7 July, 2003
Preliminary Results for the year ended 30 April 2003
Read and download the preliminary results for the year ended 30 April 2003
- Loss before exceptional items, goodwill amortisation andtax of £1.8m (2002 profit of £28.9m)
- After exceptional charges of £31.4m, £16.8mof which related to prior years and £7.5m to advisory andcommitment fees, the loss before tax was £42.2m (2002 –loss of £15.5m)
- £68.3m increase in net free cash flow* from 2002outflow of £29.4m to 2003 inflow of £38.9m
- Net debt** at 30 April of £622.3m (2002 -£675.3m). At constant exchange rates, debt reduced by£21.2m in the year.
- Renewed banking arrangements agreed at 30 May providingcommitted financing through January 2005
* net cash inflow from operating activities beforeexceptional items, less interest paid, net capital expenditure andtax
** net bank debt, the subordinated, unsecured convertibleloan note, finance lease obligations and non-recourse fundingreceived under the account receivable securitisation.
Ashtead’s non-executive chairman, Henry Staunton,commented:
“The Group has had to confront unprecedentedinternal difficulties in the USA against a background of the worsttrading conditions in at least a decade. With the aid of ouradvisers, the Group’s management has in the space of fourmonths drawn a line under the accounting issue, committedsignificant additional resources to strengthening the Group’sfinance function, conducted a full commercial review of thebusiness and of its balance sheet and negotiated renewed bankfacilities with revised covenants reflecting the current tradingenvironment.
The Group is a half billion pound turnover business withleading positions in each of its markets. It is once again ready totake advantage of its significant operating leverage as and wheneconomic conditions improve. The Board regrets that the past yearhas been a difficult one for all the Company’s stakeholdersbut looks forward to making progress along the road to recovery inthe current year.”
The year to 30 April 2003 has been the most difficultsince the inception of the Group in 1984. The effect of slowingeconomies in the USA and the UK, coupled with more difficultconditions in the oil and gas sector, made for challenging tradingconditions particularly against the background of uncertainty aboutwar in Iraq. Nevertheless all of this was manageable and was beingmanaged. What had not been anticipated was the admission in earlyMarch by the financial controller of our US subsidiary SunbeltRentals, that he had been failing properly to reconcile a number ofbalance sheet accounts. The effects of this admission wereimmediate. On the following day the Group had been due to makerepresentations and warranties as part of a normal rollover of partof its debt facility. In the circumstances it was clearly unable todo so and as a result was put in default of its bankingagreements.
It was gratifying therefore to be able to announce on 2June the conclusion of the forensic examination and the renewal ofour banking arrangements until January 2005. As we noted in ourJune statement “the Group will generate a significant amountof cash over the next two years and the Board expects to refinancethe senior debt facilities well before January 2005.” We alsostated that future dividend payments will depend on the completionof a successful refinancing but that, regrettably, no dividendwould be paid for the year ended 30 April 2003.
The knock on effects of the events of March weresignificant in both the USA and the UK but particularly the latter,given the Group’s status as a UK public company. They arereflected in the outcome for the year of a loss of £1.8mbefore exceptional items, goodwill amortisation and tax, and in thescale of exceptional charges incurred and a loss before tax of£42.2m. A-Plant has also provided for the cost of therationalisation of a number of its businesses and for thecentralisation of all of its UK accounting and head officefunctions at Warrington, the total sum being £7.4m. Inaddition, the Group has taken the opportunity to review the methodby which it estimates the likely cost of incurred insurance claimsin the USA by moving from a case by case analysis carried out byappointed independent claims handling agents to a more conservativeactuarial estimate of the likely total cost of the self-insuredrisk. This has given rise to an additional current year expense of£2.7m and to an exceptional £7.4m charge relating tothe brought forward balance. The prior year impact of the USaccounting issue was £9.4m.
Total exceptional costs therefore amounted to £31.4min the year of which £16.8m relates to the year to 30 April2002 and prior and £7.5m to the cost of advisory andcommitment fees in respect of the successful renegotiation of theGroup’s debt facilities.
Costs relating to the successful legal action in theUnited States of approximately £1m in total have been chargedto the profit and loss account over the last two years and nocredit has been taken in this year’s accounts for theanticipated recovery of these or in respect of the US$15m ofdamages awarded to the Company by the North Carolina business courtas announced on 6 May 2003.
Review of trading
|Group central costs||-||-||(4.2)||(4.7)||(4.2)||(4.7)|
* before exceptional items and in 2002 excluding the prioryear BET lease impact
** operating profit before exceptional items and goodwillamortisation. Additionally in 2002, the Sunbelt figures exclude theprior year BET lease impact.
Sunbelt continued to takemarket share in the USA although trading conditions were the mostchallenging for over a decade. These were exacerbated in the secondhalf by the wettest weather conditions on parts of the East Coastsince records began. The maintenance of dollar revenues at lastyear’s levels reflected maintained utilisation levels and thebenefit of the twenty-three branches opened in the previous yearand four in the first half of the current year. These benefits wereoffset by increased pressure on rental rates. The 0.2% decline inSunbelt’s dollar revenues compared with the collectivedecline of 6% in revenues reported by the top ten US equipmentrental companies in calendar year 2002. Although cost reductionmeasures were put in place, the drag effect of the additional 27branches reduced Sunbelt’s profitability with its EBITDAmargin falling to 28.4% (34.1%) and its divisional profit margin to9.4% (16.4%).
During the last quarter ofthe year Sunbelt implemented the leading IT operating system in theUS rental market. This will facilitate improved efficiencies incustomer service and cost control through a supplierrationalisation programme in the coming year. Capital expenditurewill also be kept under tight control being concentrated on highermargin products as part of a reconfiguration of the rentalfleet.
In recent months there hasbeen a better balance between supply and demand as major equipmentdisposal programmes by our competitors appear to have been largelycompleted and dollar revenues have continued broadly in line withthose of a year ago.
As previously mentioned theknock-on effect of the US accounting problem had an adverse impacton A-Plant, our UK subsidiary, as it damaged the confidence ofcustomers and suppliers. As a result the positive trend achieved inthe first half and beyond was reversed. Full year EBITDA marginswere 27.4% (32.2%) while divisional profit margins fell to 4.4%(7.8%).
During the year theintegration of the four regional accounting offices and the UKCorporate and Marketing office into our new Warrington facility wassuccessfully completed on time and within budget. A-Plant’sbusiness was also restructured on a product basis to give ourspecialist and tool hire shop businesses a national presence andour general equipment locations a greater focus.
A national meeting of UKmanagers was held in June, supported by a number of key suppliers,to confirm the successful outcome of the banking discussions, toshare with them our strategy and business plan and to brief them ona significant new incentive programme with a view to increasingmarket share. The achievement of this goal has been enhanced by theimpending announcement of a 3 year preferred supplier contract withone of the country’s largest contractors. The contract has apotential value of several million pounds perannum.
Since the beginning of Junethere has been a steady increase in the number and value of rentalcontracts towards the level of early March.
The offshore oil and gasindustry was particularly weak in Technology’s two principalmarkets, Aberdeen where the effects were partially offset byserving customers in the West African sector and Houston. Despitethe slow US economy the environmental business continued to tradewell. Costs and capital expenditure were kept under tight control.Recently we have seen improvement in the offshore market andTechnology’s management is more optimistic about the futurethan it has been for some time.
The Group generated a netfree cash inflow in the year of £38.9m, a £68.1mturn-round on the previous year’s outflow of £29.2m.Net debt at year end was £622.3m, £53.0m less than theprevious year’s £675.3m. At constant exchange rates thereduction was £21.2m.
Capital expenditure waslimited to £85.5m down from £113.8m in the previousyear reflecting economic conditions. £71.0m was spent on theequipment fleet of which £58.4m was replacement expenditureand £12.6m for expansion. The average age of thefleet at 30 April 2003 was a fraction over four years in both theUK and the US but, in the US, when the longer-life aerial workplatform fleet is excluded, the average fleet age for the rest ofthe fleet reduces to slightly below three and a half years.This means that the Group retains a relatively young fleetimportant at the current difficult stage of the economic cycle.Gains on disposal of fixed assets were £2.7m up from£1.5m in the previous year.
It is anticipated thatcapital expenditure in the coming year will remain at similarlevels but with a higher proportion spent in the UK. Significantnet free cash flow is also expected.
Response to the US accounting issue
Immediate action was takenin response to the US accounting issue. Sunbelt’s financialcontroller left the Company. A temporary replacement was installedwho continues to provide transitional support to a full timeappointee who joined Sunbelt in May. A forensic investigation wasundertaken by KPMG reporting to the Group and its banks. Deloitte& Touche was also employed to assist the Company in theproduction and review of detailed business plans across the Group.An ambitious target date of the end of May was set for thedetermination of the extent of the accounting problem and theconclusion of discussions with the Group’s bankers and thedelivery of a renewed bank facility. These deadlines were met andan amended facility, committed to January 2005, with revisedcovenants reflecting current trading conditions was put in place atthe end of May.
The audit of our financialstatements has since been concluded by PricewaterhouseCoopers and anew senior Group position, Director of Financial Reporting, hasbeen created and filled from outside the Group.
There are some indicationsthat the worst is over as far as the economic cycle is concerned.US government statistics for our principal market, non-residentialconstruction, show that after a 30% decline in the period March2001 to September 2002, the position has been stable for the lasteight months. The continued large investment in PFI work and theannouncement of a significant road-widening programme by the UKgovernment are signs of encouragement as A-Plant continues todevelop its major account programme. The offshore market,particularly that in Houston, has picked up in recent months aftera slow period.
The equipment rentalindustry tends to lag the economic cycle making it prudent to becautious. Having addressed a number of significant coincidingissues the Board looks forward to making progress on the road torecovery in the coming year.
The Board is confident thatall three divisions will continue to be cash generative and thatsignificant net free cash flow will be generated in the coming yearand beyond, with an attendant reduction in debt levels. The Groupremains a half billion pound business with market leading positionswhich offer significant operating leverage as market conditionsimprove.
There will be a presentationtoday to analysts at 9.30am at the offices of Panmure at WoolgateExchange, 25 Basinghall Street, London EC2V 5HA. A simultaneouswebcast of the meeting and a copy of the slides will be availablethrough the Company’s website, www.ashtead-group.com. Arecorded playback will also be available shortly after the meeting.