Hargreaves Serv Regulatory News (HSP)

HARGREAVES SERVICES PLC 

(the "Group" or "Hargreaves")

Update on the Group Simplification Plan and Pre Close Period Trading Update for the six months ended 30 November 2014

Hargreaves Services plc (AIM: HSP), the UK's leading supplier of solid fuels and bulk material logistics, today issues the following update on the Group Simplification Plan together with a trading update prior to the Group entering its close period. The Group expects to announce its interim results on 17 February 2015.

Update on the Group Simplification Plan

On 27 October 2014, following a period of unprecedented turmoil in European coke markets, the Board announced the commencement of a 45 day consultation process at Monckton Coke and Chemical Company Limited ("Monckton").

The Board can confirm today that whilst discussions with key export customers have continued throughout the consultation period, there has been no significant improvement in market conditions or customer demand. It is therefore with regret the Group confirms today that, following the completion of the consultation process, the closure of Monckton will proceed and production will cease during December 2014.

The Group remains committed to exploring alternative employment opportunities for staff, both within the wider Hargreaves Group and externally.

For the year to 31 May 2015 Monckton is expected to be managed to a break even position at the operating level against an original budgeted operating profit of £2.0m. The cash closure costs are estimated to be approximately £3m together with £1.8m of remediation costs, which have been provided for. A further £13.6m of non-cash book impairments, including £5.7m relating to goodwill, are expected. The total charge to the income statement, before taxation relief, in respect of the closure of Monckton is estimated to be £16.6m.

As previously reported, the Board expects the closure of Monckton to be cash positive, with the resultant unwinding of approximately £22m of working capital, comprised mainly of coke stocks, across the two years ending 31 May 2016. The approximate cash impact of closure in the current financial year is expected to be an inflow of £8m.

The decision on Monckton represents a major element of the Group's simplification plan, which continues to progress well and the Board remains confident that its implementation will deliver strong cash generation and a more simplified and streamlined Group.

The £16.6m charge relating to Monckton will be aggregated with other amounts relating to the simplification programme, including the gain made on the disposal of Imperial Tankers. The resulting net cost of the simplification programme is estimated to be a net charge of £7m in the year ending 31 May 2015. This charge includes a provision of £1.5m for the early termination of long term interest rate swaps that will no longer be required following the decision to simplify and pay down debt levels. These simplification costs do not form part of the Group's ongoing activities and will be excluded from the Group's underlying result.

As expected, the simplification programme has achieved strong cash generation to date, and the Board expects further significant capital to be released over the next 18 months. The Board is pleased with the strengthening of the balance sheet and can report that, notwithstanding the normal first half inventory build in Energy and Commodities ('E&C'), net debt at 30 November 2014 had reduced to approximately £40m.

Current Year Trading Update

The Board is pleased to confirm that trading during the first six months of the current financial year has been in line with management's expectations.

Our surface mining operations are performing well, with strong production rates being achieved across its portfolio of operating sites.

In our E&C division, as previously outlined, ongoing uncertainty around Government policy on energy, coal generation and carbon taxes, continues to reduce medium term visibility for the division. Sales of thermal coal have been slow in the first six months of the year, reflecting the impact of low gas prices on coal burn. Volumes are expected to recover to normal levels through the winter. In respect of the current year, whilst contract visibility provides the Group with confidence of meeting full year expectations, the Board notes the ongoing production and financial problems at Hatfield which could impact on coal off-take and services in the second half.

Outlook for Financial Year ending 31 May 2016

The current financial year benefits from historic coal contracts and hedges which were put in place to protect committed production projects in Scotland from volatility in commodity prices. These projects and contracts expire toward the end of this financial year. On 9 September 2014, we noted that the benefit of these contracts and hedges in this financial year was between £8 - 9m, compared to the prevailing market prices, and that the Board was considering various mining plan scenarios in an effort to mitigate the impact as far as possible.

Since then, the position has significantly worsened with 2016 forward coal prices falling by a further £4 per tonne from the level on 9 September 2014. At these exceptionally low price levels the Group has elected to depart from its long standing strategy and has not hedged or contracted to supply significant fixed tonnages for the next financial year. Consequently, the Group's target will be to maintain the overall Scottish mining operation at a break even level in the year to 31 May 2016.

The Group will monitor coal price and selectively target production, particularly focusing on those reserves that have a low cost of production and yield higher quantities of speciality coals. Furthermore, before committing to operate specific sites, the Group will secure contract or hedge cover for each specific project. This will maximise the opportunity for the Group to benefit from any increases in coal prices, whilst managing further profit exposure.

In addition to our Scottish activities, at current coal price levels, the lower coal prices are expected to reduce the Group's share of profit from the Tower joint venture by around £2.0m in the financial year to 31 May 2016.

The Group remains confident that the mining assets in Scotland and Wales are important and potentially very valuable long term assets. The team continue to work hard and, given the ongoing challenges around coal price, has intensified its efforts to drive value and cash from the renewable projects and property assets that were acquired with the ATH and Scottish Coal acquisitions.

Share Buyback Programme

As announced on 27 October 2014, the strong cash generation being achieved by the Group provided the Board with the confidence to announce an intention to increase the dividend payout ratio and implement a rolling share buyback programme. The Board commenced the buyback programme and as at the date of this announcement had bought back 230,000 shares.

Summary

In summary, the Group is satisfied with the progress and trading in this financial year.

The decision to close Monckton, whilst regrettable for the staff and stakeholders, will reduce the level of risk and volatility currently created by the challenge of fluctuating demand and low commodity prices. We are pleased to note that the Group faces these challenges with a very strong balance sheet and profitable and cash generative trading, services and transport operations.

The Board remains committed to developing the Group's surface mining operations and regards these assets as a source of significant long term value. The actions taken to maintain the maximum amount of operational flexibility around the mining business will ensure that the Group is well placed to ride out the current challenges presented by low international coal prices and quickly benefit from any improvement.

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