Interim Results Announcement for the six months ended 30 September 1999
Operating profit (including associates) up 11%
regulated operating costs down by 5% in real terms
£5.8m contribution (before goodwill amortisation) from the Group's interest in Waste Recycling Group plc
profit before taxation up 4%
adjusted earnings per share up 2%
interim dividend 7.3p per share
KEY FIGURES
1999
1998
Increase
Operating profit (including share of associates)
£151.1m
£136.2m
10.9%
Profit before tax (FRS 3)
£122.2m
£117.6m
3.9%
Adjusted earnings per share
30.2p
29.7p
1.7%
Interim dividend per share
7.3p
6.75p
8.1%
Group net debt
£851.5m
£686.2m
Gearing (debt:equity ratio)
51.1%
44.8%
Interest cover
5.2
6.7
CHAIRMAN'S STATEMENT
The Group has made encouraging progress in the six months ended 30 September 1999. Group profit before taxation for the period increased 3.9% to £122.2m (1998: £117.6m) with adjusted earnings per share up 1.7%. An interim dividend of 7.3p will be paid, an increase of 8.1% over the interim dividend paid last year. It is the board's intention to recommend a similar percentage increase in the final dividend in respect of the current year.
The Group's water services companies both reported strong financial results. The first contribution from the Group's share in Waste Recycling Group plc provides the foundation for a meaningful stream of non-regulated profits. The acquisition of Aquarion Company in the US, which was announced in June, should be completed in the New Year and reinforces our strategy to move away from dependency on UK regulated profits.
In line with our stated aim of acquiring new laboratory businesses, Alcontrol announced in August conditional agreements to purchase two further analytical laboratories in Sweden. In September, we acquired Geochem Group Limited, a well respected environmental analysis laboratory in Chester.
The UK water industry Regulator has recently published his Final Determination on price limits for the water services companies for the next five years. The targets set are challenging but achievable and we have decided to accept the outcome.
However, we do have to deliver an extensive environmental improvement programme and at the same time reduce prices significantly. This has wide ranging implications for the water businesses and means that we will have to reduce significantly our operating costs. As a result we are accelerating the existing Change Programme, which is already bringing efficiencies, and plan to reduce manpower levels by around 500 from current levels of 2700 over the next 12 months.
The Board is determined to meet these future challenges and to accelerate growth of its other businesses. This will include capitalising on the excellent platform we will achieve in the US through our acquisition of Aquarion.
The Board is confident that it can continue to deliver value for shareholders. It is our intention that the dividend paid in respect of the current year should form the base for future dividends. The growth in future dividends will be dependent on the annual performance and achievement of all the Group's businesses.
Brandon Gough
Chairman
REVIEW OF THE BUSINESS
Group financial performance
The results include, for the first time, the Group's share of the results of Waste Recycling Group plc (WRG). Turnover (including share of associates) increased 5.3% to £370.7m (1998: £351.9m). Operating profit (including share of associates), but after goodwill amortisation of £2.0m, was 10.9% higher at £151.1m (1998: £136.2m). This increase in profits reflects the strong performance of the Group's regulated water services companies. The overall contribution from the Group's other businesses was £8.4m (1998: £6.2m) before goodwill amortisation of £1.5m, including the £5.8m contribution from WRG.
The interest charge increased from £20.3m to £28.9m, principally as a result of the continuing heavy investment in water services. However, interest cover was maintained at 5.2 times, a similar level to 1998/99, partly due to the contribution from WRG. Profit before taxation was £122.2m (1998: £117.6m), an increase of 3.9%. The increase in adjusted earnings per share was 1.7%.
Following the sale of 3C Waste to WRG in April, the Group's net debt reduced over the period. Net debt at 30 September 1999 was £851.5m (31 March 1999: £882.8m) representing gearing of 51.1% (31 March 1999: 56.0%).
Interim Dividend
An interim dividend of 7.3p per share will be paid on 1 March 2000 to shareholders on the register on 28 January 2000. This represents an increase of 8.1% in accordance with the Group's existing dividend policy. The full cost of the Group dividend will be met by the regulated water services business of Yorkshire Water.
Water Services
Turnover in Yorkshire Water increased by 5.8% compared with the first six months of 1998/99 following an overall increase in tariffs of 6.2%. Revenue growth was offset by the continuing decline in consumption by industrial and commercial customers and the effect of domestic metering.
Regulated operating costs have reduced by around 5% in real terms from the equivalent period last year. This is a result of the additional operating costs arising from the completion of capital schemes being more than offset by savings resulting from the Change Programme efficiency initiatives. This will ensure that the company is in a good position to meet the challenges set by the Final Determination.
The Drinking Water Inspectorate's report for 1998, published in July 1999, reported an overall compliance of 99.81% with drinking water quality standards - our best performance to date. Further improvements in service are planned over the next few years as a result of our ongoing water mains rehabilitation programme. Waste water compliance has also been excellent; there were no recorded failures of sanitary determinands in the first six months.
'Humbercare' and 'Coastcare', our major investment programmes to improve the quality of the Humber Estuary and Yorkshire's bathing waters, are also progressing to schedule. In the first six months, £204.5m (1998: £152.7m) was spent by Yorkshire Water on the improvement of water and sewerage services.
The integration of York Waterworks continues as planned. The provision of water services in York is becoming more cost effective as ways of working are harmonised and duplication is eliminated. York Waterworks' customers will also benefit from improvements to service, including increased security of supply through integration into Yorkshire Water's regional water grid.
At the end of October we completed the sale of York Gas to Independent Energy. The disposal was in line with the Group's strategy to continue to focus on exploiting core skills.
In June the North of Scotland Water Authority announced that Yorkshire Water Projects had been selected, as part of a preferred consortium, to build and operate new waste water treatment works to serve customers in Aberdeen, Stonehaven, Peterhead and Fraserburgh. The capital contract will be worth around £80m and Yorkshire Water will be responsible for the 30 year contract to operate the plant.
Environmental Services
White Rose Environmental (WRE) continues to expand its services. The new Healthcare Services division serving nursing homes continues to grow strongly and has recently been awarded a number of prestigious national accounts.
Building on the company's experience in the disposal of sensitive waste and logistics
capability, this year will see the expansion of its presence in the washroom services sector through a new brand, 'Hystar', and the start up of White Rose Confidential, our specialist disposal service for confidential waste.
In Europe, Alcontrol continues to perform strongly. The Biochem business, acquired in October 1998, has performed above expectations. The consolidation of the two environmental testing laboratories onto one site from January 2000 will bring further cost savings.
In August Alcontrol announced that it was in exclusive negotiations to purchase two
environmental and food testing laboratories in Sweden, with a total combined turnover of around £15m. The first of these acquisitions, KM Lab AB, should become unconditional before the end of the calendar year.
In September Alcontrol UK announced the purchase of the Geochem Group Limited, an environmental analysis laboratory based in Chester. The Geochem brand is highly respected in the market and Alcontrol will benefit from Geochem's product range and technical skills.
The acquisition process will continue and further opportunities are being sought in the UK, Holland and the rest of Europe in both environmental and food testing.
The share of associates' results reflects the inclusion of the Group's 46% interest in WRG from January 1999. The Group's share of profits has been derived from the previously published WRG interim results for the six-month period ended 30 June 1999. These results do not reflect a full six-month contribution from the 3C Waste business, which was not acquired by WRG until 12 April 1999.
Energy
Construction of Europe's first commercially operating wood fuelled biomass energy plant at Eggborough is at an advanced stage. The Government has recently restated its commitment to the development of renewable energy resources and First Renewables continues to explore a range of innovative commercial opportunities arising from this commitment.
Land Development
Delays in finalising sales have adversely affected anticipated first-half profits. It is expected that the position will be more than fully recovered in the second half.
Year 2000
We have made excellent progress to ensure that the Group's equipment and systems are Year 2000 compliant. Our programme of work is complete as are our contingency plans for the Millennium weekend. Yorkshire Water has been classified as 'blue' status (no risks of material disruption identified) by the water industry regulator who independently assessed our work and state of preparation. We are confident that the enormous amount of work done over the last three years will give a high level of protection against equipment failures and their potential impact on customers' services.
