46 Strategic Report - Performance Operating Review - DCC Environmental DCC Environmental is a leading British and Irish provider of recycling, waste management and resource recovery services to the industrial, commercial, construction and public sectors, operating in both the non-hazardous and hazardous segments of the market. This year DCC Environmental handled approximately 1.4 million tonnes of waste through its twenty one facilities in Britain and Ireland. Markets and Market Position Britain DCC Environmental is a market leader in non hazardous waste management in both Scotland and the East Midlands. In Scotland, operating under the William Tracey brand, DCC operates a comprehensive recycling infrastructure across the central belt, including one of the largest material recycling facilities in Britain in Linwood, close to Glasgow airport. During the year, DCC Environmental strengthened its position in the Edinburgh market through the acquisition of Oran, a waste collection business. In the East Midlands, operating under the Wastecycle brand, DCC Environmental operates three material recycling facilities in Nottingham and Leicester along with a civic amenity site on behalf of Nottingham City Council. The facilities process waste collected by both company owned and third party vehicles into valuable commodities which can be used as a substitute for virgin materials. In addition, in the East Midlands, DCC Environmental has the added capacity to process waste not suitable for recycling into a fuel which is used by the cement industry. In hazardous waste management, also operating under the William Tracey brand, DCC Environmental is a market leader in Scotland and the north of England with three dedicated facilities providing a wide range of treatment solutions for hazardous waste. During the year the range of services offered was broadened by entering the sludge treatment sector. In addition, operating under the Oakwood Fuels brand DCC Environmental is a leading national collector of waste oils, which are brought back to its facility in Nottingham where they are converted into a fuel which can How we win Clear understanding of customers requirements. Provider of innovative solutions for customers. Respond quickly to opportunities arising from new regulations. Absolute focus on recycling/recovery without the distraction of legacy landfill assets. DCC Environmental What We Do Commercial and industrial waste Landfill Material recycling facility Energy Construction and demolition waste Raw material for manufacturing
47 DCC Annual Report and Accounts 2014 Supplementary Information Financial Statements & Notes Governance Strategic Report Revenue 130.6m : 116.1m UP 12.5% Return on capital employed 8.6% : 8.3% Operating profit 11.7m : 10.9m UP 7.8% Brands Enva*, Wastecycle*, Tracey*, Oakwood*. * DCC owned brands
48 Strategic Report - Performance Operating Review - DCC Environmental (continued) DCC Environmental is constantly looking to reduce the proportion of waste that cannot be recycled or utilised for its energy content. In this regard, as highlighted in the case study, DCC Environmental has recently commenced the export of processed material to Sweden for energy recovery. be used as a substitute for heavy fuel oil. Waste management businesses are at the heart of the burgeoning circular economy and DCC Environmental have pioneered such development. One such example is its relationship with British Gypsum whereby waste gypsum is collected nationally and brought back to DCC Environmental's Nottingham site where it is processed and then sent back to British Gypsum s facilities to be used to manufacture new gypsum. DCC Environmental is constantly looking to reduce the proportion of waste that cannot be recycled or utilised for its energy content. In this regard, as highlighted in the case study, DCC Environmental has recently commenced the export of processed material to Sweden for energy recovery. Overall, the British business handles 1.3 million tonnes of material, the majority of which is collected by its own fleet of 231 vehicles, and 71% of all waste volumes are diverted from landfill. Recovery percentages depend on the mix of material with the highest percentage achieved from construction material. The pickup in economic activity, particularly in the construction sector, has translated into an improved market backdrop in the non hazardous sector with increased activity particularly evident in the East Midlands. Recyclate prices however remain relatively low compared to historic highs. The hazardous market remains challenging with excess capacity evident. DCC is fortunate that Scotland is such an important market noting the country s continuous focus on developing and improving waste management through its Zero Waste agenda. From 1 January 2014, all businesses in Scotland had to present metals, plastics, glass and card for separate collection. In addition, businesses in non-rural areas which produce over 50kg of food waste per week must also present this for separate collection. This will broaden to include all businesses producing 5kg of food waste per week from January 2016. In October plans were published to reduce all waste in Scotland by 7% by 2017 and 15% by 2025. Also, Scotland recently passed legislation for the introduction of its own landfill tax which will replace the current UK system from 2015 and is expected to provide further impetus to the development of the Scottish waste industry. At the recent Awards for Excellence in Waste Management and Recycling, a highly respected British ceremony, William Tracey won Recycling Business of the Year for its promotion of the new regulations. Ireland Operating under the Enva brand, DCC Environmental s Irish business is recognised as Ireland s leading hazardous waste treatment company. Enva operates from six EPA/NIEA licensed sites in both the Republic of Ireland and Northern Ireland, offering technically innovative solutions to a wide range of waste streams for both multinational and indigenous clients. It has an inhouse infrastructure to treat a broad range of materials including waste oil, contaminated soils, bulk chemicals and contaminated packaging. In cases where it is unable to treat the waste itself, it has relationships with a network of European based companies to provide a range of solutions for hazardous waste which are not available in Ireland. Enva s water treatment division provides specialised chemicals, equipment and professional services to the drinking, industrial and waste water sectors. The division operates an in-house manufacturing facility as well as an INAB accredited laboratory to support these services. Enva works closely with Oakwood in developing new treatment processes for hazardous waste and also with DCC Energy who provide a route to market for the Processed Fuel Oil produced from waste oil. The Irish waste market is valued at approximately 1 billion. The sector was severely impacted by the economic recession, in particular the collapse in the construction sector which hit the non hazardous waste sector particularly hard. Whilst DCC Environmental s Irish business was somewhat protected through its focus on the niche hazardous sector and through developing innovative
49 DCC Annual Report and Accounts 2014 Case Study TRACEY COMMENCES EXPORT OF REFUSE DERIVED FUEL Supplementary Information Financial Statements & Notes Governance Strategic Report During the year, Tracey commenced the manufacture of Refuse Derived Fuel which is exported to Sweden. Refuse Derived Fuel is produced from residual waste where recyclable material has already been separated. The residual waste is processed to remove any remaining recyclable material and then shredded and bailed to allow it to be shipped abroad. There is currently a lack of Energy from Waste plants in Britain whereas there was significant investment in such infrastructure in Continental Europe. By producing and exporting Refuse Derived Fuel, Tracey is assisting Scotland in meeting its landfill diversion targets as part of its continued journey to a Zero Waste society and is also producing a fuel used to generate renewable energy in Sweden. In due course, as further infrastructure is developed in Britain, such material will be redirected to plants in Britain which will assist in achieving its renewable energy targets. solutions for hazardous waste, it is intent on ensuring that it fully benefits from the improving economic backdrop. Strategy and Development DCC Environmental s strategy continues to be to grow as a leading broadly based waste management and recycling business in Britain and Ireland by positioning itself to take advantage of the trend towards more sustainable waste management, with a particular emphasis on resource recovery and recycling. DCC Environmental will ensure that it harnesses the opportunities arising from the recovery in the economies it operates in. The strategy includes delivering superior value adding services to all its customers by way of a deep understanding of their requirements and the development of innovative solutions to their problems. Furthermore, DCC Environmental is aligning its business to support the transition to both a low carbon economy and the emerging circular economy through a focus on resource rather than waste, developing internal climate change expertise and continually improving its recycling capability.
50 Strategic Report - Performance Operating Review - DCC Environmental (continued) Customers DCC Environmental provides recycling, waste management and resource recovery services to the industrial and commercial, construction and public sectors. Revenue split by customer Industrial and commercial 67% Construction and demolition 19% Public sector 14% The customer base is quite fragmented, with the ten largest customers accounting for approximately 20% of total revenue in the year ended 31 March 2014. Many of the customers have been with DCC Environmental for a long time, in some cases over 30 years, and the business has developed a clear understanding of their requirements. Our People DCC Environmental s management have deep industry knowledge with the former owners of the businesses still with the Group. Each company seeks to develop their employees as illustrated by a policy of promoting from within the organisation wherever possible. Employee engagement is critical and employee surveys are regularly undertaken. The businesses constantly strive for excellence in health and safety to ensure that a safe place of work is provided to all employees. In this regard, external consultants have been recently appointed across the division to provide assistance in the development of a safety culture awareness program. DCC Environmental currently employs 1,005 people. Key Risks Similar to all businesses within the Group, DCC Environmental faces a number of strategic, operational, compliance and financial risks. As highlighted in previous years, every effort is made to minimise the interaction of heavy plant and people but given the nature of its operations, it is impossible to eliminate entirely and this gives rise to the risk of accidents. The construction sector is an important market for DCC Environmental and this sector is particularly sensitive to changes in the economic backdrop, as has been the case in recent years. DCC Environmental has an exposure to movements in both recyclate and oil commodity prices. Noting the significant degree of regulation of the sector, it is important that there is uniform enforcement of the regulations. In addition changes in regulations can create opportunities but also risks to business models. The sector attracts a relatively high degree of media scrutiny which also creates a heightened risk of negative publicity. A number of IT projects are being undertaken to enhance the IT environment and related operational efficiencies which gives rise to particular implementation risks which are being managed. DCC Environmental s management have deep industry knowledge with the former owners of the businesses still with the Group. Each company seeks to develop their employees as illustrated by a policy of promoting from within the organisation wherever possible.
51 DCC Annual Report and Accounts 2014 DCC Environmental: Key Financial Performance Indicators Strategic objective KPI Performance Drive for enhanced operational performance Revenue growth 2014 Drive for enhanced operational performance Operating profit growth 2014 Grow operating margin Operating margin 2014 Deliver superior shareholder returns Return on capital employed 2014 Drive for enhanced margins Recycling/recovery% 2014 Generate cash flows to fund organic and acquisition growth and dividends 2014 v : +12.5% 2014 v : +7.8% Operating cash flow 2014 Deliver superior shareholder returns 10 year operating profit CAGR 2014 130.6m 116.1m 11.7m 10.9m 9.0% 9.4% 8.6% 8.3% 68% 69% 17.2m 17.5m 12.7% 12.7% 14.9% Supplementary Information Financial Statements & Notes Governance Strategic Report Environment The businesses continue to focus on energy efficiency initiatives to generate cost savings and reduce carbon emissions. During the year both rainwater harvesting and solar panels were installed at a number of sites. Tracey have invested in vehicles which have the ability to maintain separate waste streams in one collection vehicle thereby reducing the carbon impact of these uplifts. Wastecycle was re-certified for another two years to the Carbon Trust Standard. During the year there have been a number of routine inspections by environmental regulatory agencies. No major non-conformances with licensing were recorded and all minor non-conformances or observations were actioned as a priority. DCC Environmental's 21 sites continue to maintain excellent or good ratings from their respective regulators. Performance for the Year Ended 31 March 2014 DCC Environmental s operating profit increased by 7.8%, driven by improved market conditions in the non-hazardous waste market and a continued focus on operational efficiency. In Britain, the non-hazardous waste business benefitted from improved economic conditions with a pickup in construction sector activity. In the hazardous sector, price competition continues to be intense, with the improved economic backdrop yet to translate into an increase in demand.