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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Hss Hire Group Plc | LSE:HSS | London | Ordinary Share | GB00BVFD4645 | ORD GBP0.01 |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| -0.01 | -0.12% | 8.00 | 8.00 | 8.12 | 8.12 | 8.10 | 8.12 | 551,852 | 16:35:19 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Equip Rental & Leasing, Nec | 332.78M | 20.48M | 0.0290 | 2.79 | 57.1M |
From Apr 2019 to Apr 2024
TIDMHSS
RNS Number : 8787J
HSS Hire Group PLC
05 April 2018
HSS Hire Group plc
Audited Results for HSS Hire Group plc for the year ended 30 December 2017
Trading momentum and strategic progress give strong platform to build upon
HSS Hire Group plc ("HSS" or the "Group") today announces results for the year ended 30 December 2017.
Hot Features
Premium
Financial Highlights FY17 FY16 Change
(52 weeks) (53 weeks)
------------------------- ----------- ----------- ----------
Revenue GBP335.8m GBP342.4m (1.9)%
------------------------- ----------- ----------- ----------
Adjusted EBITDA(1) GBP48.9m GBP68.6m GBP(19.7)m
------------------------- ----------- ----------- ----------
Adjusted EBITDA
margin 14.6% 20.0% (5.4)pp
------------------------- ----------- ----------- ----------
Adjusted EBITA(2) GBP1.8m GBP20.5m GBP(18.7)m
------------------------- ----------- ----------- ----------
Adjusted EBITA
margin 0.5% 6.0% (5.5)pp
------------------------- ----------- ----------- ----------
Adjusted (loss)/profit GBP(12.0)m GBP5.8m GBP(17.8)m
before tax(3)
------------------------- ----------- ----------- ----------
Adjusted (loss)/earnings
per share(4) (5.68)p 2.94p (8.62)p
------------------------- ----------- ----------- ----------
Statutory extracts
------------------------- ----------- ----------- ----------
Operating loss GBP(71.4)m GBP(2.7)m GBP(68.7)m
------------------------- ----------- ----------- ----------
Reported loss before GBP(85.2)m GBP(17.4)m GBP(67.8)m
tax
------------------------- ----------- ----------- ----------
Financial Highlights
-- Adjusted EBITA of GBP1.8m (FY16: GBP20.5m), in line with management expectations
-- Decisive management actions returned Group to adjusted EBITA profit in the second half of the year:
o H1 Adjusted EBITA loss of GBP7.3m, profitability impacted by substantial operating model changes
o H2 Adjusted EBITA profit of GBP9.1m
-- Improving performance trend through H2:
o Underlying rental revenue growth of 1.1% vs H2 16 (5)
o Continued strength in Services with revenue +11.1% and contribution +30.5% vs H2 16
o Q4 Adjusted EBITDA ahead of prior year on a comparable basis (6)
Operational Highlights
-- Delivered GBP13m of annualised cost savings through network efficiencies, reduced central headcount and branch closures; Q4 overheads GBP3.3m lower than Q1
-- Continued operational improvements:
o Improved capital efficiency leading to reduction in capex of around GBP5m year on year
o Asset utilisation for Core in H2 53% (H2 16: 50%) and for Specialist 75% (H2 16: 75%)
-- In depth strategic review completed with findings and plans outlined in December, including identification of further GBP10-GBP14m of annualised cost savings to be delivered in FY18 and FY19
-- Exceptional costs of GBP66.6m primarily to realise savings implemented in the year and enable changes to the supply chain model identified in Strategic Review.
-- Strategy focused on three areas to deliver improved performance:
o Delever the Group
o Repair the tool hire business
o Strengthen the Group commercial proposition
Current Trading and Outlook
-- Solid performance with improving trend continuing into 2018:
o Underlying revenue growth of over 6% in Q1 18 compared to Q1 17 (5)
o Underlying core rental revenue growth greater than 3% in Q1 18 compared to Q1 17 (5)
o LTM Adjusted EBITDA expected to be cGBP54m at the end of March 2018, with Q1 18 expected to be 50% higher than Q1 17
-- Reducing net debt and delevering the Group remains a key focus
o Leverage reduced to 4.3x by end of Q1 18
o Facility and cash headroom over GBP30m as at March 18
o Agreed with lenders to extend the GBP80m revolving credit facility (RCF), now maturing in July 2019
-- Good progress made on strategy implementation, including:
o Changes to supply chain model on track to deliver annualised savings of c.GBP11m, resulting in an overall net cash inflows of c.GBP8m per annum from FY19
o Targeted action on improving profitability of Tool Hire business
o Looking forward we expect Net Leverage to reduce to 3.2x following the implementation of the identified strategic actions
Steve Ashmore, Chief Executive Officer of HSS Hire, said:
"Overall 2017 was a difficult year for HSS, mainly due to the impact of operational changes made in 2016. We have addressed this by focusing on the core rental business and reducing our cost base and I am pleased with how the business responded in the second half of the year. When I arrived in June, I instigated a thorough strategic review process, the results of which have given us clear direction and an ambition to restore the business to historic levels of performance. Whilst we are only a few months into implementing the strategy, early signs are encouraging, and we are pleased with the results of the changes made to our network and the associated cost savings. I have been particularly pleased with how the organisation has embraced and responded to the new strategic direction, and remain confident that we will be successful in delivering on our strategic priorities set out in December.
Looking ahead the positive trading momentum has continued into the first quarter. This strong start to 2018 and good progress made on our strategic priorities gives me growing confidence the business can deliver on its full potential."
Notes
1) Adjusted EBITDA is defined as operating profit before depreciation, amortisation and exceptional items. For this purpose depreciation includes the net book value of hire stock losses and write offs, and the net book value of other fixed asset disposals less the proceeds on those disposals. Adjusted EBITA is defined as operating profit before amortisation and exceptional items
2) Adjusted earnings per share is defined as profit before tax with amortisation and exceptional costs added back less tax at the prevailing rate of corporation tax divided by the weighted average number of ordinary shares.
3) Adjusted (loss)/profit before tax defined as (loss)/profit before tax with amortisation and exceptional items added back
4) Adjusted (loss)/earnings per share defined as (loss)/profit before tax with amortisation and exceptional items added back less tax at the prevailing rate of corporation tax divided by the diluted weighted average number of ordinary shares
5) Underlying revenue is total revenue adjusted for the impact of branch closures in 2016 and 2017, business divestments in 2017, the effect of week 53 in 2016, and rental revenues and disposal proceeds arising from the material asset disposals made in 2016
6) Q4 16 post stripping out one off benefits from asset sales and one off supplier rebates of GBP2m
Results presentation
Management will be hosting a presentation for analysts at 0900 BST today at Numis Securities. Analysts/investors unable to attend in person may join the meeting by conference call by dialling in: +44 3333000804/
Pin: 59036688#. A copy of the presentation will be available at www.hsshiregroup.com/investor-relations/financial-results/ from 0900 BST today.
Update call for Hero Acquisitions Limited for holders of Senior Secured Notes
As required by the reporting obligations for the Senior Secured Notes, a separate conference call discussing the results of Hero Acquisitions Limited (a wholly owned subsidiary of HSS Hire Group plc) will be held for noteholders at 1400 BST today.
To obtain dial-in details for the call, holders should contact Teneo Blue Rubicon at hss@teneobluerubicon.com. The accompanying presentation for the call will be made available at www.hsshiregroup.com/investor-relations/senior-secured-notes
-Ends-
Disclaimer:
This announcement contains forward-looking statements relating to the business, financial performance and results of HSS Hire Group plc and the industry in which HSS Hire Group plc operates. These statements may be identified by words such as "expect", "believe", "estimate", "plan", "target", or "forecast" and similar expressions, or by their context. These statements are made on the basis of current knowledge and assumptions and involve risks and uncertainties. Various factors could cause actual future results, performance or events to differ materially from those described in these statements and neither HSS Hire Group plc nor any other person accepts any responsibility for the accuracy of the opinions expressed in this presentation or the underlying assumptions. No obligation is assumed to update any forward-looking statements.
Notes to editors
HSS Hire Group plc provides tool and equipment hire and related services in the UK and Ireland through a nationwide network of over 250 locations. Focusing primarily on the maintain and operate segments of the market, over 90% of its revenues come from business customers. HSS is listed on the Main Market of the London Stock Exchange. For more information please see www.hsshiregroup.com.
For further information, please contact:
HSS Hire Group plc Tel: 020 3757 9248 (on
5(th) April 2018)
Thereafter, please email:
Investors@hss.com
Steve Ashmore, Chief
Executive Officer
Paul Quested, Chief Financial
Officer
Jonathan Edwards, Investor
Relations, Treasury and
Special Projects Manager
Teneo Blue Rubicon Tel: 020 3757 9248
Robert Morgan
Shona Buchanan
Chairman's Statement
Strategic Review and progress made
We conducted a thorough, all-encompassing Strategic Review, reviewing the profitability of each customer, product and branch, as well as the most efficient operating model to support our business going forward.
To this end there are three clear areas of focus for the year ahead
-- Delever the Group -- Repair and Revitalise the Tool Hire business -- Strengthen the Group's commercial proposition
I am encouraged by the outcome of the Strategic Review, the findings of which we presented in December 2017, and am confident that the delivery of these three priorities will improve Group profitability in 2018 and beyond.
We have already made good progress in the implementation of the strategy, and we are on track to deliver the annualised savings of GBP10m-GBP14m, which we presented in December.
As we communicated as part of the Strategic Review in December 2017, an agreement was reached in principle with Unipart at the end of 2017 and was finalised on the 13 February 2018. This allows us to make significant changes to our supply chain, in order to optimise our network. The National Distribution Engineering Centre model was initially envisaged to support a much larger branch network. Based on the size of our current network, this model is no longer cost effective. We therefore decided to move testing and some engineering back into the network and as a consequence, significantly reduce distribution costs. These changes have been positively received and will lead to improved product availability and contribute annualised cost savings of around GBP11m of the total anticipated cost savings stated above. These changes resulted in an exceptional cost of GBP41m, which includes various one off payments in 2018 and cash payments of GBP33.8m over the following seven year period.
Our Results
We have seen an improving trend in our performance in the second half of the financial year, with strong Adjusted EBITA growth compared to the first half. These improving trends are demonstrated by our underlying rental revenue growth where we report 1.1% growth in H2 17 compared to H2 16. The underlying measure strips our the impact of branch closures in the two years, business divestments in 2017, the effect of week 53 in 2016, and rental revenues and disposal proceeds arising from the material asset disposals made in 2016. This was augmented by continued growth in our services segment revenue and contribution, which delivered 11.1% and 30.5% growth respectively in H2 17 compared to H2 16. Our relentless focus on cost reduction led to our overheads in Q4 17 being GBP3.3m below the level in Q1 17.However, notwithstanding this improvement, year on year revenue decreased 2% to GBP335.8m, with a decline in rental, which was impacted by operating model changes in 2016 and branch closures, offset by a growth in services, generating an Adjusted EBITA of GBP1.8m and Return on Capital Employed (ROCE) of 0.9%.
Our Board and Management Team
In June we welcomed the appointment of Steve Ashmore as our CEO. He brings considerable leadership experience to bear and consistent delivery of growth and value in a range of industries. Steve previously held a number of senior roles at Exel, the supply chain and third party logistics provider, and was UK Managing Director at Wolseley, the GBP2.0bn revenue distributor of plumbing and heating products and supplier of building materials. More recently he was the UK Managing Director of Brammer, the specialist distributor of industrial products.
On behalf of the Board, I would like to thank John Gill who stepped down as CEO in May, for his considerable contribution over more than eight years at the Company.
Governance
We are committed to high standards of corporate governance and as such, I am pleased to announce that the Group has complied with the UK Corporate Governance Code (the Code) during 2017.
During the year, and continuing into 2018, the Group has assessed and is implementing changes as required in preparation for the General Data Protection Regulation (GDPR) becoming law. This year also saw the introduction of the Criminal Finances Act, placing increased emphasis on controls to prevent the facilitation of tax evasion. The Board has given top level commitment to this, including a new policy, a risk assessment, and bespoke e-learning training modules. We also continued to monitor the Group's policies and procedures in respect of the Modern Slavery Act.
Our people
I continue to be extremely impressed with the motivation, can-do attitude and achievement of HSS people across our Group, which is reflected in our consistently high customer satisfaction scores. I am very confident that with their support, HSS will be successful in delivering on our strategic priorities and building upon the momentum of the second half of 2017.
Corporate Responsibility
Our primary responsibility is to always ensure the safety of HSS colleagues and customers, and the Board remains fully committed to providing a safe environment for all. We also pay close attention to reducing the impact we have on the environment and in the role that we play as a community business across the UK and Ireland.
Refinancing
We announced in February 2018 that we had agreed with our lenders to extend the GBP80m Revolving Credit Facility (RCF), which will now expire on 6 July 2019. Under the terms of the agreement, if the Group has not completed a refinancing by 30 September 2018, the facility will expire at the option of the lenders on 30 April 2019. Management continues to make good progress towards refinancing the Group and expects to complete this during 2018.
We have prepared the accounts on a going concern basis as the Board is confident that the Group will be able to refinance these debt facilities well in advance of their maturity dates.
Dividend
The Board is focused on reducing net debt and, after careful consideration of the performance of the Group during the year, and in line with the clear priorities set out in our Strategic Review, believes it is in the best interests of the shareholders of the Group, to not pay a final dividend in respect of 2017.
Looking ahead
The positive trading momentum in the second half of the financial year has continued into 2018. Underlying revenue grew by 6% in the first quarter of 2018 against prior year with underlying rental revenue growing 3% and our already actioned cost initiatives are delivering benefits as expected. Based on this positive start to the new financial year we expect the LTM Adjusted EBITDA at the end of March to be around GBP54m with the first quarter Adjusted EBITDA being more than 50% higher than the previous year. This clearly benefits the net leverage ratio of the Group, which has reduced to 4.3x as at the end of Q1 18. Looking forward we expect Net Leverage to reduce to 3.2x following the implementation of the identified strategic actions.
Our focus will be on developing a leaner operation, improving product availability and enhancing customer service, and reducing our debt to manageable levels. We will continue to drive operational efficiency across the Group, improving profitability and returns, and growing a profitable share of the market.
Alan Peterson
Chairman
CEO's Review
Overview of my first year
I was honoured to be asked to lead HSS Hire. It's a business with a strong brand and leading positions in its chosen markets across the UK and Ireland. Having worked in the industry for many years, I have always admired HSS, so when the opportunity arose to lead this fantastic organisation, it was an opportunity not to be missed.
I arrived at a challenging time for the Group, and it was evident that a lot of work needed to be done. In some areas within the business we were experiencing reduced margins, the new distribution network had led to lower rental revenue growth and there was a loss of focus on our Tool Hire business. Repairing each of these areas will take time and we must continue to remain focused on the task in hand, as we implement changes across the Group and our business evolves.
Notwithstanding these challenges, I continue to strongly believe that there remains huge potential at HSS. Over the past few months I have spent a lot of time with different parts of the business, and have been incredibly impressed by the motivation, achievements and commitment of HSS people across our Group.
Our wide ranging strategic review
During the year, we engaged an independent third party to work with the HSS management team to undertake the most extensive strategic review of the business to date. The review was wide ranging in scope and involved the analysis of 20 million contract lines, more than 35,000 customers, 1,600 products and 250 locations. We focused on a number of areas including profitability, the cost of our operations, processes we have in place, and the market opportunity.
My initial perceptions reaffirmed
We presented our findings of the Strategic Review on the 7th December 2017. The review not only highlighted areas of focus, but also reaffirmed my initial perceptions. We have a strong brand having served our customers for 60 years and our NPS score is above market average. Within our chosen markets we are joint number 2 in the UK tool and equipment rental market by revenue, we have good national coverage and we operate primarily in the highly attractive 'repair, maintain and operate' segment of the market. The 2,900 employees across the Group are committed and knowledgeable, and were named winners of the UK customer experience award in 2016. Our business model is innovative and forward thinking, with multichannel digital technology, and a healthy network of branches which allow for high levels of utilisation of our stock across the Group.
Our new strategy
Upon completion of the review, we identified three key strategic priorities; Delever the Group, Repair the Tool Hire business and Strengthen the Group's commercial proposition.
Delever
During 2017 we took a number of cost reduction actions which resulted in us delivering annualised savings of GBP13m compared to the Q1 FY17 run-rate. This was achieved through working with our suppliers to reduce costs, reducing our central headcount, closing 55 branches and network efficiencies.
The Strategic Review announced in December 2017 outlined initiatives to reduce costs by a further GBP10m-GBP14m on an annualised basis, including up to GBP10m related to changes in the supply chain model. We were therefore pleased to announce in February 2018 that agreement had been finalised to make these changes enabling c.GBP11m of cost benefit, GBP1m higher than the amounts originally communicated. The changes are expected to give rise to a net cash outflow of approximately GBP3m in 2018 followed by net cash savings of approximately GBP8m annually over the following seven years.
Last but not least, we will drive further efficiencies across the business through eliminating duplication in some areas and simplifying our processes. This should generate savings of between GBP3m-GBP4m. Full implementation of each of these cost saving initiatives will take time and is not going to happen overnight, however we have a clear plan in place and are focused on executing these changes in order to reduce the leverage of our business.
Repair
Three key areas to repair the Tool Hire business were identified; customer, product and branch.
Customer
Taking customer first, we have identified several areas where we can work with our customers to look at ways in which we can improve the customer experience that we are able to offer them. We want to improve our utilisation rates and ensure that we are always in a position to fulfil the needs and requirements of each and every one of our customers.
Product
On occasions, highly valuable products have been commodity-priced with certain customers. There has also been inconsistent pricing within product categories and we have seen circumstances where the stock profile does not match the profit opportunity. A lot of work has been done to introduce smart pricing to reflect asset utilisation and service, and we are looking at improving discount effectiveness and rationalising ranges, as well as ensuring that we optimise our fleet size.
Branch
We closed a number of branches over the last year or so, and now feel that our network is of a size which is flexible and that we are comfortable with. It is a network which can be adapted and modified accordingly as we remain ever vigilant to market conditions. However when we look at the branches, there is a variety of differing performance across the business which needs to be resolved. We are therefore looking at a number of areas where we can improve, to ensure that all our branches are contributing as efficiently and effectively as they possibly can.
Strengthen
The third and final strategic priority is to strengthen the Group's commercial proposition. The actions being taken here are around customer segmentation, geographic focus and sales channel development. Taking customer segmentation first, customers have different needs and therefore we have to respond in different ways. We have to ensure that the products we can offer are relevant for those customer segments. For geographic focus, we know the areas where driving initiatives will be much more advantageous for us. Our target areas have been identified, and we have begun working through these and will continue to do so over the medium to long term. Further progress has also been made on developing our sales channels, with investment having been made to improve our digital capabilities. This will help to enhance and improve the proposition and customer experience that we are able to offer.
Our market
The size of our addressable market for tool hire, powered access and power generation hire in the UK is in the region of GBP1.9bn. The market has grown by 1-2% CAGR since 2013 and is expected to grow at a similar rate over the next three years*. The market is highly fragmented with the vast majority of registered hire companies employing less than 50 staff and serving their local geography often from one, and usually from less than 10 locations. The Group is one of a small number of 'nationals'. We are placed 2nd or 3rd in each of our three primary markets with between 9-14% market share.
The Group has a large and diverse customer base and operates across a diverse set of end-markets. This provides us with some protection against cyclical trends that are evident in some sectors, such as construction. Our main customer groups are in the facilities management, retail operations, commercial fit-out, property, utilities and waste, infrastructure and energy supply services sectors. We also work with charities, government entities, house builders and construction contractors.
The ERA notes that the 'UK market is relatively concentrated' but this is in contrast to the fragmented and less mature markets of continental Europe. It estimates that the larger rental players with between 50 and 250 employees are 50% of the UK market. In our view there is room for further market consolidation to create scale rental players able to deliver further efficiency benefits for customers, and enhanced returns to shareholders.
* AMA Market Research estimates.
Management team
The executive team in place at HSS is relatively new in terms of tenure, with Paul Quested, Chief Financial Officer, being the longest serving executive having joined the business in August 2016. Notwithstanding this limited time within the executive team, I have been very encouraged since joining the business in June, by the dedication and commitment of the management team, and the strength and depth of the experience which we have across the Group. I am very confident that with their support, we will be successful in delivering on our strategic priorities set out in December.
2018 and beyond
The strategic review has been a massive step forward for us and gives us a real understanding of our business. We have a clear map forward, with steps identified to deliver significant change in performance within HSS. The strategy has been reset, with three levers; Delever the Group, Repair the Tool Hire business and Strengthen the Group's commercial proposition. Our immediate focus in 2018 is to undertake a number of cost reduction actions which will create a leaner operation, but we have to get the balance right and get this business working effectively and efficiently. We must get the branch optimisation right, lifting levels of profitability not only across the network, but also more widely across the entire business.
Over the next few years, we will be examining our customer segmentation; deploying and working with our teams in areas where we see the most profitable opportunities is key. We will also continue to develop our sales channels, maximising our digital competitive advantage to increase the use and mix of innovative low-cost channels.
Steve Ashmore
Chief Executive Officer
Financial Review
Overview
The first half of 2017 was heavily impacted by changes to the operating model in the prior financial year, with a higher cost base and reduced availability during these changes, adversely impacting rental revenue. This led to an Adjusted EBITA loss of GBP7.3m in the first half of the year.
Decisive management action taken has delivered like for like rental revenue growth of 1.1% in H2 17, and reduced annualised costs by GBP13m against the Q1 17 run rate. This led to Adjusted EBITA profit of GBP9.1m in H2 17.
We also completed our Strategic Review with the clear actions to Delever the Group, Repair the Tool Hire Business and Strengthen the Group's Commercial Proposition. I am confident that these are the right steps to build on the momentum of H2 17 performance and deliver sustainable and improved profitability.
Revenue
Group revenue declined by 1.9% to GBP335.8m (FY16: GBP342.4m) behind the anticipated UK tool and equipment hire market growth rate for 2017 as estimated by the ERA. The main drivers of this result were:
-- FY17 was a normal 52 week year whilst FY16 was a 53 week period.
-- Another year of strong growth in our Service revenues, up 10.6% year on year to GBP88.0m, mainly driven by performance on our rehire business, HSS OneCall augmented with further growth from our HSS Training business, and;
-- A reduction of 5.7% in Rental and related revenues, to GBP247.8m which were negatively impacted by the establishment of the new operating model during the second half of FY16 and the first half of FY17. Rental and related revenues were further impacted by the decision to close a total of 73 branches since Q3 of FY16. Our performance on rental and related revenues improved in the second half of FY17.
Revenue and revenue growth are two of our KPIs as, combined with estimates of market size and growth rates, it provides us with a measure of our evolving market share. We underperformed the UK tool and equipment hire market during the year for the reasons set out.
Segmental performance
Rental (and related revenues)
Our Rental revenues were down 5.7% year on year at GBP247.8m (FY16: GBP262.8m) and accounted for 73.8% of Group revenue (FY16: 76.8%). Performance in the first half of the year, particularly amongst our small and medium customers in England and Wales, was affected by the implementation of our new operating model, including the set-up of the NDEC, which caused disruption to availability. This did not affect the second half of the year.
Contribution, defined as revenue less cost of sales (excluding depreciation and exceptional items), distribution costs and directly attributable costs of GBP158.1m (FY16: GBP179.4m) was 11.9% lower year on year reflecting both a change in revenue mix, and a growth in operating cost coming from the new operating model which had been designed for a larger sized branch network.
LTM core utilisation remained level at 50% (2016: 50%) and LTM specialist brand utilisation was lower at 73% (2016: 75%). These are both KPIs. As a consequence of management action taken, our utilisation rates have improved through the second half of 2017, being ahead of the same period in 2016 at 53% for core equipment and 75% for specialist brands. .
Services
Services revenues increased 10.6% to GBP88.0m (FY16: GBP79.6m) and accounted for 26.2% (FY16: 23.2%) of Group revenues. This was principally due to strong growth in HSS OneCall and the continued development of HSS Training. Our Services revenues benefited from existing and new Key Account contracts where our one- stop-shop offering has provided clear market differentiation.
Contribution from Services grew 15.1% to GBP11.9m (FY16: GBP10.3m), slightly ahead of the revenue growth rate, reflecting further margin improvement achieved using the existing teams and infrastructure to support increased levels of activity.
Costs
Our cost analysis set out below is on a reported basis and therefore includes exceptional investment associated with our operating model change. Year on year variances driven by such costs are identified in the commentary.
Our cost of sales increased by GBP9.1m (6.2%) during the year to GBP154.3m, mainly reflecting the growth in our Services revenues (principally HSS OneCall and HSS Training) and the associated third-party supply costs incurred to support this activity. This also included GBP0.2m of exceptional costs compared to GBP3.4m in 2016. The high level of exceptional costs in 2016 related to changes in our operating model and the identification as part of that process of some aged resale stock that required impairment. A change in depreciation rates on one class of product during the year has led to an increase in depreciation charge of GBP0.8m. Changes to depreciation rates made during FY 16 led to a decreased charge of GBP4.2m during that year.
Our distribution costs increased by GBP1.0m (2.3%) from GBP45.1m to GBP46.1m. Within this exceptional costs were GBP0.1m compared to GBP1.3m in FY16. The higher exceptional costs in FY16 relate largely to the dual running costs as the Group migrated its activities to the NDEC whilst running its existing network in parallel.
Our administrative expenses grew GBP51.7m (33.1%) to GBP207.7m (FY16: GBP156.0m). Exceptional costs accounted for a GBP53.8m increase year on year. The current year exceptional items include GBP40.7m network reconfiguration costs relating to the agreement with Unipart to terminate the NDEC contract. Additionally to this the cost of onerous leases increased by GBP2.4m to GBP6.9m reflecting an increased number of branch closures year on year. The onerous lease provisions represent the discounted value of future rent payments on properties we are not trading from until lease expiry. There was an impairment of property, plant & machinery in closed branches of GBP8.3m. Looking forwards the Group incurred GBP3.7m of costs relating to delivering a cost reduction programme, GBP1.0m on senior management changes, GBP1.2m conducting its Strategic Review and GBP0.7m on preparatory refinancing expenses. Administrative expenses also include the GBP4.9m loss on disposal of the Reintec and Tecserv cleaning equipment and maintenance businesses which were sold in November 2017.
Adjusted EBITDA and Adjusted EBITA
Our Adjusted EBITDA for 2017 was GBP48.9m, 28.8% lower than in FY16 (GBP68.6m) driven by the decline in Rental and related revenue and the increased costs associated with the NDEC. Whilst this was offset by Services revenue growth, this was at a lower margin.
As a result, the Group's Adjusted EBITDA margin for FY17 was 14.6% (FY16: 20.0%). Adjusted EBITDA and margin are included in our KPIs.
Our Adjusted EBITA declined to GBP1.8m (FY16: GBP20.5m). The significant reduction was driven by the higher costs of our operating network and our performance on rental and related revenue during the first half of the year. The business made an Adjusted EBITA loss in the first half of the year but returned to Adjusted EBITA profit in the second half.
This combined with a growth in lower margin Services revenue led to a reduction in EBITA margin to 0.5% (FY16: 6.0%) Adjusted EBITA and margin are included in our KPIs.
Other operating income
Other operating income reflects the income received from the subletting of non-trading stores. This decreased by GBP0.3m year on year as the portfolio of non-trading stores fully or partially sublet reduced. We continually assess our portfolio to identify revenue opportunities or to pursue attractive lease surrender opportunities as and when they arise.
Operating loss
Our operating loss increased from GBP2.7m in 2016 to GBP71.9m in 2017, driven by lower revenue and increased operating costs including GBP66.6m of exceptional costs.
The GBP49.6m growth in exceptional costs, to GBP66.6m (FY16: GBP17.0m), and the reduction in Adjusted EBITDA from GBP68.6m to GBP48.9m driven by lower rental revenue and the increased network costs accounts for the majority of this decline.
Exceptional items
We have incurred significant one off expenditure in a number of areas of the business as we seek to make cost reductions in order to take the business forwards in the coming years. These totalled GBP66.6m. The majority of these exceptional items had no cash flow impact during 2017.
Branch closures led to onerous lease provisions of GBP6.9m (FY16 GBP4.5m). The cost included adjustments to expected future sub-let income from these closed properties and other properties that the group has closed in previous years. Sub-let income from vacant properties declined from GBP1.2m to GBP0.9m.
Impairments of GBP8.3m were recorded in respect of closed branches (FY16: Nil).
In the first half of the year the Group started a cost reduction programme alongside the branch closures. This included making refinements to how the network operated and reductions in headcount. The total cost was GBP3.7m and this included a property impairment of GBP1.2m as head office functions were centralised in Manchester. Total average headcount across the group reduced from 3,254 to 3,006
Following the appointment of Steve Ashmore in June 2017 we announced in August 2017 that we would be undertaking a Strategic Review and we engaged an independent third party to assist. We believe that this was the most extensive review and analysis of the business ever conducted. The costs of this were GBP1.2m. We announced the outcome of this review in December 2017.
When we announced the outcome of our Strategic Review we identified significant cost savings that would be made. Principal to this was to save between GBP7m and GBP10m on an annualised basis from making changes to our supply chain model. In December 2017 heads of terms were agreed with Unipart to make significant changes to how we managed our centralised engineering at the NDEC. We will bring the Test and Run activity for high volume products back into our branch network with repair and maintenance consolidated into regional distribution centres. Unipart will remain responsible for our spare parts warehousing and will provide cross-docking space to enable us to rebalance our fleet across the network. A formal agreement with Unipart was announced in February 2018 and an exceptional cost of GBP40.7m is recorded in the year. This represents an impairment of fixed assets of GBP1.9m, an intangible asset impairment of GBP1.2m, the write off of a security deposit of GBP4.5m, and the provision for termination payments and an onerous contract of GBP32.6m. Of the total provision created GBP9.6m will be payable in 2018 with the balance payable between in broadly equal annual amounts each year to 2026.
In November 2017 we sold our non-core Reintec and Tecserv cleaning equipment hire and maintenance businesses for proceeds net of costs of GBP1.2m giving rise to a loss on disposal of GBP4.9m.
Finance costs
Net finance expense (finance expenses less finance income) reduced to GBP13.7m (FY16: GBP14.7m). Drawings on our RCF increased during the year whilst our finance lease liability reduced. The reduction was driven by the financial period being one week shorter and a reduction in the interest unwind on discounted provisions.
Taxation
The Group generated a net tax credit of GBP5.2m compared to a credit of GBP0.1m in 2016. The Group made an overall loss for tax purposes in the UK, and the charge represents current tax suffered in Ireland offset by a GBP4.9m deferred tax credit arising from the offset of tax losses against the previously recognised deferred tax liability on intangible assets.
Reported and adjusted earnings per share
Our basic and diluted reported loss per share increased to 46.96p (FY16: loss of 11.18p). This was due to the larger loss generated in the year, partially offset by an increase in the weighted average number of shares from 154.8m to 170.3m shares as a result of the share placing completed in December 2016.
Our basic adjusted earnings per share, being profit before amortisation and exceptional costs less tax at the prevailing rate of corporation tax divided by the weighted average number of shares, moved from 2.98p FY16 to a loss of 5.68p in FY17. Our diluted adjusted earnings per share, calculated in the same manner as basic adjusted earnings per share, but with the weighted average number of shares increased to reflect LTIP and Sharesave options was also a loss of 5.68p (FY16: 2.94p). These reflect the significant reduction in Adjusted EBITA in FY17 compared to FY16, which was driven by our performance in the first half of the year. Adjusted EPS (diluted) is one of our KPIs and is also used to assess Executive Director remuneration.
Capital expenditure
Fixed asset additions in the year were GBP34.5m, a GBP7.8m or 18.6% decline year on year. Within this GBP25.7m was spent on hire fleet (2016: GBP27.3m) reflecting another managed reduction of spend in these areas after two years of significant expenditure and including the capital efficiency benefit of centralising engineering activity into fewer locations. The remaining GBP8.7m was spent on non-hire additions (land, buildings, plant and machinery) (2016: GBP15.1m). The changes to the Group's operating model centred on the NDEC were designed to support enhanced capital and operational efficiency across the Group. We do not anticipate a material increase in our 2018 capital expenditure requirements due to efficiency gains through our fast moving products being tested in branches and more targeted investment using insight from the Strategic Review. Fleet investment is one of our KPIs.
Return on Capital Employed (ROCE)
Our ROCE for FY17 was 0.9% compared with 9.7% for FY16. ROCE is calculated as Adjusted EBITA divided by the total of average total assets (excluding intangible assets and cash) less average current liabilities (excluding current debt items). Adjusted EBITA dropped by more than 90% during the year whilst the average capital employed by the Group decreased by 4.0% from the level calculated at the end of 2016, reflecting depreciation and asset disposals being higher than capital expenditure. This is one of our KPIs and is also used to assess Executive Director remuneration.
Cash generated from/utilised in operations
Cash generated from operating activities was GBP10.1m for FY17, a decrease of GBP16.5m over the prior year (FY16: GBP26.6m). This reflects the reduction in profits which was offset by a planned reduction in hire fleet asset capital expenditure and an improvement in working capital compared with FY16.
Leverage and net debt
Net debt (stated gross of issue costs) increased by GBP13.4m to GBP232.7m (FY16: GBP219.4m).
As at 30 December 2017 the Group had access to GBP29.8m of combined liquidity from available cash and undrawn committed borrowing facilities. Our leverage, calculated as net debt divided by Adjusted EBITDA, increased from 3.2x in FY16 to 4.8x at the end of FY17. This was primarily due to the lower Adjusted EBITDA generated in FY17. Leverage or Net Debt Ratio is one of our KPIs and is also used to assess Executive Director remuneration.
Use of alternative performance measures to assess and monitor performance
In addition to the statutory figures reported in accordance with IFRS, we use alternative performance measures or (APMs) to assess the Group's ongoing performance. The main APMs we use are Adjusted EBITDA, Adjusted EBITA, Adjusted profit before tax, Adjusted earnings per share, leverage (or Net Debt Ratio) and ROCE, all of which are included in our key performance indicators.
We believe that Adjusted EBITDA, a widely used and reported metric amongst listed and private companies, presents a 'cleaner' view of the Group's operating profitability in each year by excluding exceptional costs associated with non-recurring projects or events, finance costs, tax charges and non-cash accounting elements such as depreciation and amortisation.
Additionally analysts and investors assess our operating profitability using the Adjusted EBITA metric, which treats depreciation charges as an operating cost to reflect the capital intensive nature of the sector in which we operate. This metric is used to calculate any annual bonuses payable to Executive Directors.
Analysts and investors also assess our earnings per share using an Adjusted earnings per share measure, calculated by dividing an adjusted profit after tax by the weighted average number of shares in issue over the period. This approach aims to show the implied underlying earnings of the Group. The Adjusted profit before tax figure comprises the reported loss before tax of the business with amortisation and exceptional costs added back. This amount is then reduced by an illustrative tax charge at the prevailing rate of corporation tax (currently 19%) to give an adjusted profit after tax. Adjusted earnings per share is used as a performance metric for the vesting of 2016 LTIP and 2017 market value option awards.
The calculation of Adjusted EBITDA and Adjusted EBITA can vary between companies, and a reconciliation of Adjusted EBITDA and Adjusted EBITA to operating profit/(loss) and Adjusted profit before tax to loss before tax is provided on the face of the Group's income statement.. A reconciliation of reported loss per share to Adjusted earnings per share is provided in note 6 of the accounts.
In accordance with broader market practice we comment on the amount of net debt in the business by reference to leverage (or Net Debt Ratio), which is the multiple of our Adjusted EBITDA that the net debt represents. This metric is also used in the calculation of any annual bonuses payable to Executive Directors.
We use ROCE to assess the return (the Adjusted EBITA) that we generate on the average tangible fixed assets and average working capital employed in each year. We exclude all elements of net debt from this calculation. This metric is also used as a performance metric for the vesting of 2016 LTIP awards.
Paul Quested
Chief Financial Officer
Principal Risks and Uncertainties
Managing risk
The Board sets the strategic priorities for the Group, the KPIs and performance monitoring relating to these priorities, and establishes the risk appetite.
Overall responsibility for the Group's risk management lies with the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), who have ownership of risk in reporting to the Board of Directors.
The Group then manages its risk through a group risk register which is maintained by the Risk and Assurance Director. This is subject to quarterly review by both the Executive Management Team and Audit Committee, where changes to the risk landscape, risk ratings and assurance activity are discussed and necessary action and changes agreed.
A risk-based internal audit programme is in place to ensure assurance activity is targeted at key risk areas, as identified below. Risk-based assurance work is then reported to the Audit Committee on a quarterly basis for review. In addition the Risk and Assurance Director reports to the Executive Board and the senior management team on a monthly basis to review the findings of risk-based assurance activity and investigation, provided by the Internal Audit and Health, Safety, Environment and Quality (HSEQ) teams.
Principal risks and strategy
The Board has carried out a robust assessment of the principal financial and operating risks facing the Group, based on its three strategic priorities:
-- Delever the Group -- Repair the Tool Hire Business -- Strengthen the Group's Commercial proposition
These risks, how they have changed and how they are mitigated are shown in the table opposite.
2017 risk management developments
Through 2017 the group has continued to improve its approach to the management of risk which is now a quarterly agenda item for the Executive Management Team to review.
-- The Risk and Assurance Director held one-to one sessions with the Executive Management Team and Senior Management to improve risk management culture in the group.
-- Improvements in the monitoring of risk and identification of risk trends by enhancing the measurable indicators on the key risks.
-- Increased training to improve the ownership of risk at Executive Management level. This was noted in last year's annual report
2018 planned improvements to risk management process
In 2018 the Internal Audit team are working with individual departments to document risks and opportunities relating to their role in the corporate strategy.
-- A dedicated project management office has been set up to oversee strategy work streams, monitoring performance against plan and tracking and mitigating risks.
-- Assurance work will be revised in line with the new operating model, focussing on profitability, key controls and areas of risk.
-- Increased cross working of assurance teams to support the strategy and to ensure we are focussed on quality, environment and health and safety.
Risk
Key risks Description and impact Mitigation change
================= ================================= ================================ ===============
Macroeconomic An economic downturn The Group focuses Unchanged
conditions in the UK and Ireland on the 'fit-out,
may adversely affect maintain and operate'
the Group's revenue markets, which are
and operating results less cyclical, less
by decreasing the demand discretionary and
for its services and have a larger proportion
the prices it may charge. of recurring spend
The Brexit referendum than the new-build
result has caused economic construction sector.
uncertainty with potential While the Group
short-term and long-term is not isolated
effects on demand for from the construction
services within the sector, it focuses
Group's industry and on the non-construction
broad customer base. portion of the market,
with specific exposure
in the facilities
management, retail,
commercial fit-out,
property, utilities
and waste, infrastructure
and energy services
markets.
================= ================================= ================================ ===============
Competitor The Group's industry The Group is ranked Unchanged
challenge is highly competitive, 2nd or 3rd in each
and competition may of our three primary
increase. The equipment markets and the
rental industry is resulting economies
highly fragmented, of scale enable
with competitors ranging it to be highly
from national equipment competitive, whilst
rental companies to the fragmented nature
smaller multi-regional of the market may
companies and small, offer consolidation
independent businesses opportunities.
operating in a limited The Group's national
number of locations. presence, effective
Competition in the distribution service
market has led to frequent model and well maintained
excess capacity and fleet, provides
resultant pricing pressure. improved customer
availability
================= ================================= ================================ ===============
Distribution The provision of the The Group has a Unchanged
Network Group's expected service flexible distribution
levels depends on its model incorporating
ability to transport CDCs which support
its hire fleet across the branch network.
its network in a timely Performance is monitored
and cost-effective continually to identify
manner, and on the areas where we can
successful operation improve the cost
of its Customer Distribution and the efficiency
Centres "CDCs" and of the network.
Branch Network.
================= ================================= ================================ ===============
IT infrastructure The Group requires The current IT system Unchanged
an IT system that is has been fully reviewed
appropriately resourced to ensure that it
to support the business, is the best possible
Any IT system malfunction option to optimise
may affect the ability the success of the
to manage its operations Group's strategy.
and distribute its Disaster recovery
hire fleet and service tests are carried
to customers, affecting out on a regular
revenue and reputation. basis. Firewalls
A cyber security attack are in place to
on the business systems protect against
could lead to a potential malicious attempts
loss of confidential to penetrate the
information and disrupt IT environment.
the business' transactions Penetration testing
with customers and is carried out on
suppliers. a regular basis
to detect weaknesses
in our IT and cyber
security. Software
has been implemented
to identify any
malicious attack.
================= ================================= ================================ ===============
Insufficient Some of the Group's The Group is focused Increased
Liquidity customers may have on working capital in 2017
Headroom liquidity issues and management and KPIs due to
ultimately may not are reviewed regularly. higher
be able to fulfil the The Group runs extensive outstanding
terms of their rental credit checking debtor
agreements with the for its account days
Group. Bad debts and customers and maintains following
credit losses can also strict credit control the relocation
arise due to service over its diversified of the
issues or fraud. customer base. credit
Unauthorised, incorrect The Group's investigation control
or fraudulent payments team conducts proactive function
could be made, leading and reactive work from
to financial loss or in order to minimise London
delays in payment which the Group's exposure to Manchester
could adversely affect to fraud. and,
the relationship with Payments and amendments looking
suppliers and lead should only be made forward
to a disruption in in line with a regularly to 2018,
supply. reviewed authorisation an element
Continuing losses of matrix. of the
the Group or delays The management is cash
in the implementation working with appointed costs
of cost savings may debt advisors, to associated
lead to a lack of liquidity. ensure that the with
future capital structure, the network
as part of the refinancing change
process, provides arising
sufficient liquidity before
for the Group. the benefits
fully
accrue.
================= ================================= ================================ ===============
Equipment The reliable supply The Group makes Unchanged
supply, of safe and good-quality every effort to
maintenance equipment is critical evaluate its counterparties
& availability for delivering our prior to entering
customer promise; unavailable into significant
or unreliable equipment procurement contracts
can reduce potential and seeks to maintain
revenue and drive additional a range of suppliers.
costs into the business. Refining the Group's
The Group is dependent operating model
upon its relationships during the year,
with key suppliers and establishing
to obtain equipment the right balance
and other services of centralised and
on acceptable terms. decentralised responsibilities.
Any disruption in supply The 2018 operational
could affect its ability plan is based on
to provide its customers improving the availability
with expected service of equipment and
levels, increasing the efficiency of
the risk of lost customers our operating model
or reduced trading to drive profitability.
levels.
The changes in the
way we operate can
impact the availability
of supply during implementation.
================= ================================= ================================ ===============
Customer A decline in the Group's The Group is looking Unchanged
retention customer service levels to improve regional
and brand could result in a loss interaction in areas
reputation of customers and market such as customer
share. care in 2018.
The Group's business The Group invests
depends on strong brands in areas such as
and any failure to marketing, community
maintain, protect and relations and colleague
enhance its brands training, aimed
could have an adverse at delivering the
effect on its ability highest standards
to grow the business. of customer service
and colleague engagement.
The Group actively
engages in online
advertisements and
email communications,
and engages on a
regular basis in
public relations
and sponsorship
activities to promote
its brands and its
business.
================= ================================= ================================ ===============
Outsourcing The Group outsources Outsourcing of services Reduced
of services certain activities by the Group is in 2017
of its business to subject to stringent as operating
third parties. procurement and model
If any third parties service criteria was refined.
become unable or refuse and all contracts
to fulfil their obligations, are subject to demanding
or violate laws or service level agreements
regulations, there which are closely
could be a negative monitored and enforced.
impact on the Group's Performance and
operations or it could quality metrics
lead to adverse publicity and KPIs are tracked
and a decline in demand. throughout the life
of contracts.
================= ================================= ================================ ===============
Inability Turnover of members The Group has established Unchanged
to attract of the Group's management and maintains competitive
and retain and colleagues and pay and benefit
and train its ability to attract, packages, as well
personnel train and retain key as the right working
personnel may affect environment for
its ability to efficiently its colleagues.
manage its business Training for colleagues
and execute its strategy. is provided within
branches of excellence.
The Group is reviewing
colleague incentives
in 2018.
================= ================================= ================================ ===============
Legal Failure to comply with Robust governance Unchanged
and regulatory laws or regulation, within the Group,
requirements such as the Companies including a strong
Act, accounting regulations, financial structure,
health and safety law, with adequate assurance
Bribery Act or Road provision from internal
Traffic Act, leading and external audit.
to material misstatement Additional assurance
and potential legal, and support is provided
financial and reputational by a fully skilled
liabilities for non-compliance. HSEQ team and an
internal group investigation
team.
================= ================================= ================================ ===============
FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENT
Year Year
ended ended
30 December 31 December
2017 2016
Note GBP000s GBP000s
Revenue 2 335,780 342,410
Cost of sales (154,289) (145,232)
Gross profit 181,491 197,178
--------------------------- ----- ----------------- -------------
Distribution costs (46,140) (45,091)
Administrative expenses (207,652) (155,969)
Other operating income 882 1,151
Operating loss (71,419) (2,731)
--------------------------- ----- ----------------- -------------
Adjusted EBITDA(1) 2 48,944 68,638
Less: Depreciation (1) (47,159) (48,175)
--------------------------- ----- ----------------- -------------
Adjusted EBITA(1) 1,785 20,463
Less: Exceptional items 3 (66,567) (16,957)
Less: Amortisation(1) 7 (6,637) (6,237)
--------------------------- ----- ----------------- -------------
Operating loss (71,419) (2,731)
Net finance expense 4 (13,743) (14,686)
Loss before tax (85,162) (17,417)
--------------------------- ----- ----------------- -------------
Adjusted (loss) / profit
before tax (11,958) 5,777
Less: Exceptional items 3 (66,567) (16,957)
Less: Amortisation 7 (6,637) (6,237)
--------------------------- ----- ----------------- -------------
Loss before tax (85,162) (17,417)
--------------------------- ----- ----------------- -------------
Income tax credit 5 5,240 104
Loss for the financial
year (79,922) (17,313)
--------------------------- ----- ----------------- -------------
Loss attributable to:
Owners of the company (79,922) (17,313)
--------------------------- ----- ----------------- -------------
Loss per share (pence)
Basic and diluted loss
per share 6 (46.96) (11.18)
Adjusted basic earnings
per share(2) 6 (5.68) 2.98
Adjusted diluted earnings
per share(2) 6 (5.68) 2.94
--------------------------- ----- ----------------- -------------
(1) Adjusted EBITDA is defined as operating profit before depreciation, amortisation, and exceptional items. For this purpose depreciation includes the net book value of hire stock losses and write offs, and the net book value of other fixed asset disposals less the proceeds on those disposals. Adjusted EBITA is defined as operating profit before amortisation and exceptional items.
(2) Adjusted earnings per share is defined as profit before tax with amortisation and exceptional costs added back less tax at the prevailing rate of corporation tax divided by the weighted average number of ordinary shares.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year Year
ended ended
30 December 31 December
2017 2016
GBP000s GBP000s
Loss for the financial
period (79,922) (17,313)
Items that may be reclassified
to profit or loss:
Foreign currency translation
differences arising
on consolidation of
foreign operations 104 1,533
Other comprehensive
profit for the period,
net of tax 104 1,533
---------------------------------- ------------- -------------
Total comprehensive
loss for the period (79,818) (15,780)
================================== ============= =============
Attributable to owners
of the Company (79,818) (15,780)
================================== ============= =============
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
30 December 31 December
2017 2016
Note GBP000s GBP000s
ASSETS
Non-current assets
Intangible assets 7 172,509 178,755
Property, plant and
equipment 8 150,915 178,473
Deferred tax assets 13 358 780
323,782 358,008
Asset held for resale 19 1,500 -
Current assets
Inventories 5,519 7,898
Trade and other receivables 9 96,503 103,744
Cash 2,151 15,211
------------ ------------
104,173 126,853
Total assets 429,455 484,861
LIABILITIES
Current liabilities
Trade and other payables 10 (82,452) (89,150)
Borrowings 11 (69,000) (66,000)
Provisions 12 (16,684) (6,431)
Current tax liabilities (90) (501)
(168,226) (162,082)
Non-current liabilities
Trade and other payables 10 (14,105) (17,266)
Borrowings 11 (134,242) (133,212)
Provisions 11 (36,510) (10,712)
Deferred tax liabilities 13 (2,800) (8,203)
(187,657) (169,393)
Total liabilities (355,883) (331,475)
Net assets 73,572 153,386
------------------------------ ----- ------------ ------------
EQUITY
Share capital 1,702 1,702
Merger reserve 97,780 97,780
Foreign exchange translation
reserve 425 321
Retained (deficit)/earnings (26,335) 53,583
Total equity attributable
to owners of the group 73,572 153,386
------------------------------ ----- ------------ ------------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Foreign
exchange
Share Merger translation Retained Total
capital reserve reserve earnings equity
GBP000s GBP000s GBP000s GBP000s GBP000s
At 1 January
2017 1,702 97,780 321 53,583 153,386
--------- --------- ------------- ---------- ---------
Total comprehensive
loss for the
period
Loss for the
period - - - (79,922) (79,922)
Foreign currency
translation
differences
arising on consolidation
of foreign operations - - 104 - 104
Total comprehensive
loss for the
period - - 104 (79,922) (79,818)
--------- --------- ------------- ---------- ---------
Transactions
with owners
recorded directly
in equity
Share based
payment charge - - - 4 4
At 30 December
2017 1,702 97,780 425 (26,335) 73,572
========= ========= ============= ========== =========
Foreign
exchange
Share Merger translation Retained Total
capital reserve reserve earnings equity
GBP000s GBP000s GBP000s GBP000s GBP000s
At 26 December
2015 1,548 85,376 (1,212) 72,557 158,269
--------- --------- ------------- ---------- ---------
Total comprehensive
loss for the
period
Loss for the
period - - - (17,313) (17,313)
Foreign currency
translation
differences
arising on consolidation
of foreign operations - - 1,533 - 1,533
Total comprehensive
loss for the
period - - 1,533 (17,313) (15,780)
--------- --------- ------------- ---------- ---------
Transactions
with owners
recorded directly
in equity
New share issue
for cash 154 12,800 - - 12,954
Share issue
costs - (396) - - (396)
Share based
payment charge - - - 103 103
Dividends paid - - - (1,764) (1,764)
At 31 December
2016 1,702 97,780 321 53,583 153,386
========= ========= ============= ========== =========
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended Year ended
30 December 31 December
2017 2016
GBP000s GBP000s
Cash flows from operating activities
Loss before income tax (85,162) (17,417)
Adjustments for:
- Amortisation 6,637 6,237
- Depreciation 37,006 37,729
- Accelerated depreciation
relating to hire stock customer
losses, hire stock write offs 10,065 9,762
- Impairment of property, plant
and equipment 11,230 -
- Impairment of intangible
assets 1,239 -
- Loss on disposal of property,
plant and equipment 88 684
- Loss on disposal of intangible
assets 3 -
- Loss on disposal of subsidiary 4,919 -
- Share based payment charge 4 103
- Finance income - (3)
- Finance expense 13,743 14,689
Changes in working capital
(excluding the effects of disposals
and exchange differences on
consolidation):
- Inventories 804 1,197
- Trade and other receivables 6,560 (5,717)
- Trade and other payables (5,764) 2,571
- Provisions 31,504 (1,187)
Net cash flows from operating
activities before changes in
hire equipment 32,876 48,648
Purchase of hire equipment (22,787) (22,085)
Cash generated from operating
activities 10,089 26,563
------------- -------------
Net interest paid (12,494) (12,974)
Income tax paid (59) (373)
Net cash generated from operating
activities (2,464) 13,216
------------- -------------
Cash flows from investing activities
Proceeds on disposal of businesses,
net of cash disposed of 1,138 -
Purchases of non hire property,
plant, equipment and software (7,260) (16,804)
Net cash used in investing
activities (6,122) (16,804)
------------- -------------
Cash flows from financing activities
Proceeds from the issue of
ordinary share capital - 12,954
Share issue costs - (170)
Proceeds from borrowings 18,000 31,000
Repayments of borrowings (15,000) (11,000)
Cash received from refinancing
hire stock 5,030 -
Capital element of finance
lease payments (12,504) (12,498)
Dividends paid - (1,764)
Net cash received from financing
activities (4,474) 18,522
------------- -------------
Net (decrease)/ increase in
cash (13,060) 14,934
Cash at the start of the period 15,211 277
Cash at the end of the period 2,151 15,211
============= =============
1. Basis of Preparation / Accounting policies
The Group's financial information has been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and on a basis consistent with those policies set out in our audited financial statements for the year ended 31 December 2016 (available at www.hsshiregroup.com/ investor-relations/financial-results).
The Group financial statements have been prepared, on a going concern basis, on a consistent basis, under the historical cost convention except for the treatment of certain financial assets and liabilities (including derivative instruments which are measured at fair value through the profit or loss). The financial statements were approved by the Board on 5 April 2018.
The financial information for the year ended 30 December 2017 and the year ended 31 December 2016 does not constitute the company's statutory accounts for those years. Statutory accounts for the year ended 31 December 2016 have been delivered to the Registrar of Companies. The statutory accounts for the year ended 30 December 2017 will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The auditors' reports on the accounts for 30 December 2017 and 31 December 2016 were unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.
The Annual Report and Accounts for the year ended 30 December 2017 will be posted to shareholders on or about 9 May 2018.
The directors have also considered the adequacy of the Group's debt facilities with specific regard to the following factors:
-- there is no requirement to redeem any of the senior secured notes until 1 August 2019.
-- The borrowings under the revolving credit facility are not due for repayment until 6 July 2019, unless the Group has not refinanced the senior secured notes by 30 September 2018 when the revolving credit facility may become, at the option of the lenders, repayable on 30 April 2019.
-- the terms and financial covenants relating to the revolving credit facility secured by the Group.
The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, and senior debt and interest repayments falling due, show that the Group is expected to be able to operate within the level of its current facilities for the foreseeable future.
After reviewing the above, taking into account current and future developments and principal risks and uncertainties, and making appropriate enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly they continue to adopt the going concern basis in preparing these Financial Statements.
2. Segment reporting
The Group's operations are segmented into the following reportable segments:
- Rental and related revenue. - Services.
Rental and related revenue comprises the rental income earned from owned tools and equipment, including powered access, power generation, cleaning and HVAC assets, together with directly related revenue such as resale (fuel and other consumables) transport and other ancillary revenues.
Services comprise the Group's rehire business known as HSS OneCall and HSS Training. HSS One Call provides customers with a single point of contact for the hire of products that are not typically held within HSS' fleet and are obtained from approved third party partners and HSS Training provides customers with specialist safety training across a wide range of products and sectors.
Contribution is defined as segment operating profit before branch and selling costs, central costs, depreciation, amortisation and exceptional items.
All segment revenue, operating profit, assets and liabilities are attributable to the principal activity of the Group being the provision of tool and equipment hire and related services in, and to customers in, the United Kingdom and the Republic of Ireland. The Group has one customer which accounts for more than 10% of Group turnover (2016: Nil).
Year ended 30 December
2017
Rental
(and
related
revenue) Services Central Total
GBP000s GBP000s GBP000s GBP000s
Total revenue from
external customers 247,770 88,010 - 335,780
---------- --------- ---------- ----------
Contribution 158,063 11,877 - 169,940
Branch and selling
costs - - (82,422) (82,422)
Central costs - - (38,574) (38,574)
Adjusted EBITDA 48,944
Less: Exceptional
items - - (66,567) (66,567)
Less: Depreciation
and amortisation (41,842) (311) (11,643) (53,796)
Operating loss (71,419)
Net finance expenses (13,743)
Loss before tax (85,162)
----------
Rental
(and
related
revenue) Services Central Total
GBP000s GBP000s GBP000s GBP000s
Additions to non-current
assets
Property, plant
and equipment 25,763 24 8,726 34,513
Intangibles - 200 2,657 2,857
---------- --------- ---------- ----------
Non-current assets
net book value
Property, plant
and equipment 118,643 224 32,048 150,915
Intangibles 165,960 290 6,259 172,509
Unallocated corporate
assets
Asset held for
resale - - 1,500 1,500
Non-current deferred
tax assets 358 358
Current assets 104,173 104,173
Current liabilities (168,226) (168,226)
Non-current liabilities (187,657) (187,657)
73,572
----------
Year ended 31 December
2016
Rental
(and
related
revenue) Services Central Total
GBP000s GBP000s GBP000s GBP000s
Total revenue from
external customers 262,817 79,593 - 342,410
---------- --------- ---------- ----------
Contribution 179,429 10,317 - 189,746
Branch and selling
costs - - (89,294) (89,294)
Central costs - - (31,814) (31,814)
Adjusted EBITDA 68,638
Less: Exceptional
items - - (16,957) (16,957)
Less: Depreciation
and amortisation (40,572) (267) (13,573) (54,412)
Operating loss (2,731)
Net finance expenses (14,686)
Loss before tax (17,417)
----------
Rental
(and
related
revenue) Services Central Total
GBP000s GBP000s GBP000s GBP000s
Additions to non-current
assets
Property, plant
and equipment 27,337 115 14,945 42,397
Intangibles - 149 4,590 4,739
---------- --------- ---------- ----------
Non-current assets
net book value
Property, plant
and equipment 133,922 387 44,164 178,473
Intangibles 169,748 542 8,465 178,755
Unallocated corporate
assets
Asset held for
resale - -
Non-current deferred
tax assets 780 780
Current assets 126,853 126,853
Current liabilities (162,082) (162,082)
Non-current liabilities (169,393) (169,393)
153,386
----------
3. Exceptional items
Items of income or expense have been shown as exceptional either because of their size or nature or because they are non-recurring.
During the year ended 30 December 2017 the Group has incurred a number of exceptional items.
In the first half of the year the Group identified the need to reduce its cost base. A cost reduction programme identified annualised savings of GBP13 million, based on the Q1 2017 run-rate, to be achieved through a number of initiatives including closing branches, making efficiencies in the network and reducing headcount. This led to redundancy costs and provisions being made for onerous leases and the impairment of property plant and equipment.
Following the appointment of the new CEO the Group carried out a strategic review. In December 2017 it was announced that this had identified further annualised savings of between GBP10 million and GBP14 million to be achieved through a network reconfiguration and further headcount savings. This led to the recognition of an onerous contract, asset impairments and redundancy costs.
Additionally to this the Group sold a business which was not considered core to its new strategy and incurred costs relating to reviewing the available options ahead of the planned refinancing of the Group's borrowings during 2018.
As a result, during the period ended 30 December 2017, the Group has recognised total exceptional items of GBP66.6 million analysed as follows:
Included Year
Included Included Included in other ended
in cost in distribution in administrative operating 30 December
of sales costs expenses income 2017
GBP000s GBP000s GBP000s GBP000s GBP000s
Onerous leases - - 6,903 - 6,903
Impairment
of property,
plant and
equipment - - 8,279 - 8,279
Business divesture - - 4,919 - 4,919
Cost reduction
programme 176 131 3,432 - 3,739
Senior management
changes - - 1,031 - 1,031
Strategic
review - - 1,172 - 1,172
Network reconfiguration - - 40,692 - 40,692
Preparatory
refinancing
cost - - 714 - 714
Sub-let rental
income on
onerous leases - - - (882) (882)
Exceptional
items 176 131 67,142 (882) 66,567
========== ================= =================== =========== =============
During the year ended 31 December 2016, the Group recognised total exceptional costs of GBP17.0 million, analysed as follows:
Included Year
Included Included Included in other ended
in cost in distribution in administrative operating 31 December
of sales costs expenses income 2016
GBP000s GBP000s GBP000s GBP000s GBP000s
NDEC exceptional
costs
Project management,
design, set-up 508 - 2,560 - 3,068
Parallel running 1,036 1,128 4,130 - 6,294
Non-recurring
transitional
engineering
costs 125 - 226 - 351
Branch and
CDC closure
redundancies 162 163 116 - 441
Total NDEC
exceptional
costs 1,831 1,291 7,032 - 10,154
Onerous leases - - 4,492 - 4,492
Group restructuring 15 5 1,622 - 1,642
Resale stock
impairment 1,552 - - - 1,552
Pre-opening
costs - 8 172 - 180
Cost reduction
programme - - - - -
IPO fees - - 74 - 74
Acquisitions - - - - -
Sub-let rental
income on
onerous leases - - - (1,137) (1,137)
Exceptional
items 3,398 1,304 13,392 (1,137) 16,957
========== ================= =================== =========== =============
An analysis of the amount presented as exceptional items in the consolidated income statement is given below.
Onerous leases: branch and distribution centre closure
The number of branches has been reduced to remove less profitable locations with activity centralised into fewer locations. 55 branches were closed during the year (2016: 30). An exceptional cost of GBP6.9 million relating to onerous leases and dilapidations costs has been recorded in the year ended 30 December 2017 (2016: GBP4.5 million). Sub-let rental income on onerous leases for the year amounted to GBP0.9 million (2016 GBP1.1 million).
Impairment of closed branch property, plant and equipment
Following the branch closures management have conducted an impairment review of property plant and equipment in closed branches to determine what can be reused across the network. During the year ended 30 December 2017 an impairment of GBP8.3 million has been recorded (2016: GBPnil).
Cost reduction programme
The Group announced plans in the first half of the financial year 2017 to deliver significant cost reductions primarily by reducing head office headcount by redundancy and restructuring costs at the NDEC to drive operational efficiencies in the supply chain. Included in these costs is an asset impairment relating to the closure of the former head office in Mitcham and associated relocation costs of transferring transactional activity to the new head office in Manchester. During the year ended 30 December 2017 costs of GBP3.7 million are included as exceptional items relating to the cost reduction programme, (2016: GBPnil).
Senior management changes
During the first half of the year a number of senior management changes happened including the recruitment of a new Chief Executive Officer. Termination costs, legal fees and recruitment costs totalled GBP1.0 million. (2016: GBPnil)
Strategic review
Following the appointment of the new Chief Executive Officer, a thorough Strategic Review was carried out by the Group. Non-recurring third party consultancy costs of GBP1.2 million were incurred for the period ended 30 December 2017 to support this review (2016: GBPnil).
Network reconfiguration
The Strategic Review identified operational efficiencies that could be achieved through reconfiguring the Group's supply chain model. Potential annual savings of between GBP7 million and GBP10 million were identified by moving the testing and repair of all fast-moving products closer to HSS's customers, using the Group's existing network of distribution centres and branches. In addition to the cost savings, these changes are expected to improve asset utilisation and availability of product.
To realise these benefits, agreement was reached with Unipart who operated the Group's National Distribution and Engineering Centre (NDEC) to terminate the remaining 8 year term of the contract. In terminating this contract the Group will make cash payments of GBP33.8 million over the period 2018 to 2026 as compensation to Unipart. In aggregate a discounted provision of GBP32.6 million has been made for these payments. Included in the above are one off cash payments of GBP6.5 million which will be made in 2018 to cover the immediate restructuring costs associated with the change, including redundancy, site decommissioning and exit costs from operating leases.
The Group has impaired fixed assets of GBP1.9 million and software intangibles of GBP1.2 million relating to the operation of the NDEC. The Group has also impaired a security deposit of GBP4.5 million paid to Unipart prior to the opening of the NDEC as this will not be repaid.
The total provision for network reconfiguration, including GBP0.5 million of legal costs, recorded within exceptional items amounts to GBP40.7 million (2016: GBPnil).
Business divesture
The Group sold businesses not considered core to the strategy. The Reintec branded fleet of cleaning machines and the associated Tecserv equipment maintenance business were sold on 16 November 2017 for a consideration of GBP1.5 million. After transaction costs net proceeds were GBP1.2 million. This gave rise to a loss of GBP4.9 million including goodwill written off of GBP0.8 million. Further details on the disposal can be found in note 15.
Preparatory refinancing costs
Included with exceptional items for the period ended 30 December 2017 is an exceptional cost of GBP0.7 million in respect of preparatory costs for the refinancing of the Senior Secured Notes and the Revolving Credit Facility which are due for repayment in 2019. The Group expects to complete this refinancing in 2018.
Group restructuring costs
In parallel with the implementation of the NDEC the Group changed its operating model during 2016 to a new Divisional structure. This resulted in a reduction in headcount leading to a redundancy cost of GBP1.6 million for the year ended 31 December 2016 which was included within administrative expenses.
Resale stock impairment
As part of the NDEC set up and branch and distribution centre closures, inventory held for sale was centralised into fewer locations leading to an inventory impairment of GBP1.6 million which was included within cost of sales in the year ended 31 December 2016.
Pre-opening costs
Included in exceptional items for the year ended 31 December 2016 were GBP0.2 million of costs relating to new branch openings and relocations. These amounts have been included within administrative expenses.
IPO fees
Included in exceptional items for the year ended 31 December 2016 were GBP0.1 million off fees relating to the IPO in February 2015 and related to professional adviser and broker fees, which were included within administrative expenses.
NDEC establishment
During the year ended 31 December 2016, the Group incurred exceptional costs of GBP10.2 million establishing operations at the National Distribution and Engineering Centre ("NDEC").The NDEC was a centralised engineering and replenishment centre set-up to serve our branch and distribution network replacing the former hub and spoke model deployed by the Group.
A dedicated project team oversaw these changes. Associated costs incurred amounted to GBP3.1 million.
As branches and distribution centres rolled into the NDEC, there was a period of increased costs due to the operation of both the new and old models in parallel. The Group determined that a reasonable approximation of these parallel running inefficiencies to be the total costs incurred in operating the NDEC up to the point where 50% of operational volumes were processed through the NDEC rather than the original branch and distribution network. Accordingly all related NDEC costs until October 2016 were treated as exceptional costs, which amounted to GBP6.2 million.
4. Finance income and expense
Year Year
ended ended
30 December 31 December
2017 2016
GBP000s GBP000s
Interest received on
cash deposits - (3)
Finance income - (3)
------------- -------------
Bank loans and overdrafts 2,118 2,039
Senior secured notes 9,155 9,331
Finance leases 1,392 1,792
Interest unwind on discounted
provisions 31 484
Debt issue costs 1,047 1,043
Finance expense 13,743 14,689
------------- -------------
Net finance expense 13,743 14,686
============= =============
5. Income tax credit
(a) Analysis of expense/ (credit) in the year
Year Year
ended ended
30 December 31 December
2017 2016
GBP000s GBP000s
Current tax charge
UK corporation tax on
the loss for the year 486 389
Adjustments in respect
of prior years (788) 26
Total current tax (credit)/
charge (302) 415
Deferred tax credit
Deferred tax (credit)/charge
for the year (4,889) 443
Deferred tax charge impact
of change in tax rate - (961)
Adjustments in respect
of prior years (49) (1)
------------- -------------
Total deferred tax credit (4,938) (519)
Income tax credit (5,240) (104)
============= =============
(b) Factors affecting the income tax expense/ (credit) in the year
The tax assessed on the loss for the year differs from the standard UK corporation rate of tax. The differences are explained below:
Year Year
ended ended
30 December 31 December
2017 2016
GBP000s GBP000s
Loss before tax (85,162) (17,417)
Loss before tax multiplied
by the effective standard
rate of corporation tax
of 19.25% (2016: 20%) (16,394) (3,483)
Effects of:
Expenses not deductible
for tax purposes 1,076 501
Adjustments in respect
of prior years (838) 25
Difference in foreign
tax rate 444 389
Unprovided deferred tax
movements on short term
temporary differences
and capital allowance
timing differences 10,472 3,425
Impact of change in tax
rates - (961)
Income tax credit (5,240) (104)
============= =============
(c) Factors that may affect future tax charge
The standard rate of corporation tax in the UK changed from 20% to 19% with effect from 1 April 2017. The Group's losses for the year ended 30 December 2017 were taxed at an effective rate of 19.25%
The Group has an unrecognised deferred tax asset relating to temporary timing differences on plant and equipment, intangible assets and provisions of GBP18.2 million (2016: GBP14.8 million) and relating to losses of GBP6.9 million (2016: GBP1.4 million).
These potential deferred tax assets have not been recognised on the basis that it is not sufficiently certain when taxable profits that can be utilised to absorb the reversal of the temporary difference will be made in the future.
The corporation tax main rate at is 19% for the years starting the 1 April 2017, 2018 and 2019 and at 18% for the year starting 1 April 2020. The tax rate for the year starting 1 April 2020 is 17%.
6. Earnings per share
Year ended 30 December 2017
Weighted
average
Loss after number Loss per
tax of shares share
GBP000s 000s pence
----------- ----------- ---------
Basic and diluted
loss per share (79,922) 170,207 (46.96)
Potentially dilutive
securities - - -
Diluted earnings
per share (79,922) 170,207 (46.96)
=========== =========== =========
Year ended 31 December 2016
Weighted
average
number
Loss after of shares Loss per
tax (1) share
GBP000s 000s pence
----------- ----------- ---------
Basic and diluted
loss per share (17,313) 154,887 (11.18)
=========== =========== =========
(1) The ordinary shares issued on 28 December 2016 had no material impact on the weighted average number of shares for the year ended 31 December 2016.
Basic loss per share is calculated by dividing the result attributable to equity holders by the weighted average number of ordinary shares in issue for that period.
Diluted loss per share is calculated using the loss for the year divided by the weighted average number of shares outstanding assuming the conversion of its potentially dilutive equity derivatives outstanding, being nil cost share options (LTIP shares) and Sharesave Scheme share options. All of the Group's potentially dilutive equity derivative securities were anti-dilutive for the year ended 30 December 2017 for the purpose of diluted loss per share. There were no potentially dilutive equity derivative securities outstanding during the year ended 30 December 2017 for the purpose of diluted loss per share.
The following is a reconciliation between the basic loss per share and the Adjusted basic loss per share:
Year Year
ended ended
30 December 31 December
2017 2016
Basic and diluted
loss per share (pence) (46.96) (11.18)
Add back:
Exceptional items
per share (1) 39.11 10.95
Amortisation per
share (2) 3.90 4.03
Tax per share (3.08) (0.07)
Charge:
Tax credit/ (charge)
at prevailing rate 1.35 (0.75)
Adjusted basic (loss)/ earnings
per share (pence) (5.68) 2.98
============== ===============
(1) Exceptional items per share is calculated
as total exceptional items divided by the weighted
average number of shares in issue through the
period.
(2) Amortisation per share is calculated as
the amortisation charge divided by the weighted
average number of shares in issue through the
period.
The following is reconciliation between the basic and diluted loss per share and the adjusted diluted (loss)/ earnings per share:
Year Year
ended ended
30 December 31 December
2017 2016
Basic and diluted
loss per share (pence) (46.96) (11.18)
Add back:
Adjustment to basic
loss per share for
the impact of dilutive
securities (1) - 0.12
Exceptional items
per share (2) 39.11 10.83
Amortisation per
share (3) 3.90 3.98
Tax per share (3.08) (0.07)
Charge:
Tax credit/ (charge)
at prevailing rate 1.35 (0.74)
Adjusted diluted (loss)/ earnings
per share (pence) (5.68) 2.94
======================= ================
7. Intangible assets
Customer
Goodwill relationships Brands Software Total
GBP000s GBP000s GBP000s GBP000s GBP000s
Cost
At 31 December
2016 129,744 27,482 24,142 19,968 201,336
Foreign exchange
differences 2 - - - 2
Additions - - - 2,857 2,857
Sale of business (755) (738) (40) (240) (1,773)
Disposals - - - (2,104) (2,104)
At 30 December
2017 128,991 26,744 24,102 20,481 200,318
--------- --------------- -------- --------------- --------
Amortisation
At 31 December
2016 - 10,940 391 11,250 22,581
Charge for
the period - 2,762 143 3,732 6,637
Impairment
loss - - - 1,239 1,239
Sale of business - (356) (8) (183) (547)
Disposals - - - (2,101) (2,101)
At 30 December
2017 - 13,346 526 13,937 27,809
--------- --------------- -------- --------------- --------
Net book
value
At 30 December
2017 128,991 13,398 23,576 6,544 172,509
========= =============== ======== =============== ========
Customer
Goodwill relationships Brands Software Total
GBP000s GBP000s GBP000s GBP000s GBP000s
Cost
At 26 December
2015 130,171 27,044 24,142 14,999 196,356
Foreign exchange
differences 11 - . - - 11
Additions - - - 4,739 4,739
Transfers (438) 438 - 230 230
At 31 December
2016 129,744 27,482 24,142 19,968 201,336
--------- --------------- -------- --------------- --------
Amortisation
At 26 December
2015 - 8,014 234 7,866 16,114
Charge for
the period - 2,926 157 3,154 6,237
Disposals - - - 230 230
At 31 December
2016 - 10,940 391 11,250 22,581
--------- --------------- -------- --------------- --------
Net book
value
At 31 December
2016 129,744 16,542 23,751 8,718 178,755
========= =============== ======== =============== ========
At 26 December
2015 130,171 19,030 23,908 7,133 180,242
========= =============== ======== =============== ========
All goodwill arising on business combinations
has been allocated to the Cash Generating Units
(CGUs) that are expected to benefit from those
business combinations. The Group tests goodwill
and indefinite life brands annually for impairment.
Analysis of goodwill, indefinite life brands,
other brands and customer relationships by
cash generating units
Indefinite Other Customer
Goodwill life Brands Brands Relationships Total
GBP000s GBP000s GBP000s GBP000s GBP000s
Allocated
to
HSS Core 111,497 21,900 299 11,793 145,489
Powered access 4,114 - 681 - 4,795
Climate control 7,327 - 462 1,044 8,833
Power generation 6,053 - 234 561 6,848
At 30 December
2017 128,991 21,900 1,676 13,398 165,965
========= =============== ======== =============== ========
Indefinite Other Customer
Goodwill life Brands Brands Relationships Total
GBP000s GBP000s GBP000s GBP000s GBP000s
Allocated
to
HSS Core 112,250 21,900 352 14,735 149,237
Powered access 4,114 - 725 - 4,839
Climate control 7,327 - 525 1,156 9,008
Power generation 6,053 - 249 651 6,953
At 31 December
2016 129,744 21,900 1,851 16,542 170,037
========= =============== ======== =============== ========
The remaining life of intangible assets other
than goodwill and indefinite life brands is
between three to seventeen years.
The Group tests goodwill and indefinite life
brands for impairment annually or more frequently
if there are indicators that impairment may
have occurred. The recoverable amounts of the
goodwill and indefinite life brands, which are
allocated to cash generating units (CGUs), are
estimated from value in use (VIU) calculations
which model pre-tax cash flows for the next
four years (2016: four years) together with
a terminal value using a long term growth rate.
The key assumptions underpinning the recoverable
amounts of the CGUs tested for impairment are
those regarding the discount rate, forecast
revenue, EBITDA, and capital expenditure.
The key variables applied to the value in use
calculations were determined as follows:
* Cash flows were derived assuming future Group growth
rates in the short to medium term (up to four years)
of 2.5% for each of the CGUs (2016: between 6% and
4%). The directors believe that it is appropriate to
lower the growth rate assumptions from previous years
to reflect the focus of the business on cost
reduction. The cash flows calculations are based upon
the achievement of the cost savings identified from
the network reconfiguration identified in the
Strategic Review. The majority of the cost saving
initiatives have already been both identified and
implemented and the directors are confident of their
delivery.
* Cash flows beyond 2021 (ie after four years) have
been determined based on a long term growth rate of
2.5% (2016: 2.5%).
* A pre-tax discount rate of 10.0% (2016: 9.1%),
calculated by reference to a market based weighted
average cost of capital (WACC).
Whilst the delivery of the identified cost savings
is critical to the cash flow projections that
have been used, additionally, the directors'
cash flow projections are based on key assumptions
about the performance of the Group, the UK tool
hire market and the general UK macro-economic
environment. An impairment may be identified
if changes to any of these factors were significant,
including underperformance of the Group against
forecast, negative changes in the UK tool hire
market, or a deterioration in the UK economy,
which would cause the directors to reconsider
their assumptions and revise their cash flow
projections.
Based on this VIU modelling and impairment testing,
the directors do not consider the goodwill and
indefinite life brands assets carried in the
balance sheet at 30 December 2017, for any of
the CGUs, to be impaired.
For the CGU groupings listed in the table above
in respect of goodwill and brands, excluding
HSS Core, the directors' sensitivity analysis
does not result in an impairment charge. Given
the level of headroom in VIU they show, the
directors do not envisage reasonably possible
changes to the key assumptions that would be
sufficient to cause an impairment at this time.
In respect of HSS Core, at 30 December 2017,
the headroom between VIU and carrying value
of the related assets was GBP89.9 million. The
directors' sensitivity analysis with regard
to HSS Core shows that an increase in the discount
rate by 2.5%, to 12.5%, or a reduction in the
long term growth rate to a decline of 2.2%,
or a reduction in the short to medium term growth
rate to a decline of 3.3% would eliminate the
headroom shown. Additionally if planned cost
savings from the Strategic Review are GBP6.2
million less than anticipated on an annual basis
the headroom would be eliminated. The short
to medium term growth rate reduction equates
to a reduction in EBITDA of between GBP3 million
to GBP6 million annually over the medium term.
8. Property, plant and equipment
Materials
& Equipment
held
Land Plant for
& Buildings & Machinery hire Total
GBP000s GBP000s GBP000s GBP000s
Cost
At 31 December
2016 69,187 58,673 247,295 375,155
Foreign exchange
differences 16 65 620 701
Additions 6,664 2,086 25,763 34,513
Transferred to
asset held for
resale (3,806) - - (3,806)
Sale of business (93) (463) (5,504) (6,060)
Disposals (197) (79) (30,676) (30,952)
At 30 December
2017 71,771 60,282 237,498 369,551
------------- ----------------------- ----------------------- --------------
Accumulated depreciation
At 31 December
2016 37,095 46,214 113,373 196,682
Foreign exchange
differences 1 46 382 429
Charge for the
year 4,382 3,669 28,955 37,006
Impairment loss 9,103 2,127 - 11,230
Transferred to
asset held for
resale (2,306) - - (2,306)
Sale of business (33) (409) (3,164) (3,606)
Disposals (127) (62) (20,610) (20,799)
At 30 December
2017 48,115 51,585 118,936 218,636
------------- ----------------------- ----------------------- --------------
Net book value
At 30 December
2017 23,656 8,697 118,562 150,915
============= ======================= ======================= ==============
Materials
& Equipment
held
Land Plant for
& Buildings & Machinery hire Total
GBP000s GBP000s GBP000s GBP000s
Cost
At 26 December
2015 63,313 55,914 256,208 375,435
Foreign exchange
differences 29 199 2,377 2,605
Additions 10,360 4,700 27,337 42,397
Disposals (4,515) (2,140) (38,627) (45,282)
At 31 December
2016 69,187 58,673 247,295 375,155
------------- ----------------------- ----------------------- --------------
Accumulated depreciation
At 26 December
2015 35,258 44,016 112,948 192,222
Foreign exchange
differences - 158 1,409 1,567
Charge for the
year 6,266 3,582 27,881 37,729
Disposals (4,429) (1,542) (28,865) (34,836)
At 31 December
2016 37,095 46,214 113,373 196,682
------------- ----------------------- ----------------------- --------------
Net book value
At 31 December
2016 32,092 12,459 133,922 178,473
============= ======================= ======================= ==============
At 26 December
2015 28,055 11,898 143,260 183,213
============= ======================= ======================= ==============
9. Trade and other receivables
30 December 31 December
2017 2016
GBP000s GBP000s
Gross trade receivables 85,270 83,072
Less provision for
impairment (4,429) (3,740)
------------ ------------
Net trade receivables 80,841 79,332
Other debtors 271 679
Prepayments and accrued
income 15,391 23,733
Total trade and other
receivables 96,503 103,744
============ ============
10. Trade and other payables
30 December 31 December
2017 2016
GBP000s GBP000s
Current
Obligations under finance
leases 11,892 11,448
Trade payables 39,729 52,505
Other taxes and social
security costs 5,792 5,688
Other creditors 916 467
Accrued interest on
borrowings 3,904 3,859
Accruals and deferred
income 20,219 15,183
82,452 89,150
============ ============
30 December 31 December
2017 2016
GBP000s GBP000s
Non-current
Obligations under finance
lease 14,105 17,266
14,105 17,266
============ ============
11. Borrowings
30 December 31 December
2017 2016
GBP000s GBP000s
Current
Revolving credit facility 69,000 66,000
Bank overdraft - -
69,000 66,000
============ ============
Non-current
Senior secured note 134,242 133,212
134,242 133,212
============ ============
The secured senior note is a 6.75% fixed rate bond maturing in August 2019, and is listed on the Luxembourg stock exchange.
The Group's Super Senior RCF is a revolving credit facility expiring in July 2019.
The Group's Super Senior RCF and Senior Secured Notes are both secured on a shared basis by a first ranking lien over certain assets (comprising substantially all material assets of the Group). The Super Senior RCF shares its security with the Senior Secured Notes but shall get priority over any enforcement proceeds via a payment waterfall.
The Group had undrawn committed borrowing facilities of GBP27.6 million at 30 December 2017 (2016: GBP27.0 million). Including net cash balances, the Group had access to GBP29.8 million of combined liquidity from available cash and undrawn committed borrowing facilities at 30 December 2017 (2016: GBP42.2 million).
12. Provisions
Onerous Onerous
leases Dilapidations Contracts Total
GBP000s GBP000s GBP000s GBP000s
At 31 December 2016 5,398 11,745 - 17,143
Additions 6,273 4,582 32,612 43,467
Utilised during the
period (3,960) (1,885) - (5,845)
Unwind of provision (15) 46 - 31
Released, including
disposal on sale of
business (1,089) (513) - (1,602)
At 30 December 2017 6,607 13,975 32,612 53,194
======== ============== =========== ========
Of which:
Current 2,763 4,310 9,611 16,684
Non-current 3,844 9,665 23,001 36,510
-------- -------------- ----------- --------
6,607 13,975 32,612 53,194
======== ============== =========== ========
At 26 December 2015 4,537 10,136 - 14,673
Additions 3,349 3,173 - 6,522
Utilised during the
period (2,223) (1,460) - (3,683)
Unwind of provision 332 152 - 484
Released (597) (256) - (853)
At 31 December 2016 5,398 11,745 - 17,143
======== ============== =========== ========
Of which:
Current 2,876 3,555 - 6,431
Non-current 2,522 8,190 - 10,712
-------- -------------- ----------- --------
5,398 11,745 - 17,143
======== ============== =========== ========
Onerous leases
Provisions for onerous leases relate to the current value of contractual liabilities for future rent and rates payments and other unavoidable costs on leasehold properties the Group no longer operationally uses. These liabilities, assessed on a lease by lease basis, are expected to arise over a period of up to 12 years with the weighted average being 3.5 years (2016: 2.8 years). They are stated net of existing and anticipated sublet income based on management's experience of the commercial retail property market in conjunction with specialist third party advice. The onerous lease provision has been discounted at a rate of 0.752% (2016: 0.478%). A 1% increase in the discount rate at 30 December 2017 would reduce the onerous lease provision by GBP0.1 million.
The amount of anticipated sub-let income for vacant properties included in the onerous lease provision amounted to GBP0.9 million at 30 December 2017 (2016: GBP2.3 million). Variations in the actual timings or amounts of sub-let income will lead to a commensurate increase or decrease in the amount of provision required in the future. If the Group failed to dispose of or sub-let any of these vacant properties prior to their lease expiry the provision would increase by GBP0.9 million at 30 December 2017 (2016: GBP2.3 million).
Dilapidations
The dilapidations provision represents dilapidation costs in respect of the Group's leasehold properties and will therefore arise over the lease lives of the Group's properties, and comprises specific amounts based on surveyors' reports on a property by property basis, where available. The remaining properties are covered by an estimate based on gross internal area. The weighted average dilapidations provision at 30 December 2017 was GBP5.10 psf (2016: GBP3.10 psf). Estimates for future dilapidations costs are regularly reviewed, and the increase in the cost of the provision psf reflects a change in the estimate of future cost based upon experience during the year ended 30 December 2017. A GBP0.50 psf increase in the dilapidations provision would lead to an increase in the provision at 30 December 2017 of GBP1.3 million.
The dilapidations provision has been discounted at a rate of 1.19% (2016: 1.45%) at 30 December 2017 based on 10 year UK gilt yields. A 1% increase in the discount rate at 30 December 2017 would decrease the dilapidations provision by GBP0.6 million and associated dilapidation fixed asset by GBP0.6 million, respectively.
Onerous contract
The onerous contract represents amounts payable in respect of the agreement reached between the Group and Unipart to terminate the contract to operate the NDEC. The Group will make total cash payments to Unipart of GBP33.8 million of which GBP9.6 million is payable in 2018. The obligations under this agreement will unwind over the period to 2026. The provision has been discounted at a rate of 1.19% at 30 December 2017 based on 10 year UK gilt yields. A 1% increase in the discount rate at 30 December 2017 would decrease the provision by GBP0.9 million.
13. Deferred tax
Deferred tax is provided in full on taxable temporary differences under the liability method using applicable tax rates.
Property,
plant
and equipment Acquired
and other intangible
Tax losses items assets Total
GBP000s GBP000s GBP000s GBP000s
At 31 December
2016 780 (1,204) (6,999) (7,423)
----------- --------------- ------------ --------
(Charge) / credit
to the income statement (422) (1,078) 6,438 4,938
Sale of business - - 43 43
At 30 December
2017 358 (2,282) (518) (2,442)
=========== =============== ============ ========
Deferred tax
assets 358 - - 358
Deferred tax
liabilities - (2,282) (518) (2,800)
At 30 December
2017 358 (2,282) (518) (2,442)
=========== =============== ============ ========
At 26 December
2015 1,900 (1,265) (8,577) (7,942)
----------- --------------- ------------ --------
(Charge) / credit
to the income statement (1,120) 61 1,578 519
Arising on acquisition - - - -
At 31 December
2016 780 (1,204) (6,999) (7,423)
=========== =============== ============ ========
Deferred tax
assets 780 - - 780
Deferred tax
liabilities - (1,204) (6,999) (8,203)
At 31 December
2016 780 (1,204) (6,999) (7,423)
=========== =============== ============ ========
At 30 December 2017 GBP2.8 million (2016: GBP7.6 million) of the deferred tax liability is expected to crystallise after more than one year.
At 30 December 2017 the Group had an unrecognised deferred tax asset relating to trading losses of GBP6.9 million (2016: GBP1.4 million). Tax losses generated in the year have been offset against the previously recognised deferred tax liability on intangible assets resulting in a net credit to the income statement of GBP4.9 million (2016: GBPnil).
The Group also has an unrecognised deferred tax asset relating to temporary differences on plant and equipment, intangible assets and provisions of GBP18.2 million (2016: GBP14.8 million).
These potential deferred tax assets have not been recognised on the basis that it is not sufficiently certain when taxable profits that can be utilised to absorb the reversal of the temporary difference will occur in the future.
14. Commitments and contingencies
The Group's commitments under non-cancellable operating leases are set out below:
30 December 31 December
2017 2016
GBP000s GBP000s
Land and buildings
Within one year 15,030 16,140
Between two and five
years 45,316 48,447
After five years 33,084 35,562
93,430 100,149
------------ ------------
Other
Within one year 9,074 9,142
Between two and five
years 15,263 15,952
After five years 7 321
24,344 25,415
------------ ------------
117,774 125,564
============ ============
15. Business Disposal
On 16 November 2017 the Group sold its Reintec cleaning asset rental and Tecserv cleaning equipment and servicing businesses for a cash consideration net of costs of GBP1.2 million. The table below shows the assets and liabilities disposed of:
Descriptions of assets and liabilities GBP000s
Intangible assets 472
Property, plant and equipment 2,453
Inventories 1,575
Trade and other receivables 1,042
Cash 19
Trade and other payables (131)
Provisions (66)
Deferred Tax liabilities (43)
5,321
Proceeds of disposal less transaction
costs 1,157
--------
Loss on disposal before goodwill written
back (4,164)
Goodwill written back (755)
--------
Loss on disposal (4,919)
========
Proceeds of disposal less costs 1,157
Cash disposed of (19)
--------
Net cash inflow 1,138
========
16. Related party transactions
Ultimate parent entity
By virtue of its majority shareholding the Group's immediate and ultimate parent entity is Exponent Private Equity LLP. During the year entities managed by Exponent Private Equity LLP charged the Group fees of GBP42,725 (2016: GBP40,000) and GBPnil was outstanding at 30 December 2017 (2016: GBPnil). Additionally Exponent Private Equity invest in businesses whom the Group trade with. All transactions are carried out on an arm's length basis and are immaterial to both parties.
17. Dividends
Year ended Year ended
30 December 31 December
2017 2016
GBP000s GBP000s
Interim dividend of
Nil (2016: 0.57p) per
ordinary share paid
during the year - 882
Final dividend of Nil
(2016: 0.57p) per ordinary
share paid during the
year - 882
- 1,764
============================================ =============
The Board continue to be focused on reducing net debt and, after careful consideration of the significant cash investments made during 2016 chose not to pay an interim dividend and in advance of the planned network changes in 2018 the Directors believe it is in the best interests of the shareholders for the Group to not pay a final dividend in respect of 2017. During the year ended 31 December 2016, the shareholders approved a final dividend of 0.57p per ordinary share, totalling GBP0.9 million in respect of the year ended 26 December 2015 which was subsequently paid on 4 July 2016. Additionally during the year ended 31 December 2016, the Directors paid an interim dividend of GBP0.9 million in October 2016.
18. Note supporting statement of cash flows
At Other At
1 January Cash Non-cash 30 December
2017 Flows Movements 2017
GBP000s GBP000s GBP000s GBP000s
Cash 15,211 (13,060) - 2,151
Current borrowings (66,000) (3,000) - (69,000)
Non-current
borrowings(1) (133,212) - (1,030) (134,242)
Finance lease
liabilities (28,714) 12,504 (9,788) (25,998)
Total (212,715) (3,556) (10,818) (227,089)
========== ========= ========== ============
Accrued interest
on borrowings (3,859) (12,494) 12,449 (3,904)
Debt issue costs
(1) (2,788) - 1,030 (1,758)
Net debt (2) (219,362) (16,050) 2,661 (232,751)
========== ========= ========== ============
(1) Non-current borrowings are stated net of
debt issue costs
(2) HSS calculation of Net debt includes accrued
interest on borrowings and excludes deduction
for debt issue
costs
19. Post balance sheet events
On 11 January 2018 the sale of the former Mitcham Head Office, which closed in September 2017 as part of the cost reduction programme was completed for proceeds of GBP1.5 million. The property was an asset held for resale at 30 December 2017.
On 13 February 2018 the Group agreed an extension of the maturity date of its GBP80 million Revolving Credit Facility from 6 February 2019 to 6 July 2019. This resulted in an increase in the margin payable under the facility from 2.50% to 3.00%. There were no changes in covenants. If the Group has not refinanced it's senior security notes by 30 September 2018, the GBP80 million revolving credit facility will become repayable at the option of the lenders on 30 April 2019.
20. Adjusted EBITDA and Adjusted EBITA
Adjusted EBITDA is calculated as follows:
Year ended Year ended
30 December 31 December
2017 2016
GBP000s GBP000s
Operating loss (71,419) (2,731)
Add: Depreciation of property,
plant and equipment 37,006 37,729
Add: Accelerated depreciation
relating to hire stock customer
losses, hire stock write offs
and other asset disposals 10,153 10,446
Add: Amortisation 6,637 6,237
EBITDA (17,623) 51,681
Add: Exceptional items 66,567 16,957
Adjusted EBITDA 48,944 68,638
============= =============
Adjusted EBITA is calculated as follows:
Year ended Year ended
30 December 31 December
2017 2016
GBP000s GBP000s
Operating loss (71,419) (2,731)
Add: Amortisation 6,637 6,237
EBITA (64,782) 3,506
Add: Exceptional items 66,567 16,957
Adjusted EBITA 1,785 20,463
============= =============
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR USAURWAASRUR
(END) Dow Jones Newswires
April 05, 2018 02:00 ET (06:00 GMT)
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