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Edited Transcript of NTG.L earnings conference call or presentation 26-Jun-18 8:00am GMT

Full Year 2018 Northgate PLC Earnings Call

London Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Northgate PLC earnings conference call or presentation Tuesday, June 26, 2018 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Page

* David Tilston

* Kevin Michael Bradshaw

Northgate plc - CEO & Director

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Conference Call Participants

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* Andrew Nussey

Peel Hunt LLP, Research Division - Analyst

* Gregory Poulton

Nplus1 Singer Capital Markets Limited, Research Division - Research Analyst

* Jane Linsdey Sparrow

Barclays Bank PLC, Research Division - Director

* Joseph Spooner

* Julian Charles Cater

Numis Securities Limited, Research Division - Analyst

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Presentation

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Andrew Page, [1]

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Well, good morning, everybody, and welcome to Northgate's full year presentation for the 12 months ended 30th of April 2018, and welcome to those joining on the webcast. The format for this morning, very short introduction from me, and then you'll hear from both Kevin and David. And after that, there'll be an opportunity to ask questions.

So 2018 has been a very active year for Northgate. New U.K. management team. I'm see -- pleased to see that we have Frank sitting here in the front row, and Frank has brought with him alongside some very able people, and the results of that are already starting to show through. We revisited our strategy and revised and refined that, and that was led by Kevin, obviously with help from Fernando and his team in Spain and Frank in the U.K., plus some outside consultants who know their way around our sector.

So we now have a very clear pathway to driving the business forward and to delivering long-term shareholder value. And the results for last year are very much in line with market expectations, 5% increase in revenues, earnings per share coming in a shade under 35p and a full year dividend of 17.7p, so covered a couple of times, representing a small increase on last year. And that should be seen very much as a sign and a symbol of our confidence in the ongoing ability of this business to generate good levels of cash flow and return.

In terms of the geographic breakdown, fantastic performance from Spain, very strong rental growth and particularly encouraging to see this new leg of the business, the minimum term rental taking off, and Kevin will talk about that in some detail. But equally pleasing, certainly from my perspective, is to see the momentum that is now building in the U.K. It's a delight to be able to stand up here and talk about that business being in growth and some very good metrics coming off that.

As always, there are a number of moving parts. Kevin and David will take you through that. But the key message here is that we've taken decisions for the long term. We may have slightly depressed short-term reported profits, but what we're doing is taking steps to build long-term shareholder value and on a sustainable basis. And that includes our drive into the minimum term market alongside flex, but it also, of course, takes into account maximizing the returns from our investments in vehicles, our fleet optimization strategy.

So we have a very good team now at the top. Kevin's been onboard for 18 months. I'd like to thank David, too, for his fantastic contribution. He came in at very short notice last autumn and has done some sterling work.

You'll have seen this morning, we've announced the appointment of Philip Vincent. Philip comes onboard in a few weeks' time, great pedigree, come out of South African Breweries. He was the CFO of their Asia Pacific business, and prior to that, he was the CFO of BBC Worldwide. So some very interesting experience and I think a complementary skill set to Kevin, I think he'd be a very good wingman.

What about the way forward? Well, I feel optimistic about this because we now have strong operational teams in place in both Spain and the U.K., a great top team. We have real momentum building in the business. We have a landscape that is very attractive with the minimum term rental business sitting alongside flex, and we have a clear and well-understood strategy, and everybody in Northgate is signed up to that. So clear strategy, strong teams, lots of potential, what's not to like?

Over to you, Kevin.

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Kevin Michael Bradshaw, Northgate plc - CEO & Director [2]

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Great. Thanks, Andrew. Right. Good morning, everyone. Welcome to the 2018 results presentation for Northgate. I wanted to start, if I may, just with a brief overview of the key messages that we've got for you today before handing over to David to take you through the financials.

2018 and my first full year in the business has been a critical year of transition for Northgate where we've developed and begun implementation of a new growth strategy for the group. We restructured the U.K. business, overhauling sales and marketing in particular and reversed a multi-year decline in VOH. In addition, we took advantage of a failed competitor at the end of the year by acquiring fleet through 3 separate asset deals to add a further 3,400 vehicles to the U.K.'s operational fleet. The implementation of the new strategy was executed really well in Spain, driving strong growth in VOH, and in both markets, the addition of new minimum term product has delivered profitable growth and increased the quality and the stability of earnings as we look forwards.

In February, as Andrew alluded to, we took the difficult decision to implement a fleet optimization strategy, ending the poor practice of recent years. Now whilst this creates short-term headwinds on earnings as the fleets aged, it delivers a structural improvement in steady-state cash production through extending the replacement cycle and reducing net replacement CapEx. Our debt facilities have been extended. Leverage covenants increased to support growth. So in short, this has been a key year of building the foundations for strong and sustainable growth in shareholder value.

Let me hand you over to David, who can take you through the detailed financials.

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David Tilston, [3]

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Well, thank you, Kevin, and good morning, everyone. I'd like to run you through the key numbers before Kevin provides more background to the underlying trading dynamics.

If we start with the income statement, we can see this is a story of higher revenue and EBITDA but low operating profit, which then obviously impacts profit before tax and earnings per share. Before I start, can I mention that, where we refer to underlying performance metrics, we exclude exceptional items and amortization of intangible assets?

Total revenue increased 5.1% to just over GBP 700 million. Behind this, vehicle hire revenue increased 3.3% to GBP 471 million, and revenue from vehicle sales increased 9.1% to GBP 230 million. Underlying EBITDA increased 4% to GBP 251 million due to the increase in hire revenue. Underlying operating profit fell 19.2% predominantly due to disposals, and this largely explains the 24% reduction in underlying profit before tax to GBP 57 million, although interest costs also increased due to higher net debt levels. I will go into more detail about operating profit in a moment.

Underlying earnings per share consequently declined 26.4% to 34.8p. The Board is proposing to maintain the full year dividend, resulting in an increase in the dividend for the year of 2.3% to 17.7p, which reflects our confidence in the outlook for the group. We have started to see the benefits of our strategy in the fourth quarter, and Kevin will take you through this shortly.

Here, we take a look at the components of the operating profit decline. We can see that of the GBP 16.3 million decline, some GBP 13.9 million is explained by the reduction in disposal profits at our 2 main businesses as we implement our fleet optimization strategy. In comparison, only GBP 3.1 million related to lower rental profits. U.K. rental profits declined 22% to GBP 23 million with margins down by 2.2 percentage points as we prioritize getting VOH back into growth and incurred the cost of doing so. In comparison, Spain rental profit grew by 14% to GBP 29 million, driven by VOH growth with rental margins there broadly flat.

Please note that all margins quoted are calculated as rental profit over rental revenue. Kevin will give you more insight into the rental margin movements in both markets a little later on.

Disposal profits declined 47% in the U.K. and 42% in Spain largely as a result of lower PPUs, down by around 45% in both territories. As we explained when we announced our fleet optimization strategy at the start of the fourth quarter, this falling PPU resulted from the previous policy of selling vehicles at younger ages, i.e. when they still have high net book values. There was also a GBP 4.2 million negative impact of depreciation rate changes in previous years. Please note that underlying operating profits benefited by GBP 1.7 million due to foreign exchange effects from a weaker sterling.

Moving on to cash flow. We see underlying operating cash generation increased by GBP 2.2 million on 2017, reflecting the growth in rental revenue and increase in underlying EBITDA. New vehicle purchases were up sharply by GBP 141 million, driven mainly by the strong VOH growth in Spain and the resumption of VOH growth in the U.K. as well as some OEM price inflation. This increase in vehicle purchase expenditure was, by far, the most significant feature of the group's cash flow during the year, and I will come back to this in a moment.

Vehicle disposal proceeds increased GBP 10 million to GBP 187 million with the proceeds in both 2017 and 2018 reflecting the disposal of a high volume of vehicles at younger ages. Other nonfleet net capital expenditure increased by GBP 6.2 million to GBP 11 million mainly due to property and IT software investments.

Tax and interest cash costs were broadly similar to last year, and this led to an outflow of GBP 96 million as we invested to pursue our growth opportunities. We see this very clearly on the next slide.

We are disclosing cash flow before and after growth CapEx for the first time. We calculate growth CapEx by taking the increase in the size of the fleet in the year and multiplying it by the average cost of the new vehicles. Clearly, this does not reflect changes in the mix of vehicles purchased, but we believe it is a good, straightforward way to articulate growth CapEx. Everything else is defined as replacement CapEx with vehicle disposal proceeds being added back to derive a net replacement CapEx number. Net replacement CapEx was up 7.5% to GBP 186 million, reflecting a variety of factors including OEM price inflation and foreign exchange impacts. EBITDA less net replacement CapEx, which we believe to be a good indicator of the steady-state cash flow of the business before investing for growth, was GBP 3 million down on 2017 but still a very healthy GBP 65 million. This illustrates well the cash generative characteristics of our business.

We also undertook a very significant investment to grow our hire business. Growth CapEx was almost 0 in 2017 with fleet growth in Spain offset by a decline in the U.K. fleet. But in 2018, we invested GBP 125 million to expand the business. This expenditure comprised 72 million in Spain as we grew the fleet by nearly 15%, and GBP 54 million in the U.K. as we returned to VOH growth. The U.K. number includes GBP 13 million for the acquisition of vehicles formerly managed by a competitor that went into administration close to the year-end.

As previously announced, we have extended the maturity date of the majority of our bank facilities by 1 year to July 2020. You can see here the component parts of our loans under our medium-term facilities of GBP 442 million. You can see -- and the cost of these with our total borrowing cost being 2.27%. Net debt, after taking account of the borrowings under short-term facilities and cash balances, was GBP 439.4 million. At the same time, we agreed to increase our leverage covenant in the bank documentation to 2.75x to give ourselves greater financial flexibility. This compares to a year-end leverage level of 1.76x, up from 1.31x last year as we have invested for the growth, and net debt levels are therefore higher.

Following this amendment, we have announced a change to our targets. We plan to operate with leverage in the 1.5 to 2.5x range with higher levels of leverage during periods of significant growth. We believe this gives us the ability to finance our growth plans and is efficient whilst, at the same time, protecting our balance sheet through economic cycles. Thanks.

With that, I'd like to hand you back to Kevin.

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Kevin Michael Bradshaw, Northgate plc - CEO & Director [4]

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Thanks, David. Okay. Let me start with a recap of our rental market opportunity. We operate in markets that are undergoing a clear structural change with customers moving away from outright ownership of vehicles into rental and minimum term hire models instead. Penetration of rental and term hires continued to increase, now standing at 14.3% in the U.K. market, and this continues to drive around 6% volume growth per annum in our segments, independent of any underlying growth in the LCV market.

Against this, we're focused on 3 core opportunities in rental: so defending and growing our share of flex, particularly in the U.K. where that share has been lost in recent years; second, gaining share in minimum term markets, which are a natural adjacency to our core business and where we've got deep competitive advantages; and third, to pursue opportunities presented by the shift from ownership into rental with products such as We Buy, You Rent, where we purchase customers' legacy fleet, dispose of it and then supply them with new fleet based on minimum term contracts instead.

In the fourth quarter, we returned the U.K. business to positive volume growth with average fleet rising 3.2% versus the prior year, and this marked the culmination of significant efforts through the year and the application of self-help metrics that I set out at last year's results. The executive team was largely overhauled with strong leadership installed now in all key positions. Sales and marketing have had particular focus. In sales, significant changes to leadership to sales talent coupled with stronger pipeline management and more agile decision-making and more competitive pricing all contributing to the result. The marketing team equally was entirely replaced. The website overhauled and relaunched, customer contact data cleansed and increased and a brand strategy developed for launch later this year.

The new minimum term product, 12 Months +, was launched last September and has sold very successfully into a growing market, gaining substantial share. Vehicles on minimum term contracts now account for about 11% of closing vehicles on hire in the U.K., a significant growth, and with an average contract duration of 3 years, it provides far higher quality of earnings and stability of future revenue streams than the core flex business. Critically and in line with our strategic objectives, we also saw flat volumes return to growth in the fourth quarter.

At the end of the year, TOM Vehicle Hire went into administration, and we secured deals with 3 of its lenders to acquire fleet, the majority of which was already on rent to customers. For a total consideration of GBP 36 million, 3,400 vehicles were purchased. Our sales account management and operational teams have since focused on inspecting these vehicles, administering the change in ownership and bringing the customers onto Northgate contracts at improved commercial terms. We expect that by the end of the first quarter, 2,000 of these vehicles will remain on hire, mostly to ex TOM customers, and 1,400 will have been sold profitably or will be awaiting sale or redeployment to further customers.

Now rental margins in the U.K. Well, these have really reflected our growth strategy through the year. Since FY '17, margins have reduced by 1% as a result of pricing becoming more competitive in the flex market in particular. We've simply not been prepared to let competition take business from us based on price. And there's been a further 0.5% reduction as a result of increasing our mix in minimum term at a lower rate per day than flex. Finally, we've seen a further 0.6% reduction through increased costs, such as OEM terms, which have not been passed through historically, plus investments in marketing to drive growth and a modest reduction in leverage as rental revenues declined slightly in the year.

The U.K. fleet increased by 6,500 units through the year driven by strong growth in closing VOH, which was up 6.9%, coupled with the acquisition of fleet at the end of the year. Disposals reduced slightly as fleet optimization was implemented as of February, and there was a slight offsetting increase in third-party disposals.

Van Monster sales accounted for 48% of units sold, a strong increase on the prior year. And the average age of the U.K. fleet reduced over the year by 1 month, really reflecting the strong growth in closing VOH.

Turning to Spain. The implementation of the new growth strategy, combined with favorable macro conditions, has driven a significant step in rental volumes with average VOH in the fourth quarter trading up 14.1% versus the prior year. While the underlying economy and the service sector in particular is growing in Spain, we continue to see a market shift out of ownership and into rental. And our Spanish business has outperformed the market with the addition of new minimum term products presenting a really compelling breadth of offer to customers, especially large accounts who wish to satisfy a blend of short-term variable needs through flex with the longer-term efficiency afforded by minimum term rental.

Spanish margins have been broadly flat year-over-year. We saw a 1.5 percentage point reduction due to taking a more competitive stance on pricing both to defend the core business in flex but also to gain strong market share in minimum term. Mix drove a further 0.9 percentage points reduction primarily again as lower-priced minimum term business increased. However, operational leverage over the fixed cost base increased, and cost efficiencies mainly within our workshops were driven through. The cost of network expansion was deferred until FY '19, and the effect of these cost impacts was positive on margins, mostly offsetting the contraction from pricing and mix.

The Spanish fleet increased by 6,200 units through the year, again, driven by strong growth in closing VOH, which was up 13.3%. De-fleets reduced slightly as fleet optimization was implemented. And again, the average age of the fleet reduced over the year by 1 month, again, reflecting strong growth in closing VOH.

In February, we announced the implementation of the new fleet optimization policy, which marked a significant evolution of the strategy that we set out in October. While its implementation generated short-term earnings headwinds, the objectives of the policy were focused on improving cash returns from the investment in fleet, reducing debt and improving the return on capital employed in order to drive shareholder value.

Now actions have now been taken to age the fleet by 3 to 9 months across the U.K. and Spain, unless for specific vehicles operational constraints prevent this. For a minority of vehicles, these can be -- or cash returns can be further maximized by faster rotation, and a clear framework exists to manage this. So consequently, we've now started to see a lower volume of sales and replacement purchases as the fleet ages, and this, in turn, is leading to lower net replacement CapEx, which we define, as David said, as replacement purchases less disposal proceeds. It also leads to structurally higher steady-state cash flow defined as EBITDA less net replacement CapEx. Lower CapEx clearly has a positive impact on our net debt, and return on capital employed is supported as a result of the average net book value of these older vehicles being lower.

How this translates into specific guidance is that we're stating that net replacement CapEx in FY '19 will be 25% to 35% lower, so that's GBP 50 million to GBP 70 million lower than in FY '18. And beyond FY '19, with the longer replacement cycle, there will of course be an ongoing structural benefit to net replacement CapEx and therefore, the steady-state cash flow.

Let's go on to our outlook for the U.K. and Ireland. So clearly, there have been some significant steps to evolve our strategy, particularly with regard to how we manage cash within the business since Capital Markets Day in October. The outlook that I'm presenting now reflects these changes. The update to depreciation rates commenced in May and the recent acquisition of fleet in the U.K. It also reflects a combined view for the U.K. and Ireland, which will be managed under Frank Hayes and the U.K. executive team moving forwards.

It's also worth stating that following the update to our depreciation rates, future disposal profits by design will be a far smaller component of our guidance as we aim in line with accounting standards to manage the net book value of the fleet to be in line with sale proceeds at end of life.

So the growth that we saw in VOH last year has continued, and in the UK&I rental business, we expect high single-digit percentage growth in VOH this year, including the impact of the TOM vehicles acquired, returning to mid- to high single-digit growth in FY '20.

We expect rental margins to be broadly flat this year due to the further costs of investing to drive sustainable growth with rental margins then expanding in FY '20 as the benefit of these investments come through. Disposal profits are expected to reduce both this year and next as a function of both the fleet optimization strategy and the unwind associated with recent depreciation rate changes.

In Spain, again, we've continued to see really strong growth in VOH in recent months and expect continued double-digit percentage growth in average VOH this year and in FY '20. Rental margins will expand significantly this year, primarily driven by the depreciation rate change, and we expect rental margins to then remain broadly flat in FY '20. Disposal profits will decline this year as a result of the fleet aging but are expected to increase in FY '20 as the business returns to normalized sales volumes.

So rolling that up for the group. In FY '19, we expect rental profits to grow strongly driven by continued VOH growth and expanding margins in Spain. Disposal profits will be significantly lower driven by fleet optimization and the extension of holding periods. Interest charges will be higher, both due to the increased net debt as the fleet grows but also by some increased margins leverage increases.

Net replacement CapEx, as I mentioned earlier, will be 25% to 35% lower, so GBP 50 million to GBP 70 million increase in steady-state cash flow. We expect organic growth CapEx to be in a range of GBP 90 million to GBP 120 million, and we'll continue to apply disciplined controls to ensure that the marginal contribution from this CapEx is substantially ahead of the weighted average cost of capital.

While rental profits will grow strongly, the return on capital employed this year will be impacted by both the reduction in disposal profits as the fleets age and also by the significant investment to support VOH growth. And we expect leverage, as David outlined, to remain within a range of 1.5 to 2.5x net debt to EBITDA. Beyond FY '19, we expect further growth in rental profits, higher disposal profits for the group and higher return on capital employed for the group.

So let me just conclude by recapping the equity story for Northgate. We're the market leader in large, growing, profitable markets with future growth underpinned by a clear structural shift away from ownership and into rental. Northgate has been historically under-managed and has substantial self-help upside, which we've demonstrated this year. We have a new compelling growth strategy. We have a new strengthened U.K. management team to supplement our already strong Spanish team. We've delivered a clear turnaround of volumes in the U.K. and are pursuing opportunities to improve rental margins in the medium term and this continued substantial profitable growth available in Spain as we execute the new strategy. But most importantly, we've taken decisive actions to optimize our fleet, and we expect to see strong and structural benefits in cash generation as a result of that move moving forwards.

Okay. So maybe at that point, we can pause there and hand over to you for questions.

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Questions and Answers

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Andrew Page, [1]

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So have we got a roving mic? If I can ask people to put their hand up. I see Jane's first out of the box. And if you would give your name and your organization and then your questions, please. Jane?

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Jane Linsdey Sparrow, Barclays Bank PLC, Research Division - Director [2]

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Jane Sparrow from Barclays. Just a couple on pricing. You've referenced in the statement about the price competition in flex in Spain. I was just wondering, is that your sort of traditional smaller, flexible players? Or is that the sort of larger car rental companies flexing their muscles a bit in the van market?

And on pricing in the U.K., at the beginning of FY '19, you've obviously put the prices up 5% and not noticed much churn as a -- in reaction to that. Just wondering where on the price curve in the U.K. that leaves you given you cut prices last year. Are you kind of -- how far back are you to reclaiming what you cut by?

And then one final one on the impact on margin from the growth in minimum term. I thought the understanding of minimum term was that it was fairly margin neutral given the lower transaction cost. Is that just a timing issue on the margin that, initially, it impacts the margin, but longer term, it's neutral?

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Andrew Page, [3]

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Kevin, want to take all 3?

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Kevin Michael Bradshaw, Northgate plc - CEO & Director [4]

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I'll take the 3.

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Andrew Page, [5]

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Yes. Kevin?

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Kevin Michael Bradshaw, Northgate plc - CEO & Director [6]

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That's fine. Thanks, Jane. Let me take those in turn. So first, competition in flex in Spain. This is not about small players competing against the flex proposition. Frankly, there are a few of them, and our service standards and brand are sufficiently strong to be able to deal with those sorts of threats. The main price pressure on the flex business in Spain comes from 1 or 2 of the larger traditionally fixed term players. One of whom, in particular, has a small network across the country much less significant than ours but where, in regions, they can introduce some price pressure. And that's where we're seeing the majority of it.

Your question on pricing in the U.K. and where are we on the curve, you're right that we put through 4.8%, and that was on the majority of the flex base. We are indeed seeing that stick. What's pleasing is that we were very vocal about that change out with the customers in the market, and some of our recent indications suggest that competition is following that sort of price move, which certainly helps. We will look at opportunities to move up minimum term pricing in addition through the course of this year, and that's something that the team are actively exploring. But where we are on the curve, I think, clearly, we will seek to continue to push pricing, certainly recovering costs as we move forwards and aiming to widen pricing as a lever to driving margins.

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Andrew Page, [7]

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Minimum term margins.

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Kevin Michael Bradshaw, Northgate plc - CEO & Director [8]

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Yes, final question on minimum term. And to be clear on this, we have previously drawn analogies on marginal return on capital between flex and minimum term. And we believe moving forwards that, yes, there is broad parity there when the 3 different components of rate per day, utilization and direct costs are weighed up.

There is a little bit of timing impact. So whilst rate comes down straightaway, utilization comes up straightaway, there's a little bit of timing around those direct costs from lower touch points on the vehicle for that to come through. But I think net-net, we do see a little bit of dilution, as you've seen on the chart, primarily as a result of that lower-priced minimum term coming in. But we believe firmly that this is fantastic business to grow in as a combination of its marginal returns and the stability it provides on forward earnings and revenues.

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Andrew Page, [9]

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Julian? The guy with the hand up. Yes.

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Julian Charles Cater, Numis Securities Limited, Research Division - Analyst [10]

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It's Julian Cater from Numis. Two questions, please. The first is in terms of the guidance, Kevin, that you provided on the U.K. rental margins for this year. You obviously alluded to the 4.8% price increase on the flex back book. That's sticking. And I just wonder whether you could talk about the sort of offsetting factors that you're anticipating this year, perhaps how much incremental investments going into sales and marketing that you alluded to, which brings it back to flat.

And then my second question is just in terms of U.K. Van Monster. You've obviously seen a big step-up in terms of the penetration for the full year, but given that 2/3 of the vehicles were disposed in the first half, the implied penetration rate for the second half, it looks like it's about sort of 65%, 70%. So I wonder whether you could say is it just the mix of the vehicles or is there another dynamic at work there, please.

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Kevin Michael Bradshaw, Northgate plc - CEO & Director [11]

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Sure. Yes, let me take both of those. So on your first question, just on FY '19 U.K. margin guidance. Let me just put some color around the tailwinds and the headwinds that result in that broadly flat outlook. In terms of tailwinds, you highlight the 4.8%, and that's absolutely right. And I've commented around that sticking. We also say that, as I mentioned to Jane, we're exploring some rate increases potentially around minimum term product. So there could be some opportunity there. We will see, with revenue growth this year in the U.K., some benefit on leverage over fixed costs, and that's a further tailwind. And of course, we've got the depreciation rate change more modest in the U.K. but driving GBP 4.1 million increase in rental profits.

Offsetting that in terms of headwinds, we have OEM pricing, which is really a fact of life in our business. It will always be there, as you'd expect, but you should be thinking in terms of the low single-digits pressure on OEM pricing. The market remains competitive, and so we're yet to see the extent again to which we can manage price in the face of that competition whilst maintaining top line growth. Minimum term mix, we expect to see that increase again, so potentially a bit of drag coming from minimum term mix increasing. And then finally, yes, some investment in transformation. So more investment in marketing, a little bit more investment in sales. We want to make sure that the growth that we're seeing in the U.K. isn't a flash in the pan. It's sustainable, long-term growth in terms of top line so thus, the investment around that. Does that help?

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Andrew Page, [12]

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Kevin, [the other one was on] Van Monster penetration in the second half.

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Kevin Michael Bradshaw, Northgate plc - CEO & Director [13]

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So on your Van Monster question, I mean clearly part of this, Julien, is affected by the disposals decisions that we took in the second half of the year, and as of February, we were into a fleet optimization plan. And naturally, that started to reduce the level of disposals overall that we're making because we're focused on disposals and de-fleeting of mature fleet. And I can only imagine that if there's a change in mix on your observations between first and second half, it will be driven by that as opposed to any underlying performance within the business. But I'm happy to pick up more detail at a later stage if you wish.

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Andrew Page, [14]

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Andrew? This chap.

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Andrew Nussey, Peel Hunt LLP, Research Division - Analyst [15]

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Andrew Nussey from Peel Hunt. Again, a couple of questions. Just wonder if you'd give us any insight to the trends you experienced in May and June. I'm just wondering if there'd been any sort of issues with the commercial teams obviously having to take on all the TOM customers. And secondly, just any thoughts on any potential cannibalization between the fixed and flex product both in Spain and in the U.K.? And maybe a cheeky third just in terms of the IT system, the choices made and any thoughts in terms of what could be realized from fleet management and workshop efficiencies.

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Andrew Page, [16]

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They're all for you. Yes.

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Kevin Michael Bradshaw, Northgate plc - CEO & Director [17]

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Yes. So look, trends in May and June as regards to TOM, we maintain that these deals were attractive ones for the U.K. to do, and there has certainly been work to identify the vehicles, examine the vehicles, negotiate with customers and bring those vehicles onboard. You saw from the slides that our expectation is that 2,000 of those vehicles will be on hire by the end of the first quarter. So that's a good indication of the progress that we've made. We have seen some profitable sales of the balance of those vehicles so far this year. And for the remaining vehicles, as I said, we'll expect to either redeploy them to hire customers or trade them out profitably over the course of the coming months.

To cannibalization between flex and fixed, it's something that we monitor and we track hard. The short answer is, there may be some, but it is minimal. And typically, it's in cases where customers have been on legacy flex contracts but really haven't required the optionality of putting that fleet back to the supplier because their business is stable and they're not experiencing volatility. In those few cases, we see pressure to switch that into minimum term contracts, and we're happy to if that's the case.

On the IT system, I think that the message is no change, Andrew, since our last update. The team in the U.K., along with Infor as the supplier, have been working really deeply through an elaboration phase of that implementation, defining the target operating model, making sure that the workflow and the processes that the system will support on its implementation are exactly those and are best in class for the U.K. business. But there's no change in terms of cash or benefits outlook relative to the guidance we've given before.

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Andrew Page, [18]

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Any more questions?

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Gregory Poulton, Nplus1 Singer Capital Markets Limited, Research Division - Research Analyst [19]

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Greg Poulton from Nplus1 Singer. How important is pricing flexibility in your sales strategy? And now that you're putting pricing up, how are you adapting that? And then second one, could you give us the VOH growth guidance excluding Ireland and TOM?

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Andrew Page, [20]

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Okay. Kevin?

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Kevin Michael Bradshaw, Northgate plc - CEO & Director [21]

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Sure. Pricing and the sales strategy, the answer is it varies by customer at the more strategic, larger customer end of the spectrum. Typically, pricing is a bigger component in the decision-making. At the smaller end, serving SMEs or regional accounts, there's a huge emphasis on service and keeping the customer on the road and well maintained and well served. So it -- there is a spectrum.

As we have driven both pricing up, we're also seeking to drive service levels up across the U.K. so that we can justify a premium into the market at -- with the SMEs and with the regional players. So I think we're very comfortable, Greg, with our matching of service levels and prices as we see it.

In terms of the VOH growth, I don't have those numbers immediately to hand. But again, we're very happy just to follow up after the Q&A.

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Andrew Page, [22]

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Okay. There's a question here.

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Unidentified Analyst, [23]

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I was slightly intrigued by this strategic comment that you're -- effectively, you're going to age your vehicles longer and then your returns will be higher, and you mentioned you have a lower capital employed. With the depreciation changes, your capital employed will increase. You would expect that in the older end of the market, there's more -- there'd be more mom-and-pop type competition, lower barriers to entry. Just talk a little bit at high level, helicopter view, why this is the right way forward.

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Kevin Michael Bradshaw, Northgate plc - CEO & Director [24]

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Yes, happy to and great question. The decision wasn't taken lightly, and it was taken on the basis of some very detailed work in all of our core markets. The teams looked at all cash flows associated with running the vehicle and putting that on rent, so including an increase in service and maintenance profile as the vehicle ages.

In our business, even in the flex term business, we operate vehicles that are of rentable standard. And if a vehicle is of rentable standard, we charge the same price irrespective of whether it's 3 months old or 18 months old. So there's no degradation on pricing, and that's part of the input into that equation.

We find that in competition with local players, it's Northgate's service standards that stand out in the relationships that we build with local customers through our workshops and our depots. And that's the basis of competition, is that service differentiation to the small customer. And that's really the basis of the logic and the thinking. It was very clear from the work that we did that the NPV of an investment in a vehicle was maximized by lengthening the holding period. And in fact, in Spain in particular, we'd be happy to further lengthen that holding period if acceptable to customers. In the Spanish market, the vehicle park in the industry is substantially older, so it doesn't present us with a problem in doing so.

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Andrew Page, [25]

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Any more questions for the guys? Where?

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Joseph Spooner, [26]

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Joe Spooner from Jefferies. Can you just talk a little bit about the opportunities to make more acquisitions to accelerate the scale of the business? Obviously, you've brought in TOM. I guess that was a little bit of a one-off situation, but you did mention talking to others about their fleets. And maybe just a little bit of color on the pipeline around that.

And then just to be clear on the depreciation policy. Did you say that, that is now targeting a 0 disposal profit at the extended holding period that you now intend for the vehicles?

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Andrew Page, [27]

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Should we let David answer the second one and you deal with the first?

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Kevin Michael Bradshaw, Northgate plc - CEO & Director [28]

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Acquisitions, we, as I mentioned at our previous announcement, we keep an active pipeline and view of potential acquisitions in both territories. I think we have more opportunity in the U.K. market to consider small bolt-ons. And the team, I think, now are certainly of a caliber to be able to evaluate, assess and execute those if we wish them to, which is certainly a good step forward from where the business has been in prior years.

In terms of then moving forwards with acquisitions, our view on capital allocation hasn't changed. So our first call on additional capital really is into fleet and into growing the core fleet because, as we've mentioned before, we can see marginal returns on capital in a range of 20% to 25% against the capital deployed in additional vehicles on our core fleet. Beyond that, of course dividends, and beyond that, we would consider either -- if we were in a position of having excess capital, we'd then be at a point where we would actively pursue and consider M&A or alternative approaches towards dividends or buyback.

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Andrew Page, [29]

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On depreciation, David?

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David Tilston, [30]

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Yes. On depreciation, we're targeting sort of slightly above 0 rather than bang on 0, Joe, just to be clear on that. Just to be absolutely clear, we make our profit in the group from hiring vehicles. When we sell a vehicle, effectively, what we're doing is we're recycling cash back into replenishing the fleet. And so we don't really make profit on the sale of vehicles from the way that other people might think of it. And it is an adjustment to depreciation rates. So I think as the depreciation rate adjustment policy rolls through, in time, whereas we see disposals, profits as being a sort of a high-ish proportion of our overall level of profitability, we'd expect over a 3- or 4-year period for that to decline to less than 10%. And the focus very much for us is on how do we maximize our profit from hiring vehicles, which is our -- clearly, our core business.

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Andrew Page, [31]

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Any other questions? Right. Well, thank you all very much indeed for your attendance this morning. It's much appreciated. And the guys will be around for another 15 or 20 minutes, so if there's anything that you'd like to ask them, please feel free to stick around. Thank you very much.