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Edited Transcript of NTG.L earnings conference call or presentation 27-Jun-17 8:30am GMT

Full Year 2017 Northgate PLC Earnings Presentation

London Oct 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Northgate PLC earnings conference call or presentation Tuesday, June 27, 2017 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Page

Northgate PLC - Chairman

* Kevin Bradshaw

Northgate PLC - CEO

* Paddy Gallagher

Northgate PLC - CFO

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Conference Call Participants

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* Jane Sparrow

Barclays Capital - Analyst

* Julian Cater

Numis Securities - Analyst

* Andrew Nussey

Peel Hunt - Analyst

* Chase Weiner

Jefferies LLC - Analyst

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Presentation

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Andrew Page, Northgate PLC - Chairman [1]

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Good morning, everybody, and welcome to the presentation for the full-year results for the year ended April 30, 2017. And a particular welcome to those people listening on the webcast.

The format for today, a very short intro from me. Kevin Bradshaw, our new CEO, is then going to come up and spend a few minutes talking about his background. Paddy will then deal with the financials. Kevin is going to come back for a longer session on the strategy and the way forward and the four pillars of growth. And then we will hand over to you guys for Q&A and we will do our very best to answer your questions.

So, 2017 turned out to be a very challenging year. Although our revenues were up, our profits dropped 9%. Earnings per share were down just over 3%, but, and very importantly, we are increasing our full-year dividend, up 8% to 17.3 p. That is covered 2.7 times. And it is important to recognize that that increase the symbolic; it is very much a statement of our confidence in the potential for this business to generate increasing profits, cash flow and returns.

So, in terms of the composition of 2017's results, good performance from Spain and a very good performance from Ireland. Unfortunately not matched in the UK where the performance was rather disappointing. Particularly disappointing that we didn't sustain the momentum into the second half that we had anticipated. I'm pleased to say that that's now stabilized and there's a lot of opportunity going forwards.

There's quite a few moving parts behind these figures and we'll hear more about that in a few moments. During the year, it became clear to the Board that we needed to affect change and, as you know, in December we announced Kevin's appointment. He came on board in mid-January and he's been a very busy boy. He looks far more relaxed than he is. I can assure you he's spent a lot of time out and about in the business.

He's got a very good track record of improving business performance. He has worked in our sector with Avis; he understands the rental market. Very good B2B experience. And also overlaid on top of that, he ran Wyevale, so he understands multisite and consumer and B2C.

In terms of the way forward, I'm not going to steal his thunder because he's got quite a lot to talk about. Spain will be very much more of the same. We will continue to build on our very strong market position, terrific leadership out there under Fernando Cogollos. He has done a great job with that business.

We are the market leader. We will continue to invest in that area and also to innovate. And it's very encouraging to see how we are growing our new fixed term leg to the business over there.

A similar picture in Ireland under Peter Millen, good leader. A much smaller business but still with plenty of potential.

In the UK, there is a great deal to do and we've been lucky in the last few weeks to secure Frank Hayes to head up our UK business. Frank and Kevin have worked together before and have produced some outstanding results. I'm very confident that we will see a repeat of that in due course in the UK.

In the near-term, Frank's focus has got to be on the basics: products, marketing, sales, consistency of execution. Just frankly simply doing the day to day job better and properly. But in due course I believe that that business does have a great deal of potential. So, we are optimistic but we're also realistic. There's a lot to do and it's up to us to make sure that we get on and do it. So, that's probably enough from me for now. I will hand over to Kevin.

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Kevin Bradshaw, Northgate PLC - CEO [2]

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Great. Thanks, Andrew, and good morning, everyone. Let me add my personal welcome to our results presentation today. As Andrew said, I haven't quite met everyone in the room and so I wanted to start just with a few brief comments on my background.

I've spent the majority of my career in B2B organizations, invariably with a fix it and build remit. I am an engineer at heart and frankly that's what I love doing. Earlier in my career I spent 10 years building global financial data businesses at Reuters. That taught me a huge amount about new product development and launch, and also bringing excellent sales and account management to bear against a very tough and demanding institutional business customer base.

More recently at Avis Europe I led the UK business through the credit crunch and recession where we put on substantial volumes in a B2B sales led recovery of that business. And we did that prior to its successful sale. So, I really learned a huge amount there about driving sales growth in a declining market with capital discipline in what was a very competitive UK fleet hire business.

I've now been at Northgate for five months and trading out the last quarter of the financial year, really getting my arms around the operations and undertaking a preliminary strategic review. My first impressions are that this is a fundamentally good, well-positioned business with people who might have a real desire to serve our customers well and in turn deliver great returns for our shareholders.

Now the results this year have clearly been mixed and there is certainly work to be done. But I'm absolutely confident that my background and my experience, particularly at Avis and driving growth there through the recession, will be extremely useful with the job at hand over the coming months. So, more on my thoughts shortly, but first, as Andrew had said, let me hand over to Paddy to take you through the numbers.

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Paddy Gallagher, Northgate PLC - CFO [3]

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Thanks, Kevin. Good morning, everybody. Well, we haven't quite delivered what we had hoped we'd delivered largely on the back of a poor UK performance. We said at the interims that we expected a second half bias, but this didn't happen.

In the UK we still haven't fixed the issue of demand generation and sales conversion. We saw the usual seasonal off hires in December, but the UK business didn't recover in January with weakness across all industries and all regions.

In Spain we went backwards year-on-year in local currency as the business came up against exceptional compare from FY16. However, compared to FY15 operating profit in Spain was up 17%.

In terms of vehicles on hire, last year we lost 2,800 vehicles on hire from the start of the year on a group basis compared with a loss of 700 vehicles this year with increases in Spain of 2,000 VOH, mainly fixed term hires. While this is an encouraging, most of the gains in Spain occurred later in the year with little in-year financial benefit, but providing them with a good platform for a strong start for FY18. Ireland also increased by 6% in VOH, but both these countries were more than offset by a continued decline in the UK of 2,900.

Profit before tax was down GBP8 million, largely reflecting a GBP6 million adverse impact from depreciation rate changes and the weak opening vehicle on hire position in the UK offset by currency gains of GBP5 million.

Overall group disposal profits also reduced, broadly reflecting the depreciation adjustment. We expected a better number as residual market prices were roughly flat, but we couldn't de-fleet enough older vehicles and, in fact, sold more vehicles this year than last year. But as they were younger we made a smaller accounting profit.

The numbers were helped by a GBP2 million lower interest charge and a lower tax rate of 16% as a result of the closure of potentially disputed Spanish tax return. So, year-on-year EPS declined 3%. A final dividend of 11.6% is proposed in line with our progressive policy and our policy of dividend cover in a range between 2.5 and 3.75 times earnings. The dividend rise reflects, as Andrew said, our confidence in the opportunities ahead, which Kevin will outline shortly.

The Group continues to be cash generative with underlying free cash flow in the year of GBP44 million. However, with 80% of our debt denominated in euros as a natural hedge against our euro assets, the adverse FX variance on our debt saw our leverage remain at 1.3 times debt to EBITDA, despite the cash generated. This is comfortably below our covenant of 2.0 times and we will continue to maintain the balance sheet structure within a target range of 1.25 to 1.85 net debt to EBITDA.

Our interest cost reduced due to lower average debt, the full-year benefits of lower rates following the FY16 refinancing and interest on a Spanish tax refund. For FY18 we expect P&L and cash interest to be approximately GBP1 million higher as we reach some interest rate step-ups as a result of higher capital expenditure in Spain.

With two of our three businesses now growing vehicles on hire, we've been spending more on the fleet than a year ago. Please note this chart is prepared on an accrual's basis and that, due to significant additions in Spain later in the year, vehicle creditors rose by about GBP20 million.

In terms of utilization, we are still looking at marginal improvements in Spain, but significant improvements in the UK. And it should be borne in mind that fixed term contracts by their very nature improve utilization.

Mix adjusted purchase costs per vehicle were relatively flat year-on-year, though these rose approximately 3% this January due to the introduction of Euro 6 vehicles. These cost increases will gradually spread through our fleet in the next 3.5 years or so.

At the half we believe, as I said, that the UK had gone through a period of stabilization. In half one last year the closing vehicles on hire fell 1,300 from the May opening position whereas this year there was small growth in the same period. Unfortunately this proved to be a false [dawn] and, following the seasonal off hires in December, the expected January and February bounce back simply didn't happen. Basically the demand generation and sales conversion engine had not been fixed.

Of the GBP11 million year-on-year profit decline, approximately GBP4 million was due to the depreciation rate change, GBP6 million due to the vehicle on hire start point, and GBP3 million due to ongoing weaknesses in putting vehicles on hire during the year. This was partially offset by some cost efficiencies predominantly in our depots and workshops.

Van Monster profits declined GBP5 million due to the GBP4 million depreciation headwind and a GBP1 million impact from selling younger less depreciated vehicles. Our retail penetration though was up to 36% from 33% a year ago. At the interims we stated we would run a trial selling third-party vehicles to drive footfall.

We have concluded the trial was successful selling 900 vehicles for a net profit of GBP600 per vehicle after selling costs. We added 270 new fixed term vehicles from 33 customers, on average 8 vehicles per customer. Half of these were sold to new customers and half to existing. In terms of length of contract, the most popular was 12 months for approximately half the vehicles followed by 36 months or longer for 40%.

Our Spanish business finished the year well with regard to VOH adding a net 2,000 compared with a net 100 the previous year. We added over 3,100 new fixed term vehicles from almost 1,500 customers, an average of just over two vehicles per customer. Almost half of these vehicles were hired to new customers and just over half to existing.

In terms of length of contract in Spain, the most popular was 24 months for 40% of the vehicles followed by 36 months or longer for 42%. Flexible vehicles on hire grew by 100 but these are offset by 1,900 returns from fixed legacy contracts. In May a further 500 new fixed term vehicles went on hire with contracts signed for a further 200 vehicles which were not yet with customers.

As a result of the late momentum, the fact that the government never approved a budget, a EUR2 million depreciation headwind, EUR1 million additional bad debt and EUR1 million additional insurance, a result of legislative change, all this led to a EUR5 million production in year-on-year profit. However, as I mentioned earlier, FY16 was an exceptional year and a more normal compare would be FY15 against which Spain is up 17%.

As I mentioned at the interims, we have been seeing an increasing customer churn and trend to shorter-term rental, which I estimate added GBP2 million to the cost base during the year. We have to some extent now mitigated this by raising shorter-term pricing and introducing a fixed term hire product which will help over time flatten out the churn.

Early in the fiscal we took a decision in Spain to de-prioritize Van Monster. The main reason is that strong trade pricing on older vehicles currently erodes the benefits of retail sales given the refurbishment costs we bear if selling through retail. We expect this to persist for the next year or so and anticipate that this aspect of retail will only grow when the market normalizes. This led to a reduction in retail sales penetration from 17% to 10%.

Ireland had a good year growing closing vehicles on hire by 6%. However, this translated into a flattish rental operating profit in local currency as we invested in both the size of the fleet and in some overhead. However, the biggest factor was the need to outsource much of our service, maintenance and repair work due to the lack of internal workshop capacity.

Our depots generally do not have a workshop, so most maintenance, service and repair needs to be outsourced or we bear additional costs of transporting vehicles to and from our Dublin depot. In order to scale the business and ensure top-line growth falls through adequately to the bottom line, we need to invest in depots with workshops over the next few years.

We're shortly opening depots and workshops in Cork and Galway and all future depots will have workshops. And this should accelerate the fall through of increased revenues to the bottom line. Thanks, I will now hand back to Kevin.

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Kevin Bradshaw, Northgate PLC - CEO [4]

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Thanks, Paddy. So, over the first five months I've spent time in our regional headquarters in Darlington and Dublin and in Madrid. I spent time on the road, as Andrew said, in depots and in workshops with salespeople, with account managers out in front of our existing customers, but also in front of our new prospects.

I believe that the potential for Northgate looks really significant and I genuinely believe that we are a business capable of delivering good long-term growth in cash flows with returns well ahead of our WACC. However, as I said, there is work to be done. And the strategic review I referred to earlier has highlighted four key growth opportunities to deliver these returns, which I will cover a little later.

The most immediate area that needs attention is of course the UK business and I've already started to address this with a number of self-help actions, again, which I'll cover shortly. We're starting from a position of real strength in our core retail markets -- rental markets with clear market leadership in all three territories and genuine strategic advantages both in terms of service differentiation and a low-cost position.

Our excellent purchasing terms as a result of buying narrow but deep across our LCV fleet, our in-house workshops, low cost of debt certainly relative to regional competitors, and ownership of a market leading retail disposal channel all give us really significant cost advantage is relative to our competitors.

Our ability to keep customers on the road with 24/7 fast turnaround times in dedicated nationwide workshops also gives us genuine ability to differentiate our service offering. And critically as we look forwards, we are extremely well-placed given our established networks to grow cost effectively into adjacencies such as term hire.

It is extremely hard and much more challenging for our term hire competitors to build the networks necessary to compete directly in our rental market. Instead they are most often reliant on brokers with little control over service standards to meet the rental needs of customers.

However, despite these great strengths, it's also clear that Northgate's neither pursued a consistent nor frankly compelling growth strategy over recent years. And at the heart of this is the fact that there's simply been no rigorous fact-based or deep understanding internally of our markets, their size, their segmentation and their growth. And where we've done qualitative research it's tended to be piecemeal and not focused into a coherent strategy or set of actions to drive the business forwards.

Consequently there have just been too many shifts in direction. And I really sympathize with investors that we've not been clear enough about our growth ambitions, the potential financial returns and really why we can win in so many of the segments.

If I turn to the territories, our Spanish and Irish business units are fundamentally strong. Our Spanish business has an outstanding market position and share and benefits from deeply skilled and experienced leadership. I think performance this year, as Paddy said, needs to be seen in the context of a really excellent 2016 which delivered very strong disposal and rental profits. The performance in 2017 was still 17% up on 2015 and the Spanish business is currently trading extremely well.

This strong performance in Spain can be attributed to strong leadership; a well-developed and digitally led marketing function that's been very adept to tailoring the product proposition to the local market; effective sales processes and leveraging the resources not just in the sales team but within the depots themselves; and an extremely efficient workshop network that's just delivered outstanding customer service.

If we look at Ireland, we saw some growing pains this year as workshop activity needed to be outsourced to a greater degree than planned and at a higher unit cost per job than planned. Moving forwards we are putting workshops in place in Cork and Galway to address this and Ireland, again, has strong leadership, a thriving Van Monster business. And with the recent successful implementation of the Spanish IT system called Cap, has also improved the management information with which the Irish team are able to control the business in growth.

However, fundamental weaknesses have been allowed to persist in the UK. At the interims, the increase of 100 vehicles on hire since the start of the year was mainly underpinned by growth in short-term broker business which off hired after the peak and masked the true underlying decline across many verticals and many account sizes. And in addition, when the anticipated volumes behind new contract wins didn't materialize, the UK ended the year 2,900 vehicles on hire down.

Now what I find both frustrating but also equally encouraging is that the UK rental market has grown volumes at around 6% annually over the last three years. And this is set against the decline in Northgate UK volumes. So, I want to be really clear -- the challenges that we've seen and the poor performance in the UK has been very much self-inflicted and I'm confident that self-help actions will deliver the growth we are looking for from the UK moving forwards.

There are five main issues at stake here. First of all, there's simply just not been the urgency or pace in leadership from the UK and we've neither shown the commercial agility nor flexibility to get out there and win business. The business has been too inward facing and mired in process. Too often key decisions to close deals have needed to be passed up the management line causing delays and just meaning that we've missed out on securing new business wins.

Marketing capabilities haven't moved forward fast enough. We haven't recruited sufficient digital talent in the generation of web traffic and its conversion on the website has been poor. In particular, we failed to invest sufficiently in customer data, and this is key, both in its acquisition but also in its management via CRM.

As an example, we've had less than 4% of the SME and regional accounts in the UK market contactable directly via our CRM database. So, instead of driving new account acquisition or share of wallet programs centrally and efficiently with strong direct marketing, we've relied instead on salespeople walking industrial estates noting down the names of companies off the sides of vans to self-generate their own pipelines and frankly this simply can't continue.

In sales the restructuring last year to manage our SMEs by telesales was the right move, but we've just invested too little and too late in building our solution sales capability for large strategic accounts. For regional sales teams we haven't empowered them with enough pricing flexibility to get deals done and there's been too much time spent on admin.

Over the course of last year less than 20% of sales people's time was spent in front of and facing validated prospects and that has to change. We've also suffered from, I think, a lack of vehicle rental sector experience across the leadership and we've just not been as connected to the market as we need to be.

As to Darlington, I think while we have an outstanding operational team in Darlington for which we can recruit very effectively from the local talent pools, the business has certainly been held back by its inability to recruit sufficient numbers of really strong commercial resource there.

For example, the majority of the current UK exec team wasn't able to be recruited locally to Darlington and the business has really struggled to attract sufficient numbers and strength of talent around areas such as IT, digital, marketing and broader commercial functions. So, consequently there hasn't been that strength or pace of commercial leadership required across the UK business and, again, that needs a solution.

Finally, on technology, our core technology platforms, we have two systems in AX and fleet dynamics are old and outdated. And that's resulted in a high cost of change and, again, a lack of space in development of new functionality to support new product launches.

So, I think these are really the key issues that have held the UK business back and, as you'd expect, work has already started on -- and I've taken a number of actions to address these. All of this is solvable and can be dealt with with plans over the course of the coming months.

In the last two months I've made three critical changes in leadership. As Andrew mentioned, Frank Hayes has been appointed to run our UK business. Neil McCrossan has been appointed as the UK Sales Director and Claire Harrison-Church has been appointed as interim UK Marketing Director.

Frank started his career at Bain & Co. and brings a really outstanding track record of turnaround and growth having acted as a divisional MD and CEO of both public and private equity backed multisite businesses. Frank and I have worked together extensively over the course of the last four years and he has my absolute confidence.

Neil and Claire each bring over 30 years of directly relevant experience to their functions. Neil having spent his entire career in leadership roles in the UK vehicle hire sector and Claire bringing an outstanding breadth and depth of experience across all the key marketing disciplines.

In marketing we are redirecting spend to increase our in-house digital skills and to improve our media mix by using much more efficient digital channels where we expect fast payback, particularly in the SME sector. We've also begun to drive tactical upgrades to the UK website to improve lead conversion ahead of a fundamental overhaul to the site later this year.

We've also started to implement a customer data strategy to improve data acquisition and cleansing so that we are able to drive much more efficient direct marketing campaigns in the mid-tier and large-tier to acquire new accounts and grow our share of wallet effectively.

In sales we're starting to build a solution sales capability to sell more effective one-stop solutions to the larger strategic accounts and this will gain pace over the coming months. We've empowered regional sales people by giving them greater ownership of price flexibility. But importantly, at the same time we've revised incentive schemes to ensure that they are remunerated well by really trying to achieve the very best price possible at each and every turn.

In addition, we are simplifying reporting, so focusing just on essential pipeline and win/loss reports and removing as much of the admin from the frontline as we can. More broadly, over the last week, we've announced internally our intent to establish a small commercial hub in Reading while leaving our core operational hub up in Darlington.

This will give us access to both the Central London and Southeast talent pools and enable us to build a much stronger commercial base of talent for the business, particularly, again, in the areas of digital, marketing, finance and technology. We expect all of these investments to be funded by efficiencies generated across the business and by improving our ability to grow.

We've also progressed the IT strategy for the UK. We are focusing on two alternative solutions to replace the core AX system and a decision will get made later this year with implementation starting before the end of the financial year. So, in summary, I have every confidence that these initial actions, but coupled with rigorous continued management focus, will ensure we get the UK into growth.

Let me turn now to our strategic review. The scope of this covered our core and adjacent markets in all three territories to assess the size, segmentation, growth and profitability of each part of the market that we operate in. It was completed with the support of OC&C Strategy Consultants. And we also evaluated our competitive advantage and position relative to competition in each of the segments. And as a result, as I mentioned before, we've surfaced four exciting growth opportunities for the business moving forwards.

Today we operate in territories with 8 million light commercial vehicles that have been supplied to customers via three fulfillment models. The first is ownership where the vehicles are bought either from used or from new, either with financing support or bought outright. The second is contract hire on a fixed term basis where the vehicle is taken typically for several years. And the third being rental where the vehicle is provided on a short-term flexible basis.

Now these markets together generate total annual revenues of around GBP16 billion and today we participate directly in around GBP11 billion of this spanning rental, contract hire and secondhand LCV trading. A key point here is that we see growth in the contract hire and rental markets as being particularly strong over the last three years and we firmly believe that this will continue driven by three factors.

First by a cultural shift on behalf of customers just moving away from asset ownership, and we are seeing that across many asset markets.

Second, the attraction to customers of low upfront capital investment followed by certainty in ongoing cash flows relative to an outright model where there's a heavy upfront cash investment and uncertainty around the residuals at the end.

And thirdly, frankly just the overall reduction in lifetime cost of ownership by sourcing a vehicle through a third party such as Northgate with the benefit of its purchasing terms, its low-cost maintenance program and strong residuals through Van Monster.

We think that these are structural trends in our marketplace and that they are going to underpin really strong growth in contract hire and rental over the coming years. If we blend that market picture with a review of our competitive advantage in each of the segments we surface the four growth opportunities, and let me just walk you through these.

First, naturally we've prioritized defense and growth of our position in flex rental. This is a GBP1 billion market with volumes growing at around 6% and today we have an overall volume share of 31%. So, we see continued opportunity to build on our leadership position here and deliver further profitable growth from that market.

Second, we will target share gain in the term hire market. We value this at GBP2 billion in revenue, again with volumes growing at around 8%, and EBIT margins similar to those in flex rental where we see an outstanding opportunity for us to grow from a position of very low market share today. We see this as a natural adjacency requiring limited variations in our operating model to serve it and with substantial opportunities to cross sell into our existing accounts.

Third, we see significant untapped potential in converting customer fulfillment from ownership to term hire instead. With around GBP12 billion in annual sales from 1.2 million transactions in the new and secondhand LCV markets, we believe that really attractive EBIT margins are achievable from volumes that are converted from ownership to term hire.

The 450,000 finance transactions each year will be a priority to target. And remember, this conversion is already underpinned by clear market trends. So, we are focused on how to drive that and capture demand for Northgate across all traders, SMEs and regional accounts.

And fourth, we see a significant opportunity to consolidate the large but highly fragmented secondhand LCV trading market in the UK. This is a GBP5 billion market where Northgate has just 2.5% market share today through Van Monster. We believe Van Monster has got significant potential and is currently under exploited.

We see opportunities to increase the supply of stock to Van Monster and drive significant digital and network expansion of the business to consolidate the market. Now while this market operates today on thinner EBIT margins, very high asset turn ensures we get very strong return on capital for investments there.

If I take each of those in turn and just talk a little to our implementation plans. In flex rental we'll focus primarily in the UK and on improving lead generation in the SME and the regional accounts. We'll optimize the proposition and, as I mentioned earlier, we will also increase our price flexibility to equip our sales teams to just get deals done.

As Paddy has shown previously using the GBP100 Van example, and using our list pricing, we'll generate around 36% return on capital employed on incremental capital after variable costs are accounted for. And clearly at that level it affords us some substantial flexibility on our price book and we typically trade at a discount to that.

In term hire the first opportunity is simply to gain share of the existing GBP2 billion market. Implementation here will focus in the UK on cross-selling into existing regional and strategic accounts to provide that one-stop solution where we already have good relationships. In Spain and Ireland we see good opportunities to gain share in small and midsize fleets and that will be the focus.

The second term hire opportunity is in the conversion of owners to term hire customers. So, here we will offer sole traders and SMEs the ability to trade in their existing vehicles at an attractive price supported by our ability to dispose of the vehicle through Van Monster. For regional customers we are going to trial larger scale of fleet purchases, again, disposing of the vehicles through Van Monster while moving customers into term hire contracts instead.

It's encouraging to see that our Spanish business is already achieving a run rate of just over 400 new fixed term contracts per month. And of these about 150 are being sold to SMEs who had previously owned their vehicle but now rely on a term hire contract from Northgate instead.

If we look at the GBP100 Van example in this case, again we'd expect to see around 36% return on capital employed once all variable costs have been covered at our expected list prices for term hire products. Now this matches the return on the flex business really as a result of much stronger utilization through term hire coupled with modestly lower SMR costs offsetting the impact of a lower monthly hire rate.

Finally for Van Monster, we'll focus first on maximizing the performance of the existing sites by increasing the availability of stock, testing and refining and generating what we think is the optimal retail offer for used LCV trading on a model site and then testing and optimizing the marketing support around that.

We see opportunities to increase the stock availability both through optimizing our de-fleet from the rental business where we think there are opportunities by different ages and mileages by derivative, but also by carefully introducing third-party stock which we've successfully trialed this year.

We will later develop our network expansion plan significantly beyond the five new openings that we're planning this year and optimize marketing support for the entire network. By blending different sources of stock on a site and improving the marketing effectiveness, we think that for GBP100 of incremental capital we can generate just under 50% return on capital employed, after all variable costs have been covered and site overheads have been accounted for once the site has reached its first stage of maturity.

So, in summary, look, I believe that we are really well positioned with good strategic advantages in our core and in our adjacent markets. We've got strong businesses in Spain and Ireland, but clearly significant remedial work to do in the UK. This is all fixable via self-help and the actions have already begun to address that.

We've got large profitable core and adjacent markets which we believe are in strong structural growth, and we can see four exciting growth opportunities which we are going to pursue hard in the immediate future. Our increase in dividend this year reflects our conviction and my conviction in the strength of the growth opportunities for the Group moving forwards.

And I would like to share more detail with you on our implementation plans at an Investor Day later this year, where I'll also update our progress and set out some clear milestones for the next 12 to 36 months. Okay, let me close there and then perhaps we can open it up for some questions.

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Questions and Answers

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Andrew Page, Northgate PLC - Chairman [1]

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Come join us. Okay, Jane.

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Jane Sparrow, Barclays Capital - Analyst [2]

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Jane Sparrow from Barclays. I hear all the stuff on the issues with losing share 2013 to 2016, but how confident are you that the issues from January onwards at the beginning of 2017 that none of that is macro related? Have you seen those normal on-hires, are they -- are you seeing that you're losing share to other people? Is that what gives you the confidence it is self-inflicted rather than market-related?

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Kevin Bradshaw, Northgate PLC - CEO [3]

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Yes, two parts to the answer there, Jane. The first is, yes, it has been share loss, but protracted share loss over the course of three years. I don't see a difference more recently than the continuation of that share loss over a longer period of time. I am confident, as Andrew said, that the actions that we've implemented have absolutely brought a halt to that rapid decline that we saw in the second half in the UK. And frankly, what gives me confidence is I've seen this and done it before.

Having traded Avis UK in what is possibly a more competitive sector through recession into 2008 -- and many people in the room will have seen the depression on volumes that happened at that point -- we traded through that period, putting growth into the business through B2B as a result of getting on the front foot and winning share against the likes of Enterprise and other regional players. So, I've got some personal experience there and confidence of our ability to correct that and then drive it forwards irrespective of the macro environment.

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Jane Sparrow, Barclays Capital - Analyst [4]

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And you made quite a few comments around pricing flexibility as well and the need for it. How much is your price differing from competitors currently? Do you think that's the biggest issue, that it's really the price point is too high for your product?

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Kevin Bradshaw, Northgate PLC - CEO [5]

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I think it's more a function of pricing agility than price point. So, there is no doubt that as you look from sole traders through strategic accounts, the pricing is sharper and finer, as you would expect, amidst the strategic accounts than it is across the sole traders and SMEs. And so, certainly there is a difference there.

And as we start to drive for growth across a number of these sectors there will be a mix effect. But I don't think it's really a question of us being wildly adrift on prices. Often times we've missed the opportunity to secure a deal because we've just been too inflexible with the price point and haven't empowered the guys at the [coalface] to get the deal done.

So, we may have missed a piece of business over matter of a few percent on price that would have been significantly contributing in terms of a contribution to the fixed cost base. And giving us that operational leverage that we know is a really strong lever in this asset ranking business. So, it is agility more them price point itself.

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Jane Sparrow, Barclays Capital - Analyst [6]

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And then the last one just on the fixed term product in the UK, which obviously didn't grow by much in the second half. Was some of that due to just not necessarily rolling out to the extent that perhaps in December we thought it might be rolled out, because you were dealing with the issues in Flexi Rent.

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Kevin Bradshaw, Northgate PLC - CEO [7]

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I think that's absolutely right. So, this is symptomatic of some of the issues that we've had in terms of leadership and really commercial focus within the business -- coupled with some challenges just technology wise to get things in the right place to get that launched successfully.

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Jane Sparrow, Barclays Capital - Analyst [8]

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So, it wasn't poor customer response to the product, no?

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Kevin Bradshaw, Northgate PLC - CEO [9]

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No, no.

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Andrew Page, Northgate PLC - Chairman [10]

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Julian?

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Julian Cater, Numis Securities - Analyst [11]

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It is Julian Cater from Numis. I've got three questions as well, please. The first one, in the context of your market share loss in the UK between 2013 and 2016. And the thing that I'm slightly puzzled by is in previous presentations we've seen data on quite rapid growth in UK customer numbers, sort of mid-teens growth which was reported over that period.

And I just wonder whether you can go into some detail in terms of whether those new customers were just churning off very rapidly, were they with the wrong sorts of customers, please?

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Paddy Gallagher, Northgate PLC - CFO [12]

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Yes, I wasn't around when those numbers -- but my understanding was that that was during a period of SME focus. So, they were probably losing some larger stuffing and gaining a lot of small stuff. And yes, my understanding is it did churn off quite quickly. It tended to be shorter-term rental.

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Julian Cater, Numis Securities - Analyst [13]

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Okay, thank you. I just wonder whether you can say, again, in the context of the UK share loss, whether you feel part of that has been caused by quite material churn that you've seen, both UK management and sales staff, and going to perhaps smaller competitors and taking business with them. And what that perhaps says about the importance of relationships within the business and how that might affect your ability to re-win some of that business?

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Kevin Bradshaw, Northgate PLC - CEO [14]

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I think the share loss, Julian, has really been a function of misfiring on new account wins and really effectively growing our share of wallet within our existing accounts. Neither of those levers has been functioning effectively.

On the other side, clearly the likes of Enterprise and other regional players have been effectively and consistently nibbling away at the underlying base of accounts that have been there. And so, I think that has resulted in the underlying share loss that we've seen over the course of the last few years in the UK.

By its very nature flex business churns; that is the beauty of the product. The customer can hand back the vehicle at will without penalty. So, there is a lot of churn and one would expect a lot of churn within the business.

And what I'm focused on getting the sales and marketing functions really sharply tuned to is anticipating and discerning where that churn is bad, because it's a result of competitive threat onto the account or a shift in share of wallet within the account versus actually natural and seasonal. So, the customer will off hire but they will be back again the next year and perhaps on hire to the same or greater degree.

And getting the teams really focused on and anticipating where we're seeing a genuine competitive threat on the account and being proactive to defend the account and improve the relationships there. That is the heart of stopping that degradation, if you like, in terms of the flow out from the accounts. If we couple with the actions we've described in terms of driving the top line, you see a substantial shift in the net balance, but you need to act on both of those levers, which is very much what we're doing.

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Julian Cater, Numis Securities - Analyst [15]

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My last question is in respect of Spain. I think there were 1,800 or 1,900 legacy vehicles that were handed back. And I wonder whether you'd just give us an update on what the residual balance and therefore headwind from those vehicles is going forwards, please.

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Paddy Gallagher, Northgate PLC - CFO [16]

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I would expect circa 1,000 back this year. So, it is a declining balance which is helpful. On your question of churn, in Spain we had a lot of churn and the analytics was that quite a lot of that churn were customers going to buy a vehicle. So, one of the ways we can stop the impact of churn is by selling aggressively the fixed-term product.

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Andrew Page, Northgate PLC - Chairman [17]

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Has that covered all your questions, Julian? Andrew?

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Andrew Nussey, Peel Hunt - Analyst [18]

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Yes, good morning. Andrew Nussey from Peel Hunt. A couple of questions as well, if I may. First of all a strategic one. In terms of targeting the owned market, if I was a manufacturer what would I be thinking at the moment? Is this an opportunity or a threat?

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Kevin Bradshaw, Northgate PLC - CEO [19]

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I think it is an opportunity. I think, as we've seen across the markets as a whole -- and this isn't limited to LCV ownership versus rental, we see it in a host of asset classes -- that there is this strong cultural shift on behalf of customers not wanting to own the asset. And I think that's clear, that's a trend that's here to stay and I suspect that we will see manufacturers recognize that.

There are many changes in the markets for manufacturing vehicles to come, technology driven, business model driven and customer driven. And I would expect us to partner well with manufacturers to support what's a natural shift in the market.

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Paddy Gallagher, Northgate PLC - CFO [20]

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The other point I'd like to make is there's two -- obviously more than one type of ownership. So, you can buy new, which does affect the manufacturers. Or most people buy used, which doesn't affect the manufacturers. And we might be helpful because we'll be recycling some new stuff into that.

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Andrew Page, Northgate PLC - Chairman [21]

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You had another question I think.

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Andrew Nussey, Peel Hunt - Analyst [22]

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Yes, just in terms of the IT systems, obviously Spain and Ireland is now running a similar system. Is it an odd case that that Spanish system can be taken into the UK?

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Kevin Bradshaw, Northgate PLC - CEO [23]

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Well, it's certainly one of the alternatives that we are looking at. I referenced two and that indeed is one of them. And there are differences, Andrew, between the makeup and business processes therefore that are required to serve the Spanish and the Irish business as well versus that in the UK.

You will have seen I think historically that both the Spanish and the Irish businesses and markets are more focused and biased to SME. And that defines a particular set of business processes to drive and support it, versus the UK which is more geared towards regional and national accounts. So, there are differences but we're very much weighing up that Cap system against another strong alternative with a view to, as I say, taking a decision later this year.

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Andrew Nussey, Peel Hunt - Analyst [24]

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Just one final one. In terms of the mix between de-fleeting older vehicles and younger vehicles, should we expect that to sort of trend back to normal in 2018, or is there perhaps a little bit of a benefit from the older stuff now de-fleeting in 2018?

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Paddy Gallagher, Northgate PLC - CFO [25]

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Well, we're doing a lot of analytics and there's actually a couple sweet spots. Obviously accounting wise traditionally by selling older vehicles we've made a bigger accounting profit. But there's now also an opportunity for certain derivatives to sell a lot younger than we previously would, maybe between 14 and 18 months. So, there will be a mix.

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Andrew Page, Northgate PLC - Chairman [26]

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Any other questions? Yes.

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Chase Weiner, Jefferies LLC - Analyst [27]

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Good morning. [Chase Weiner] from Jefferies. You talked about a lot of actions, self-help work to be done. Is there any material cost impact from that new system changes and everything else you're doing? Is there any kind of CapEx or operational costs, exceptionals that have to come alongside that?

And I think in an answer to an earlier question you suggested that maybe the UK had already seen stabilization coming into the new financial year. Can you just elaborate on exactly what's gone on there? Thanks.

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Kevin Bradshaw, Northgate PLC - CEO [28]

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Yes, sure. Just to be very clear in terms of costs -- in terms of all of the self-help actions that we've described from leadership change through the Reading hub through the focus in terms of marketing and the shift of spend in digital marketing, we expect the costs associated with those to be covered through self-generated efficiencies more broadly across the Group. So, that's not something we would sit and give cost guidance on. We expect to cover those.

For the IT system, rather than give any guidance now, as I said, we are still at early-stage on the evaluation of the two alternatives. I think as and when we've made the decision, and that will be on the basis of a very clear business case and plan, we'll be able to share the details of that with you more fully at that point in time. That should be before the end of this year.

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Chase Weiner, Jefferies LLC - Analyst [29]

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Just on the IT system, how wide reaching is that system change? Is that quite a large operational risk that you have to go through over an extended period? Or is it a relatively simple system switch in/switch out?

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Kevin Bradshaw, Northgate PLC - CEO [30]

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We've just been through exactly the same system change in Ireland where, in fact, it was an implementation of the Cap IT system. I think that implementation has gone extremely well and wasn't a substantial cost to the business or disruption to the business. So, we have good experience through that initiative.

Moving forwards, yes, the core AX system is our core asset management system for the business. So, it is a change. But this is a standard change that's been done many times in the past and I'm confident that we will plan and execute well.

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Andrew Page, Northgate PLC - Chairman [31]

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Did you have a question on stabilization regarding this? Would you like to repeat that?

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Chase Weiner, Jefferies LLC - Analyst [32]

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I think you mentioned in answer to an earlier question that coming into a new financial year -- or you suggested coming into a new financial year the UK fleet had shown some stabilization. Just wondered if you could expand on that.

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Kevin Bradshaw, Northgate PLC - CEO [33]

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Yes, look I wanted to be very clear. The decline that we saw in the second half of last year, we have not seen that decline continue in the UK in the first half of this year and in trading so far. We've seen a degree of stabilization, but this is very early days. And I would want to come back to you and give you a full update at October at the Investor Day.

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Chase Weiner, Jefferies LLC - Analyst [34]

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Is there something that you have changed in terms of the trading stance materially since the experience of the second half last year? Because I think a lot of what you're describing is change to come? So, is this kind of business the market picking you up rather than maybe something you've done?

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Kevin Bradshaw, Northgate PLC - CEO [35]

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Well, I think -- I mean, we've covered in some depth the self-help actions that have already been taken. For me those are absolutely the right actions to stabilize and address the share loss in the UK. And even though early days, we're starting to see some impact there from those changes as they've gone through.

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Andrew Page, Northgate PLC - Chairman [36]

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Anybody else with a question? No? Okay, well, we will be around to take individual questions if you'd like to chat with us in the next 15 or 20 minutes. And otherwise, thank you very much indeed for your time and attendance. And we look forward to seeing you at the interim results at the end of the year. Thank you.