Group Vehicle rental revenue grew to £471.2 million from £456.1 million in 2017, mainly driven by the 3.7% increase in Group average VOH.

In 2018 the Group announced a new fleet optimisation strategy. This strategy optimises the holding periods of all vehicles across the Group with a focus on maximising shareholder returns.

David Tilston Interim Chief Financial Officer

Group summary

A summary of the Group's financial performance is as follows:

Year ended 30 April2018
£m
2017
£m
Change
£m
Change
%
Revenue701.7667.434.2+5.1%
Underlying operating profit68.384.6(16.3)(19.2%)
Underlying profit before tax57.075.0(18.0)(24.0%)
Underlying EPS34.8 p47.3p(12.5p)(26.4%)
Dividend per share17.7 p17.3p0.4p2.3%
Underlying free cash flow29.244.2(15.0)(33.9%)

On a statutory basis, Group operating profit was £64.1m (2017: £81.5m) and profit before tax was £52.7m (2017: £72.2m). The statutory effective tax rate was 18.0% (2017: 16.0%). Basic earnings per share were 32.4p (2016: 45.7p).

Revenue

Group revenue increased by 5.1% to £701.7m. Revenue grew by 3.4% at constant exchange rates, reflecting Sterling weakness in 2018 compared to 2017.

Group revenue comprised:

Year ended 30 April2018
£m
2017
£m
Change
£m
Change
%
Vehicle hire471.2456.115.13.3%
Vehicle sales230.5211.319.29.1%

Vehicle hire revenue grew to £471.2 million from £456.1 million in 2017, mainly driven by the 3.7% increase in Group average VOH.

Group vehicle sales volumes remained broadly flat, with sales revenue growth being primarily driven by the 8.0% growth in average proceeds per vehicle, mainly due to younger vehicles being sold and the higher proportion of vehicles being sold through retail channels in the UK.

Underlying operating profit

Underlying Group operating profit reduced by 19.2% to £68.3 million. Underlying operating profit was supported by £1.7 million of foreign exchange benefit.

Underlying Group operating profit comprised:

Year ended 30 April2018
£m
2017
£m
Change
£m
Change
%
Rental profit52.456.7(4.3)(7.5%)
Disposals profit19.633.0(13.4)(40.6%)
Corporate costs(3.7)(5.1)1.427.1%
Total68.384.6(16.3)(19.3%)

The decline in Group vehicle rental profit reflected the growth in Spain, driven by strong growth of VOH and stable rental margins, being more than offset by the decline in the UK due to the decline in average VOH and lower rental margins.

The reduction in Group disposals profits resulted primarily from the higher net book value per vehicle sold, reflected in previous changes to depreciation rates (-£4.2 million) and the age profile of vehicles being sold (-£10.0 million). This was slightly offset by the impact of increased sales volumes (+£1.1 million).

Underlying corporate costs reduced to £3.7 million (2017: £5.1 million).

Depreciation rate changes

The accounting requirements to adjust depreciation rates due to changes in expectations of future residual values of used vehicles make it more difficult to identify the underlying profit trends in the business. When a vehicle is acquired it is recognised as a fixed asset at its cost net of any discount or rebate receivable. The cost is then depreciated evenly over its rental life, matching its pattern of usage.

Matching of future market values to net book value on the disposal date requires significant judgement for the following key reasons:

  1. Used vehicle prices are subject to short term volatility which makes it challenging to estimate future residual values;
  2. The exact disposal age is not known at the point at which rates are set and therefore the book value at disposal date is not certain; and
  3. Mileage and condition are the key factors in influencing the market value of a vehicle. This can vary significantly through a vehicle's life depending upon how the vehicle is used.

Inevitably, a difference arises between the net book value of a vehicle and its market value at the date of disposal. Where differences arising are within an acceptable range these are adjusted against depreciation. Where these differences are outside of the range Northgate changes the depreciation rate estimate to better reflect the pattern of usage of the vehicle.

The impact of previous rate changes on 2018 operating profit, and the estimated impact on future years of the previous changes, is set out below:

Cumulative impactYear on year impact
Year:Group
£m
Group
£m
UK and Ireland
£m
Spain
£m
30 April 20135.35.35.3
30 April 20144.3(1.0)(1.0)
30 April 201515.711.48.43.0
30 April 201612.0(3.7)(5.9)2.2
30 April 20176.3(5.7)(4.1)(1.6)
30 April 20182.1(4.2)(2.7)(1.5)
30 April 2019*2.1(2.1)(2.1)

In February 2018 the Group announced a new fleet optimisation strategy. This strategy optimises the holding periods of all vehicles across the Group with a focus on maximising shareholder returns.

This fleet optimisation 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. The decision to extend holding periods, combined with continued progress in increasing the volume of disposals through the retail channel, would have resulted in higher profits on disposal going forward on the basis of the depreciation rates in use before the change in fleet strategy.

The Board therefore reviewed depreciation rates in line with accounting standards and in March 2018 made the decision to reduce depreciation rates by 3% in Spain and Ireland and by 0.5% in the UK, with effect from 1 May 2018. The estimated impact on future years of these changes is set out below:

Cumulative impactYear on year impact
Year:Group
£m
Group
£m
UK & Ireland
£m
Spain
£m
30 April 2019*17.417.44.113.3
30 April 2020*12.0(5.4)(1.4)(4.0)
30 April 2021*6.6(5.4)(1.4)(4.0)
30 April 2022*1.3(5.3)(1.4)(4.0)
30 April 2023*(1.3)(1.3)

* These are management estimates based on indicative fleet size and assuming an equalised level of defleeting in each year.

Interest

Net underlying finance charges for the year increased by 18.1% to £11.3 million (2017: £9.6 million) as a result of higher net debt. The net cash interest charge for the year was £10.7 million (2017: £9.0 million) as a result of higher borrowings and a £0.3 million adverse foreign exchange impact. Non-cash interest was £0.6 million (2017: £0.6 million).

Underlying profit before tax

Excluding the impact of foreign exchange, underlying profit before tax was £57.0 million, £18.0 million lower than in 2017 (2017: £75.0 million). Weaker Sterling during the year increased profit before tax by £1.5 million compared to the prior year.

Taxation

The Group's underlying tax charge was £10.7 million (2017: £12.0million) and the underlying effective tax rate was 19% (2017: 16%). The statutory effective tax rate was 18% (2017: 16%).

Earnings per share

Underlying EPS was 34.8p compared to 47.3p in the prior year. Statutory earnings per share was 32.4p compared to 45.7p in the prior year.

Underlying earnings for the purpose of calculating EPS were £46.4 million (2017: £63.0 million). The weighted average number of shares for the purposes of calculating EPS was 133.2 million, in line with the prior year.

Exceptional items

During the year £2.5 million of exceptional net costs were incurred (2017: £1.5 million) which mainly related to restructuring costs incurred in the UK as part of the strategic turnaround initiatives.

Dividend and capital allocation

In December 2017 the Board updated the Group's dividend policy, such that the underlying basic earnings per share will cover the total annual dividend within a range of 2.0× to 3.0×.

Subject to approval, the final dividend proposed of 11.6p per share (2017: 11.6p) will be paid on 21 September 2018 to shareholders on the register as at close of business on 10 August 2018.

Including the interim dividend paid of 6.1p (2017: 5.7p), the total dividend relating to the year would be 17.7p (2017: 17.3p). The dividend is covered 2.0× by underlying earnings, in line with stated policy.

The Group's objective is to build shareholder value by generating returns above the cost of capital. Capital will be allocated within the business in accordance with the framework outlined below, with the first priority being to allocate capital to support the Group's growth ambitions:

  1. investment for growth;
  2. provide regular returns to shareholders;
  3. acquisitions; and
  4. return of surplus cash

The Group plans to maintain a balance sheet within a target leverage range of 1.5× to 2.5× net debt to EBITDA, and during periods of significant growth net debt would be expected to be towards the higher end of this range. This is consistent with the Group's objective of maintaining a balance sheet that is efficient in terms of providing long term returns to shareholders and safeguards the Group's financial position through economic cycles.

This policy represents an update to previous leverage guidance of 1.25× to 1.85× net debt to EBITDA, reflecting the Group's current balance sheet position, growth aspirations and banking restrictions at that time.

Cash flow

A summary of the Group's cash is as follows:

Year ended 30 April2018
£m
2017
£m
Underlying operational cash generation240.5238.3
Net capital expenditure(311.0)(174.1)
Net taxation and interest payments(22.2)(21.2)
Share purchases and refinancing costs(3.3)(0.1)
Free cash flow(96.0)42.9
Dividends(23.4)(21.9)
Net cash (consumed) generated(119.4)21.0

A total of £486.9 million was invested in new vehicles compared to £346.3 million in the prior year. The Group's new vehicle capital expenditure was partially funded by £186.9 million generated from the sale of used vehicles (2017: £177.0 million). Other net capital expenditure amounted to £11.0 million (2017: £4.8 million).

All vehicles required for the Group's operations are paid for in cash upfront. The cash flow generation of the Group in any year is therefore influenced by the capital expenditure to grow the business or cash generated by adjusting the fleet size downwards if VOH reduce. If the impact of increasing or reducing the fleet size in the year is removed from net capital expenditure, the underlying free cash generation of the Group was as follows:

Year ended 30 April2018
£m
2017
£m
Free cash flow(96.0)42.9
Add back: Growth capex(125.2)1.2
Underlying free cash flow29.244.1

Net debt reconciles as follows:

Year ended 30 April2018
£m
2017
£m
Opening net debt309.9309.9
Net cash consumed (generated)119.4(21.0)
Other non-cash items(0.8)0.5
Exchange differences10.820.5
Closing net debt439.3309.9

Free cash outflow was £96.0 million (2017: £42.9 million inflow) after net capital expenditure of £311.0 million (2017 £174.1 million). If the impact of growth capex in the year is removed from net capital expenditure in each year, the underlying free cash flow of the Group was £29.2 million (2017: £44.1 million).

Net cash consumption was £119.4 million (2017: £21.0 million generated). After an adverse exchange rate impact of £10.8 million (2017: £20.5 million), closing net debt was £439.3 million (2017: £309.9 million) and gearing was 83% (2017: 61%).

Borrowing facilities

The Group successfully refinanced its core bank facilities in the year, extending the final maturity date by one year. As at 30 April 2018 the Group had £442 million drawn against total committed facilities of £568 million, giving headroom of £126 million, as detailed below:

 Facility
£m
Drawn
£m
Headroom
£m
MaturityBorrowing
Cost
UK bank facility457343114July 20212.38%
Loan notes8888Aug 20222.38%
Other loans231112Nov 20180.94%
5684421262.27%

The overall cost of borrowings at 30 April 2018 is 2.27% (2017: 2.17%).

The margin charged on bank debt is dependent upon the Group's net debt to EBITDA ratio, ranging from a minimum of 1.50% to a maximum of 3.00%. The net debt to EBITDA ratio at 30 April 2018 corresponds to a margin of 2.25% (2017: 1.75%).

Interest rate swap contracts have been taken out which fix a proportion of bank debt at 2.40% (2017: 2.16%) giving an overall cost of borrowings (gross of cash balances) at 30 April 2018 of 2.28% (2017: 2.16%).

The other loans consist of £10.5m of local borrowings in Spain and £0.5m of preference shares.

The split of borrowings (gross of cash balances and excluding overdrafts) by currency is as follows:

20182017
£m£m
Euro328256
Sterling12876
Borrowings before unamortised arrangement fees456332
Unamortised arrangement fees(3)(2)
Borrowings (excluding cash and overdrafts)453330

There are three financial covenants under the Group's facilities as follows:

ThresholdApril 2018HeadroomApril 2017
Interest cover6.22£34m (EBIT)9.23×
Loan to value70%43%£277m (Net debt)37%
Debt leverage1.76×£31m (EBITDA)1.31×

The covenant restriction on leverage was increased to 2.75× on refinancing of facilities in April 2018, to be applied from the next testing date. Had this applied to the April 2018 testing date the EBITDA headroom would have been £91 million.

Balance sheet

Net tangible assets at 30 April 2018 were £530.3 million (2017: £509.7 million), equivalent to a net tangible asset value of 398p per share (2017: 383p per share).

Gearing at 30 April 2018 was 82.8% (2017: 61.0%).

Return on capital employed was 7.5% (2017: 10.5%).

Treasury

The function of Group Treasury is to mitigate financial risk, to ensure sufficient liquidity is available to meet foreseeable requirements, to secure finance at minimum cost and to invest cash assets securely and profitably. Treasury operations manage the Group's funding, liquidity and exposure to interest rate risks within a framework of policies and guidelines authorised by the Board of Directors.

The Group uses derivative financial instruments for risk management purposes only. Consistent with Group policy, Group treasury does not engage in speculative activity and it is Group policy to avoid using more complex financial instruments.

Credit risk

The policy followed in managing credit risk permits only minimal exposures, with banks and other institutions meeting required standards as assessed normally by reference to major credit agencies. Group credit exposure for material deposits is limited to banks which maintain an A rating. Individual aggregate credit exposures are also limited accordingly.

Liquidity and funding

The Group has sufficient funding facilities to meet its normal funding requirements in the medium term as discussed above. Covenants attached to those facilities as outlined above are not restrictive to the Group's operations.

Capital management

The Group's objective is to maintain a balance sheet structure that is efficient in terms of providing long term returns to shareholders and safeguards the Group's financial position through economic cycles.

Operating subsidiaries are financed by a combination of retained earnings and borrowings.

The Group can choose to adjust its capital structure by varying the amount of dividends paid to shareholders, by issuing new shares or by adjusting the level of capital expenditure.

Interest rate management

The Group's bank facilities and other loan agreements incorporate variable interest rates. The Group seeks to manage the risks associated with fluctuating interest rates by having in place a number of financial instruments covering at least 50% of its borrowings at any time. The proportion of gross borrowings hedged into fixed rates was 73% at 30 April 2018 (2017: 97%).

Foreign exchange risk

The Group's reporting currency is, and 59% of its revenue is generated in, Sterling (2017: 62%). The Group's principal currency translation exposure is to the Euro, as the results of operations, assets and liabilities of its Spanish and Irish businesses must be translated into Sterling to produce the Group's consolidated financial statements.

The average and year end exchange rates used to translate the Group's overseas operations were as follows:

2018
£ : €
2017
£ : €
Average1.131.18
Year end1.141.18

The Group manages its exposure to currency fluctuations on retranslation of the balance sheets of those subsidiaries whose functional currency is in Euros by maintaining a proportion of its borrowings in the same currency. The exchange differences arising on these borrowings have been recognised directly within equity along with the exchange differences on retranslation of the net assets of the Euro subsidiaries. At 30 April 2018 71% of Euro net assets were hedged against Euro borrowings (2017: 70%).

Going concern

Having considered the Group's current trading, cash flow generation and debt maturity including severe but plausible stress testing scenarios, the Directors have concluded that it is appropriate to prepare the Group financial statements on a going concern basis.

David Tilston

Interim Chief Financial Officer

GAAP Reconciliation

A reconciliation of GAAP to non-GAAP underlying measures is as follows:

Group
2018
£000
Group
2017
£000
Profit before tax52,73872,222
Add back:
Restructuring costs2,4992,189
Certain intangible amortisation1,7671,830
Spain tax settlement(1,235)
Refinancing costs
Underlying profit before tax57,00475,006
Group
2018
£000
Group
2017
£000
Profit for the year43,23260,901
Add back:
Restructuring costs2,4992,189
Certain intangible amortisation1,7671,830
Spain tax settlement(1,235)
Tax on exceptional items and certain intangible amortisation(1,145)(686)
Underlying profit for the year46,35362,999
Weighted average number of Ordinary shares133,232,518133,232,518
Underlying basic earnings per share34.8p47.3p
Group
2018
£000
Group
2017
£000
Operating profit64,07781,482
Add back:
Restructuring costs2,4992,189
Certain intangible amortisation1,7671,830
Spain tax settlement(896)
Underlying operating profit68,34384,605
Add back:
Fleet depreciation176,600149,742
Other depreciation5,5856,549
Net impairment(380)131
Loss on disposal of assets415199
Intangible amortisation included in operating profit40461
EBITDA250,967241,287
UK
2018
£000
Spain
2018
£000
Ireland
2018
£000
Corporate
2018
£000
Eliminations
2018
£000
Group
2018
£000
Underlying operating profit (loss)30,57138,9602,543(3,731)68,343
Exclude:
Adjustments to depreciation charge in relation to vehicles sold in the period(7,598)(10,002)(2,010)(19,610)
Corporate costs3,7313,731
Rental profit22,97328,95853352,464
Divided by: Revenue: hire of vehicles263,780187,64420,623(860)471,187
Rental margin8.7%15.4%2.6%11.1%
UK
2017
£000
Spain
2017
£000
Ireland
2017
£000
Corporate
2017
£000
Eliminations
2017
£000
Group
2017
£000
Underlying operating profit (loss)43,88642,6073,233(5,121)84,605
Exclude:
Adjustments to depreciation charge in relation to vehicles sold in the period(14,348)(17,114)(1,545)(33,007)
Corporate costs5,1215,121
Rental profit29,53825,4931,68856,719
Divided by: Revenue: hire of vehicles272,168163,41921,528(995)456,120
Rental margin10.9%15.6%7.8%12.4%
Group
2018
£000
Group
2017
£000
Net decrease in cash and cash equivalents(5,507)(327)
Add back:
Receipt of bank loans and other borrowings(113,902)
Repayments of bank loans and other borrowings21,369
Net cash generated(119,409)21,042
Add back: Dividends paid23,36521,875
Free cash flow(96,044)42,917
Add back: Growth capex125,1451,127
Underlying free cash flow29,10144,044