Redde Northgate PLC

Earnings Release • Jun 28, 2016

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RNS Number : 4148C

Northgate PLC

28 June 2016

28 June 2016

NORTHGATE PLC

PRELIMINARY REPORT FOR THE YEAR ENDED 30 APRIL 2016

Overall results in line with expectations and increase in dividend

Northgate plc ("Northgate", the "Company" or the "Group"), the UK and Spain's leading specialist in light commercial vehicle hire, announces its results for the year ended 30 April 2016.

Financial summary

·     Underlying profit before tax £82.9m (2015 - £85.0m) including:

o  £3.7m adverse impact from the previous changes in vehicle depreciation rates;

o  £1.7m adverse effect of the weakened Euro across the year;

Adjusting for the above factors, underlying profit before tax increased by £3.3m;

·     Profit before tax £77.6m (2015 - £83.0m);

·     Underlying basic earnings per share 49.0p (2015 - 51.0p);

·     Basic earnings per share 46.1p (2015 - 50.1p);

·     Reduction in net debt from £337.8m at 30 April 2015 to £309.9m including:

o  £42.8m net cash generation post dividends;

o  £16.1m adverse effect of the strengthened Euro at the balance sheet date;

·     10% increase in proposed full year dividend per share to 16.0p (2015 - 14.5p):

o  Final dividend proposed 10.9p (2015 - 10.2p).

Operational summary

·     UK:

o  Underlying operating profit £58.2m (2015 - £69.0m), including a £5.9m adverse impact from the previous changes in vehicle depreciation rates;

o  Restructuring and strengthening of the UK management team completed;

o  Average vehicles on hire 3% lower than the prior year;

o  Average revenue per vehicle increase of 2% compared to the prior year;

o  Average utilisation of 87% (2015 - 88%);

o  Closing vehicles on hire of 45,700 (April 2015 - 48,600).

·     Spain:

o  Underlying operating profit £41.3m (2015 - £33.3m) including a £2.2m benefit from the previous changes in vehicle depreciation rates;

o  Average vehicles on hire constant compared to the prior year, including a change in mix with a higher proportion of SME customers;

o  Average revenue per vehicle increase of 1% compared to the prior year;

o  Average utilisation of 91% (2015 - 91%);

o Closing vehicles on hire of 35,700 (April 2015 - 35,600).

Bob Contreras, Chief Executive, commented:

"We are pleased to be delivering results in line with expectations, against a mixed trading backdrop with a reduction in the number of UK vehicles on hire being offset by a more encouraging result in Spain where we have seen an increase in our core flexible hire business and an improvement in the residual values of used vehicles sold. The cash generation of the Group remains strong with free cash flow generation of nearly £63m, giving us the confidence to propose a 10% increase in the dividend.

During the year we have strengthened our UK management team and whilst it will take time for this to translate into results, we believe that this will allow us to optimise our UK business and enable us to take advantage of the growth opportunities that we see.

Our Spanish business continues to execute its market strategy well, leading to improved profitability and returns.

In all territories our renewed focus is on optimising our core rental business whilst taking opportunities to grow within our traditional markets and capture opportunities to expand our product offering whilst continuing to maximise value throughout the life cycle of our vehicle fleet."    

Full statement and results attached.

There will be a presentation to analysts at 9.30am today at Numis, 5th floor, London Stock Exchange Building, 10 Paternoster Square, London EC4M 7LT.  If you have not already registered for attendance then please contact MHP Communications on the number below.  A live webcast of the presentation will be available to view via a link on the Company's website www.northgateplc.com

For further information, please contact:

Northgate plc                                                    01325 467558
Bob Contreras, Chief Executive Paddy Gallagher, Group Finance Director

MHP Communications                                  020 3128 8100
Andrew Jaques Barnaby Fry
Simon Hockridge
Ollie Hoare

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 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

GLOSSARY OF TERMS

The following defined terms have been used throughout this document:

Term	Definition
EPS	Basic earnings per share
Facility headroom	Calculated as facilities of £532.0m less net borrowings of £312.6m. Net borrowings represent net debt of £309.9m excluding unamortised arrangement fees of £2.7m and are stated after the deduction of £18.7m of cash balances which are available to offset against borrowings.
GAAP	Generally Accepted Accounting Practice: meaning compliance with International Financial Reporting Standards
Gearing	Calculated as net debt divided by net tangible assets (as defined below)
LCV	Light commercial vehicle: the official term used within the European Union for a commercial carrier vehicle with a gross vehicle weight of not more than 3.5 tonnes
Net tangible assets	Net assets less goodwill and other intangible assets
NPS	Net promoter score: a standardised measure of customer satisfaction
PPU	Profit per unit/loss per unit - this is a non-GAAP measure used to describe the adjustment in the 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
SME	Small and medium sized enterprise

GAAP RECONCILIATION

Throughout this report we refer to underlying results and measures.  The underlying measures allow management and other stakeholders to better compare the performance of the Group between the current and prior period without the effects of one-off or non-operational items.

Underlying measures exclude certain one-off items such as those arising from restructuring activities and recurring non-operational items, namely intangible amortisation.

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

	Group 2016 £'000	Group 2015 £'000
Profit before tax	77,632	82,963
Add back:
Restructuring costs	1,777	-
Intangible amortisation	1,979	2,010
Exceptional finance costs	1,561	-
Underlying profit before tax	82,949	84,973

				Group 2016 £'000	Group 2015 £'000
Profit for the year				61,479	66,802
Add back:
Restructuring costs				1,777	-
Intangible amortisation				1,979	2,010
Exceptional finance costs				1,561	-
Tax on exceptional items, brand royalty charges and intangible amortisation				(1,446)	(868)
Underlying profit for the year				65,350	67,944
Weighted average number of Ordinary shares				133,232,518	133,232,518
Underlying basic earnings per share				49.0p	51.0p
Net increase (decrease) in cash and cash equivalents				5,586	(8,036)
Add back:
Receipt of bank loans and other borrowings				(70,410)	(14,317)
Repayments of bank loans and other borrowings				107,653	-
Net cash generated (outflow)				42,829	(22,353)
Add back: Dividends paid				20,114	14,607
Free cash flow				62,943	(7,746)
Add back: Adjustment to net capital expenditure for (contraction) growth in fleet size				(14,545)	40,556
Underlying free cash flow				48,398	32,810

		UK 2016 £'000	Spain 2016 £'000	Corporate 2016 £'000	Group 2016 £'000
Operating profit		53,917	36,480	166	90,563
Add back:
Restructuring costs		1,777	-	-	1,777
Brand royalty charges		559	4,723	(5,282)	-
Intangible amortisation		1,898	64	17	1,979
Underlying operating profit (loss)		58,151	41,267	(5,099)	94,319
Underlying operating profit (loss)		58,151	41,267	(5,099)	94,319
Divided by: Revenue: hire of vehicles		306,353	140,781	-	447,134
Underlying operating margin		19.0%	29.3%	-	21.1%

		UK 2015 £'000	Spain 2015 £'000	Corporate 2015 £'000	Group 2015 £'000
Operating profit		66,662	28,328	772	95,762
Add back:
Brand royalty charges		442	4,881	(5,323)	-
Intangible amortisation		1,928	51	31	2,010
Underlying operating profit (loss)		69,032	33,260	(4,520)	97,772
Underlying operating profit (loss)		69,032	33,260	(4,520)	97,772
Divided by: Revenue: hire of vehicles		311,282	145,536	-	456,818
Underlying operating margin		22.2%	22.9%	-	21.4%

Chairman's statement

I became Northgate's Chairman nine months ago and therefore this is my first Report to our shareholders. 

Performance

During the year we have made good progress in a number of key areas and, on an underlying basis, the Group's profit before tax was £82.9m.  After further adjusting for accounting changes to depreciation and the impact of exchange rates this represented an increase of £3.3m compared to the prior year.

Cash generation has continued to be strong with free cash flow of £62.9m and this provides good scope to further expand our business and also to return cash to our shareholders in the form of increased dividends.

The Group's Spanish business performed well during the year and ended the period with a modest increase in vehicles on hire.  In contrast, the UK business was more challenged with a lower level of demand than the prior year, particularly from customers operating in the renewable energy sector, as well as a result of our reduced focus on short term rentals to domestic, non-business customers and vehicles on hire at the end of the year was 2,900 below the prior year.

Dividend

The Group remains in a strong financial position, with healthy cash generation and a robust balance sheet.  This underpins our progressive dividend policy and the Board's continued confidence in the outlook for the Group means we are proposing a full year dividend of 16.0p, an increase of 10% compared to the 2015 full year dividend of 14.5p.  This means a final dividend of 10.9p (2015 - 10.2p). 

This gives a 3.1x cover on underlying earnings, in line with our intention to keep cover in the range of 3.75x to 2.5x. 

The way forward

Our core objective is to grow shareholder value and we will do this by developing a business capable of delivering long term, sustainable and growing cash flows, achieved through a disciplined approach to deployment of capital and a rigorous focus on execution.  Our touchstones will be cash flow and returns on investment.

During the year we have been assessing the opportunities for Northgate and how best to position the business to capture and maximise these.  This has involved reviewing the potential addressable market, determining how we can effectively widen Northgate's offering and brand so as to appeal to a broader customer base and building a senior management team which possesses the skill and ambition to drive our business forward.

As such, we have renewed the Group's strategic focus on three key areas:

·     To optimise our core business;

·     To expand our addressable markets; and

·     To maximise end of life value.

During the past six months we have recruited a new UK senior management team and structured it in a similar way to our highly successful Spanish team.  A Group Executive Committee has also been formed which includes the senior management from both the UK and Spain. This will benefit the Group in several ways, including alignment of objectives, clarity of focus, sharing of best practices and securing further operational efficiencies.

This sharper focus on the quality of business, a customer proposition with wider appeal, improving brand recognition, clear lines of responsibility and more efficient and consistent execution I believe will generate improved performance.

Board changes

Since last year we have welcomed several new Board members.  In November 2015 Claire Miles joined as a non-executive Director, in February 2016 Paddy Gallagher was appointed as Group Finance Director and, since the year end, Bill Spencer has been appointed as a non-executive Director.  I am sure that each will make a significant contribution to the future development of Northgate.

Our People

I would like to record the Board's thanks to all of our 2,900 team members throughout Northgate.  They are the people who, day in and day out, make sure that our customers receive a superb service and we are most grateful to them.

We now have experienced senior teams in both the UK and Spain and they are eager to demonstrate what can be achieved. There is much to do and I am confident that our team will be looking to drive the business forward to secure profitable progress.

Andrew Page, Chairman

Chief Executive's operational review

GROUP

We have taken a number of steps during the year to review the way in which we operate and how we address our markets in order to strengthen the business for future profitable growth.  As such, our strategic focus is in three core areas:

Optimising our core business

We continue to believe that flexible rental offers the best opportunity for many businesses to manage their fleet requirements.  In particular, the Group has continued to pursue its strategy of increasing the proportion of our vehicles on hire with SME customers where the flexibility we offer is of greatest value. 

Our aim is to increase awareness of the whole life benefits that flexible rental offers through the clarity of our proposition and by providing clear routes to market through our sales and marketing deployment and the use of technology.

Internally we will continue to target operational excellence through our branch and workshop network and ensure that all of our people understand their role in shaping the culture of the Group.

Expanding our addressable markets

With approximately seven million LCV's on the road in the UK, Spain and Ireland, significant opportunities exist to grow the business beyond its current position as the largest flexible rental provider in each territory.  The rental market currently accounts for an estimated 5% of LCV usage and we therefore have a significant opportunity to position and widen our product offering to customers not currently renting.

We have completed a full market usage and attitude study and have insight to support growing the Northgate brand within the current LCV rental market as well as an opportunity to partner with customers not currently renting.

Maximising end of life value

The price received when we sell our ex-rental vehicles has a significant impact upon returns. Traditionally, our ex-rental vehicles would have been sold through trade and auction channels but in recent years an increasing number are being sold through our Van Monster retail channel.

We will focus on maximising the value created through Van Monster and will continue to increase the proportion and value of vehicles sold through this channel as the awareness and reputation of the brand increases.

UK

Our people and customers

The UK market provides an opportunity for significant profitable growth.  We have replicated the successful Spanish management structure, strengthening the UK senior management team with the appointment of a dedicated Managing Director, separate Sales and Marketing Directors and a new Operations Director.  This highly experienced team with a clearer strategic focus and ambition for flawless execution will capitalise upon these opportunities for growth.

Customer numbers increased by 2% during the year, reflecting our strategy of growth within the SME sector.  NPS, a key indicator of customer satisfaction, grew to 48% across all customers (2015 - 45%) with our target being to further improve beyond 50%.

Vehicles on hire and hire rates

The average number of vehicles on hire was 47,200, a 3% decrease compared to the previous year. 

Closing vehicles on hire at 30 April 2016 were 45,700, a reduction of 2,900 since April 2015.  This was split by business type as follows:

	30 April 2016	30 April 2015	Change
Regional	32,600	33,000	(400)
National	13,000	15,000	(2,000)
Consumer (non-business)	100	600	(500)
	45,700	48,600	(2,900)

The Regional business was affected by reductions from customers linked to the struggling renewable energy sector.  Excluding this segment, the closing vehicles on hire in Regional increased by 400 vehicles.  The total number of customers has increased by 200 to 6,900.

We have seen reductions in our lower margin National business.  Customers have moved a larger proportion of their business in house or to a contract hire model as uncertainty in their own business has reduced. 

During the year we made the decision to reduce the number of vehicles rented to non-business users in order to improve returns and focus on delivering high levels of customer service to our core business customers. 

We are currently refreshing our customer proposition and product offering in order to bridge the perceived gap between headline price and overall in-life vehicle costs for customers who are comparing our offering to other acquisition methods such as contract hire.

Average hire revenue per vehicle increased by 2% when compared to the previous year.

Asset management

During the year the fleet size reduced from 56,100 at 30 April 2015 to 52,300 at 30 April 2016.  Average utilisation was 87% in the year (2015 - 88%).  Average utilisation was affected by the reduction in vehicles on hire in the year.  However, the overall good asset management performance reflects our ability to manage the fleet size effectively as customer demand changes.  Going forward we are targeting utilisation in excess of 90% whilst ensuring that each branch has the right range of vehicles available to meet our customers' needs.

Purchases for the year totalled 15,800 vehicles (2015 - 19,800) and the average fleet age was 20.9 months (2015 - 21.1 months).

A total of 20,300 vehicles were sold during the year (2015 - 17,600) with the increase being in response to the reduction in vehicles on hire.

We continue to make progress in selling a higher proportion of vehicles through our Van Monster retail network.  During the year 33% (2015 - 31%) were sold via this route.  The absolute number of vehicles sold through this channel increased by 1,300 or 24% compared to the prior year.

We have previously commented on how the supply of used vehicles within our target disposal age range (3 to 4 years) had been constrained as a result of a low number of registrations in the post-recessionary period.  We have seen that this supply constraint has now eased and inevitably put downward pressure on market pricing.  This, coupled with the impact of historical depreciation rate changes, has resulted in an adjustment to the depreciation charge of £20.5m compared to £27.8m in the previous year.  This equates to a PPU (profit per unit) of £1,014 compared to £1,583 in the prior year.

Network

Since our network expansion programme commenced in 2013, we have opened 16 new sites in total, including one opened in the year.  These new sites contributed 5,100 to the closing vehicles on hire.

We have made the decision to pause new site openings in order to allow the new management team to focus sales and marketing efforts on optimising demand generation across the entire network. 

Spain

Our people and customers

During the year we appointed a new Operations Director, tasked with increasing the efficiency and effectiveness of our workshops and good progress is being made in this important area. 

Customer numbers increased by 16% during the year.  We continue to monitor NPS as a key indicator of customer satisfaction and this measure improved to 37% in 2016 compared to 34% in the previous year.  We will continue to seek improvement in this area as it is key to the future success of the business.

Vehicles on hire and hire rates

Closing vehicles on hire at 30 April 2016 was 35,700, an increase of 100 from 35,600 at 30 April 2015, with a growth in Regional customers of 2,000 being offset by a 1,900 reduction in larger National accounts as follows:

	30 April 2016	30 April 2015	Change
Regional	21,900	19,900	2,000
National	13,800	15,700	(1,900)
	35,700	35,600	100

The decrease in National business reflects the planned run off of a number of lower margin contracts. 

The average number of vehicles on hire was maintained at 35,600 vehicles.  

Average hire revenue per vehicle increased by 1% compared to the previous year.

Asset management

During the year the fleet size increased from 39,400 at 30 April 2015 to 39,800 at 30 April 2016.  Utilisation levels were maintained at 91% during the year.

Purchases for the year totalled 10,600 vehicles (2015 - 12,400) and the average fleet age closed at 23.3 months (2015 - 23.7 months).

A total of 10,000 vehicles were sold during the year (2015 - 10,300).  The proportion of sales made through our own more profitable retail network was 17%.  This represents an increase of 100 vehicles, a 6% increase compared to the prior year.

The increase in the resale values of used vehicles led to a reduction of €21.4m in the depreciation charge compared to €16.0m in the previous year.  This equates to a PPU (profit per unit) of €2,102 compared to €1,554 in the prior year.

Network

We operate from 24 rental locations in Spain with one additional branch having opened during the year.  We will continue to consider any opportunities to fill in remaining geographical gaps in our network and expect to open up to three more sites over the next three to five years.

Group current trading and outlook

We began the new financial year with a lower level of vehicles on hire than expected, albeit we have seen stable conditions over the last few months.  We expect to grow vehicles on hire over the course of the year, subject, of course, to uncertainty arising from the UK's recent decision to leave the EU.

We have confidence in the steps we have taken to strengthen our management team in the UK and, whilst it will take some time to translate into results, we have put in place a range of operational and commercial initiatives which will improve both the quality of the business and our financial performance over the medium term.  Therefore we expect that the current financial year will be more heavily weighted towards strength in the second half.

Bob Contreras, Chief Executive

Financial Review

Group

Summary

A summary of the Group's financial performance for 2016, with a comparison to 2015, is shown below:

	2016 £m	2015 £m	Change £m	Change %
Revenue	618.3	614.3	4.0	0.7
Underlying operating profit	94.3	97.8	(3.5)	(3.5)
Underlying profit before tax	82.9	85.0	(2.1)	(2.4)
Underlying EPS	49.0p	51.0p	(2.0)p	(3.9)
Dividend per share	16.0p	14.5p	1.5p	10.3
Underlying free cash flow	48.4	32.8	15.6	47.6

Group revenue increased by 1% to £618.3m or 2% at constant exchange rates.

The weakened Euro across the year reduced profit before tax by £1.7m compared to the prior year.

The impact of previous changes to depreciation rates decreased profit before tax by £3.7m compared to the prior year.

Excluding both of the above impacts underlying profit before tax was £3.3m higher than the prior year.

The accounting requirements to adjust depreciation rates due to changes in expectations of residual values of used vehicles make it more difficult to identify the underlying profit trends in our business. 

The impact on operating profit since changes were made in the year ended 30 April 2012, including the estimated impact on future periods is as follows:

	Cumulative impact	Year-on-year impact
	Group	Group		UK	Spain
Year:	£m	£m		£m	£m
30 April 2015	15.7	11.4		8.4	3.0
30 April 2016	12.0	(3.7)		(5.9)	2.2
30 April 2017*	6.3	(5.7)		(4.1)	(1.6)
30 April 2018*	2.1	(4.2)		(2.7)	(1.5)
30 April 2019*	-	(2.1)		-	(2.1)

* management estimate

Free cash flow was £62.9m (2015 - outflow of £7.8m) after net capital expenditure of £155.5m (2015 - £218.4m).  If the impact of increasing or reducing the fleet size in the year is removed from net capital expenditure in each year, underlying free cash flow of the Group was £48.4m (2015 - £32.8m).

Net cash generation was £42.8m (2015 - outflow of £22.4m).  After an adverse exchange rate impact of £16.1m (2015 - £28.8m favourable impact), closing net debt was £309.9m (2015 - £337.8m) and gearing was 67% (2015 - 81%).

On a statutory basis, operating profit was £90.6m (2015 - £95.8m) and profit before tax was £77.6m (2015 - £83.0m). Basic earnings per share were 46.1p (2015 - 50.1p). Net cash generated from operations, including net capital expenditure on vehicles for hire, was £73.7m (2015 - £8.5m).

UK

The composition of the UK revenue and operating profit is set out below:

	2016 £m	2015 £m	Change £m	Change %
Revenue
Vehicle hire	306.4	311.3	(4.9)	(1.6)
Vehicle sales	127.0	115.0	12.0	10.4
	433.4	426.3	7.1	1.7
Operating profit	58.2	69.0	(10.8)	(15.8)
Operating margin	19.0%	22.2%

A decrease in hire revenue of 1.6% was primarily driven by a decrease in the average number of vehicles on hire of 3.2%. This was partially offset by a 1.6% increase in revenue per vehicle.

The impact of previous changes to depreciation rates decreased operating profit by £5.9m compared to the prior year. 

The increased volume of vehicles sold was offset by lower residual values and a higher net book value per vehicle sold as a result of previous depreciation rate changes. Residual values of vehicles sold also reduced.  The total impact was a £7.3m decrease in operating profit compared to the prior year.

Spain

The revenue and operating profit generated in Spain is shown below:

	2016 £m	2015 £m	Change £m	Change %
Revenue
Vehicle hire	140.8	145.5	(4.7)	(3.3)
Vehicle sales	44.1	42.4	1.7	4.1
	184.9	187.9	(3.0)	(1.6)
Operating profit	41.3	33.3	8.0	24.0
Operating margin	29.3%	22.9%

The decrease in hire revenue of 3.2% was impacted by the weaker Euro across the year.  At constant exchange rates hire revenue grew by 1.0%.  Average vehicles on hire were constant compared to the previous year and average revenue per vehicle increased by 1.0%.

The weaker Euro across the year adversely impacted operating profit by £1.8m.

The impact of previous changes to depreciation rates increased operating profit by £2.2m compared to the prior year.

Stronger residual values of vehicles sold increased operating profit by £3.5m compared to the prior year.

Corporate

Underlying corporate costs were £5.1m (2015 - £4.5m).

Interest

Net underlying finance charges for the year were £11.4m (2015 - £12.8m).

The net cash interest charge for the year was £10.1m (2015 - £12.4m) benefitting by £1.0m from lower levels of net borrowings, £1.1m due to lower pricing and £0.2m from movements in foreign exchange rates.

Non-cash interest increased by £0.9m to £1.3m (2015 - £0.4m) following a refinancing of the Group's borrowing facilities in the year.

Taxation

The Group's underlying effective tax rate was 21% (2015 - 20%).

The underlying tax charge excludes the tax on exceptional items, brand royalty charges and intangible amortisation. 

Including these items the Group's statutory effective tax rate was 21% (2015 - 19%).

Earnings per share

Underlying EPS was 49.0p compared to 51.0p in the previous year.

Underlying earnings for the purpose of calculating EPS were £65.4m (2015 - £67.9m).  The weighted average number of shares for the purposes of calculating EPS was 133.2m, in line with the previous year.

Exceptional items

During the year £3.34m of exceptional costs were incurred (2015 - £Nil) of which £1.78m related to restructuring costs and £1.56m related to finance costs following the refinancing of the Group's borrowing facilities in the year.

Dividend

Subject to approval, the final dividend proposed of 10.9p per share (2015 - 10.2p) will be paid on 23 September 2016 to shareholders on the register as at close of business on 19 August 2016.

Including the interim dividend paid of 5.1p (2015 - 4.3p), the total dividend relating to the year would be 16.0p (2015 - 14.5p).  The dividend is covered 3.1x by underlying earnings.

Cash flow

A summary of the Group's cash flows is shown below:

	2016	2015
	£m	£m
Underlying operational cash generation	242.8	251.6
Net capital expenditure	(155.5)	(218.4)
Net taxation and interest payments	(18.8)	(28.8)
Share purchases and refinancing costs	(5.6)	(12.2)
Free cash flow	62.9	(7.8)
Dividends	(20.1)	(14.6)
Net cash generated (outflow)	42.8	(22.4)

A total of £296.2m was invested in new vehicles compared to £350.1m in the prior year.  The Group's new vehicle capital expenditure was partially funded by £145.9m generated from the sale of used vehicles (2015 - £135.9m).  Other net capital expenditure amounted to £5.2m (2015 - £4.2m).

All vehicles required for the Group's operations are paid for in cash up-front.  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 vehicles on hire 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:

	2016	2015
	£m	£m
Free cash flow	62.9	(7.8)
Add back: Adjustment to net capital expenditure for (contraction) growth in fleet size	(14.5)	40.6
Underlying free cash flow	48.4	32.8

Net debt reconciles as follows:

	2016	2015
	£m	£m
Opening net debt	337.8	346.1
Net cash (generated) outflow	(42.8)	22.4
Other non-cash items	(1.2)	(1.9)
Exchange differences	16.1	(28.8)
Closing net debt	309.9	337.8

Excluding the £16.1m impact of foreign exchange net debt reduced by £44.0m.

Borrowing facilities

During the year the Group successfully refinanced its borrowing facilities, extending the maturity of its existing multi-bank facility by two years, improving existing terms and replacing part of this facility with €100m of seven year private placement loan notes.  As at 30 April 2016 the Group had £313m drawn against total committed facilities of £532m, giving headroom of £219m, as detailed below:

	Facility	Drawn	Headroom	Maturity	Borrowing cost
	£m	£m	£m
UK bank facility	438	224	214	Jun-20	2.12%
Loan notes	78	78	-	Aug-22	2.38%
Other loans	16	11	5	Nov-16	0.94%
	532	313	219		2.14%

The overall cost of borrowings at 30 April 2016 is 2.14% (2015 - 2.78%).

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 2.25%.  The net debt to EBITDA ratio at 30 April 2016 corresponds to a margin of 1.75%.

Interest rate swap contracts have been taken out which fix a proportion of bank debt at 2.23% (2015 - 3.00%) giving an overall cost of bank borrowings at 30 April 2016 of 2.12% (2015 - 2.85%). 

The other loans consist of £10.0m of local borrowings in Spain and £0.5m of preference shares.

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

			2016	2015
			£m	£m
Euro			257	232
Sterling			75	117
Borrowings before unamortised arrangement fees			332	349
Unamortised arrangement fees			(3)	(2)
			329	347

There are three financial covenants under the Group's facilities which remain unchanged and are as follows:

	Threshold	April 2016	Headroom	April 2015
Interest cover	3.00x	9.13x	£62m (EBIT)	7.75x
Loan to value	70%	39%	£251m (Net debt)	44%
Debt leverage	2.00x	1.33x	£79m (EBITDA)	1.41x

Balance sheet

Net tangible assets at 30 April 2016 were £463.4m (2015 - £418.4m), equivalent to a net tangible asset value of 348p per share (2015 - 314p per share). 

Gearing at 30 April 2016 was 67% (2015 - 81%), which reflects the £27.9m reduction in net debt.

Return on capital employed was 12.2% (2015 - 13.0%).

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 our 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.  Our credit exposure 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 91% at 30 April 2016 (2015 - 73%).

Foreign exchange risk

The Group's reporting currency is, and the majority of its revenue (67%) is generated in, pounds Sterling. 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:

	2016	2015
	£ : €	£ : €
Average	1.35	1.29
Year end	1.28	1.38

The Group manages its exposure to currency fluctuations on retranslation of the balance sheets of those subsidiaries whose functional currency is in Euro 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 2016 78% of Euro net assets were hedged against Euro borrowings (2015 - 77%). 

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.

Paddy Gallagher, Group Finance Director

Principal risks and uncertainties

Economic environment

The demand for our products and services could be affected by a downturn in economic activity in the countries in which the Group operates.

The recent referendum decision for the UK to leave the European Union could potentially cause a downturn in the economies in which we operate. 

The high level of operational gearing in our business model means that changes in demand can lead to higher levels of variability in profits. 

An adverse change in macro-economic conditions could also increase the risk of customer failure and therefore incidences of bad debts.

In the short term, foreign exchange volatility, credit risk and availability of capital may be affected by the decision for the UK to leave the EU. In the longer term, demand for our products and the cost of our supplies may be impacted.

Should there be a significant economic downturn the flexible nature of the Group's business model allows any vehicles returned to be placed with different customers.  Alternatively, utilisation can be maintained through purchasing fewer vehicles, increasing disposals or a combination of the two.  Although this may affect short term profitability it generates cash and reduces debt.

No individual customer contributes more than five per cent of total revenue generated, and ongoing credit analysis is performed on new and existing customers to assess credit risk.

With regards to the European Union referendum, the Group's current hedging arrangements protect it from material foreign exchange risks and the Group has in place sufficient borrowing facilities to fund its activities with maturities up to seven years. Any impact on demand or the cost of supplies is not yet known.

Competition and hire rates

The markets in which the Group operates are fragmented and competitive, with competitors often pursuing aggressive pricing strategies to increase market share.  This leads to a risk of the Group being forced to reduce hire rates to retain current business or attract new customers. 

There is a risk that lack of understanding of the Group's product offering and low brand awareness could lead to the Group not taking full advantage of the opportunities open to it.

As our business is highly operationally geared any decrease in hire rates will impact profit and shareholder returns to a greater extent.

All hire rates offered to customers must exceed certain hurdle rates to ensure that the appropriate levels of return on capital are achieved.

Our current pricing strategy is focussed on ensuring that we charge an appropriate price for the product and ancillary services provided which reflects the benefits provided to our customers. 

Although flexible rental is not necessarily the cheapest option it will attract customers for whom it is the best option and protect the Group from solely price led competition.

The Board is currently reviewing the Group's route to market, which will include a review of our marketing strategy and reinforcing the benefits of our product offering through training of commercial teams.

Vehicle holding costs

The profitability of the Group is dependant upon minimising vehicle holding costs, which are affected by the pricing levels of new vehicles purchased and the disposal value of vehicles sold.

An increase in holding costs, if not recovered through hire rate increases, would adversely affect profitability, shareholder returns and cash generation.

Pricing is negotiated with manufacturers on an annual basis in advance of purchases being made.  Variable supply terms allow us flexibility to make purchases as required throughout the year.

Whilst the Group is exposed to fluctuations in the used vehicle market we have sought to increase the level of sales made through our more profitable retail channel.  Should the market experience a short term decline in residual values, we can age our existing fleet until such time as the market improves.

Employees and the working environment

Failure to invest in our workforce and high levels of staff turnover will impact upon customer service and delivery of the Group's strategic objectives.

Failures in health and safety would put the reputation of the business at risk, both in terms of attracting and retaining talent and maintaining customer relationships.

Our recruitment processes seek to attract individuals who will exemplify our core values of professionalism, team work and can do attitude.  Each new joiner receives an introduction to the company's culture as well as our processes.

Personal development plans and tailored training are conducted for all employees.  Salaries are benchmarked against the market and a range of incentives are provided to attract and retain staff.  Succession plans are in place for executive positions.

Regular communication and engagement with everyone across the business is vital to our success.

The Group Health & Safety and Group Internal Audit functions are responsible for delivering health and safety best practice and reporting any non-compliance to the Board.

Our scheduling and compliance department is overseen by Group Internal Audit and ensures that vehicles are maintained to required standards.

IT systems

The Group's business involves a high number of operational and financial transactions across numerous sites which rely on the continuous operation of our IT systems.

Should IT systems fail, whether the cause is accidental or malicious, this could have an adverse impact on both the ongoing operations of the Group and the recording and processing of financial information.

The Group has an appropriate business continuity plan in the event of disruption arising from an IT systems failure.

Before any material system changes are implemented a project plan is approved by the Board.  A member of the executive team will then lead the project and an ongoing implementation review will be performed by either Group Internal Audit or external consultants where appropriate.  The objective is always to minimise the risk of business disruption that could result from changes.

Access to capital

The Group requires capital to replace vehicles at the end of their rental life and for any growth in the fleet.

The Group therefore requires continued access to adequate credit facilities to remain in compliance with its financial covenants.

Failure to maintain or extend access to credit facilities could impact on the Group's abilities to continue as a going concern.

The Group's existing facilities mature in June 2018 and the Group believes that these facilities provide adequate resources for present requirements.

The Group reviews its compliance with covenants on a monthly basis in conjunction with cash flow forecasts to ensure ongoing compliance.

CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 30 APRIL 2016
			Underlying			Statutory			Underlying			Statutory
			2016			2016			2015			2015
	Note		£000			£000			£000			£000
Revenue: hire of vehicles			447,134			447,134			456,818			456,818
Revenue: sale of vehicles			171,154			171,154			157,442			157,442
Total revenue	1		618,288			618,288			614,260			614,260
Cost of sales			(459,286)			(459,286)			(445,221)			(445,221)
Gross profit			159,002			159,002			169,039			169,039
Administrative expenses (excluding exceptional items and intangible amortisation)			(64,683)			(64,683)			(71,267)			(71,267)
Exceptional administrative expenses	6		-			(1,777)			-			-
Intangible amortisation			-			(1,979)			-			(2,010)
Total administrative expenses			(64,683)			(68,439)			(71,267)			(73,277)
Operating profit	1		94,319			90,563			97,772			95,762
Interest income			3			3			9			9
Finance costs (excluding exceptional items)			(11,373)			(11,373)			(12,808)			(12,808)
Exceptional finance costs	6		-			(1,561)			-			-
Profit before taxation			82,949			77,632			84,973			82,963
Taxation			(17,599)			(16,153)			(17,029)			(16,161)
Profit for the year			65,350			61,479			67,944			66,802

Profit for the year is wholly attributable to owners of the Parent Company.  All results arise from continuing operations.

Underlying profit excludes exceptional items as set out in Note 6, as well as brand royalty charges, intangible amortisation and the taxation thereon, in order to provide a better indication of the Group's underlying business performance.

Earnings per share
Basic	2	49.0p	46.1p	51.0p	50.1p
Diluted	2	48.3p	45.5p	50.0p	49.2p

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 30 APRIL 2016
		2016	2015
		£000	£000
Amounts attributable to owners of the Parent Company
Profit attributable to the owners		61,479	66,802
Other comprehensive income (expense) Foreign exchange differences on retranslation of net assets of subsidiary undertakings		22,775	(28,526)
Net foreign exchange differences on long term borrowings and derivatives held as hedges		(18,347)	21,885
Foreign exchange difference on revaluation reserve		70	(126)
Recycling of hedging reserve items		649	-
Net fair value losses on cash flow hedges		(1,428)	(1,772)
Deferred tax credit recognised directly in equity relating to cash flow hedges		285	355
Total other comprehensive income (expense) for the year		4,004	(8,184)
Total comprehensive income for the year		65,483	58,618

All items will subsequently be reclassified to the consolidated income statement.

CONSOLIDATED BALANCE SHEET
AS AT 30 APRIL 2016
			2016	2015
			£000	£000
Non-current assets
Goodwill			3,589	3,589
Other intangible assets			4,054	4,341
Property, plant and equipment: vehicles for hire			684,499	660,160
Other property, plant and equipment			65,765	66,248
Total property, plant and equipment			750,264	726,408
Derivative financial instrument assets			-	57
Deferred tax assets			15,256	14,784
Total non-current assets			773,163	749,179
Current assets
Inventories			23,109	21,673
Trade and other receivables			63,499	71,817
Cash and bank balances			18,748	9,676
Total current assets			105,356	103,166
Total assets			878,519	852,345
Current liabilities
Trade and other payables			53,183	62,273
Current tax liabilities			19,350	9,956
Short term borrowings			10,015	12,081
Total current liabilities			82,548	84,310
Net current assets			22,808	18,856
Non-current liabilities
Derivative financial instrument liabilities			3,152	1,780
Long term borrowings			318,610	335,375
Deferred tax liabilities			3,184	4,524
Total non-current liabilities			324,946	341,679
Total liabilities			407,494	425,989
NET ASSETS			471,025	426,356
Equity
Share capital			66,616	66,616
Share premium account			113,508	113,508
Revaluation reserve			1,026	956
Own shares reserve			(8,157)	(8,812)
Merger reserve			67,463	67,463
Hedging reserve			(2,522)	(2,028)
Translation reserve			(9,400)	(13,828)
Capital redemption reserve			40	40
Retained earnings			242,451	202,441
TOTAL EQUITY			471,025	426,356

Total equity is wholly attributable to owners of the Parent Company.

CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 30 APRIL 2016
	Note	2016 £000	2015 £000
Net cash generated from operations	4	73,726	8,532
Investing activities
Interest received		3	9
Proceeds from disposal of other property, plant and equipment		1,001	2,371
Purchases of other property, plant and equipment		(4,503)	(5,659)
Purchases of intangible assets		(1,682)	(889)
Net cash used in investing activities		(5,181)	(4,168)
Financing activities
Dividends paid		(20,114)	(14,607)
Receipt of bank loans and other borrowings		70,410	14,317
Repayments of bank loans and other borrowings		(107,653)	-
Debt issue costs paid		(1,675)	(2,042)
Net payments to acquire own shares for share schemes		(2,366)	(10,068)
Termination of financial instruments		(1,561)	-
Net cash used in financing activities		(62,959)	(12,400)
Net increase (decrease) in cash and cash equivalents		5,586	(8,036)
Cash and cash equivalents at 1 May		9,676	19,056
Effect of foreign exchange movements		3,486	(1,344)
Cash and cash equivalents at 30 April		18,748	9,676

Cash and cash equivalents comprise cash and bank balances.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 30 APRIL 2016

	Share capital  and share premium	Own shares reserve	Hedging reserve	Translation reserve	Other reserves	Retained earnings	Total
	£000	£000	£000	£000	£000	£000	£000
Total equity at 1 May 2014	180,124	(653)	(611)	(7,187)	68,585	150,475	390,733
Share options fair value charge	-	-	-	-	-	1,680	1,680
Share options exercised	-	-	-	-	-	(1,909)	(1,909)
Profit attributable to owners of the Parent Company	-	-	-	-	-	66,802	66,802
Dividends paid	-	-	-	-	-	(14,607)	(14,607)
Net purchase of own shares	-	(10,068)	-	-	-	-	(10,068)
Transfer of shares on vesting of share options	-	1,909	-	-	-	-	1,909
Other comprehensive expense	-	-	(1,417)	(6,641)	(126)	-	(8,184)
Total equity at 1 May 2015	180,124	(8,812)	(2,028)	(13,828)	68,459	202,441	426,356
Share options fair value charge	-	-	-	-	-	1,666	1,666
Share options exercised	-	-	-	-	-	(3,021)	(3,021)
Profit attributable to owners of the Parent Company	-	-	-	-	-	61,479	61,479
Dividends paid	-	-	-	-	-	(20,114)	(20,114)
Net purchase of own shares	-	(2,366)	-	-	-	-	(2,366)
Transfer of shares on vesting of share options	-	3,021	-	-	-	-	3,021
Other comprehensive (expense) income	-	-	(494)	4,428	70	-	4,004
Total equity at 30 April 2016	180,124	(8,157)	(2,522)	(9,400)	68,529	242,451	471,025

Other reserves comprise the capital redemption reserve, revaluation reserve and merger reserve.

NOTES TO THE ACCOUNTS

FOR THE YEAR ENDED 30 APRIL 2016

1. SEGMENTAL ANALYSIS

		UK	Spain	Corporate	Total
		2016	2016	2016	2016
		£000	£000	£000	£000
Revenue: hire of vehicles		306,353	140,781	-	447,134
Revenue: sale of vehicles		127,044	44,110	-	171,154
Total revenue		433,397	184,891	-	618,288
Underlying operating profit (loss) *		58,151	41,267	(5,099)	94,319
Restructuring costs		(1,777)	-	-	(1,777)
Brand royalty charges		(559)	(4,723)	5,282	-
Intangible amortisation		(1,898)	(64)	(17)	(1,979)
Operating profit		53,917	36,480	166	90,563

		UK	Spain	Corporate	Total
		2015	2015	2015	2015
		£000	£000	£000	£000
Revenue: hire of vehicles		311,282	145,536	-	456,818
Revenue: sale of vehicles		115,058	42,384	-	157,442
Total revenue		426,340	187,920	-	614,260
Underlying operating profit (loss) *		69,032	33,260	(4,520)	97,772
Brand royalty charges		(442)	(4,881)	5,323	-
Intangible amortisation		(1,928)	(51)	(31)	(2,010)
Operating profit		66,662	28,328	772	95,762

* Underlying operating profit (loss) stated before amortisation, intra-group brand royalty charges and exceptional items is the measure used by the executive Board of Directors to assess segment performance.

2. EARNINGS PER SHARE
	Underlying	Statutory	Underlying	Statutory
Basic and diluted earnings per share	2016 £000	2016 £000	2015 £000	2015 £000
The calculation of basic and diluted earnings per share is based on the following data:
Earnings
Earnings for the purposes of basic and diluted earnings per share,
being profit for the year attributable to owners of the Parent Company	65,350	61,479	67,944	66,802
	Number	Number	Number	Number
Number of shares
Weighted average number of Ordinary shares
for the purposes of basic earnings per share	133,232,518	133,232,518	133,232,518	133,232,518
Effect of dilutive potential Ordinary shares:
- share options	1,990,249	1,990,249	2,649,060	2,649,060
Weighted average number of Ordinary shares for the purposes
of diluted earnings per share	135,222,767	135,222,767	135,881,578	135,881,578
Basic earnings per share	49.0p	46.1p	51.0p	50.1p
Diluted earnings per share	48.3p	45.5p	50.0p	49.2p

3. DIVIDENDS

Dividends paid in the year were £20,114,000 (2015 - £14,607,000).

An interim dividend of 5.1p per Ordinary share was paid in January 2016 (2015. - 4.3p).  The Directors propose a final dividend of 10.9p per share for the year ended 30 April 2016 (2015 - 10.2p), which is subject to approval at the Annual General Meeting and has not been included as a liability as at 30 April 2016.

4. NOTES TO THE CASH FLOW STATEMENT

	FOR THE YEAR ENDED 30 APRIL 2016
			2016	2015
	Net cash generated from operations		£000	£000
	Operating profit		90,563	95,762
	Adjustments for:
	Depreciation of property, plant and equipment		144,272	144,455
	Amortisation of intangible assets		1,979	2,010
	Loss on disposal of property, plant and equipment		122	50
	Share options fair value charge		1,666	1,680
	Operating cash flows before movements in working capital		238,602	243,957
	Decrease in non-vehicle inventories		866	105
	Decrease in receivables		10,157	2,833
	(Decrease) increase in payables		(6,825)	4,672
	Cash generated from operations		242,800	251,567
	Income taxes paid, net		(8,259)	(16,524)
	Interest paid		(10,527)	(12,302)
	Net cash generated from operations		224,014	222,741
	Purchase of vehicles		(296,165)	(350,085)
	Proceeds from disposal of vehicles		145,877	135,876
	Net cash generated from operations		73,726	8,532
5. ANALYSIS OF CONSOLIDATED NET DEBT
		2016			2015
		£000			£000
Cash at bank and in hand		(18,748)			(9,676)
Bank loans		249,742			346,415
Loan notes		77,930			-
Cumulative preference shares		500			500
Confirming facilities		453			541
Consolidated net debt		309,877			337,780

6. EXCEPTIONAL ITEMS
During the year, the Group recognised exceptional items in the income statement made up as follows:
		2016	2015
		£000	£000
Restructuring costs		1,777	-
Exceptional administrative expenses		1,777	-
Costs associated with July 2015 refinancing		1,561	-
Exceptional finance costs		1,561	-
Total pre-tax exceptional items		3,338	-
Tax credit relating to exceptional items		(688)	-

Restructuring costs

The Group incurred total exceptional restructuring costs of £1,777,000 (2015 - £Nil), all of which arose in the United Kingdom.

Costs associated with July 2015 refinancing

The Group incurred £1,561,000 (2015 - £Nil) of exceptional finance costs relating to the cancellation of previous hedging arrangements.

7. BASIS OF PREPARATION 

The results for the year ended 30 April 2016, including comparative financial information, have been prepared in accordance with International Financial Reporting Standards ("IFRS"), and their interpretations adopted by the European Union.

Northgate plc ("the Company") has adopted all IFRS in issue and effective for the year, with the exception of IFRS 13, 'Fair value measurement', which has not been applied as the impact is not considered to be material.

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of IFRS, this announcement does not itself contain sufficient information to comply with IFRS. The Company expects to publish full financial statements that comply with IFRS in July 2016.

The financial information set out above does not constitute the Company's statutory accounts for the years ended 30 April 2016 or 2015, but is derived from those accounts. Statutory accounts for 2015 have been delivered to the Registrar of Companies and those for 2016 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts: their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498 (2) or (3) of the Companies Act 2006.

The financial information presented in respect of the year ended 30 April 2016 has been prepared on a basis consistent with that presented in the annual report for the year ended 30 April 2015.

This information is provided by RNS

The company news service from the London Stock Exchange

END

FR BRGDLRDDBGLR

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