the shortfall in production output during the year. Notwithstanding these challenges, the Scottish business finished the year strongly and the Group is pleased with the current production run rates that are being achieved.

The Scottish operation delivered first year coal revenues of £50.5m during the year and generated an operating profit of £5.8m. This result reflected the sale of 845,000 tonnes, marketed and sold through our E&C business, at just over £5 operating profit per tonne, as expected, and also benefitted from some restoration activity during the year and the sale of surplus mining assets. We are also pleased to be contributing to significant restoration efforts at a number of key sites. Whilst this does not by any means deal with the significant restoration liability left behind by ATH and SRG, we are actively providing restoration at a number of sites. We have already delivered significant improvement at sites such as Glenmuckloch in Dumfries and Galloway and Muir Dean in Fife. At these sites we have utilised world class heavy plant and equipment and expertise to deliver on our contractual commitments. Restoration services have been provided on time and to the highest standards. Our specialised heavy duty equipment is providing the maximum possible impact for the money available. Even at sites where there is minimal or no restoration funding available, such as Duncanziemere, Netherton and House of Water, we are working to extract remaining reserves of coal whilst providing the greatest possible improvement to site conditions and environmental impact.

The Tower project contributed £5.8m of operating profit during the year through a combination of our 35% share of mining profits and profit made by Hargreaves surface mining. Whilst the profit earned by our contract mining business remained steady, our share of joint venture profits suffered as a result of the record wet weather. Production output of 470,000 tonnes fell short of the joint venture's target. We remain encouraged by the prospects for the operation and will be working with the joint venture and off-take customers to ensure that we can establish mine and off take plans to support an increase in production in the second phase of the project.

In England, our small site at Well Hill in Northumberland contributed its first tonnes during the year and we continue to make progress in getting additional sites through the planning process.

Monckton

Monckton performed broadly in line with plan during the first half of the year as domestic and export volumes were largely contracted through to the end of the calendar year. Monckton operated against a very challenging backdrop during the second half of the year across all markets. In the export markets, the negotiation of new contracts resulted in significant pricing pressure through the second half. In particular, a number of Monckton's export customers opted to minimise off take contracts and seek shorter term arrangements until greater visibility could be achieved in the market place.

In the domestic market, Tata Chemicals Europe (TCE) announced a restructure of its UK based soda ash production plants at the start of the second half of the year. Initially we sought to enforce the contract on advice that the contract remained fully enforceable through the end of its term to December 2015. In August we reached a commercially acceptable agreement whereby we obtained an extension and a reduction in the rate of off-take to 36,000 tonnes per annum. The Group is continuing commercial discussions with a number of other customers in an effort to place the additional volumes in the market. The market volatility and short term nature of customers' off-take appetite is making it very difficult to lock down a high degree of contractual certainty for Monckton to ensure that coking coal input costs and commitments are sufficiently linked with the associated coke off-take contracts

Against this backdrop of challenging and volatile steel markets, Monckton's operating profit contribution fell from £6.6m to £2.9m during the year ended 31 May 2014. Monckton revenues fell from £53.1m to £42.8m reflecting a significant reduction in average selling price per tonne from £217 to £198 with production volumes remaining relatively stable at 190,000 tonnes. The drop in revenue reflected a drop in the volume of third party coke products that could be sold by Monckton alongside its own production.

Maltby

Maltby ceased to trade during the year and has remained a discontinued operation throughout the year as the closure programme continues in line with plan. At the date of this report, the mine shafts have been filled and capped as part of Maltby's overall restoration programme and the Group awaits formal certification of this completion. The process to sell the underground equipment continues to progress; there have been a number of enquiries to date and £2.9m of realisations were achieved during the year leaving a residual net book value to recover of £6.7m (FY13: £9.5m). These assets have been transferred to our plant pool team for management and disposal.  The Group remains very confident of achieving an amount in excess of book value for the assets. The Board is very pleased with the progress that has been made in closing the Maltby operation and thanks all the staff and other stakeholders involved. The project has been completed on time, on budget and to a high quality. The Group is working hard with local authorities to optimise the value of land to the Group and to the local community. 

The Energy & Commodities Division performed in line with overall divisional expectations during the year. Gross revenues increased by £8.3m from £585.0m to £593.3m reflecting a significant increase in metallurgical coal volumes sold in our UK bulk business offset by the deconsolidation of European revenues from the Group revenue number during the second half of the year as our German operation became an associate. Underlying operating profit increased slightly by £0.6m from £31.9m to £32.5m with a better than expected UK bulk performance offsetting the impact of challenging coke markets experienced in Europe.

Bulk Coal

Our UK Bulk Coal operations exceeded management expectations during the year with 5.4m tonnes of coal delivered to customers in the coal and steel markets, an increase of approximately 700,000 tonnes on the prior year. Whilst thermal volumes increased slightly during the year, the division saw a significant increase in metallurgical volumes.  With a full year of operation at Redcar, volumes of coking coal increased by almost 300,000 tonnes and the Group began supplying PCI coal during the year contributing almost 300,000 tonnes. We continue to closely manage counterparty risk exposure, whilst maximising opportunities, particularly within the challenging steel markets. Total coking coal and PCI coal volumes shipped in the year were 1.5m tonnes.

Profit per tonne in the UK bulk market increased slightly to £2.52 operating profit per tonne during the year with the addition of PCI coals and a slightly stronger thermal margin. The Group shipped approximately 1.2m tonnes to Eggborough power station during the year. The Group has continued to support Hatfield Colliery and is working closely with the owners to assist with product off-take for the upcoming coal panel when the current panel finishes in November. In the current financial year the Group marketed 0.8m tonnes of coal produced at Hatfield.

Speciality coal

Our UK speciality coal business performed largely in line with expectations during the year. Volumes were increased to 680,000 tonnes through aggressive pricing. This pricing pressure reduced the operating profit per tonne from £21.68 to £18.78 resulting in a slight reduction in overall operating profit from £13.4m to £12.8m. This is a very pleasing performance in light of the announcement of UK Coal's insolvency and restructuring last year, which required the Group to mitigate the loss of the associated speciality coal supply contract. It is still unclear how the supply of speciality coal from UK Coal's mines will impact markets this year. The acquisition of the surface mining operation in Scotland has provided the Group with the opportunity to diversify the sources of the Group's speciality coal supply. The Group retains a strong position in these markets and is well placed to source and deliver a high quality of competitively priced coal. The Group continues to closely monitor developments in these important markets to ensure that it is best placed to deal with any challenges that arise from changes in the balance of supply and demand.

Throughout last year, our associate German operations traded in increasingly subdued and difficult coke markets. Volume during the year reduced to 491,000 tonnes with a comparable margin to the prior year.  This was an excellent result that reflected the trading synergies available from both the Monckton operation and the trading relationship with SSI's steel operation at Redcar. Whilst existing contract positions at the end of the first half provided a platform for a robust second half performance, these challenging underlying trading conditions have remained. As a consequence, activity within the German business has been managed down to a lower level, ensuring the business does not take any unnecessary risks. Efforts are being made to reduce working capital to maximise cash generation.

As previously reported, the Group successfully completed a reorganisation of its German business on the 28 November 2013. Whilst the Group retains the same economic interest and therefore a similar level of contribution to the Group's results, the resultant lower equity participation and greater autonomy means that the German business was treated as an associate in the second half of the year with its profit being included in the Group numbers as a one line entry in the income statement.

The table below provides a breakdown of volumes and margins within the Energy & Commodities division.

Industrial Services Division revenues reduced by £26.7m from £149.3m to £122.6m. This reduction on the prior year is substantially due to the incremental contribution to revenue made by the two biomass conversion projects in the prior year. Core material handling revenues of £104.2m (2013: £104.3m) in the current year have remained at a strong level and are comparable with the prior year.

Underlying operating profit of the division of £5.7m represents an increase of £2.7m on the prior year. If the impact of the biomass conversion projects is removed, the underlying profit from the core material handling operations was comparable with the prior year at £5.1m (2013: £5.0m).

The core materials handling business has performed well during the year. Whilst the division encountered some delays in expected key contract awards that impacted the underlying result for the year, the division was able to support the operating profit with some one-off profits on the sale of surplus plant from its plant pool trading business. Pleasingly, the Division has made good commercial progress through the second half of the year, and into the current year, winning a number of these key contracts and positioning the underlying business to deliver a strong result in the next 12 months. In particular, the Division was awarded a five year integrated maintenance services contract with China Light and Power at the end of 2013. The contract was mobilised successfully in January 2014 and we are pleased to report a number of months of trading in line with plan.

The Group is pleased to report that the first biomass conversion project has been commercially concluded with payment received in July 2014, with no material impact on profit. On the second, larger biomass conversion project, the Group is pleased to report that this project is now complete and has been handed over to the client with final commercial discussions now underway. The Group has worked closely and collaboratively with EON to support and deliver a quality solution despite significant scope changes and resulting cost over-runs. The Group has focussed on the delivery of the project and is now in commercial discussions with EON to agree final contract values and payment. We do not anticipate any further provisions being required to commercially conclude this second project.

Transport revenues increased significantly during the year from £82.7m to £89.0m. Strong volumes in the period within our Dry Bulk business contributed £59.3m. Underlying operating profit also increased significantly from £4.0m to £4.5m reflecting increased contribution from both the Dry Bulk and Tankers business units with Bulk contributing £2.2m and Tankers contributing £2.3m.

Health and Safety

The health and safety of employees, contractors, customers and the public continues to be of the highest priority to the Board and management. We recognise the potentially hazardous nature of the work undertaken across all of our divisions and we are determined to ensure that we provide safe systems of work throughout our diverse range of operations.

The whole Board takes an active role in Health & Safety. The CEO personally acts as a Group Health and Safety Champion, working alongside the health and safety team to drive high quality health and safety performance throughout the business, not just in terms of developing processes and systems, but in ensuring substance in terms of actions, resources and culture to underpin the processes and systems.

The Group has health and safety management systems in place that are either internally or externally audited to the highest standard. In addition to a top down management style we have worked hard to ensure that a positive engaging health and safety culture is encouraged throughout our operations. Although we focus on safety at the business unit level, we have regular accountability meetings and a Group Health and Safety Forum to define best practice and to promote high standards of communication and coordination across the Group.

Health and safety statistics continue to be monitored at a divisional and business unit level, with regular main Board review, as well as pro-active health and safety strategies in place at each division.

The Group is committed to a philosophy of continuing improvement across all Group operations. During the last 18 months the Group has reshaped its health and safety team and invested in additional resources where appropriate. Our strategy has been to identify risks and eliminate them before an accident and not to rely on "lessons learned". To this effect the team have embarked on a number of accident prevention initiatives including "step back and speak up", greater emphasis on hazard spotting and analysis of near misses.

For the year ended 31st May 2014, accident rates within the Group are monitored on the basis of the number of lost time accidents per 100,000 hours worked. Following last year's 31% reduction we are pleased to note that the accident rate has seen a further 61% reduction from 1.04 to 0.41 in the year ended 31 May 2014.

The incidence of lost time accidents at Hargreaves has been strongly trending downwards for a number of years. Whilst the rate of improvement is slowing the downward trend is continuing in the current year. 

Iain Cockburn

Group Finance Director

Gordon Banham

Group Chief Executive

8 September 2014

FINANCIAL REVIEW

Continuing revenues in the Group increased by £25.9m from £843.3m to £869.2m. Production division revenues grew by 63% from £103.2m to £167.7m, reflecting the first year of operations in our Scottish surface mining business.  Overall E&C revenues grew by £8.3m from £585.0m to £593.3m with over £80m expansion in UK bulk revenues. Of this UK bulk revenue growth, £50.5m was the Scottish 'pass through' revenue, as all Scottish coal production is sold to and marketed by our E&C division; the balance of the increase related to additional metallurgical coal volumes during the year. This significant increase was offset by the removal of revenue generated by our German business at the start of the second half following its 'deconsolidation' from the Group. Finally, there was a significant reduction in Industrial Services revenues from £149.3m to £122.6m reflecting the revenue contribution from the biomass conversion projects in the prior year.

Underlying operating profit increased by £3.8m from £55.7m to £59.5m reflecting a robust contribution from all Divisions. The Production Division delivered underlying operating profit of £16.7m in line with the prior year with the first year contribution from our Scottish operations offsetting the challenges at Tower and Monckton. Our E&C division delivered a strong year with an increase in metallurgical volumes compensating for the shortfall in volume in Germany. Industrial Services operating profit increased by £2.7m reflecting the losses taken in the prior year on the biomass conversion projects and the downsizing of the engineering business.

Gain on disposal of subsidiary

As previously announced, a reorganisation of our European operations was completed on 28 November 2013, resulting in a lower equity participation for the Group, whilst retaining the same economic interest. From a financial reporting perspective, this resulted in the sale by the Group of our German business, and the deconsolidation of its net assets, including net debt, from the Group balance sheet. This was then immediately followed by re-acquisition of the same entity as an associate and recognition of the fair value of the investment in the associate, in accordance with IAS 27. Sale of a subsidiary from the Group required recycling of the associated translation and non-controlling interest reserves into the income statement. These accounting entries resulted in a one-off, non-recurring profit on disposal of £2.1m during the year. This has been excluded from underlying operating profit.

Impairment of non-current assets

As noted in our announcement on 1 September 2014 the Group has received early stage interest in the acquisition of Rocpower's Commonside Lane facility.  As a result of the decision to streamline the Group, the Board is minded to consider the disposal of the Commonside Lane facility and other Rocpower assets. Having considered this course of action as an alternative to holding the assets for a prolonged period, the Board has elected to impair some of the operating assets of Rocpower by £2.8m. This impairment reflects the view that it is unlikely that, in current market conditions, any buyer of Commonside Lane would elect to continue to use the heavy fuel oil engines that are currently in place.

Income tax expense for the year is £11.5m compared with £10.9m for the year ended 31 May 2013; including the share of tax of equity accounted investees of £0.9m (2013: £1.1m) results in a total tax expense of £12.4m (2013: £12.1m). This charge represents an effective tax rate for the Group of 23.47% (2013: 27.3%).

The reduction from the 27.3% rate for the year ended 31 May 2013 to the underlying rate of 23.47% is driven by the fall in the UK corporation tax rate from 23% to 21%, the non-taxable profit on disposal of subsidiaries and the exceptional goodwill write-off last year that was treated as non-deductible.

Following a recent change in legislation introduced as part of the 2014 Finance Act, HMRC may now request payment in advance of concluding discussions in respect of certain disclosable tax planning schemes. Consequently, over the next 12 months, the Group may be required to pay cash in respect of the cash flow benefit taken in the year ended 31 May 2011 on a corporation tax planning arrangement which is still subject to ongoing negotiation with HMRC.  Should such a notice be received, and HRMC in due course accept the Group's view on how this arrangement should be treated for corporation tax purposes, any cash paid under the 2014 Finance Act notice will be subsequently repaid by HMRC. As previously reported, no P&L benefit was taken at the time and no benefit will be taken until the returns have been fully agreed. The quantum of tax involved is around £10m.

Reported continuing basic earnings per share increased from 112.5p to 123.2p. Underlying fully diluted earnings per share decreased by 7.3% from 134.6p to 124.8p. The weighted average number of shares in the period increased from 27.9m to 33.1m following the equity raise in May 2013.

Discontinued operations

The loss for the period from discontinued operations, largely relating to costs incurred at Maltby colliery as part of the overall restoration programme and orderly closure of the mine, was £3.7m during the year. The closure programme continues to progress well and in line with plan. The closure at Belgium is also proceeding as expected with a small amount of cost relating to discontinued operations incurred during the year.

In line with the Board's previously announced target of increasing the dividend payout progressively over three years towards a dividend cover of around four times, the Board has recommended an increase of 22.8% in the final dividend from 13.6p to 16.7p. This will result in a full year dividend of 25.5p, a 24% increase over the prior year, representing dividend cover of 4.9 times (2013: 6.6 times). The dividend will be paid on 21 November 2014 to all shareholders on the register at the close of business on 24 October 2014.

Net debt reduced by £9.1m from £77.9m at 31 May 2013 to £68.8m at 31 May 2014. The reduction in the net debt figure reflects the deconsolidation of the German debt which was £10.2m at the point of change in ownership.

Group net assets increased from £118.3m at 31 May 2013 to £150.1m at 31 May 2014. Gearing (measured as net debt compared to net assets) at the end of May 2014 was 46%, compared to 66% at 31 May 2013.

The Group's financial position remains strong with net debt at 31 May 2014 equal to 1.0 times earnings before interest, tax, depreciation and amortisation ("EBITDA") pre exceptional profit, comfortably below our maximum covenant levels.

Net cash flow from continuing operating activities generated a cash inflow of £42.2m during the year. This cash generation has reflected a strong EBITDA of £67.2m partly offset by £20.3m working capital investment detailed below. By the half year end, the Group had invested £45.6m in working capital. Strong inflows in the second half reduced this to £20.3m over the year.

Whilst the Group consumed working capital of £20.3m during the year, this included the one off acquisition of the SRG property portfolio of £8.4m and the Work in Progress ("WIP") build on the Lot 4 biomass conversion project of £11.8m. Consequently, the underlying core working capital increase year on year was £0.1m. Efforts are ongoing to prepare the property portfolio for sale and the Group is pleased with general progress.

Inventory is the key driver of our working capital movement. Looking specifically at inventories it is noted that they increased by a net £28.4m during the year. German inventories started the year at £34.8m and reduced by £9.0m between the start of the year and the date of deconsolidation. At the date of deconsolidation, the inventory level in Germany was £24.8m. German inventory ended the year at £13.7m, a reduction of £21.1m across the full year, of which only £9.0m, pre-deconsolidation, is reflected in the Group cash flow.

Underlying inventory, setting aside the impacts of Germany, the SRG property portfolio acquisition and the impact of the LOT1/4 WIP builds, increased by £17.2m. The underlying increase in inventory was mainly driven by two new business streams within the Group during the year. Firstly, £14m of the increase relates to E&C inventory where PCI coal flows to the steel sector began during the year and, secondly, £7.8m reflects routine inventory levels built in Scotland during its first year of operation. Other movements include a stock build in Monckton during the first half of the year offset by a number of other stock unwinds across the Group.

Group inventory days increased from 77 days to 87 days. Whilst the deconsolidation of Germany improved this figure, this was more than offset by the stock build in our UK bulk business. The increase in stock days reflects that shipments of coal to UK power station customers slowed in May and June resulting in higher than expected stock and a compensating reduction in trade debtors. Since the end of the year many customers have been trying to reduce stocks as coal burn dropped. This position is expected to unwind during the year and we would expect to see stock days reduce to historic levels. In addition to this dynamic there was also an element of stock build at Monckton.

Debtor days have reduced slightly during the year to 21 days. The efficiency of the Group cash cycle has been maintained year on year and it is the removal of the higher debtor days in our German business that has resulted in a slight overall reduction in this metric. Trade creditor days have increased from 18 days to 23 days. Whilst this was also partly driven by the deconsolidation of Germany during the year, the increase in surface mining activities following the start up in Scotland also contributed to the increase.

Net income tax paid of £0.8m reflects last year's tax losses at Maltby.

The discontinued operation at Maltby resulted in a net cash outflow from operating activities of £9.1m during the year as the mine shafts were filled and capped as part of the overall restoration programme.

Capital expenditure

Net capital expenditure during the year was £34.5m. Of this, £12.3m relates to mine stripping costs capitalised under IFRIC 20 and development in our new Scottish business, the cash benefit of which will be realised over the next 12 months. The balance of £22.2m was higher than normal due to the £12.3m invested in mining equipment in Scotland, as previously reported.  £5m was invested in our Transport business. £13.0m of the £22.2m of capital expenditure was financed through finance leases.

The cash flow in relation to the disposal of subsidiaries relates to the reorganisation of our German business. The net debt figure of the German business was £10.2m at 28 November 2013 which was deconsolidated from net debt at the point of disposal.

Net cash from investing activities in discontinued operations resulted in a cash inflow of £2.9m as good progress was made in realising an element of the remaining Maltby mining asset portfolio. The majority of the remaining plant of £6.7m is expected to be sold in the current financial year.

Financing activities

Net cash outflow from financing activities in continuing operations was £15.6m. The Group has repaid £4m of its banking facilities and made payments of £5m against finance lease liabilities. Dividend payments made during the year amounted to £7.4m.

Net cash from financing activities in discontinued operations resulted in a cash outflow of £1.9m (2013: £5.4m) relating to the repayment of finance lease liabilities during the year.

Borrowings and facilities

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

The Group continues to operate comfortably within its banking covenants. The key covenants on the Revolving Credit Facility ("RCF") are interest cover and leverage, measured as a ratio of net debt to EBITDA. As at 31 May 2014 interest cover was 15.1 times, comfortably over the covenant minimum of 4 times and leverage was 1.0, comfortably under the maximum 2.5 times permitted.

Capital Management

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

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

Summary of Net Debt

Going Concern

The Group has considerable financial resources together with long-term contracts with a number of customers and suppliers across different geographic areas and industries. As a consequence, the directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook.

After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

Iain Cockburn
Group Finance Director

8 September 2014

Consolidated Statement of Comprehensive Income

for year ended 31 May 2014

4

4

4

4

4

4

Consolidated Balance Sheet

at 31 May 2014

Consolidated Statement of Changes in Equity

for year ended 31 May 2014

Consolidated Cash Flow Statement

for year ended 31 May 2014

1. Basis of preparation and status of financial information

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

The financial information set out above does not constitute the Group's statutory accounts for the years ended 31 May 2014 or 2013. Statutory accounts for 2013 have been delivered to the Registrar of Companies, and those for 2014 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

These results were approved by the Board of Directors on 8 September 2014.

2 Segmental Information

The following analysis by industry segment is presented in accordance with IFRS 8 on the basis of those segments whose operating results are

regularly reviewed by the Board of Directors (the Chief Operating Decision Maker as defined by IFRS 8) to assess performance and make strategic decisions about allocation of resources.

The sectors distinguished as operating segments are Production, Energy & Commodities, Transport and Industrial Services. A short description

of these sectors is as follows:

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

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

energy consumers;

•   Transport: provides bulk logistics to UK customers; and

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

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

The segment results, as reported to the Board of Directors, are calculated under the principles of IFRS. Performance is measured on the basis of

underlying operating profit, which is reconciled to profit before tax in the tables below:

Unallocated net assets includes goodwill and intangibles (£17.8m), revolving credit facility (£80.2m), cash and cash equivalents (£3.0m), derivative financial instruments (£3.2m), deferred tax liability (£2.2m) and other corporate items (£3.3m).

Unallocated net assets include goodwill and intangibles (£19.1m), revolving credit facility (£83.6m), cash and cash equivalent (£12.6m) derivative financial instruments (£7.6m), deferred tax asset (£4.1m) and other corporate items (£9.6m).

Information About Key Customers

Included in revenue is an amount of £155,595,000 (2013: £146,699,000) arising from sales to the Group's largest customer, relating to the Energy and Commodities and Industrial Services  divisions.

The following table analyses revenue by significant category:

Geographical Information

On 28 November 2013 a group reorganisation took place, whereby the Group's share of the voting rights in its German subsidiary reduced from 86% to 49%, which together with changes in board composition and shareholder rights, resulted in the Group losing control of the German business but retaining significant influence. In accordance with IAS 27, this is accounted for as a disposal of subsidiary and acquisition of an associate; the latter is accounted for at its fair value at the date of the acquisition, resulting in a gain on disposal of £2,087,000.

Prior to the deemed disposal of Hargreaves Raw Materials Services GmbH which was completed on 28 November 2013, the revenue and trading results of this entity have been included in the consolidated profit and loss and other comprehensive income on a line by line basis.

From 28 November 2013, from which date Hargreaves Services plc ceased to control the entity, the trading results of Hargreaves Raw Material Services GmbH continue to be included within continuing operations, albeit as part of the share of profit in associates.

This also resulted in the deconsolidation of its net assets from the group balance sheet and the recycling of the associated translation and non‐controlling interest reserves into the income statement resulting in a profit on disposal of £2.1m.

3 Taxation

Recognised in the Statement of Comprehensive Income

Recognised in Other Comprehensive Income

Reconciliation of Effective Tax Rate

The UK corporation tax rate reduced to 21% on 1 April 2014, giving an effective base rate of 22.67% (2013: 23.83%).

Factors That May Affect Future Current and Total Tax Charges

The March 2013 budget announced that the main rate of corporation tax will further reduce to 20% by 1 April 2015 in addition to the planned reduction to 21% by 2014 previously announced in the December 2012 Autumn Statement.  These changes were substantively enacted during the year and are therefore included in the figure above.

4 Earnings Per Share

The calculation of earnings per share is based on the profit/(loss) for the year attributable to equity holders and on the weighted average number of shares in issue and ranking for dividend in the year.

The calculation of diluted earnings per share is based on the profit/(loss) for the year and the weighted average number of ordinary shares in issue in the year adjusted for the dilutive effect of the share options outstanding (effect on weighted average number of shares is 266,277 (2013: 392,241); effect on earnings per ordinary share is 0.89p (2013: nil).  Effect on continuing earnings per ordinary share is 0.99p (2013: 1.57p)

Underlying and basic diluted earnings per share is calculated on the same weighted average number of shares in the tables above, and on underlying profit after tax, as reconciled below:

5. Dividends

The aggregate amount of dividends comprises :

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