Hss Hire Regulatory News (HSS)

HSS Hire Group Plc

Interim report: Half-year results for the 26 week period ended 29 June 2019

Improved returns; full-year expectations unchanged

HSS Hire Group plc ("HSS" or the "Group") today announces results for the 26 week period ended 29 June 2019.

The new accounting standard IFRS16 Leases will be adopted for the financial year beginning 29th December 2019. IFRS16 has not been adopted for the current period and as such all of the financial results have been presented excluding the impact of the standard.

Highlights for H1 19

·; Significant improvement in returns, ROCE increased to 21.7%

o Adjusted EBITDA growth of 10.9% and Adjusted EBITA increased £5.5m

o Revenue growth and cost initiatives improved EBITDA margins by 1pp and EBITA margins by 3.3pp

o ROCE improved 16.8pp by leveraging insight tools, improved price controls and growth in the capital light Services business

·; Revenue growth of 3.9% driven by increased focus on Services, improved availability and fleet investment

o Rental (and related) revenue growth of 1.1%

o Continued strength in Services with revenue +10.6% and contribution +15.7%

o LTM utilisation6 has remained high following investment in new fleet at 51.3% in Core tool hire and 67.8% in Specialist

·; Further reduction in net debt leverage to 3.0x (H1 18: 3.7x)

o Net debt has reduced by £52.7m as a result of improved EBITDA and the use of proceeds from the sale of UK Platforms

o Cash and total facility headroom greater than £50m as at 29 June 2019

·; Continued progress against strategic priorities

o Customer app launched and development is ongoing

o New driver technology now in place, improving efficiency

o OneCall automated platform rolled out for all suppliers

·; Self-help initiatives already implemented to manage well reported market headwinds

Outlook

·; Management confident that full year profit will be in line with market expectations

Steve Ashmore, Chief Executive Officer, said:

"I am pleased to report a solid performance for the first half of 2019 in which the continued focus on driving profitable revenue growth through strong price control and effective cost management led to a significant improvement in return on capital and a further reduction in leverage.

As set out in April, the next phase of our strategy is focused on strengthening our commercial proposition by enhancing the digital offer in our Rental business and transforming the customer experience in our OneCall Services business. We are pleased with the positive reaction to the launch of our customer app, the roll-out of new driver technology and the completion of our new automated OneCall system. We will continue to develop our digital offering, further improving the customer experience, and build on these early positive results.

The widely reported headwinds in the economy have affected the tool hire market but HSS is well placed to manage these more challenging conditions. We have taken additional action to further optimise our operating cost base and have a clear strategy to build upon our existing excellent market positions, leaving us well placed to continue to grow share in all of our markets."

Notes

1) Results for H1 19 and H1 18 are for continuing operations and exclude the UK Platforms business which was sold in January 2019

2) 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

3) Adjusted EBITA defined as Adjusted EBITDA less depreciation

4) ROCE calculated as Adjusted EBITA for the 12 months to 29th June 2019 divided by the average of total assets less current liabilities (excluding intangible assets, cash and debt items) over the same period

5) Net debt leverage is calculated as closing net debt divided by adjusted EBITDA for last 12 months (LTM). H119 LTM EBITDA excludes UK Platforms.

6) Utilisation is calculated for the 12 month period to 29th June 2019 and is value weighted based on rental revenue

-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, re-hire and related services in the UK and Ireland through a nationwide network of over 240 locations and its OneCall re-hire business. It offers a one-stop shop for all equipment through a combination of our complementary rental and re-hire businesses to a diverse, predominantly B2B customer base serving a range of end markets and activities. 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

The Group is working with third party specialists to develop IFRS 16 policies along with processes and systems to manage their successful implementation. This work will be completed by the fourth quarter of 2019 and as such, the decision has been taken not to adopt IFRS16 early for the financial year 30th December 2018 to 28th December 2019. The financial results are therefore presented on a non IFRS 16 basis. All comparisons, except where separately disclosed, are on a Continuing Operations basis.

Revenue

Revenue in H1 19 was £161.4m, 3.9% above the previous year (H1 18: £155.4m). This year on year increase reflects improved trading in H1 19 across both our Rental and Services segments.

Rental and related revenues were £110.3m in H1 19 (H1 18: £109.1m), £1.2m and 1.1% higher than in H1 18. This was a strong performance in a tougher trading environment compared to H1 18 and strong comparators. In line with our strategy, the Group has used new insight tools to drive focus on profitable growth combined with improved availability post the FY18 operating model change. Contribution was £73.5m (H1 18: £72.7m), an increase of 1.1% on H1 18 driven by improved revenues with margin consistent at 66.7%.

Services revenues were £51.2m in H1 19 (H1 18: £46.3m), growth of 10.6% reflecting a strong performance in our OneCall and Training businesses with customers continuing to value the "one stop shop" service offer. Contribution increased to £8.2m (H1 18: £7.1m), with margins improving to 16.0% (H1 18: 15.3%), reflecting ongoing focus on pricing discipline and effective supply chain management.

Costs

Cost of sales grew by £2.4m to £75.9m during the period (H1 18: £73.5m) primarily as a result of the growth in our Services business revenues and associated costs. Distribution costs decreased by £0.4m to £16.7m (H1 18: £17.1m), as the Group continued to control cost and benefit from network changes made in 2018. Administrative expenses decreased by £3.6m to £64.3m (H1 18: £67.9m) due to the benefit of cost actions taken in 2018 combined with lower exceptional costs.

Gross exceptional costs in H1 19 were lower at £2.8m (H1 18: £3.2m) and include £1.7m accelerated amortisation of debt issue costs following early repayment of debt in January post the disposal of UK Platforms, a £0.5m increase in the dark stores provision and £0.5m related to cost saving initiatives. This includes third party costs following the decision to close the cross-dock operation.

In H1 18, exceptional costs were £3.2m, of which £1.5m related to onerous leases on closed branches and £0.4m was impairment of property, plant and equipment related to those closures. There were no branch closures in H1 19 (H1 18: 12). The H1 18 costs are net of sub-let income on onerous leases of £0.2m.

Net finance expenses were £4.9m higher at £12.1m (H1 18: £7.2m) reflecting the interest rate on the term facility entered into in July 18 and a higher level of debt issue costs as a result of the accelerated amortisation noted above.

Profitability

Adjusted EBITDA of £27.0m in H1 19 was 10.9% higher than the prior year (H1 18: £24.4m), with adjusted EBITDA margins improving 1pp to 16.7% (H1 18: 15.7%). The improving profitability was driven by increased revenues in the period and lower costs due to continued focus on the strategic priorities including the ongoing benefit of annualised savings from initiatives implemented in FY18.

Adjusted EBITA increased from £3.3m in H1 18 to £8.8m in H1 18, with the margin improving to 5.4% (H1 18 -2.1%), for the reasons described above, and reduced depreciation as a result of investment timing.

Loss before tax reduced by 27.7% to £7.4m, from £10.2m in H1 18, despite increased finance expense. This reflects stronger underlying performance year on year combined with lower exceptional costs.  

The basic profit per share was 4.44p in H1 19 improving from a loss per share of 4.45p in H1 18, reflecting the improved trading in the business and the profit from disposal of UK Platforms.

The adjusted basic and diluted loss per share was 0.77p per share in H1 19, improving from a loss of 1.88p in H1 18. This reflects the underlying improvement in the adjusted loss before tax position. 

Return on Capital Employed

ROCE increased to 21.7% reflecting a significant improvement compared to H1 18 (4.9%) and in line with our 2020 performance framework target of greater than 20%. This has been driven by the utilisation of new insight tools to determine fleet investment, improved pricing control driving profitability and growth in our capital light Services business.

This improvement comes at a time when the investment in fleet and asset book value has increased.

Sale of UK Platforms Limited

As part of the strategy to Delever the Group and Transform the Tool Hire Business, on 11 January 2019, the Group completed the disposal of UK Platforms Limited to Nationwide Platforms Limited, a wholly owned subsidiary of the Loxam Group. Proceeds of disposal, net of transaction costs, were £47.5m generating a profit on disposal of £12.8m. Costs of £2.1m were recognised in FY 18 and so the profit on sale recognised in H1 19 is £14.9m.

After completion, £38.0m of the proceeds was used to pay down Group debt, reducing the senior finance facility from £220.0m to £182.0m.

The Group continues to have access to the powered access fleet through its ongoing commercial agreement with UK Platform's new owner.

Net debt

Net debt at 29 June 2019 was £186.0m, £52.7m lower than December 2018 (FY 18 Total Operations: £238.7m) through the repayment of debt and reduction in finance lease obligations following completion of the disposal of UK Platforms in December, and improved Group profitability. Headroom in the Group's total facilities including net cash was £52.9m.

The debt facilities consist of a £182.0m term loan facility, with £167.0m maturing in June 2023 and £15.0m in December 2020, along with a revolving credit facility of £25.0m maturing in December 2022.

Accelerated amortisation of debt issue costs of £1.7m was recorded in H1 19 as a result of the repayment of a portion of the loan with proceeds from the sale of UK Platforms.

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 2019 financial year have not changed significantly from those described in the Group's 2018 Annual Report and are summarised in note 13 of this interim report. 

The main risk expected to affect the Group in the remaining 26 weeks of the 2019 financial year is macro-economic conditions, which includes the impact that the Brexit related developments could have on the business.

Free float

The strong improvement in the Group's performance is already leading to increased investor interest. However, the Company is cognisant of the level of the free float of its shares, which currently stands at c13.75%.

The Board and its advisors believe that:

(a) the market in the Company's shares operates properly, with a greater level of liquidity than many companies of its size;

(b) the excellent progress in the Group's turnaround will continue to lead to increased interest in the Company's shares from investors, both institutional and retail, thereby improving the level of free float.

The Company has been in dialogue with the FCA and agreed a modification of listing rule 9.2.15R, which would otherwise require a free float of at least 25%, until 21 August 2020. The Board expects to extend the free float in the Company's shares during this time; however the Board is also able to consider multiple other options.

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

5 September 2019

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.

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 29 June 2019 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 4 September 2019.

The condensed consolidated financial statements do not constitute the Statutory Accounts within the meaning of Section 434 of the Companies Act 2006. Statutory Accounts for the year ended 29 December 2018 were approved by the Board on 3 April 2019 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 29 June 2019 have been prepared in accordance with the Disclosure Guidance 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 29 December 2018, which were prepared in accordance with IFRS as adopted by the European Union.

IFRS16 Implementation

IFRS 16 Leases is mandatory for periods beginning on or after 1 January 2019. The Group is working with third party specialists to develop IFRS 16 policies along with processes and systems to manage their successful implementation. This work is now expected to be completed by the fourth quarter of 2019 and, as such the decision has now been taken not to adopt IFRS16 early for the financial year 30th December 2018 to 28th December 2019 as had been planned and noted in the Annual Report and Financial Statements 2018. The date of initial application will now be for the financial year starting 29th December 2019. By taking the time allowed by the standard it gives management the opportunity to perform a full review of its lease portfolio and accurately assess the impact of IFRS 16 and the required disclosure.

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 term loan facility of £182 million and revolving credit facility of £25 million secured by the Group

- the maturity of the term loan facility (£15m in December 2020, £167m 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 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 HSS OneCall rehire business and HSS Training. 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.

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 29 June 2019 (26 weeks ending 30 June 2018: one).

4. Exceptional items

Items of income or expense have been shown as exceptional because of their size and 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 29 June 2019, the Group has recognised net exceptional costs as follows:

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

Exceptional items incurred in 2019 and 2018

Onerous leases: branch closures

In 2017 and 2018 the number of branches was reduced to remove less profitable locations with activity centralised into remaining locations. During the 26 weeks ended 29 June 2019 no additional branches were closed (26 weeks ended 30 June 2018: 12).

An exceptional charge of £0.5 million has been recognised in the 26 weeks ended 29 June 2019 (26 weeks ended 30 June 2018: £1.5 million) and relates to a revision of the existing dark store and onerous lease provision. The onerous lease provision charge is shown net of £0.3 million of sublet rental income. This is a change from prior periods, where the sublet rental income was disclosed separately and included in other operating income £0.2 million for the 26 weeks ending 30 June 2018.

Cost reduction programme

In light of headwinds emerging in the market, the Group has undertaken initiatives in Q2 2019 to reduce costs. These include internal restructuring, the closure of a centre used for hire fleet refurbishment and exiting contracts related to operation of the cross-dock facility used to redistribute assets across the network. This has resulted in an exceptional charge of £0.5 million.

In 2018 the Group carried out restructuring as it implemented plans to reduce central overhead, with most of the

£0.7 million cost being redundancy.

Accelerated amortisation of debt issue costs

During 2019 an element of proceeds from the UK Platforms disposal was used to repay debt. The early repayment resulted in accelerated amortisation of debt issue costs of £1.7 million.

Exceptional items incurred in 2018

Strategic review

Following the appointment of the new Chief Executive Officer in 2017, a thorough Strategic Review was carried out by the Group. Non-recurring third party consultancy costs of £0.7 million were incurred for the period ended 30 June 2018 as part of this review.

Impairment of closed branch property, plant and equipment

Following the branch closures in 2018 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 £0.4 million was recorded.

5. Finance income and expense

6. Earnings per share

Basic (loss)/earnings 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)/earnings per share is calculated using the (loss)/profit for the year divided by the weighted average number of shares outstanding assuming the conversion of its potentially dilutive equity derivatives, being nil-cost share options (LTIP shares), Sharesave Scheme share options, Market value options and warrants.

All of the Group's potentially dilutive equity derivatives were anti-dilutive for the periods ended 29 June 2019 and 30 June 2018 for the purpose of calculating the weighted average number of shares and hence the diluted loss per share on a continuing operations basis.

At a Total level the Group's potentially dilutive equity instruments were dilutive for the 26 weeks ended 29 June 2019 and anti-dilutive for the 26 weeks ended 30 June 2018.

The following is a reconciliation between basic loss per share from continuing operations and adjusted basic loss per share from continuing operations.

(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

The following table details the movements in the provision for impairment of trade receivables:

The provision for impairment of trade receivables is comprised as follows:

The bad debt provision based on expected credit losses and applied to trade receivables, all of which are current,

 is as follows: