Hss Hire Regulatory News (HSS)

HSS Hire Group Plc

Interim report: Half year results for the 26 week period ended 30 June 2018

Significant progress made against strategic priorities

HSS Hire Group plc ("HSS" or the "Group") today announces results for the 26 week period ended 30 June 2018.

Highlights for H1 18

· Adjusted EBITDA growth of 74.7%

o Rental revenue growth and cost initiatives improved margins by 7.0pp to 17.6%

o LTM Adjusted EBITDA of £61.7m

· Revenue growth of 5.8% driven by improved availability and sales initiatives

o Underlying3 revenue growth of 8.7%

o Underlying3 core rental revenue growth of 3.7%

o LTM utilisation4 has increased in Tool Hire to 52.3% (H1 17: 49.5%) and remained consistently high in Specialist businesses at 73.6% (H1 17: 73.6%).

o Continued strength in Services with revenue +13.9% and contribution +30.8% 

· Significant reduction in net leverage to 3.7x (FY17: 4.3x)

o Net debt has reduced by £7.5m during the first half of the year

o Cash and total facility headroom greater than £35m as at 30 June 2018

· Secured successful refinancing

o Appropriate facilities in place to continue delivering on our strategic priorities and the Group's full potential

· Network reconfiguration implementation complete

o Full implementation of new supply chain model complete with expected savings of c.£11m

Current Trading and Outlook

· Trading momentum continued for the 8 weeks to 25 August 2018

o Underlying3 revenue grew more than 5% against the comparable prior year period

o Underlying3 core rental revenue grew more than 4% against the comparable prior year period

o Continued growth in EBITDA

· Secured shareholder approval for proposed sale of UK Platforms Limited

o Total Enterprise Value of £60.5 million

o Net cash proceeds from the Disposal will be approximately £47.5 million

o At least 80% will be used to repay debt, with the balance to be invested in the tool hire business

o Subject to CMA approval

· Reducing Group leverage continues to be a key focus

o Cash and RCF headroom increased by £18m post successful refinancing

o Looking ahead, we expect further deleveraging to occur during the second half of 2018 following the continued implementation of the identified strategic actions and the use of proceeds from the proposed sale of UK Platforms Limited

Steve Ashmore, Chief Executive Officer of HSS Hire, said:

"We are eight months into our new strategy and the Group has made significant progress. In this time we transitioned seamlessly to a new distribution model, refinanced the Group giving us long-term stability and announced the sale of our UK Platforms business, allowing us to focus on the tool hire business and further reduce our debt.

Alongside this strong operational progress, trading has been much improved, helped by our increased focus on our tool hire business and by customer demand for our extensive range of relevant seasonal products.

With significant operational change behind us and continued momentum in current trading, we look forward with confidence as our attention turns to driving improved performance from the tool hire business and strengthening the Group's commercial proposition."

Notes

1) Adjusted EBITDA is defined as operating profit before depreciation, amortisation, and exceptional items. For this purpose depreciation includes the net book value of hire stock losses and write offs, and the net book value of other fixed asset disposals less the proceeds on those disposals.

2) Adjusted EBITA is defined as operating profit before amortisation and exceptional items

3) Underlying revenue is total revenue adjusted for the impact of business divestments in 2017

4) Utilisation calculated over the last twelve months to the end of H1 2018

-Ends-

Disclaimer:

This announcement contains forward-looking statements relating to the business, financial performance and results of HSS Hire Group plc and the industry in which HSS Hire Group plc operates. These statements may be identified by words such as "expect", "believe", "estimate", "plan", "target", or "forecast" and similar expressions, or by their context. These statements are made on the basis of current knowledge and assumptions and involve risks and uncertainties. Various factors could cause actual future results, performance or events to differ materially from those described in these statements and neither HSS Hire Group plc nor any other person accepts any responsibility for the accuracy of the opinions expressed in this presentation or the underlying assumptions. No obligation is assumed to update any forward-looking statements.

Notes to editors

HSS Hire Group plc provides tool and equipment hire and related services in the UK and Ireland through a nationwide network of over 250 locations. Focusing primarily on the maintain and operate segments of the market, over 90% of its revenues come from business customers. HSS is listed on the Main Market of the London Stock Exchange. For more information please see www.hsshiregroup.com.

For further information, please contact:

Group financial performance

Revenue

Revenue in H1 18 was £169.8m, 5.8% above the previous year (H1 17: £160.5m). This year on year increase reflects improved trading in H1 18 across both our Rental and Services segments.

Rental and related revenues were £122.7m in H1 18 (H1 17: £119.3m), £3.4m or 2.9% higher than in H1 17. This was driven by improved performance in our core tool hire business delivered through focused sales initiatives, improved availability following the smooth implementation of strategic network changes moving test and repair of equipment back into our branches and the implementation of strategic profitability initiatives. Contribution was £80.5m (H1 17: £73.9m), an increase of 8.8% on H1 17 representing a 65.6% margin (H1 17: 62.0%) largely driven by improved revenues and lower operating costs following the network changes made earlier in the year.

Services revenues were £47.0m in H1 18 (H1 17: £41.3m), reflecting a strong performance in our OneCall and Training businesses with customers continuing to value the "one stop shop" service offer. Contribution increased significantly to £6.7m (H1 17: 5.2m), with margins improving to 14.3% (H1 17: 12.6%), reflecting ongoing focus on pricing discipline and effective supply chain management.

Costs

Cost of sales grew by £2.8m to £78.8m during the period (H1 17: £76.0m) primarily as a result of the growth in our rehire revenues and associated costs. Distribution costs decreased by £2.7m to £20.7m (H1 17: £23.4m) benefiting from increased efficiency following the strategic network changes made earlier in 2018. Administrative expenses decreased by £14.8m to £70.1m (H1 17: £84.9m) due to the benefit of cost actions taken in 2017 and 2018 combined with lower exceptional costs.

Gross exceptional costs in H1 18 were considerably lower at £3.3m (H1 17: £12.6m), including £1.6m of costs which relate to onerous leases on branch closures, £0.5m impairment of fixed assets associated with these closures, £0.7m relating to the implementation of the cost reduction programme across the Group and £0.7m of third party costs to complete the strategic review. In H1 17, exceptional costs were £12.6m, of which £6.2m related to the impairment of property, plant and equipment and £5.0m related to onerous leases. Exceptional income during H1 18 was £0.2m (H1 17: £0.5m) and related to fully or sub-let non-trading stores. This decrease was as a result of sub-let agreements coming to the end of their tenure.

Net finance expenses were £0.5m higher at £7.4m (H1 17: £6.9m) reflecting a higher level of drawdown on the revolving credit facility.

Profitability

Adjusted EBITDA of £29.9m in H1 18 was 74.7% higher than the prior year (H1 17: £17.1m), with adjusted EBITDA margins improving 7.0pp to 17.6% (H1 17: 10.6%). The improving profitability was driven by increased revenues in the period and lower costs due to actions taken in 2017 and 2018, including the successful implementation of the network changes which is expected to realise around £11m of annualised ongoing cost benefit as well as improved availability.

Adjusted EBITA increased from a loss of £7.3m in H1 17 to a profit of £6.8m in H1 18, with the margin improving to 4.0% (H1 17 -4.5%), for the reasons described above, and is in line with management expectations.

Loss before tax reduced by 76.5% to £7.1m, from £30.1m in H1 17, reflecting stronger underlying performance year on year, together with lower exceptional costs. 

The basic and diluted loss per share improved to a loss of 4.45p in H1 18 from 17.81p in H1 17, reflecting the lower loss before tax during H1 18.

The adjusted basic and diluted earnings per share saw a small loss of 0.32p per share in H1 18, improving from a loss of 6.74p in H1 17. This reflects an improvement in the adjusted loss before tax position in H1 18 of £0.7m, compared to a loss of £14.2m in H1 17. 

Net debt

Net debt at 30 June 2018 was £225.2m, £7.5m lower than December 17 (FY 17: £232.7m) through improved Group profitability and continued focus on working capital efficiency. Headroom in the Group's total facilities including net cash was £35.4m.

On 10 July 2018 the Group successfully refinanced with £245m of new debt facilities replacing the existing senior secured notes and revolving credit facility.

The new debt facilities consist of a £220m term loan facility, with £200m maturing in June 2023 and £20m in December 2020, along with a new revolving credit facility of £25m maturing in December 2022.

In connection with the provision of this new term facility, on 20 June 2018 the Company granted 8,510,300 warrants to subscribe for new ordinary shares to the lenders under the facility, exercisable at £0.01 per share. The fair value of the warrants at the date of grant was £2.7m.

Total other lender and advisory fees incurred in respect of the new facilities amount to around £11m and have been included in accruals at 30 June 2018. These costs and the fair value of the warrants have been deferred in the balance sheet and will be reclassified to debt issue costs in H2 2018. They will then be amortised to the income statement over the life of the facility. Debt issue costs of £1.5m were written off in H2 2018 in relation to the facilities that these arrangements replaced.

Proposed sale of UK Platforms Limited

On 19 July 2018, the Group announced that it had entered into a conditional agreement with Nationwide Platforms Limited for the sale of UK Platforms Limited for a total Enterprise Value of £60.5m and expected net cash proceeds of £47.5m, the majority of which will be used to pay down debt.

HSS shareholder approval for the transaction was granted on 7 August 2018.

Completion of the disposal, contingent upon confirmation that the proposed transaction is not referred to the Competition and Mergers Authority and retention of key managers, is expected to occur in Q4 2018.

Dividend

The Board remains firmly focused on reducing net debt in line with the clear priorities set out in our Strategic Review. As such, it believes that the interests of the shareholders of the Group are best served by not paying a dividend until the net debt leverage ratio falls below 2.5x at the earliest. This is in line with the new term loan facility agreement.

Risks and uncertainties

The principal risks and uncertainties that could have a material impact upon the Group's performance over the remaining 26 weeks of the 2018 financial year have not changed significantly from those described in the Group's 2017 Annual Report and are summarised in note 14 of this interim report. 

Responsibility Statement

We confirm to the best of our knowledge that:

(a) the condensed interim set of financial statements has been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the European Union;

(b) the Interim Report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

(c) the Interim Report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

By order of the Board

Steve Ashmore

Director

30 August 2018

Unaudited condensed consolidated income statement

(1) Adjusted EBITDA is defined as operating profit before depreciation, amortisation, and exceptional items. For this purpose depreciation includes the net book value of hire stock losses and write offs, and the net book value of other fixed asset disposals less the proceeds on those disposals. Adjusted EBITA is defined as operating profit before amortisation and exceptional items.

(2) Adjusted earnings per share is defined as profit before tax with amortisation and exceptional costs added back less tax at the prevailing rate of corporation tax divided by the weighted average number of ordinary shares.

The notes form part of these condensed consolidated financial statements.

Unaudited condensed consolidated statement of comprehensive income

The notes form part of these condensed consolidated financial statements.

Unaudited condensed consolidated statement of financial position

The notes form part of these condensed consolidated financial statements.

Unaudited condensed consolidated statement of changes in equity

The notes form part of these condensed consolidated financial statements.

Unaudited condensed consolidated statement of cash flows

The notes form part of these condensed consolidated financial statements.

Notes forming part of the condensed consolidated financial statements

1. General information

The Company is a public limited company which is listed on the London Stock Exchange and is incorporated and domiciled in the United Kingdom. The address of the registered office is Oakland House, 76 Talbot Road, Old Trafford, Manchester, England, M16 0PQ.

The condensed consolidated financial statements as at, and for the 26 weeks ended 30 June 2018 comprise the Company and its subsidiaries (the 'Group').

The Group is primarily involved in providing tool and equipment hire and related services in the United Kingdom and the Republic of Ireland.

The condensed consolidated financial statements were approved for issue by the Board on 29 August 2018.

The condensed consolidated financial statements do not comprise Statutory Accounts within the meaning of Section 434 of the Companies Act 2006. The comparative financial information for the 26 weeks ended 30 June 2018, and the 52 weeks ended 30 December 2017, do not constitute statutory accounts for those periods, respectively. Statutory Accounts for the year ended 30 December 2017 were approved by the Board on 5 April 2018 and delivered to the Registrar of Companies. The auditor's report on those accounts was unqualified, did not include a reference to any matter by way of emphasis and did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.

2. Basis of preparation

The condensed consolidated financial statements for the 26 weeks ended 30 June 2018 have been prepared in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority and relevant International Financial Reporting Standards ('IFRS') as adopted by the European Union (including IAS 34 Interim Financial Reporting). The condensed consolidated financial statements should be read in conjunction with the Group's Annual Report and Accounts for the year ended 30 December 2017, which were prepared in accordance with IFRS as adopted by the European Union.

IFRS 9 Financial instruments and IFRS 15 Revenue from contracts with customers have been adopted in these condensed consolidated financial statements but neither these IFRS nor any IFRIC Interpretations that are effective for the first time for this interim period have had a material impact on the Group. The accounting policies and judgements and estimates, applied in the condensed consolidated financial statements are therefore consistent with those set out in the Group's Annual Report and Accounts for the year ended 30 December 2017.

For the year ending 28 December 2019, the Group will adopt IFRS 16 Leases. Having performed an initial review of this standard, the Directors expect it will have a material impact on reported assets and liabilities, EBITDA, operating profit and interest expense as more assets (called right of use assets) are capitalised on to the balance sheet in relation to the lease contracts the Group has entered into.

Going concern

The Directors have reviewed the Group's current performance, forecasts and projections, taking account of reasonably possible changes in trading performance and considering senior debt and interest repayments, combined with expenditure commitments. In particular the directors have considered the adequacy of the Group's debt facilities with specific regard to the following factors:

- the financial covenants relating to the new term loan facility of £220 million and revolving credit facility of £25 million secured by the Group

- the maturity of the term loan facility (£20m in December 2020, £200m in June 2023) and revolving credit facility in December 2022

After reviewing the above, taking into account current and future developments and principal risks and uncertainties, and making appropriate enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly they continue to adopt the going concern basis in preparing these condensed consolidated interim financial statements.

3. Segmental reporting

The Group's operations are segmented into the following reportable segments:

- Rental and related revenue.

- Services.

Rental and related revenue comprises the rental income earned from owned tools and equipment, including powered access, power generation, cleaning and HVAC assets, together with directly related revenue such as resale (fuel and other consumables) transport and other ancillary revenues.

Services comprise the Group's rehire business (HSS OneCall) and HSS Training. HSS One Call provides customers with a single point of contact for the hire of products that are not typically held within HSS' fleet and are obtained from approved third party partners; HSS Training provides customers with specialist safety training across a wide range of products and sectors.

Contribution is defined as segment operating profit before branch and selling costs, central costs, depreciation, amortisation and exceptional items.

All segment revenue, operating profit, assets and liabilities are attributable to the principal activity of the Group being the provision of tool and equipment hire and related services in, and to customers in, the United Kingdom and the Republic of Ireland. Revenue from one customer exceeded 10% of Group turnover in the period ending 30 June 2018 (26 week ending 1 July 2017: one).

4. Exceptional items

Items of income or expense have been shown as exceptional either because of their size or nature or because they are non-recurring. An analysis of the amount presented as exceptional items in the consolidated income statement is given below.

During the period ended 30 June 2018, the Group has recognised net exceptional costs as follows:

During the period ended 30 December 2017, the Group has recognised net exceptional costs as follows:

During the period ended 1 July 2017, the Group has recognised net exceptional costs as follows:

Onerous leases: branch and distribution centre closures

The number of branches has been reduced to remove less profitable locations with activity centralised into fewer locations. 12 branches were closed during the 26 weeks ended 30 June 2018 (26 weeks ending 1 July 2017: 50; 52 weeks ended 30 December 2017: 55). An exceptional cost of £1.6 million relating to dark stores and onerous leases has been recorded in the period (26 weeks ending 1 July 2017: £5.0 million; 52 weeks ended 30 December 2017: £6.9 million). Sub-let rental income on onerous leases for the period amounted to £0.2 million (52 weeks ended 30 December 2017: £0.9 million; 26 weeks ending 1 July 2017: £0.5 million).

Cost reduction programme and network reconfiguration

Following the Strategic Review in the second half of the 2017 financial year, the Group has embarked upon a plan to deliver annual cost savings estimated to be between £10 million and £14 million. Principal to this were annual savings of between £7 million and £10 million to be achieved through the reconfiguration of the Group's supply chain model by moving the testing and repair of all fast moving products closer to our customers. In order to realise these benefits, network reconfiguration costs of £40.7 million was recognised in the year ended 30 December 2017 including the impairment, totalling £7.6m, of certain assets.

The annual cost savings also include a reduction in central overhead estimated to be between £3 million and £4 million. To realise these benefits, largely relating to redundancy costs, an exceptional item of £0.7 million has been recorded during the 26 weeks ended 30 June 2018.

The Group announced plans in the first half of the financial year 2017 to deliver significant cost reductions primarily by reducing head office headcount by redundancy and restructuring costs at the NDEC to drive operational efficiencies in the supply chain. These initiatives gave rise to exceptional items of £3.7 million and £2.0 million for the 52 weeks ended 30 December 2017 and 26 weeks ended 1 July 2017 respectively.

Strategic review

Non-recurring third party consultancy costs of £0.7 million were incurred by the Group towards its strategic review. (52 weeks ended 30 December 2017: £1.2 million; 26 weeks ending 1 July 2017: £nil)

Impairment of closed branch property, plant and equipment

Following the branch closures management conducted an impairment review of property plant and equipment in closed branches to determine what can be reused across the network. During the 26 weeks ended 30 June 2018 an impairment of £0.5m was recorded in relation to branches closed in the period (26 weeks ended 1 July 2017: £6.2 million; year ended 30 December 2017 £8.3 million).

Business divesture

The Group sold businesses not considered core to the strategy during the 52 weeks ended 30 December 2017. The Reintec branded fleet of cleaning machines and the associated Tecserv equipment maintenance business were sold on 16 November 2017 for a consideration of £1.5 million. After transaction costs net proceeds were £1.2 million. This gave rise to a loss of £4.9 million including goodwill written off of £0.8 million.

5. Finance income and expense

6. Earnings per share

Basic loss per share is calculated by dividing the result attributable to equity holders by the weighted average number of ordinary shares in issue for that period.

Diluted loss per share is calculated using the loss for the year divided by the weighted average number of shares outstanding assuming the conversion of its potentially dilutive equity derivatives outstanding, being nil cost share options (LTIP shares) and Sharesave Scheme options, as disclosed in note 21 in the Annual Report and Financial Statements for the year ended 30 December 2017 and share warrants as disclosed in note 15 of this report.

All of the Group's potentially dilutive equity derivatives (the LTIP shares, Sharesave Scheme options and warrants) were anti-dilutive for the periods ended 30 June 2018 and 1 July 2017, and the year ended 30 December 2017, respectively, for the purpose of calculating the weighted average number of shares and hence the diluted loss per share.

The following is a reconciliation between the basic loss per share and the adjusted basic loss per share.

(1) Exceptional items per share are calculated as total finance and non-finance exceptional items divided by the weighted average number of shares in issue through the period.

(2) Amortisation per share is calculated as the amortisation charge divided by the weighted average number of shares in issue through the period.

7. Intangible assets

8. Property, plant and equipment

9. Trade and other receivables

10. Trade and other payables

11. Borrowings

The interest rates on the Group's variable interest loans are as follows:

The following table shows the fair value of the Group's Senior Secured Notes:

The Group has undrawn committed borrowing facilities of £25.3 million at 30 June 2018 (1 July 2017: £28.3 million) under its facilities in place at that date (see note 15). Including net cash balances, the Group had access to £35.4 million of combined liquidity from available cash and undrawn committed borrowing facilities at 30 June 2018.

12. Provisions