Hss Hire Regulatory News (HSS)

31 August 2016

HSS Hire Group plc

Interim report: Half year results for the 27 week period ended 2 July 2016

HSS Hire Group plc ("HSS" or the "Group") today announces results for the 27 week period ended 2 July 2016.

Trading and Operational Highlights

Explanatory Notes:

 1) Adjusted EBITDA defined as Operating Profit with depreciation, amortisation and exceptional costs added back (exceptional costs include restructuring, IPO and acquisition costs)

2) Adjusted EBITA defined as Adjusted EBITDA less depreciation

3) The TNS NPS (Net Promoter Score) Benchmark is based on 27,000 business customer interviews in the UK across Industry Product & Services (IPS - UK) Business Customers between 2011 and 2014.

4) Utilisation calculated over the last twelve months to the end of H1 2015 and H1 2016 respectively

John Gill, Chief Executive Officer, said:

"I'm pleased to report strong revenue and underlying profit growth in the first half of the year reflecting the positive impacts of our revised strategy. Customers are increasingly seeing HSS as a single source provider of tools, equipment and related services and our trading growth reflects this. Our focus on capital and operational efficiency shows through in our utilisation rates and our EBITA margin, both of which have continued to improve through Q2 16.

"We are confident our new National Distribution and Engineering Centre will position us well for scale and volume growth and, combined with our e-commerce platform and national branch footprint, will further enhance our customer proposition by transforming availability within our sector.

"The Board believes we are well positioned to take advantage of, and continues to look for, opportunities to increase scale for the benefit of customers and shareholders."

Results presentation

Management will be hosting a presentation for analysts at 9.00 a.m. BST today at Citigate Dewe Rogerson, 3 London Wall Buildings, London Wall, EC2M 5SY.

Analysts/investors unable to attend in person may join the meeting by conference call by dialling in on +44 (0) 20 3003 2666. Password: HSS Hire. A copy of the presentation will be available at www.hsshiregroup.com/investor-relations/financial-results/ from 9.00 a.m. BST today.

A separate conference call discussing the results of Hero Acquisitions Limited will be held for holders of Senior Secured Notes at 2.00 p.m. BST today. Details for this call and an accompanying presentation will be made available at www.hsshiregroup.com/investor-relations/senior-secured-notes/.

For further information, please contact:

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 330 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.

Progress against strategic priorities

The Group operates with three strategic priorities and has made good progress against each in the period, as detailed in the table below.

In addition to these core strategic priorities, the Group actively and regularly reviews acquisition opportunities. Acquisitions within this sector can enhance the customer proposition and have the capacity to create significant shareholder value, and can bring positive attributes such as increased scale, alongside improved operating and capital efficiencies. The UK asset rental market remains highly fragmented and provides an opportunity for consolidation and clear market leadership.

Group financial performance

Revenue

Revenue in H1 2016 was £166.2m, 13.5% ahead of H1 2015 (£146.4m). Growth in the organic business accounted for 12.8% of this increase, with the remainder due to the inclusion in H1 2016 of an additional 19 weeks' revenue from All Seasons Hire, which was acquired in May 2015.

Revenue in the Core business was up 14.4% to £141.8m (H1 2015: £124.0m) with continued growth in services such as HSS OneCall and Training, alongside strong growth in key accounts revenue (+41%). Revenue in the Specialist businesses grew 8.9% to £24.4m (H1 2015: £22.4m) reflecting continued high levels of utilisation, the benefit of 2015 and 2016 fleet investment and the inclusion of All Seasons Hire for the full period.

Costs

Exceptional costs in H1 2016 were £7.1m, including £5.9m in relation to NDEC start-up costs and £0.8m in relation to non-trading stores. In H1 2015, exceptional costs were mainly related to the IPO.

Net finance expenses were £5.4m lower at £7.2m (H1 2015: £12.6m including exceptional financial costs of £4.3m).

Profitability

Adjusted EBITDA grew 11.1% to £32.1m (H1 2015: £28.9m) reflecting the impact of the cost reduction actions implemented in 2015 and 2016 and the growth in revenue through the period, with an increasing proportion coming from HSS OneCall and Training which typically have lower EBITDA margins than other areas of the business. Adjusted EBITDA in the Core business was slightly lower at £17.8m (H1 2015: £18.0m) and Adjusted EBITDA in the Specialist businesses was up 31.2% to £14.3m (H1 2015: £10.9m).

Adjusted EBITA was up 64.4% to £7.4m (H1 2015: £4.5m) and the Adjusted EBITA margin increased by 150 bps to 4.5% (H1 2015: 3.0%) reflecting the positive EBITA margin impact of the continued growth in service revenues.

Loss before tax improved from £14.1m in H1 2015 to £9.8m in H1 2016, reflecting lower finance expenses incurred in H1 2016 and the continued investment in our network.

The basic and diluted loss per share reduced from 10.51p in H1 2015 to 6.62p in H1 2016, reflecting the reduced loss after tax in H1 2016, together with an increase in the weighted average number of shares between the two periods, where the H1 2015 number was lowered by the pre IPO share structure.

The adjusted basic and diluted loss per share improved from a loss of 2.27p per share in H1 2015 to earnings per share of 0.10p in H1 2016. This reflected the move from an adjusted loss before tax in H1 2015 to an adjusted profit before tax in H1 2016, partially offset by the increase in the weighted average number of shares between the two periods.

New segmental reporting

Following a number of years of managing and investing in the specialist businesses separately, the Group has now made changes to integrate the operation of these units more fully into its core business. These changes have prompted us to review the way we present our segmental analysis. As a result, note 3 to this interim statement now shows information relating to two new reportable segments: "Rental (and related revenue)" and "Services".

The Rental segment consists of revenue earned from owned tools and equipment and directly related revenue e.g. resale, transport and other ancillary revenues. The Services segment comprises the Group's third party supplied rehire business (HSS OneCall), HSS Training and TecServ.

As a transitional measure, and to aid an understanding of the change, these new segments are reported in this statement alongside information relating to the Group's previous segments: "Core" and "Specialist".

Revenue in the Rental segment was up 5.9% to £133.7m (H1 2015: £126.2m) reflecting volume growth and a shift towards key account business that typically operate at lower average rates.

Revenue in the Services segment grew 60.9% to £32.5m (H1 2015: £20.2m), reflecting particularly strong growth in HSS OneCall as a result of broadening relationships with our key account customers.

Contribution, defined as revenue less cost of sales (excluding depreciation and exceptional items), distribution costs and directly attributable costs, in the Rental segment grew 3.6% to £86.5m (H1 2015: £83.5m) with the higher volume. Contribution in the Services segment grew 26.8% to £5.2m (H1 2015: £4.1m) principally reflecting strong growth in lower margin supply chain management contracts over the period.

Net debt and leverage

Net debt at 2 July 2016 was £238.7m, £20.6m higher than at the 2015 year end. This reflects investment in the NDEC start up, settlement of hire and non-hire fleet capital expenditure creditors in respect of purchases made during late 2015 and early 2016 and payment of an extra rental quarter because of the financial calendar. Leverage therefore increased marginally from 3.1x at the 2015 year end to 3.2x as at 2 July 2016. Net debt is expected to reduce through H2 2016 as the Group enters what is typically the most cash generative part of the year.

Dividend

The Directors are declaring an interim dividend of 0.57p per ordinary share. The interim dividend will be paid on 6 October 2016 to shareholders on the register at close of business on 9 September 2016. The ex-dividend date is 8 September 2016.

Outlook

Trading in Q3 2016 has started ahead of Q3 2015 and is in line with management expectations. Our revenue mix continues to reflect particularly strong growth amongst our key accounts and in services, as our customers recognise the operational benefits of single-sourcing tools and equipment, including technical training for their staff. We expect this trend to remain a feature of the second half of the year, alongside continued growth of our specialist categories.

The implementation of the NDEC will transform customer availability within our sector and position us well for scale and volume growth. Combined with our e-commerce platform and national branch footprint, the new facility will significantly enhance our customer proposition.

The simplification of operating structures within core, powered access and power within England and Wales will deliver cost reduction and sales efficiencies. We will continue to focus on utilisation improvements which, together with increased refurbishment activity, will allow capital spend in 2016 to be lowered to between £40m and £45m.

The Board remains confident that the investments being made provide HSS with scalable operating capacity to support future growth and that the Group strategy remains appropriate to create shareholder value over the medium to long term.

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 2016 financial year have not changed significantly from those described in the Group's 2015 Annual Report and are summarised in note 23 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

John Gill

Director

31 August 2016

Unaudited consolidated income statement

(1) Adjusted EBITDA is defined as operating profit before depreciation, amortisation and exceptional items. For this purpose depreciation and amortisation includes customer losses, hire stock write offs and hire stock asset disposals.

(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 interim financial statements

Unaudited consolidated statement of comprehensive income

The notes form part of these interim financial statements.

Unaudited consolidated statement of financial position

(1) Restated for final fair value on acquisition of All Seasons Hire Limited (see note 2).

The notes form part of these interim financial statements.

HSS Hire Group plc

Unaudited consolidated statement of changes in equity

The notes form part of these interim financial statements.  

HSS Hire Group plc

Unaudited consolidated statement of cash flows

The notes form part of these interim financial statements.

Notes forming part of the unaudited interim 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 25 Willow Lane, Mitcham, Surrey, CR4 4TS.

The condensed consolidated interim financial information as at, and for the 27 weeks ended 2 July 2016 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.

This condensed consolidated interim financial information was approved for issue by the Board on 30 August 2016.

The financial information for the half years ended 2 July 2016 and 27 June 2015 have neither been subject to an audit nor a review in accordance with the International Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity, issued by the Auditing Practices Board.

This condensed consolidated interim financial information does not comprise Statutory Accounts within the meaning of Section 434 of the Companies Act 2006. Statutory Accounts for the year ended 26 December 2015 were approved by the Board on 6 April 2016 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 interim financial information for the 27 weeks ended 2 July 2016 has 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 interim financial statements should be read in conjunction with the Group's Annual Report and Accounts for the year ended 26 December 2015, which were prepared in accordance with IFRS as adopted by the European Union.

The accounting policies applied in the condensed consolidated interim financial statements are consistent with those set out in the Group's Annual Report and Accounts for the year ended 26 December 2015. There are no new IFRS or IFRIC Interpretations that are effective for the first time for this interim period which have a material impact on the Group.

Restatements

On 8 May 2015, the Group acquired the entire share capital of All Seasons Hire Limited, one of the leading heating, ventilation and air-conditioning ("HVAC") hire companies in the UK. At 26 June 2015 and 26 December 2015, a provisional fair valuation of the identifiable assets and liabilities was recorded.

In accordance with IFRS 3, measurement period adjustments have now been made to provisional values which result in a restatement of amounts previously recognised at 26 June 2015 and 26 December 2015. The result of these adjustments changes the provisional goodwill from £8.4 million as reported at 27 June 2015, and £7.0 million, as reported at 26 December 2015, to £7.3 million at 2 July 2016.

Further details may be found in note 21.

Going concern

The condensed consolidated interim financial statements have been prepared on the going concern basis. Note 18 includes the Group's objectives, policies and processes for capital management and for financial risk management including market risk, credit risk and liquidity risk.

The directors have also considered the adequacy of the Group's debt facilities with specific regard to the following factors:

The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, and senior debt and interest repayments, show that the Group is expected to be able to operate within the level of its current facilities for the foreseeable future.

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

Presentational currency

These consolidated unaudited interim financial statements are presented in pounds Sterling (£), which is the Group's presentational currency. All amounts have been rounded to the nearest thousand, unless otherwise indicated.

Share based payments

Share based payments transactions in which the Group receives goods or services as consideration for its own equity instruments are accounted for as equity-settled share based payments. The grant date fair value of the share based payment granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employee becomes unconditionally entitled to the awards. The fair value of the options granted is measured using an option valuation model where required, taking into account the terms and conditions upon which the options were granted and is charged to the income statement on a straight line basis over the vesting period of the award.

The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date.

3. Segmental reporting

For management purposes, the Group's operations have historically been segmented into HSS Core and HSS Specialist, as follows:

These segments distinguished between the long-standing tool and equipment hire business of the Group and the specialist businesses that have been acquired in recent years.

Following a number of years of managing and investing in the Specialist businesses separately, the Group has now made changes to integrate the operation of these units more fully into its core business. These changes have prompted management to review the way segmental analysis is presented to the chief operating decision makers. Accordingly, for the 27 week period ended 2 July 2016, the Group's operations are segmented into the following, new 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 comprises the Group's rehire business (HSS OneCall), HSS Training and TecServ. HSS OneCall 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; and TecServ provides customers with maintenance services for a full range of cleaning machines.

As a transitional measure, and to aid an understanding of the change, these new segments are reported alongside information relating to the Group's previous segments, "Core" and "Specialist", for the 27 week period ended 2 July 2016 and the 26 week period ended 27 June 2015, respectively.

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 the United Kingdom and the Republic of Ireland.

The Group has no single external customers that provide more than 10% of the Group's turnover.

Old basis of segmental reporting:

(1) Restated for final fair value on acquisition of All Seasons Hire Limited (see note 2).

New basis of segmental reporting:

4. Other operating income

5. 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.

Restructuring costs

During the period ended 2 July 2016 the Group incurred costs in relation to the restructuring of the business and its operations, including £5.9 million in relation to the start-up cost of the National Distribution and Engineering Centre ("NDEC").

Operations began at the NDEC in March 2016 with a phased national roll-in of branches and distribution centres across England, Wales and Scotland. During the set-up and roll-in phase, the Group has incurred significant start-up costs related to the double running of the existing branch and distribution network in parallel with the NDEC. The Group has recognised an exceptional expense in relation to these inefficiencies during the roll-in stage and has determined that a reasonable approximation of the double running inefficiencies in starting-up the NDEC are the NDEC costs incurred up to the point when the NDEC is processing 50% of operational volumes from the existing branch and distribution network. The Group crossed this 50% milestone at the end of July 2016 and, accordingly, has exceptionalised all related NDEC costs incurred during the period ended 2 July 2016.

Restructuring costs in administrative expenses also included expenses associated with non-trading stores (including onerous leases and dilapidations) of £0.8 million (26 weeks ended 27 June 2015: £0.6 million).

Included in exceptional items (non-finance) for the 26 weeks ended 27 June 2015 is £3.0 million incurred in relation to the IPO and related to professional adviser and broker fees.

Refinancing costs

During the period ended 27 June 2015 £4.3 million was charged to the income statement relating to the early partial redemption of the senior secured note using part of the funds raised from the IPO.

6. Finance income and expense

The bond redemption premium charged in to profit and loss in 2015 relates to the early partial redemption of the senior secured note using part of the funds raised from the IPO.

7. Loss 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). All of the Group's LTIP shares were anti-dilutive for the period ended 2 July 2016 for the purpose of diluted loss per share. There were no potentially dilutive equity derivative securities outstanding during the period ended 27 June 2015 for the purpose of diluted loss per share.

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

The following is a reconciliation between the basic and diluted loss per share and the adjusted diluted earnings/ (loss) per share.

The LTIP shares were dilutive for purposes of calculating adjusted diluted earnings per share.The weighted average number of shares for purposes of calculating the adjusted diluted earnings per share are as follows:

8. Dividends

During the period ended 2 July 2016, the shareholders approved a final dividend of 0.57p per ordinary share, totalling £0.9 million in respect of the year ended 26 December 2015. The amount was included as a liability at 2 July 2016 and was subsequently paid on 4 July 2016.

During the year ended 26 December 2015, the Directors paid an interim dividend of £0.9 million.

9. Intangible assets

(1) Restated for final fair value on acquisition of All Seasons Hire Limited (see note 2).

(1) Restated for final fair value on acquisition of All Seasons Hire Limited (see note 2).

Details of intangible assets acquired in the period are set out in note 21.

All goodwill arising on business combinations has been allocated to the CGUs that are expected to benefit from those business combinations. The Group tests goodwill and indefinite life brands annually for impairment.

Analysis of goodwill and brands by cash generating units

(1) Restated for final fair value on acquisition of All Seasons Hire Limited (see note 2).

10. Property, plant and equipment