CASE
STUDY

OAKWOOD FUELS ACQUISITION
The acquisition of Oakwood Fuels Limited ('Oakwood') was immediately synergistic both with DCC Environmental companies and with the wider DCC Group. Oakwood was planning the creation of a satellite depot in Scotland but rather than invest in a new greenfield site, Oakwood were able to locate vehicles at existing Tracey facilities. Similarly, prior to the investment, Wastecycle planned to develop a new facility to manage hazardous waste but the acquisition allowed them to utilise Oakwood's existing infrastructure. Finally, DCC Energy sells significant volumes of lubricant oil in Britain and is now in a position to offer Oakwood's oil collection services to its customers.


OPERATING REVIEW -

DCC HEALTHCARE


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. IN THE LAST YEAR DCC ENVIRONMENTAL HANDLED APPROXIMATELY 1.5 MILLION TONNES OF WASTE THROUGH ITS TWENTY ONE FACILITIES IN BRITAIN AND IRELAND.

Markets and Market Position

Britain
DCC Environmental collects and processes a broad range of nonhazardous and hazardous waste.

Its market leading Scottish business owns one of the most comprehensive waste infrastructures in Scotland, which includes material recycling facilities across the central belt of Scotland. These facilities seek to divert as much waste as possible away from landfill through the extraction of valuable commodities from waste streams which are sold to paper mills, steel mills and plastic and glass reprocessors as raw materials. Wood chip is also produced from waste wood which can be used by either the panel board or biomass industries or for animal bedding, arena surfacing and ground cover. Finally, construction aggregate is produced from waste demolition material which can be used as a substitute for virgin quarry aggregate.

DCC Environmental owns the largest material recycling facility in the East Midlands at Nottingham. In addition to providing a similar range of services to that offered by the Scottish facilities, this facility produces refuse derived fuel, a substitute to fossil fuels utilised by the cement industry. During the year, DCC Environmental expanded its geographic footprint in the East Midlands region with the acquisition of Maxi Waste, which operates two material recycling facilities in Leicester.

At its three hazardous facilities in Scotland and the North East of England, DCC Environmental provides innovative solutions to customers for a broad range of both solid and liquid hazardous waste.

During the year, DCC Environmental significantly expanded its hazardous waste management activities with the acquisition of Oakwood Fuels Limited ('Oakwood'), a national waste oil and hazardous waste collection, processing and recycling business. Oakwood collects waste lubricant oil and hazardous waste from businesses in a variety of sectors (the largest of which is the automotive services sector) and converts the waste oil to processed fuel oil, which is sold to customers for use in a variety of applications including road surfacing operations, aggregate drying, industrial and agricultural drying, power stations, large boilers and furnaces.

Overall, the British business handles 1.5 million tonnes of material, the majority of which is collected by its own fleet of 261 vehicles, and 74% of all waste volumes are diverted from landfill.

The UK Government has valued the British waste management market at Stg£7.5 billion. The six largest British waste management companies account for approximately 50% of this market but below this level the market is relatively fragmented.

The British business, with its comprehensive non-hazardous recycling infrastructure (the business does not operate any active waste landfill sites), is ideally positioned to benefit from society's drive to reduce waste and to conserve natural resources. Strong legislative backing is being provided to support the shift to resource recovery from waste products, the most significant of which is the commitment by the UK Government to increase landfill tax from Stg£64 per tonne to Stg£80 per tonne over the next two years. Other examples of the movement towards a more efficient management of scarce resources was the publication by the UK Government in June 2011 of its Waste Review which includes plans to consult on materialspecific landfill bans and the Scottish Government's own plans for a 'Zero Waste' Scotland, which aims to reach a 70% recycling rate (currently circa 40%) for all waste by 2025.

Ireland
Enva is Ireland's largest hazardous waste treatment company, providing technically innovative solutions to a wide range of customers in the commercial and industrial sectors. Operating from six EPA/EA licensed sites throughout Ireland, Enva has an unrivalled national presence. The six Enva facilities process a broad range of hazardous wastes including waste oil, contaminated soils, bulk chemicals and contaminated packaging. Enva also continues to invest in new and innovative solutions for hazardous waste. In addition to treating a broad range of hazardous waste at its own facilities in Ireland, Enva also works with a network of European based companies to provide a comprehensive range of solutions for hazardous waste.

Enva's water treatment division provides specialty chemicals, equipment and professional services to the drinking, industrial and waste water sectors. The water treatment division operates an in-house manufacturing facility as well as an INAB accredited laboratory to support these services.

The Irish waste market is valued at approximately €1 billion. The recession, and the collapse in activity in the construction sector, has seen significant contraction particularly in the non-hazardous market but DCC Environmental's Irish business has been protected through its focus on the niche hazardous sector and through developing innovative solutions for hazardous waste.

Strategy and Development

DCC Environmental's strategy continues to be to grow its position as a leading broadly based waste management and recycling business in Britain and Ireland by positioning the business to take advantage of the trend towards more sustainable waste management, with a particular emphasis on resource recovery and recycling. The strategy includes delivering superior value adding services to all its customers by way of a deep understanding of its customers' requirements and the development of innovative solutions to their problems. Furthermore, DCC Environmental is aligning its business to support the transition to a low carbon economy through a focus on resource rather than waste, developing internal climate change expertise and continually improving its recycling capability.

Customers

DCC Environmental provides recycling, waste management and resource recovery services to the industrial and commercial, construction and public sectors.

The customer base is quite fragmented, with the ten largest customers accounting for approximately 16% of total revenue in the year ended 31 March 2012. Many of the customers have been with DCC Environmental for a long time and the business has developed a deep understanding of their requirements.

Our People

DCC Environmental is proud of the fact that its management teams have deep industry knowledge, combined with strong operational capability. In particular, the former owners of William Tracey, Wastecycle and Oakwood all occupy senior executive positions within DCC Environmental. DCC Environmental seeks to develop its own employees by promoting from within the organisation and each business seeks to develop a challenging but enjoyable working environment. Each company has a dedicated human resources department.

DCC Environmental currently employs 896 people.

Key Risks

DCC Environmental, like all businesses within the Group, faces a number of strategic, operational, compliance and financial risks.

The construction sector is an important market for DCC Environmental and this sector is particularly sensitive to changes in the economic backdrop. DCC Environmental has an exposure to movements in both recyclate and oil commodity prices.

The interaction of heavy plant and people, in particular employees, at the facilities gives rise to the risk of accidents.

Sustainability

The environmental sector is at the centre of society's move to a more sustainable future by ensuring that the life of material is extended by either reusing it or recycling into a new product. Significant developments during the year included the production of processed fuel oil, which is used as a substitute for virgin fuel oil, in both Britain and Ireland and the commencement of the full upgrade of the recyclable processing line at the Nottingham facility.

In November 2011, Wastecycle was awarded the Carbon Trust Standard ('CTS'), a rigorous independent verification of the business's efforts to reduce carbon emissions from both its own operations and on behalf of customers. The CTS confirms Wastecycle's commitment to meeting increasing demand for businesses to address the challenges arising from climate change.

All DCC Environmental sites are regulated by either the EA in England, SEPA in Scotland, the EPA in the Republic of Ireland or the Northern Ireland Environment Agency in Northern Ireland. During the year there were 44 inspections. No major non compliances were identified and all minor non conformances or observations were addressed in full.

Performance for the Year Ended 31 March 2012

DCC Environmental generated an increase in operating profit of 24.9% on a constant currency basis, benefitting from the first time contribution of Oakwood, which has performed strongly since its acquisition in June 2011. Oakwood is a British waste oil and hazardous waste collection, processing and recycling business based in Nottinghamshire.

While operating profit grew strongly in Britain driven by the acquisition of Oakwood, trading conditions in the non hazardous waste management and recycling business were impacted by a decline in waste volumes in the market and a reduction in recyclate commodity prices in the second half of the financial year. The business consolidated its strong position in the East Midlands through the acquisition of Maxi Waste which operates two material recycling facilities in Leicester. The hazardous waste management and recycling business performed satisfactorily and the scale and range of its activities was significantly increased by the acquisition of Oakwood.

The business in Ireland performed well driven by the development of new innovative solutions for hazardous waste and the continued tight control of costs.

Outlook

DCC Environmental is well placed for the year to 31 March 2013 to benefit from the full year contribution of acquisitions completed in the prior year.

DCC ENVIRONMENTAL: KEY FINANCIAL PERFORMANCE INDICATORS


Strategic objective

KPI

Performance
Drive for enhanced operational performance
Revenue growth (constant currency)
Drive for enhanced operational performance
Operating profit growth (constant currency)
Grow operating margin
Operating margin
Deliver superior shareholder returns
Return on capital employed ('ROCE')
Drive for enhanced margins
Recycling %
Generate cash flows to fund organic and acquisition growth and dividends
Operating cash flow
Deliver superior shareholder returns
10 year operating profit CAGR
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