RNS Number : 5867F
Northgate PLC
22 February 2018

22 February 2018

Northgate plc

Q3 Trading Update and Announcement of New Fleet Optimisation Strategy


Northgate plc, ("Northgate", the "Company" or the "Group"), the UK, Spain and Ireland's leading specialist in light commercial vehicle hire, today provides a trading update for the period 1 November 2017 to 31 January 2018 and announces a new fleet optimisation strategy to be implemented immediately.


Vehicles on Hire


Strong progress has been made across the Group in growing vehicles on hire (VOH) since the reporting of the Interim Results in December 2017.


As a direct result of the self help measures outlined during the Capital Markets Day on 4 October 2017, the UK business has progressed well with closing VOH at the end of Q3 now in year-on-year growth for the first time in three years of 0.7% (see appendix table 1). The trend in quarterly average VOH figures for the UK has continued to improve with Q3 now 2.0% lower than prior year, which also illustrates a substantial improvement versus Q2 (see appendix table 2). With the continued application of self help measures and with closing VOH now in growth, management are confident that the UK will meet its committed Q4 KPI of "average VOH being broadly flat versus prior year" and will turnaround the 7.5% decline reported in Q4 FY17.


In Spain, third quarter growth has been outstanding with average VOH up 14.2% versus prior year (see appendix table 3). This growth has been fuelled by significant uptake in fixed term products which continue to win market share from existing contract hire competitors as well as substitute for customer owned vehicles. Further strong growth is anticipated through the fourth quarter and management expects to significantly outperform the Spanish Q4 KPI of ">10% growth in average VOH".


As a result of the turnaround progress in the UK and continued strong growth in Spain, the Group achieved 5.0% growth in average VOH for Q3 versus prior year (see appendix table 4) and expects to achieve higher single digit growth in Q4 in line with the committed KPI range.


Marginal Return on Capital


Marginal returns on capital (defined as revenue less all variable costs associated with serving new contracts divided by the capital cost of the required fleet at its purchase price) remain strongly ahead of Group WACC as growth is delivered. In the UK and Spain, the average marginal return on capital of all contracts won and renegotiated up to the end of December is in the low to mid 20% range. This marginal return on capital is expected to improve over the duration of the life of these contracts as the net book values of vehicles reduce while contract pricing remains largely constant.


Rental Margin


In the third quarter, the rental margin for the Group improved by 0.4 percentage points driven by Spain where the rental margin improved by 3.3 percentage points compared to the prior year, as strong growth in VOH was delivered. In the UK there was a decline in rental margin of 1.3% as rental volumes remained slightly lower than prior year and we expect a further reduction in Q4 as pricing continues to be adjusted to position Northgate competitively in the market.


Management continues to see evidence of a clear structural shift from customers moving out of ownership and into rental and minimum term hire of vehicles and this, along with focused execution of Northgate's strategy, is expected to drive strong continued growth in vehicles on hire for the Group.


Vehicle Disposals and Fleet Optimisation Strategy


At the start of the financial year the impact of vehicle disposals was forecast by projecting volumes and profit per unit (PPU)1 across the Group using methodologies consistent with previous years.


Following the interim results in December, where declines in PPU were greater than those expected, management undertook an extensive review encompassing (i) the fleet holding periods across the Group to ensure that these are set to maximise cash returns on the investment in new fleet and (ii) the Group's asset register in order to profile the current age and mileage of all 97,500 vehicles in the fleet as well as the age and mileage of those vehicles sold to generate disposal profits in recent years.


The outcome of this review has been to conclude that:


a)    Vehicles in Spain and the UK should be held for substantially longer than has been the case over recent years. Whilst this is dependent on the type of vehicle, and a minority can be rotated faster, the optimal holding period to maximise cash returns, and ultimately shareholder value, is 3 to 9 months longer than the current disposal ages in both the UK and Spain.


b)    The profile of disposal profits in recent years and under previous management has been made up of ever higher volumes of ever younger vehicles at ever lower PPUs. This is not viewed as a route that has led to the maximisation of long term shareholder value.


As a result, the Board does not believe it is in shareholders' best interests to continue with the approach taken in recent years of selling higher volumes of younger fleet through trade channels in the short term as this is not aligned to maximising longer term value creation for the Group.


Following this substantial review and with due consideration of short term trading alternatives, the Board has therefore taken the decision to optimise holding periods in all territories starting immediately. As a consequence, vehicles will only be sold when they have reached an age which optimises cash returns unless constrained by operational factors such as mileage, condition or maturity of customer contracts. Disposal volumes will, therefore, reduce through the final quarter of FY18 and through the first half of FY19 as the fleet is allowed to age to its optimal level before disposal. Consequently, vehicle purchases will also reduce through this period.


This strategy will deliver a more efficient capital base for the business as net book values are allowed to reduce with more moderate capital expenditure and funding requirements in the short term supporting targeted increases in ROCE. Subsequently, cash returns will increase and headroom over the leverage covenant will improve.


This decision to extend holding periods, combined with continued progress in increasing the volume of disposals through the retail channel, will result in higher PPUs going forwards. Consequently, and in line with accounting principles, depreciation rates will be reviewed at year end. Any change to depreciation rates will be applied on a forward looking basis starting in FY19.


The KPIs outlined at the Capital Markets Day which relate to PPU and volume of disposals will be updated to reflect these changes at the presentation of the year end results.



The significantly improving trend in UK VOH validates the impact of the self-help measures, and is anticipated to continue through the year end and into FY19. UK rental margins are, however, expected to remain challenging through FY19. In Spain, the strong growth in VOH is expected to continue as new fixed term products gain market share. In this context, management will take the opportunity in the next few weeks to host an investor call showcasing the considerable progress in the Spanish business, details of which will be published on the company website.


This growth has been achieved as a direct result of the development of a clear and compelling strategy, rapid execution of senior operational management change and increased trading focus from the Northgate executive team. We continue to share operational and customer experiences across each region to share best practice and drive gains across the Group.


Following extensive analysis of optimal holding periods and the Group's asset register the historical approach towards generating disposal profits has been suboptimal and a one off correction is required. The new fleet optimisation strategy addresses this historical problem and delivers a more efficient capital base for the business to realise enhanced cash returns.


Operational cash generation is not impacted by the fleet optimisation strategy so despite the planned reduction in disposal volumes, FY18 EBITDA is not impacted by this strategy. However, underlying FY18 PBT is expected to be c.25% lower than the £75.0 million reported in FY17 due primarily to the application of this strategy but also a reduction in UK rental profit.


Further guidance with regard to the remaining one off impact of lower disposal volumes on FY19 PBT will be communicated with the year end results. Operational cash generation and EBITDA will not be impacted.


Irrespective of the changes outlined above, at this time the Board does not anticipate the need to change its current policy of providing a progressive dividend as (i) the core rental business has been significantly improved and is in growth (ii) the fleet optimisation strategy generates a 'one off' impact on disposal volumes which will be complete during H1 FY19 and (iii) the fleet optimisation strategy results in a more efficient capital base for the business with improved cash returns.


The Board is fully committed to ensuring that the Company has in place a strategy which is in the long term interests of shareholders and which optimally utilises the financial resources in this asset-intensive business to support further growth.


Kevin Bradshaw, Northgate CEO, commented "The decision to change from Northgate's approach in recent years and to optimise fleet holding periods in order to maximise cash returns, while difficult, is undoubtedly in the best interests of driving long term value creation for our shareholders. Equally, I am very pleased with the early progress of our self help actions and strategic initiatives."


There will be a call for investors and analysts at 8am, the details for which are available from MHP.



For further information, please contact:

Northgate plc

via MHP Communications

Kevin Bradshaw, Chief Executive Officer

David Tilston, Interim Chief Financial Officer

Katie Tasker-Wood, Company Secretary


MHP Communications 

020 3128 8771 / northgate@mhpc.com

Andrew Jaques

Barnaby Fry

Simon Hockridge

Ollie Hoare

Sophia Samaras



Notes to Editors:

Northgate plc is the leading light commercial vehicle hire business in the UK, Ireland and Spain by fleet size and has been operating in the sector since 1981.

Northgate's core business is the hire of light commercial vehicles to businesses on a flexible or term basis, giving customers the ability to manage their vehicle fleet requirements in a way which can adapt to changing business needs without the requirement to enter into a long term commitment. Further information regarding Northgate plc can be found on the Company's website: www.northgateplc.com




Table 1

Closing UK VOH ('000)

Percentage change from comparative quarter end in prior year

Quarter ended 30 April 2017



Quarter ended 31 July 2017



Quarter ended 31 Oct 2017



Quarter ended 31 Jan 2018




Table 2

Average UK VOH ('000)

Percentage change from comparative quarter in prior year

Quarter ended 30 April 2017



Quarter ended 31 July 2017



Quarter ended 31 Oct 2017



Quarter ended 31 Jan 2018




Table 3

Average Spain VOH ('000)

Percentage change from comparative quarter in prior year

Quarter ended 30 April 2017



Quarter ended 31 July 2017



Quarter ended 31 Oct 2017



Quarter ended 31 Jan 2018




Table 4

Average Group VOH ('000)

Percentage change from comparative quarter in prior year

Quarter ended 30 April 2017



Quarter ended 31 July 2017



Quarter ended 31 Oct 2017



Quarter ended 31 Jan 2018





1 PPU - This is a Non-GAAP measure used to describe the adjustment in depreciation charge made in the year for vehicles sold at an amount different to their net book value at the date of sale (net of attributable selling costs), divided by the number of vehicles sold

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