During the year we comprehensively overhauled Northgate's rental strategy to address the compelling growth opportunity in our markets, ending the year with real momentum.

"We are now further enhancing our capabilities and bringing our competitive advantages to bear on the market"

Kevin Bradshaw Chief Executive

Our opportunity

There are more than 8 million Light Commercial Vehicles (LCV) on the roads in Northgate's three territories. These vehicles are either purchased, rented for a committed term, or rented for a flexible period, and LCV transactions generate total annual revenues of approximately £15bn. Growth in the LCV minimum term and flexible rental markets is particularly strong, driven by three factors:

  • Cultural change – customers no longer feel that they need to own vehicles outright;
  • Cash flow – customers see the attraction of a low initial deposit followed by the certainty in ongoing cash flows that is afforded by minimum term rental models versus the high initial cash outlay coupled with uncertainty about the residual value associated with outright purchase; and
  • Whole life costs – customers recognise that third party provision and management of vehicles results in lower total costs over the life of the vehicle than if it is owned.

We believe strongly that these three factors are driving a major structural shift in the LCV market, away from vehicle ownership, and that this will underpin continuing strong growth in both the minimum term and flexible rental sectors in the coming years.

Our strategy

Rental

The flexible and minimum term rental and second hand vehicle trading segments in which Northgate participates represent around 70% of the total LCV market by value. Our aim is to build on our strong market positions and exploit our relative competitive advantages in these segments to deliver strong growth and attractive returns. The strategy is built around four market objectives:

  1. Defend and grow our share of flexible rental markets;
  2. Gain share in minimum term markets;
  3. Convert vehicle ownership to minimum term rental; and
  4. Consolidate the fragmented UK used LCV resale market.

Northgate has a range of competitive strengths that we are now reinforcing and deploying to deliver on these strategic market objectives, including:

  • Our strong brand, reputation and relationships in the LCV market;
  • The breadth and depth of our operational experience and expertise;
  • Our nationwide network of rental depots, service workshops and sales forecourts across all our territories delivering both national coverage capability as well as a presence in local markets;
  • Our purchasing scale and strong relationships with vehicle manufacturers; and
  • Our strong balance sheet and cash flows and our disciplined approach to capital deployment.

We are now further enhancing our capabilities and bringing these competitive advantages to bear on the market, focusing rigorously on execution in pursuit of the clear growth opportunities identified.

In the year ended 30 April 2018 we started to see the first tangible results from this rental strategy in both our main markets, with the results to date described throughout this report.

Management of the vehicle fleet

Following an extensive review of vehicle economics in all territories, it was concluded that holding vehicles for longer periods would improve cash returns, and this policy was applied during the fourth quarter. This will extend average vehicle holding periods by between three and nine months, unless constrained by operational factors such as mileage or the condition of the vehicle.

Implementing this policy will lead initially to a reduction in vehicle sales, with a corresponding reduction in replacement vehicle purchases, so that for the period over which the fleet is aged, the revenue and profits from disposals, net replacement capex, and net debt levels will all be lower than they would have been under the previous policy. There will be no impact on EBITDA or operating cash flow.

Over the longer term this strategy will deliver a more efficient capital base, as the like for like average net book value of vehicles in the fleet falls, and this should support higher ROCE and cash returns. Depreciation rates will be adjusted prospectively from 1 May 2018.

Our 2018 Performance
UK

Year ended 30 April2018
('000)
2017
('000)
Change
%
KPI
Average VOH40.241.4(2.9%)
Closing VOH (organic)42.239.5+6.9%
Vehicles purchased (incl. acquired)22.315.4+44.8%
Vehicles sold19.820.4(2.9%)
Profit per unit (PPU) £384703(45.4%)
Closing fleet size (incl. acquired)52.946.4+14.0%
Average utilisation % (organic)87%88%(1 ppt)
Average fleet age at year end (mo.)2122(1 mo.)
Year ended 30 April2018
£m
2017
£m
Change
%
PERFORMANCE (underlying)
Revenue – vehicle hire263.8272.2(3.1%)
Revenue – vehicle sales149.1144.0+3.5%
Total revenue412.9416.2(0.8%)
Rental profit23.029.5(22.2%)
Rental margin %8.7%10.9%(2.2 ppt)
Disposals profit7.614.3(47.0%)
Operating profit30.643.9(30.3%)
ROCE %6.4%9.4%(3.0 ppt)

Rental business

Average VOH in the UK in 2018 declined by 2.9% compared to 2017, which resulted in a 3.1% year on year fall in rental revenue to £263.8 million (2017: £272.2 million). The year on year VOH trend improved substantially through the course of the year, however, from a decline of 6.5% in the first quarter to organic growth of 3.2% in the fourth quarter, and this momentum was reflected in organic VOH of 42,200 at the end of the year, 6.9% higher than at the same time in the previous year.

This turnaround in UK VOH from decline to growth was driven by the new rental strategy, extensive senior management changes, and the self-help actions that resulted from the strategy, in particular in marketing and sales. The marketing function was restructured to focus on lead generation, and new digital marketing and telesales capabilities were developed. In the sales function there was an enhanced focus on lead conversion and simplification of customer acquisition processes.

Northgate also made more use of tactical price flexibility, to compete more effectively and defend and grow share in the flexible rental market, resulting in a return to growth in flexible rental in the fourth quarter after a period of decline previously.

In the minimum term market, a compelling new proposition was launched in September 2017, built around Northgate's main competitive strengths, and this gained strong traction in the market through the second half. At the end of the year minimum term hire contracts accounted for around 11% of total UK VOH, compared to around 1% at the start of the year. The average term of these contracts is three years, representing a significant improvement in the visibility of rental revenue and earnings.

The more competitive price positioning and acquisition of new minimum term contract customers also contributed to lower margins in the UK, with the rental margin in 2018 reducing by 2.2 ppts to 8.7%, compared to 10.9% during 2017.

The rental margin was also impacted negatively by higher vehicle purchase and other costs which were not passed on to customers during 2017 and 2018. On 1 May 2018 prices were therefore raised by 4.8% for UK flexible rental customers, passing on the cumulative impact of new vehicle and other cost inflation. Initial indications from the market are that competitors' prices are also increasing, and there has been no material increase in Northgate customer churn.

The net impact of the lower average VOH and lower rental margins was a 22.2% reduction in UK rental profits to £23.0 million (2017: £29.5 million).

Northgate ended the year with real momentum in both the flexible and minimum term rental markets in the UK, and the strong organic VOH growth that accelerated through the course of the year was then reinforced by the acquisition of 3,400 additional vehicles around the year end.

Transaction to acquire additional vehicles

During the fourth quarter a competitor entered administration and in April Northgate acquired approximately 3,200 vehicles from certain of the funders to whom ownership of the vehicles had reverted. Shortly after the end of the year a further 200 vehicles net were added. The total consideration is expected to be approximately £36 million net, of which £13 million was incurred before 30 April.

A process was initiated to determine the optimal commercial solution for each acquired vehicle, including potential conversion of the previous competitor's customers onto Northgate agreements and tariffs, or integration of the vehicle into the existing rental fleet, or sale of the vehicle. Around 2,000 of the vehicles acquired are expected to have become Northgate VOH by the end of the first quarter of 2019, with the remainder either sold or awaiting redeployment into the rental fleet.

Management of fleet and vehicle sales

The total UK fleet size increased by 14.0% to 52,900 vehicles, driven by growth in closing VOH and the acquisition of 3,200 vehicles at the end of the year. As well as this acquisition, the increase comprised 19,100 vehicles purchased for the fleet less approximately 15,800 defleeted vehicles. The average age of the fleet at the end of the year was around one month lower compared to the same time last year, reflecting the growth in VOH towards the end of the year.

A total of 19,800 vehicles were sold in the UK during the year, including third party vehicles purchased for resale and sales from stock. Total sales were 3.0% lower than in the previous year. Sales through Van Monster channels accounted for 48% of total sales in the year, compared to 36% in 2017.

The average UK PPU on disposals fell by more than 45% in 2018 to £384 (2017: £703). This reflected the previous policy of selling younger vehicles with higher net book values, as well as the £136 impact on PPU of the unwind of previous depreciation rate changes. Primarily as a result of the lower PPU, disposals profit in the UK almost halved to £7.6 million, from £14.3 million in 2017.

Operating profit and ROCE

The reductions in rental profit and disposals profit both contributed almost equally to the decrease of £13.3 million in UK operating profit to £30.6 million (2017: £43.9 million).

ROCE in the UK was 6.4% (2017: 9.4%) reflecting both the fall in operating profit and the increase in capital employed resulting from the growth in the fleet and the higher replacement costs incurred under the previous fleet management policy. The new strategy to age the fleet should reduce the capital employed per vehicle and improve the efficiency of the capital base.

Capex and cash flow

Year ended 30 April2018
£m
2017
£m
Change
%
Depreciation(96.8)(90.1)(7.4%)
EBITDA128.1134.2(4.8%)
Net replacement capex(91.0)(89.1)(2.1%)
EBITDA less net replacement capex37.145.1(17.7%)
Growth capex (incl. inorganic)(54.1)22.2

EBITDA reduced by 4.8% to £128.1 million (2017: £134.2 million) due to the lower rental revenue. Total UK operating costs excluding depreciation were flat year on year, with the lower direct costs resulting from the reduction in average VOH in the year offset by a small increase in indirect costs.

Net replacement capex in the year was £91.0 million, 2.1% higher than in 2017, mainly due to new vehicle price inflation.

EBITDA less net replacement capex reduced by 17.7% in 2018 to £37.1 million (2017: £45.1 million) reflecting the lower EBITDA and higher net replacement capex in the year. Investment to grow the fleet was £54.1 million, including approximately £13 million partial cost of the acquired vehicles, compared to disinvestment of £22.2 million in 2017, when the fleet contracted.

Spain

Year ended 30 April2018
('000)
2017
('000)
Change
%
KPI
Average VOH40.336.0+11.9%
Closing VOH42.737.7+13.3%
Vehicles purchased18.915.5+21.9%
Vehicles sold13.012.7+2.4%
PPU €8711,589(45.2%)
Closing fleet size48.041.8+14.8%
Average utilisation %91%91%
Average fleet age at year end (mo.)1920(1 mo.)
Year ended 30 April2018
£m
2017
£m
Change
%
PERFORMANCE (underlying)
Revenue – vehicle hire187.6163.4+14.8%
Revenue – vehicle sales73.563.2+16.3%
Total revenue261.2226.7+15.2%
Rental profit29.025.5+13.6%
Rental margin %15.4%15.6%(0.2 ppt)
Disposals profit10.017.1(41.6%)
Operating profit39.042.6(8.6%)
ROCE %10.0%14.2%(4.2 ppt)

Rental business

Average VOH in Spain grew by 11.9% in 2018 and this was the major driver of the 14.8% growth in rental revenue to £261.2 million (2017: £226.7 million). The reported growth in rental revenue benefited from weaker sterling, with rental revenue growing by 10.0% at constant exchange rates.

Year on year VOH growth accelerated through the course of the year, building from 8.1% in the first quarter up to 14.1% in the fourth quarter, and closing VOH of 42,700 at the end of the year was 13.3% higher than at the same time in the previous year.

Northgate's rapid growth is underpinned by the growth in the Spanish market, driven by favourable macroeconomic conditions, a thriving service sector, and the structural shift away from outright vehicle ownership and into minimum term hire in particular. Northgate's VOH growth is above the market rate of growth, driven by effective execution of the Group's strategy.

The step up in the pace of VOH and rental revenue growth was mainly driven by leveraging Northgate's leading position in the flexible rental market to push hard into the minimum term hire market with a range of compelling new propositions. As well as exploiting opportunities for cross selling created by the Group's deep relationships across the LCV market, the strategy includes bundling of minimum term and flexible products, and this approach gained significant traction with larger customers in particular. At the end of the year around 23% of VOH were being supplied on minimum term contracts.

Other factors that contributed to the strong VOH growth included targeting of fast growing market segments such as refrigerated vehicles for food distribution, companies participating in Spain's major infrastructure investment programme, and electric vehicles for municipal authorities.

The 2018 rental margin was broadly flat at 15.4% (2017: 15.6%) as the operational leverage of the higher revenue base and improvements in operational efficiency more than offset the impact of more minimum term customers in the VOH mix and vehicle price inflation. Vehicle utilisation in the year remained above 91%.

Rental profits in 2018 grew 13.6% to £29.0 million (2017: £25.5 million) driven by the growth of VOH. Rental profits grew by 8.8% at constant exchange rates.

Management of fleet and vehicle sales

The total fleet size in Spain increased by 14.8% to 48,000 vehicles, driven by the rapid growth in VOH during the year. This net increase of 6,200 vehicles comprised 18,900 vehicles purchased for the fleet less approximately 12,700 defleeted vehicles. The average age of the fleet at the end of the year was around one month lower than at the same time last year, mainly reflecting the strong growth in VOH and resulting expansion of the fleet during the second half of the year.

A total of 13,000 vehicles were sold in the Spain during the year, 2.4% more than in the previous year. The average PPU in Spain fell by more than 45% to €871 (2017: €1,589), reflecting the previous policy of selling increasingly younger vehicles with higher net book values, as well as the €131 impact on PPU of the unwind of previous depreciation rate changes. As a result of the lower PPU, disposals profit fell by 41.6% to £10.0 million (2017: £17.1 million).

Operating profit and ROCE

The growth of rental profit of £3.5m was more than offset by the £7.1m fall in disposal profits, with total operating profit declining by £3.6m (8.6%) to £39.0m (2017: £42.6m). Profits reported by the Spanish business benefited from weaker sterling and operating profit at constant currency decreased by 12.4%.

ROCE in Spain was 10.0% (2017: 14.2%) reflecting both the fall in operating profit and the increase in capital employed that was driven by the growth and mix of the fleet.

Capex and cash flow

Year ended 30 April2018
£m
2017
£m
Change
%
Depreciation(76.7)(56.0)(36.9%)
EBITDA115.798.6+17.3%
Net replacement capex(80.5)(77.3)(4.1%)
EBITDA less net replacement capex35.221.3+65.1%
Growth capex(72.0)(20.0)nm

EBITDA increased by 17.3% to £115.7 million (2017: £98.6 million) reflecting operational leverage resulting from the growth of the business, with 70% of the increase in rental revenue in the year falling straight to EBITDA. Fixed costs in Spain were slightly higher year on year, mainly due to the expansion of some rented depot facilities and higher marketing costs.

Net replacement capex in Spain in the year was £80.5 million, 4.1% higher than in 2017, mainly due to new vehicle price inflation. EBITDA less net replacement capex grew by 65.1%, to £35.2 million (2017: £21.3 million), reflecting the operational leverage. Growth capex was £72 million, £52 million higher than in 2017, due to the rapid VOH growth and expansion of the fleet.

Ireland

Year ended 30 April2018
('000)
2017
('000)
Change
%
KPI
Average VOH3.33.4(2.9%)
Closing fleet size3.83.9(2.6%)
Utilisation %87%89%(2 ppt)
Year ended 30 April2018
£m
2017
£m
Change
%
PERFORMANCE
Revenue – vehicle hire20.621.5(4.2%)
Revenue – vehicle sales7.84.0+93.8%
Total revenue28.425.6+11.2%
Operating profit2.53.2(21.3%)
CASH FLOW
EBITDA11.013.2(16.8%)
Net capex(13.4)(9.9)(35.5%)

Average VOH in Ireland declined by 2.9% in 2018, reflecting some market uncertainty towards the end of the year, and a loss of commercial focus by the Company in reacting to these conditions, reflected in lower utilisation rates. Rental revenue fell by 4.2% to £20.6 million (2017: £21.5 million) and EBITDA declined by 16.8% to £11.0 million (2017: £13.2 million) as a result of the negative operating leverage.

Revenue from vehicle disposals grew strongly to £7.8m (2017: £4.0 million) due to the defleeting and sale of increasingly younger vehicles. The impact of the increase in sales volumes in the year was greater than the effect of the reduction in PPU that also resulted from the sale of younger vehicles.

Net capex of £13.4 million was 35.5% higher than in 2017 due to the more rapid replacement of the fleet, and EBITDA less total net capex swung from £3.3 million in 2017 to negative £2.4 million in 2018.

The Irish business is now being reintegrated into the UK business, with the functional heads in Ireland now reporting to their UK counterparts, and a plan launched to turn around the performance of the business, by returning VOH to growth and addressing a wide range of operational issues.

Kevin Bradshaw

Chief Executive Officer