25 February 2009
INTERIM MANAGEMENT STATEMENT
PROFIT OUTLOOK, POTENTIAL ASSET IMPAIRMENT AND DEBT POSITION
Northgate plc ("Northgate", the "Company" or the "Group"), the UK and Spain's leading specialist in light commercial vehicle hire, publishes today its Interim Management Statement covering the period 1 November 2008 to 24 February 2009.
Since the time of our interim announcement in December 2008 conditions have deteriorated with further declines in used vehicle residual values in both the UK and Spain and softening in demand for vehicle rental. Furthermore, interest rates and exchange rates have changed considerably since December. These factors have resulted in the effects and actions set out below.
Market conditions and current trading
In our interim results for the six months to 31 October 2008, we reported on two main areas where the deteriorating economic conditions had impacted our business in both the UK and Spain. We had experienced a marked fall in residual values of used vehicles and had seen a reduction in the number of vehicles hired by existing rental customers, the latter impacting the utilisation rate. As a result, we expected to see a weaker performance in the second half of the financial year.
Since then, trading conditions have deteriorated and the decline in vehicle residual values in the UK has continued, albeit at a lower rate. Whilst market data is not as readily available in Spain, our own experience would indicate residual values have fallen by a similar degree to those in the UK. We do not expect to see any recovery in used vehicle prices until later this year, at the earliest, in both countries.
With further economic deterioration forecast in both countries, we expect to see existing customers continuing to reduce the number of vehicles they hire in the near term. In response to this we are de-fleeting as quickly as possible to tighten up utilisation until demand starts to recover. We believe that our business model is providing the appropriate responses to these circumstances. However, short term profitability will be impacted while we bring the vehicle fleet size into line with customer demand.
Due to the more difficult trading conditions described above, the Board is conducting a review of the Group's businesses and expects to conclude that the values of those businesses, in both the UK and Spain, are impaired.
The impact of this review is expected to be a non-recurring write-off of goodwill of approximately £54m relating to the acquisition of the two businesses in Spain, along with approximately £32m of goodwill in relation to the UK hire business. In addition, it is anticipated that other assets of the Group (mainly the vehicle fleet in the UK and Spain) will be written down by around £60m, net of deferred tax. After these adjustments the Group's pro forma net tangible assets at 31 January 2009 would have been approximately £185m, equivalent to 262p per share.
From 1 March 2009, we also intend to increase our rates of depreciation for new vehicles purchased to approximately 20% per annum in both countries, an increase of c1% in the UK and c3% in Spain.
The Board will consider this matter at its February meeting and a further announcement in respect of this will be made in due course.
As a result of the foregoing and taking account of trading in January and the outlook for the remaining three months of the financial year, we expect that underlying(1) pre-tax profits for the year to 30 April 2009 will be significantly lower than market expectations. This shortfall is expected to be, in part, mitigated by the elimination of the majority of future vehicle losses post asset impairment.
We have continued with measures set out in the interim statement including headcount reduction, extension of vehicle age profile, continued reduction in vehicle purchases and the further rationalisation of our structures in the UK and Spain.
As interest rates are currently at unprecedented levels, the Board has taken the opportunity to review its interest rate hedging policy. Previous policy was to have between 50% and 75% of net debt at fixed rates, and at 31 January the fixed rate proportion was 72%. During February we decided to take advantage of current low rates, and reduced the fixed proportion to 36%. We shall continue to monitor our level of hedging.
As indicated in our interim statement, we have sharply reduced vehicle purchases, significantly increased vehicle disposals and taken steps to rationalise the cost base. As expected, these actions have continued to generate cash. After the settling of interest rate derivatives, as described above, we anticipate net debt in constant currency terms (i.e. at the 31 October 2008 exchange rate of £/Euro 1.27) to be below £820m at 30 April 2009 (£864m at 31 October 2008). This is approximately £894m at an exchange rate of £/Euro 1.11 which compares to £1.14billion of committed borrowing facilities at that same exchange rate.
The deterioration in trading conditions, the potential asset impairment and the current weakness in sterling will increase pressure on our covenant compliance (particularly the gearing covenant) at the next testing date of 30 April 2009. In advance of this we have already initiated discussions with our banks and intend to do so with all private placement noteholders, with a view to reshaping both our covenants and debt arrangements to suit the anticipated needs of the Group over the coming years. A further announcement will be made in due course.
We believe the actions proposed, along with the previous cost-cutting measures explained in our interim report, will allow the Group to work through the current challenging times, to take the appropriate steps to continue to generate cash, and to position itself to take advantage of the opportunities which are likely to arise in both its markets in due course.
For further information, please contact:
Steve Smith, Chief Executive
Bob Contreras, Finance Director
Hogarth Partnership Limited
020 7357 9477
(1)Underlying profits before amortisation of intangible assets, reorganisation costs and impairment of intangible and tangible assets.
Notes to Editors:
Northgate plc rents light commercial vehicles and sells a range of fleet products to businesses via a network of hire companies in the UK, Republic of Ireland and Spain. Its NORFLEX® product gives businesses access to a flexible method to acquire as many commercial vehicles as they need, without tying up capital or entering a fixed term contract.
Further information regarding Northgate plc can be found on the Company's website: