Hargreaves Services

Source: Stock Market Digital

Date :27/09/2007 10:34:32

Regeneration, consolidation and expansion

Ahead of his semi- retirement to an NED role at the end of the year, Financial Director Peter Dillon tells us how Hargreaves Services is becoming a Hanson Trust for the 21st century

Written by James Hurley & Produced by Kiron Chavda

Established in 1994, Hargreaves Services is a rapidly expanding minerals and support services group that sources, produces, processes and handles carbon based and other bulk minerals throughout the UK and Europe.

Group Financial Director Peter Dillon joined the company in 2003, at a time when the company was reaching a critical juncture in its rapid development. Alongside Chief Executive Gordon Banham, Dillon was part of the team that completed a £19.2 million management buyout of the company from owner and founder Bob Young in April 2004, heralding a period of impressive diversification at the firm.

Coal

At the time of the buyout, Hargreaves Services had already established itself as the largest bulk haulage company in Britain. From its headquarters in Co. Durham and through its national network of depots, the company had generated substantial waste haulage contracts. It was also a major supplier and processor of carbon based minerals from its specialist facilities at Immingham and Newport and had biomass and ash handling facilities at several Yorkshire power stations, giving the company a strong grounding for the expansion and diversification that the new management team had planned.

“Hargreaves has an interesting business model,” says Dillon. “We’re involved in very basic industries - haulage, raw materials and waste. Even if you get a nasty recession, you want the lights to stay on and the waste to be moved, so we don’t think a recession would give us as big a problem as most companies.

“The nearest I can compare it to is a latter day version of Hanson Trust. Lord Hanson built one of the most successful FTSE 100 companies by going into unglamorous, dirty industries, consolidating and then applying professional, good management to them – that’s all Hargreaves does.”

The company began its diversification by developing its bulk haulage and waste businesses in Britain, and by placing a much stronger emphasis on the company’s coal importation activities, setting up large processing facilities and rail connections at Immingham and Newport. Dillon explains the thinking behind the expansion of this side of the business.

“Being the largest bulk haulier in Britain, we were already used to moving a lot of material. One of our bigger customers was UK Coal and we couldn’t help noticing that domestic production was declining considerably faster than the market, which led us to conclude that further imports would be required. To cover England, we saw two key ports; Immingham, the biggest raw material importer in the UK, serving a number of large power stations in the Ayr Valley, and Newport in South Wales to cover the South West and North East. That proved very successful.

To contend with the purchasing power and specialist purchasing departments of its competitors, Hargreaves had to think about coal importation in a slightly different way. “The coal burning stations are essential to keeping the lights on in this country. If they can’t get coal in the UK, they are forced to import, so why can’t Hargreaves import coal, sell it to generators and make a profit? We buy the coal abroad - from Russia, Indonesia and Columbia - but we don’t buy it ‘power station ready’.”

Power stations use coal with a diameter of 50mm, while Hargreaves buys the commodity as ‘run of mine’ - as it is when it comes to the surface. “The mine is saved a crushing operation which gives us a slight price advantage. To get the freight rates right, we also import in very big ships, because we are playing big boys games – that took some balls.”

Long term prospect

While some might argue that the decision to move into coal must have taken ‘some balls’ in itself, Dillon insists that coal is an excellent long term prospect for the company.

“All UK coal firing power stations have fitted flue gas desulphurization (FGD), which removes sulphur. These were retrofitted at a cost of £100 million per station. People don’t go to that kind of capital expenditure without seeing a reasonable long term. We can certainly see very clearly that from now until not earlier than 2015, our capacities are approximately one third nuclear, one third gas, and one third coal, and then a decimal rounding in wind and wave power. Nuclear stations are reaching the end of their effective lives and even if they were to start on a new nuclear programme tomorrow, they would do extremely well to even replace the capacity that’s coming off line by 2020.

“That leaves gas and coal. There are quite a lot of security and price concerns when it comes to gas, while coal is cleaning up its act and is now a more stable commodity,” he says.

“We’re pretty certain that the demand for coal is there until 2020, almost regardless of what happens between now and then. It will vary a bit, but the coal burn in this country is still between about 45 and 50 million tonnes. We’re mucking about with four to five million tonnes, so there’s plenty of headroom.”

Indeed, despite the company’s rapid growth, Dillon says Hargreaves tends to take a conservative approach when it comes to risk management. “We de-risk everything because we’re very cautious people. What we don’t do is take any position on commodity prices; we really don’t want to be winning or losing because the international price of coal rises or falls, or in many cases the price of the dollar rises and falls. In fact, we’d of made quite a deal more money in the last three years if we’d just ridden the upswing on coal prices.” Instead, Hargreaves enters long term contracts with its suppliers in various parts of the world, and simultaneously contracts with its customers. “We’re happy with that small but certain margin,” says Dillon.

Yet the company has shown a strong pedigree for acquisition where it has seen an opportunity. Just before its flotation on the AIM market in November 2005, Hargreaves acquired Monckton Coke Works for £12 million.

“It was the only merchant producer of Coke left in the UK. It was a dodo in the sense it was the only one left but we felt it was an unloved subsidiary of UK coal.” Through a joint venture that was set up with ThyssenKrupp Metallurgical Supplies, Hargreaves already dominated the foundry coke supply market in Britain. “We knew the market. To turn what was an ailing operation around, we negotiated more commercial terms with their biggest customer, Brunner Mond Plc, getting the contract up to international price rather than below. We gave them security of supply.”

The company did the same with the exports to Scandinavia, which represented 100,000 tonnes of Monkton’s output. “We cut out an agent who had been taking a very fat cut and upped the proceeds. The result was that over the first twelve months of operation, we turned what was a break even business into one with a £2 million profit.” Hargreaves is now the largest UK independent producer and distributor of coke products.

Maltby acquisition

Following its flotation, Hargreaves further diversified its business model by developing its on-site services capabilities. Hargreaves bought Norec Limited, one of the biggest on-site service suppliers to power stations and ports, for £5.5 million in July 2006. “We already had significant expertise in both of these areas, so this was a natural development.

The acquisition added considerable scale, with 510 staff, to Hargreaves existing Industrial Services business. The combined size of the business produced an enhanced position within the market giving further opportunities for substantial growth,” Peter Dillon says.

Hargreaves further expanded its coal activities in February 2007, with the £31 acquisition of Maltby Colliery from UK Coal. “It gives us underground mining capabilities to the tune of 1.25 million tonnes a year. We renegotiated what were uncommercial terms for the output of the mine, signing a deal with Drax for 750,000 tonnes at a more commercial price than what we had with UK Coal. A coking coal mine is an ideal strategic fit within the Hargreaves range of services.”

The company posted a 71 percent increase in turnover to £265.3m for the year to May 31 2007, up from £147 million in 2006 and £79.3 million in 2005. “We’ve shown phenomenal growth and we’ve been very active. My job as FD is to ensure that we maintain good financial control of all activities at all times and we’ve done that, restructured, employed additional accountants and integrated the whole group,” he says.

Dillon, 63, is expecting to move out of the day-to-day operation of the company in December, and migrate into an NED role. “I believe companies are best run by people with a combination of energy and experience. I will be 64 in April. The job here is extremely demanding and stressful. I will be remaining on the board in an advisory capacity, but I think it’s time to pass the ball to someone else,” he says. Give the current robust financial health of the company, Peter Dillon has certainly given his successor a tough act to follow.

Links

hargreaves services