Northgate Regulatory News (NTG)

4 Jul 2006 07:00

Northgate PLC04 July 2006 4 July 2006 NORTHGATE PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 30 APRIL 2006 Northgate plc ("Northgate", the "Company" or the "Group"), the UK and Spain'sleading specialist in light commercial vehicle hire, announces its preliminaryresults for the year ended 30 April 2006. • Revenue up 10% to £372.6m (2005 - £339.4m) • Profit before tax up 2% to £56.1m (2005 - £55.0m) • Underlying profit before tax* up 7% to £59.9m (2005 - £55.8m) • Adjusted earnings per share* increased by 6% to 65.7p (2005 - 62.1p) • Total dividend increased by 15% to 23.0p (2005 - 20.0p) • UK fleet increased by 22% to 64,000 vehicles (2005 - 52,600) including approximately 10,500 vehicles retained as a result of the acquisition of Arriva Vehicle Rental Limited • In Spain, Fualsa's fleet increased by 21% to 23,000 vehicles and following the investment in Record gave a total Spanish fleet of 47,000 vehicles *Stated before intangible amortisation of £1.2m (2005 - £0.8m) and exceptionalrestructuring costs of £2.6m (2005 - £nil) related to the reorganisation ofArriva Vehicle Rental Limited following its acquisition on 3 February 2006 Martin Ballinger, Chairman, commented: "In the current financial year, in addition to the expected organic growth inthe UK, we will see the full benefit of the Arriva Vehicle Rental acquisition.We will also see further development of our fleet management activities throughFleet Technique Limited. "In Spain, along with good organic growth, we will have 100% ownership of Recordfor the full year and the benefit of further synergies from combining businessactivities. "Consequently the Board remains confident of good progress in the year ahead andtrading remains in line with its expectations." Full statement and results attached. For further information, please contact: Northgate plc 01325 467558Steve Smith, Chief ExecutiveGerard Murray, Finance Director Hogarth Partnership Limited 020 7357 9477Andrew JaquesBarnaby FryAnthony Arthur Notes to Editors: Northgate plc rents light commercial vehicles and sells a range of fleetproducts to businesses via a network of hire companies in the UK, Republic ofIreland and Spain. Their NORFLEX product gives businesses access to a flexiblemethod to acquire as many commercial vehicles as they require. Further information regarding Northgate plc can be found on the Company'swebsite: http://www.northgateplc.com Chairman's Statement The year's performance was one of strong growth in Spain and a resilientdelivery from the UK business. It was also the third and final year ofNorthgate's three-year Strategy for Growth Plan, which was set out in 2003. TheGroup has achieved compound earnings per share growth of 14% per annum over thethree years, and in the process has developed a robust and geographicallydiverse business. This is particularly pleasing as it coincides with our 25thanniversary in the business of renting light commercial vehicles. A new three-year rolling strategy has been adopted which foresees thecontinuation of earnings growth through building on our market leading positionsin the UK and Spain. Management began the implementation of this new strategy inJanuary 2006. This is the first financial year that the Group has prepared its results underIFRS. The impact of IFRS on profit before tax for the year was immaterial. Themain presentational change to the Group's financial results is that proceedsreceived from the disposal of used vehicles are no longer classified as revenue.This change in policy has had the effect of reducing Group revenue as previouslyreported under UK GAAP. Group revenue now comprises income derived from the hireof vehicles and the supply of related goods and services. The results for the year are set out below: • Group revenue increased by 10% to £372.6m (2005 - £339.4m) • Underlying profit before tax* for the year was £59.9m (2005 - £55.8m) • Adjusted earnings per share* increased by 3.6p to 65.7p (2005 - 62.1p) *Stated before intangible amortisation of £1.2m (2005 - £0.8m) and exceptionalrestructuring costs of £2.6m (2005 - £nil). Based on these results and the Board's view of future prospects, the Board hasdecided to recommend to shareholders a final dividend of 14p per share. Thiswill produce a total dividend for the year of 23p - an increase of 15% over theprior year and is covered 2.7 times. The dividend will be payable on 29September 2006 to those shareholders on the register on 1 September 2006. As previously reported, the UK market was impacted by lower residual values inthe first half of the financial year. The second half has seen residual valuesrecover, albeit not to the unusually high levels of the prior year. Continueddevelopment of retail and semi-retail channels for vehicle sales has contributedto this improvement in profitability. Whilst UK hire rates have remained competitive, we have experienced five monthsof relative stability since January 2006. The limited fleet growth due to marketweakness experienced in the construction, retail and distribution sectorsreferred to in my Interim Statement has been largely overcome with the UKbusiness achieving expected levels of growth in the six months to April 2006. Our new strategy included a plan to acquire Arriva Vehicle Rental Limited("AVR"), a business with a rental fleet of over 11,000 vehicles in marketslargely complementary to Northgate's UK business. The acquisition, which wasfunded in part by a placing to raise £63m, was completed in January 2006 andmanagement have worked hard so that the integration of the business is nowsubstantially complete. The growth of the UK network and the AVR acquisition have demonstrated thatefficiency improvements are achievable through managing larger numbers ofvehicles per business and Northgate's autonomous management structure is morecost-effective as a result. Further strategic restructuring in the UK alongthese lines is currently underway. During the year, the Group also acquired Fleet Technique Limited ("FTL"). Animportant element of Northgate's growth strategy, this business has given theGroup the facility to manage operators' fleets regardless of how they choose toacquire their vehicles. In Spain, the growing vehicle rental market continues to justify Northgate'sconfidence in both its original investment in Fualsa and in its future strategy.In August 2005, the Group purchased 49% of Record Rent a Car SA ("Record") andcompleted the acquisition of the remaining 51% on 11 May 2006. I have been encouraged by the strategic approach of the executive team and theenergy and enthusiasm that they display in the continued development of theGroup. The commitment of the staff and management at all levels this year hasbeen impressive. Your Board will ensure that the new strategy is professionallyadopted throughout the Group with long-term benefits for all stakeholders. Current Trading and Outlook In the current financial year, in addition to the expected organic growth in theUK, we will see the full benefit of the AVR acquisition. We will also seefurther development of our fleet management activities through FTL. In Spain, along with good organic growth, we will have 100% ownership of Recordfor the full year, an expected improvement in Fualsa's operating performance andthe benefit of further synergies from combining business activities. Consequently the Board remains confident of good progress in the year ahead andtrading remains in line with the Board's expectations. Operational Review Strategy for Growth In July 2003 we announced our Strategic Plan for the three years to April 2006,the key targets of which were: • A fleet size of 60,000 in the UK and 18,000 in Spain; • A network of 100 locations in the UK and 20 in Spain; • 100% ownership of Fualsa; and • An established portfolio of non-rental products. In the year under review the acquisition of AVR has resulted in us exceeding thefleet size objective in the UK. In Spain, Fualsa exceeded their fleet target by5,000 units and had a network of 17 locations at 30 April 2006. The finalpayment of €14.9m in respect of the consideration for the purchase of Fualsa wasmade to the vendors on 8 May 2006. The completion of the acquisition of Record on 11 May 2006 effectively doubledboth the vehicle fleet and the depot network in Spain. We now have a number of ancillary products such as vehicle tracking and partsprocurement available to customers and the acquisition of FTL on 23 January 2006significantly extended our non-rental product range. Through the successful implementation of our strategy we were seeking to achievedouble-digit earnings growth in each year of the plan. Over the three-yearperiod the Company has achieved growth in earnings per share at an annualisedcompound rate of 14%. In January 2006 we announced, with our interim results, our new Strategy forGrowth based on a three-year rolling business plan aimed at achieving continueddouble-digit growth in earnings per share. The acquisitions of AVR and FTL andthe completion of the purchase of Record are very much in line with thatStrategic Plan and give us a platform to continue to successfully grow ourbusiness. Review of Current Year United Kingdom and Republic of Ireland The first half of the financial year was one of the most difficult we haveencountered with limited fleet growth, competitive pressures reducing hire ratesand lower used vehicle residual values. The second half, as predicted at thetime of our interim results, has seen more normal levels of fleet growth, stablehire rates since January 2006 and an improvement in residual values. Depot Network We currently operate from 88 locations, of which 35 are primary and 53 arebranches. This represents an increase of 12 locations over the financial year,of which we acquired ten as a result of the purchase of AVR. Vehicle Fleet The historic pattern of fleet growth for the UK has been one of a stronger firsthalf than second half of the financial year. This year has seen the oppositepattern with no growth in the first half of the year, followed by an organicincrease in the fleet of 2% in the second half. As noted in the interim report in January, in the first six months the Group wasaffected by some weakness in demand from customers operating in theconstruction, retail and distribution sectors along with a major customeroff-hiring a large number of vehicles. From September demand returned to morenormal levels and was in line with our expectations for the remainder of thefinancial year. In addition, the acquisition of AVR added significantly to ourfleet in February 2006, and we consequently ended the financial year with afleet of 64,000 vehicles. Once integrated into our fleet it became impossible to distinguish between ourexisting fleet and the AVR fleet, particularly for common customers. As aconsequence we cannot precisely split growth arising from the AVR acquisitionand organic growth for the second half of the year but estimate that of theincrease of 11,600 vehicles between 31 October and 30 April, 10,500 came fromthe acquisition, once non-utilised AVR vehicles were disposed of, and 1,100 fromexisting businesses. Utilisation and Hire Rates Utilisation again averaged 90% for the year (2005 - 90%). From the beginning of August 2005 we experienced strong competition resulting indeclining hire rates. This continued until January 2006 and as a result hirerates reduced year on year by 2.5%. Since January we have not experienced thesame level of aggressive activity and as a consequence hire rates have remainedstable. Used Vehicle Sales We sold 23,000 vehicles (2005 - 17,700) during the year, the largest volume wehave ever disposed of. In the first half we experienced a weaker market for usedvehicle values, particularly in the long wheel base van sector. Since October2005, we have seen an improvement in values as a result of the market improving,a significant reduction in our stock levels and the continued development of oursemi-retail and retail channels. Under IFRS the profit for used vehicle disposals is no longer accounted forseparately since depreciation is adjusted in order that vehicles are retiredfrom the fleet at their anticipated market value less any direct costs incurredin their disposal. If this profit arising from the used vehicle disposals hadbeen calculated on the same basis as last year, applying UK GAAP, the UK wouldhave recorded an operating profit per vehicle of £83 (2005 - £205). We continue to seek to increase both the overall capacity of our used vehiclesales network and our ability to sell more vehicles through the semi-retail andretail channels. To that end we have opened new facilities at Newmains inScotland, Colchester and Warrington during the year and now have nine outlets,of which six are devoted primarily to retail and semi-retail disposals. In theyear under review 12% (2005 - 10%) of our disposals were to semi-retail orretail customers and we remain on target to achieve 15% through these channelsin the medium term. Purchase of Fleet Technique Limited ("FTL") In line with the Group's Strategic Plan announced at the time of the interimresults, the Group acquired the entire issued share capital of FTL for aconsideration in cash of £5.7m, on 23 January 2006. FTL is a specialist fleet management business, based in the north east ofEngland, serving customers across the UK. Third party fleets under managementtotalled some 15,000 vehicles, including both cars and commercials as at 30April 2006. In addition, FTL has developed a leading software package for theindustry and has a reputation for excellent service to its customers. In the three months of ownership FTL contributed £0.1m to the Group's profitfrom operations for the year. More importantly, FTL provides us with theplatform to develop a significant fleet management business through offeringcustomers a full range of flexible vehicle solutions whilst capitalising on ourcore skills of purchasing, maintaining and disposing of large volumes ofvehicles. Purchase of Arriva Vehicle Rental Limited ("AVR") On 31 January 2006 we announced that we had entered into an agreement to acquirethe entire issued share capital of AVR and that 6.05 million new Ordinary shareswere being placed to partially fund payment of the consideration. The placingbecame wholly unconditional on 3 February 2006. The total consideration,including acquired debt, paid to date for AVR is £124.4m. This is subject tofinal agreement with the vendor of the net asset values acquired. At the time of acquisition AVR operated a fleet of over 11,000 vehicles througha branch network of 33 locations and employed around 650 people. Our plan was to fully integrate AVR into our existing operating structure by theend of our financial year and we are pleased to report that this was achieved.Of the 33 branches ten were retained as new locations for Northgate and anotherfour were used as replacements for existing Northgate sites. The staffing levelswere reduced from around 650 employed by Arriva to around 250 additional staffin the enlarged structure. Customer retention has to date been excellent andthose vehicles not being utilised have been disposed of profitably. On 8 March 2006 the Office of Fair Trading announced that it was to examine thetransaction. Having considered the evidence the OFT decided on 18 May 2006 notto refer the merger to the Competition Commission. A text of the decision isavailable on their website at www.oft.gov.uk. Reorganisation On 20 June 2006 the Group commenced a restructuring plan to create a functional,rather than geographic, management structure for the UK business by streamliningthe number of hire companies to give fewer, but larger, business units, whilstretaining the existing network of locations. It is intended that this process, which will take around six to nine months tocomplete, will leave us better able to deliver consistent customer servicethroughout the Group and with improved productivity from increased utilisationof the fleet and reduced costs. Whilst it is likely that the benefits will benegated by the one-off transactional cost of the changes in the currentfinancial year, future periods will benefit as evidenced by an improvedoperating margin. Spain On 5 August 2005 we significantly increased our presence in Spain with thepurchase of 49% of Record, like Fualsa, one of Spain's leading vehicle rentalcompanies. Since the remaining 51% of the equity was not acquired until 11 May2006, in the year under review Record is accounted for as an associate. We aretherefore reporting on Fualsa and Record as two separate businesses this yearbut going forward, will review our Spanish businesses as one operation. During the year, the growth in the Spanish vehicle rental market has been inpart due to the continued high level of activity in the construction sector.Whilst our aim remains to reduce our dependency on this sector over time, wecontinue to take advantage of the opportunities that exist in the medium term. Fualsa As at 30 April 2006 Fualsa operated a fleet of 23,000 vehicles from a depotnetwork of 17 locations, an increase of 4,000 vehicles and two locations overApril 2005. The utilisation rate averaged 89%, the same as the prior year. Hirerates continued to improve modestly and were up by just under 2% on the prioryear, albeit the benefit of this increase is reduced by a similar increase inthe capital cost of new vehicles. The operating margin at 20.9% was down by over 4% on the prior year, as a resultof an increase in external maintenance costs, increased depreciation due tolower residual values and some planned increases in expenditure on management,IT and other aspects of Fualsa's infrastructure. Maintenance costs increased dueto the cumulative fleet growth of the last few years overstretching themanagement structure combined with a shortage of skilled personnel, particularlymechanics, leading to more work having to be completed externally. Both of theseissues have been addressed and we are confident of an improvement in the yearahead. These corrective actions, along with the operational gearing benefit wewill derive from a larger fleet size, should lead to an improvement of over 1%in the operating margin for the current year. Record Since our investment on 5 August 2005 the vehicle fleet has grown by 20%producing a closing fleet of 24,000 vehicles at 18 locations. The utilisationrate averaged 92% in the period, a slight improvement on the level achievedprior to our investment. A similar increase to Fualsa was achieved in hirerates. Whilst we remain of the belief that our customers are best served by retainingtwo separate brands in Spain, there are opportunities to obtain synergies bycombining certain areas of the two operations. We have already brought together the purchasing activities of the two companiesto benefit from the economies of scale from purchasing larger volumes,particularly vehicles. In the year ahead we intend to merge vehicle disposalsinto one unit. Within the next six months we expect to have appointed a CEO forSpain to allow us to further merge the businesses in the second half of thefinancial year. Further integration is to some extent dependent on having acommon IT platform, a project currently being developed and expected to concludein the 2007 calendar year. Financial Review Financial Reporting The Group has delivered a resilient set of financial results, particularlytaking into account the difficult trading conditions that existed in the UKduring the first half of the financial year. The financial impact on theseresults of businesses acquired in the UK and Spain throughout the year aredescribed separately below. Whilst the additional contribution to earnings pershare in this year from these acquisitions has been marginal, they position theGroup for strong growth in the future. This report represents the first annual results prepared under IFRS. Thetransition to IFRS has not had a material impact on reported profit before taxor cash flow. The main presentational change to the Group's financial results isthat proceeds received from the disposal of used vehicles are no longer beingclassified as revenue. This change in policy has had the effect of reducingGroup revenue as previously reported under UK GAAP. Group revenue now comprisesthe hire of vehicles and the supply of related goods and services in the normalcourse of business. Sales, Margins and Return on Capital Group revenue increased by 10% to £372.6m (2005 - £339.4m) as a result of anincrease in UK revenue of 6% to £300.8m (2005 - £283.4m) and a 28% increase inrevenue from Fualsa to £71.8m (2005 - £56.0m). The Group acquired 49% of Record, a leading commercial vehicle rental company inSpain on 5 August 2005. The results of Record have been accounted for as anassociate under the net equity method and as a consequence none of Record'srevenues have been consolidated into Group revenue. United Kingdom & Republic of Ireland The composition of the Group's UK revenue and profit from operations as betweenvehicle rental activities and fleet management is set out below: 2006 2005 £000 £000RevenueVehicle rental 297,433 283,414Fleet management 3,338 - -------- ---------- 300,771 283,414 -------- ----------Profit from operationsVehicle rental 58,722 * 62,863Fleet management 119 -Intangible amortisation (692) (321) -------- ---------- 58,149 62,542 -------- ---------- \* The UK profit from operations is stated after an exceptional restructuringcharge of £2.6m relating to AVR following its acquisition on 3 February 2006. Operating margins (excluding exceptional charge and intangible amortisation) 2006 2005 UK overall 20.4% 22.2%Vehicle rental 20.6% 22.2%Fleet management 3.6% - The overall UK operating margin has declined to 20.4% (2005 - 22.2%) partly as aresult of acquiring FTL, a fleet management company that generates a loweroperating margin than vehicle rental. One of the main reasons for the reductionin margin, however, was a higher depreciation charge as a consequence of lowervalues being obtained for vehicles sold at the end of their life. This wasparticularly the case in the first half of the financial year when the Groupheld more stock than normal and long wheel base products experienced significantdeclines in value. The UK also experienced a highly competitive environment inhire rates and as a result the average hire rate declined by over 2% compared to2005. In order to compensate for lower hire rates and lower residual values theoperating expenses of the UK business were addressed and savings achieved. Aftera particularly difficult first half to the financial year an underlyingoperating margin in the UK vehicle rental business of 20.6% (2005 - 22.2%) is asatisfactory outcome. Spain Fualsa, a major commercial vehicle rental company in Spain, has been a whollyowned subsidiary since May 2004. On 5 August 2005 the Group acquired a 49%interest in the equity of Record, another leading Spanish commercial vehiclerental company. Fualsa has been reported as a subsidiary undertaking within theconsolidated financial statements whereas Record has been accounted for as anassociate. Fualsa The revenue and profit from operations generated by Fualsa during the year isset out below: 2006 2005 £000 £000RevenueVehicle rental 71,838 55,968 --------- -------- Profit from operationsVehicle rental 14,984 14,229Intangible amortisation (535) (534) --------- -------- 14,449 13,695 --------- -------- Operating margins (excluding intangible amortisation) 2006 2005 Overall 20.9% 25.4% Fualsa's vehicle rental revenue increased by 28%, in line with the increase inthe average rental fleet size of 26% and hire rate increases of just under 2%.The operating margin achieved by Fualsa of 25.4% in 2005 was forecast to reduceas a result of investing in the infrastructure of the business. Plannedexpenditure was incurred with the appointment of senior managers, upgrading ITsystems and introducing credit insurance. In addition to these costs, Fualsa'svehicle repair expenditure increased substantially in the second half of thefinancial year as a result of a shortage of skilled technicians to service theenlarged fleet resulting in a higher proportion of maintenance being carried outby third parties. These additional costs combined with increased depreciationdue to lower residual values have resulted in the operating margin reducing by4.5%. Record The Group's 49% share of Record's profit before tax in the nine month periodsince the date of the initial investment was £5.0m. The equivalent operatingmargin for Record during this period was 23.7% reflecting higher utilisationsand an absence of the issues surrounding repair costs that existed in Fualsa.The fleet growth of 20% in the period since acquisition indicates that themarket remains very strong for our flexible rental product in Spain. Group Group return on capital employed, calculated as Group profit from operationsdivided by average capital employed (being shareholders' funds plus net debt),is 10% (2005 - 14%). Group return on equity, calculated as profit after tax divided by averageshareholders' funds, is 16% (2005 - 19.0%). IFRS This is the first set of Group results that have been prepared under IFRS. TheGroup released an announcement on 21 December 2005 detailing the impact of IFRSon the results for the year ended 30 April 2005. The comparative financialinformation has been restated to reflect the application of IFRS. The mainimpacts of IFRS on the Group's reported results, as compared with the resultsfor 2005 reported under previous accounting standards, are set out below. IFRS 2 (Share-based Payment): An income statement charge is recognised inrespect of the cost of share options granted under the Group's various shareschemes. This cost is deemed to be the fair value of the options granted and ischarged over the vesting period. An amount equivalent to the charge is crediteddirectly to equity, resulting in no impact on net assets. This accountingtreatment is the same as UK GAAP except that the fair values used under IFRS 2differ from those under UK GAAP. IFRS 3 (Business Combinations): Separate intangible assets are recognised atfair value on the acquisition of businesses after the date of transition toIFRS, which previously formed part of goodwill under UK GAAP. These includenon-contractual customer relationships, brand names and non-compete agreements,all of which are amortised over their respective estimated useful lives. Theresidual goodwill balance under IFRS is therefore lower in value than under UKGAAP but it is no longer amortised and is, instead, tested annually forimpairment. IFRS 5 (Non-current Assets Held for Sale and Discontinued Operations): Vehiclesheld for resale are reclassified from inventories into non-current assets heldfor sale under IFRS. IAS 10 (Events After the Balance Sheet Date): Under IFRS, dividends are notappropriated within the accounts until they are either paid or formallyapproved. IAS 12 (Income Taxes): Deferred taxation changes arise under IFRS as a result ofdifferences between the accounting treatment and taxation treatment in respectof share options (IFRS 2), intangible assets (IFRS 3) and holiday pay accruals(IAS 19). Under IAS 12, deferred tax liabilities are also recognised on allcapitalised buildings, regardless of whether a contractual commitment to sellexists. IAS 16 (Property, Plant and Equipment): Under IAS 16, the Group is required toreview its depreciation rates and estimated useful lives on a regular basis toensure that the net book value of disposals of tangible fixed assets are broadlyequivalent to their market value. Depreciation charges are adjusted for anydifferences that arise between net book values and open market values of usedvehicles upon transfer into non-current assets held for sale, taking intoaccount the further direct costs to sell the vehicles. IAS 18 (Revenue): Under IFRS, income from the sale of used vehicles is notrecognised within revenue and the net book value of the vehicles sold, alongwith associated direct selling costs, are removed from cost of sales. IAS 19 (Employee Benefits): An accrual is recognised for employee annual leaveaccrued, but not taken, at each balance sheet date. Where this applies tobusiness combinations, the accrual required at the date of acquisition is deemedto reduce the fair value of the net assets acquired with a correspondingadjustment to goodwill. IAS 21 (The Effects of Changes in Foreign Exchange Rates): Certain exchangedifferences, previously recognised directly within the profit and loss accountreserve under UK GAAP, are reclassified into a separate translation reserve,directly within equity, under IFRS. IAS 32 (Financial Instruments: Disclosure and Presentation): The Company'scumulative preference shares are deemed to be debt rather than equity underIFRS. They are reclassified from share capital to borrowings in the balancesheet and preference dividends are reclassified from dividends to finance costsin the income statement. IAS 38 (Intangible Assets): Certain software assets are reclassified fromtangible to intangible assets under IFRS. Amounts previously charged to theprofit and loss account as depreciation under UK GAAP relating to these fixedassets are reclassified as amortisation within the IFRS income statement. Separate intangible assets are also recognised within business combinations (seeIFRS 3, above). These assets are amortised to the income statement over theirestimated useful lives. IAS 39 (Financial Instruments: Recognition and Measurement): Interest ratederivatives, to which the Group is party, are recognised on the balance sheet attheir fair value. Subsequent changes in the fair value are recognised eitherwithin the income statement, as a finance cost, or directly in equity to theextent that the Group elects to hedge account, within the provisions of IFRS.This standard has not been applied to the prior year as allowed under thetransitional rules. Taxation The Group's UK operations have a total tax charge of 32% (2005 - 31%), which isslightly higher than the standard rate of 30% due to disallowable expenditureincurred within the business. Both Fualsa's effective tax rate of 18% (2005 - 20%) and Record's of 29% arebelow the standard Spanish tax rate of 35% because of tax concessions based onvehicle purchase reliefs that are available to the businesses. There is draftlegislation in Spain that proposes to reduce the standard rate of CorporationTax from 35% to 30% whilst at the same time removing some of the vehiclepurchase reliefs that the businesses currently claim. The timing of any changeis not certain and the precise impact on the likely effective tax in Spain hasnot been quantified. It is expected, however, that this effective rate will benear to 30% in the medium term. Dividend The Directors recommend a final dividend of 14p per share (2005 - 12p) giving atotal for the year of 23p (2005 - 20p), an increase of 15%. The dividend iscovered 2.7 times (2005 - 3.0 times). Earnings per Share Earnings per share increased to 61.1p (2005 - 60.7p), reflecting the growth inunderlying profits being offset by an exceptional restructuring cost associatedwith the acquisition of AVR and its subsequent reorganisation and the increasednumber of Ordinary shares in issue following the placing of 6.05 million sharesin February 2006. Excluding intangible amortisation of £1.2m (2005 - £0.8m) andexceptional restructuring costs of £2.6m (2005 - £nil), basic earnings per sharegrew by 6% to 65.7p (2005 - 62.1p). Basic earnings per share have been calculated in accordance with IAS 33. Theweighted average number of shares in issue during the year has been amended toexclude those Ordinary shares held by Walbrook Trustees (Guernsey) Limited andCapita IRG Trustees Limited for the Company's various share schemes until suchtime as they rank for dividend. Investments On 5 August 2005 the Company acquired 49% of the share capital of Record for€54.8m. In the UK the entire share capital of FTL was acquired for aconsideration in cash of £5.7m on 23 January 2006 and on 3 February 2006 theCompany acquired the entire share capital of AVR for £50.3m. Ordinary shares of the Company have been acquired in the open market by WalbrookTrustees (Guernsey) Limited and Capita IRG Trustees Limited in order to satisfythe Company's obligations under its various share schemes. These shares areincluded within the Group's balance sheet within the own shares held reserve. Capital Structure As at 30 April 2006 the Group's total gearing measured as net debt (includingcash balances) as a percentage of shareholders' funds but after the deduction ofgoodwill and intangible assets increased to 204% (2005 - 198%). The net cashbalance taken into account in calculating the gearing ratios for this year is£24m (2005 - £41.4m). This level of gearing is in line with our expectations and is mainly due to thecash outflows following the purchase of 49% of Record and the acquisition of AVRbeing offset by cash generation from operations and proceeds received from theissue of 6.05 million Ordinary shares in February 2006. Since the year end theGroup has acquired the remaining 51% of Record's equity. If this purchase hadtaken place on 30 April 2006 the consolidated balance sheet of the Group wouldhave had gearing of 314% on a pro-forma basis. Treasury Cash Flows The Group's net debt increased by 28% to £524.5m (2005 - £410.9m) excluding thedebt in Record's balance sheet. This increase reflects cash outflows associatedwith the purchase of 49% of Record (£37.9m), the acquisition of AVR (£124.4m),funding of fleet growth in the UK and Spain and the receipt of the proceeds ofthe placing of 6.05 million Ordinary shares on 3 February 2006. Gross cashgeneration as reflected by EBITDA* increased to £210.0m (2005 - £197.9m). TheGroup funded the purchase of 22,500 new vehicles in the UK and 9,400 newvehicles in Fualsa for a total cash outflow of £306.3m. The sale of 23,000 UKvehicles and 4,900 Fualsa vehicles generated a cash inflow of £150.8m. Theoption over the remaining 20% of Fualsa's equity, whilst exercised, has not yetgiven rise to a cash outflow. This deferred consideration of €14.9m isclassified as debt in the Group's balance sheet and was paid after the Group'sfinancial year end in May 2006.*EBITDA - Earnings before interest, taxation, depreciation and amortisation. Interest Costs The Group's net interest costs have decreased by 6% to £20.1m (2005 - £21.2m)despite an increase in closing net debt of 28%. This is because the Group hasbenefited from the full effects of the refinancing arrangements put in place inJanuary 2005 and also from having a higher proportion of debt denominated inEuros than in the prior year. Interest cover remained a healthy 3.6 times (2005- 3.6 times). Strategy The Group's financing strategy, which has been approved by the Board, is to usemedium and long-term debt to finance the Group's vehicle fleet and other capitalexpenditure. Working capital is funded by internally generated funds and anoverdraft facility. The Group's interest rate exposure is managed by a series oftreasury contracts as described below. Treasury Management Each of the Group's operations is responsible for its own day-to-day cashmanagement. The funding arrangements of the Group with banks are negotiated andmonitored centrally. In January 2006 the Group extended its facilities to atotal of £745m under a series of unsecured, revolving, bilateral agreements.These extended facilities have provided funding for the acquisition of AVR andwill also fund the refinancing of Record's borrowings. All funds generated bythe Group's operations are controlled by a central treasury function. Liquidity The Group's aggregate finance facilities, including existing Fualsa loanfacilities, total £756m compared to net debt of £524m. As described above, thecore of these arrangements relate to the £745m unsecured facilities with thefollowing terms: Term Amount £m Within one year 149 Within three years 298 Within four years 298 ----- Total 745 Interest Rate Management The Group's bilateral agreements incorporate variable interest rate clauses.Historically, it has sought to manage this risk by having in place a number offinancial instruments covering 30% to 40% of its borrowings at any time. Thecurrent value of financial instruments represents 60% of net debt at 30 April2006 with an average term outstanding of two years. This coverage fell to 44% ofnet debt following the acquisition of Record in May 2006. In assessing the effectiveness of these instruments, the table below details theadditional interest costs to the Group, based on the Group's closing net debtposition at 30 April 2006 of £524m, of a series of interest rate increases afterapplying the benefit of the instruments. This table is based on the cash amountsand does not take into account the effects of applying IAS 39: Increase in Additional interest costs interest rate Sterling debt Euro debt Total 1% £1.8m £1.4m £3.2m 2% £3.2m £2.7m £5.9m 3% £4.3m £4.0m £8.3m Consolidated Income Statementfor the year ended 30 April 2006 2006 2005 Notes £000 £000 Revenue 1 372,609 339,382 Cost of sales 1 (248,051) (215,097) --------- ---------Gross profit 124,558 124,285 +---------+---------+Administrative expenses (excluding amortisation) |(50,733) | (47,193)|Amortisation | (1,227) | (855)| +---------+---------+Total administrative expenses |(51,960) | (48,048)| +---------+---------+ --------- ---------Profit from operations 72,598 76,237Investment income 2,047 1,814Finance costs (22,125) (23,063) --------- --------- +---------+---------+Share of profit before taxation of associate | 4,964 | - |Share of taxation of associate | (1,422) | - | +---------+---------+Share of profit of associate | 3,542 | - | +---------+---------+ Profit before taxation 56,062 54,988 Taxation (15,468) (15,757) --------- --------- Profit for the year 40,594 39,231 --------- --------- Profit for the year is wholly attributable toequity holders of the parent Company Earnings per shareFrom continuing operations Basic 3 61.1p 60.7p Diluted 3 60.6p 60.3p Consolidated Statement of Recognised Income and Expensefor the year ended 30 April 2006 2006 2005 £000 £000 Gains on revaluation of land and properties - 1,031Foreign exchange differences on retranslation of net assetsof subsidiary undertakings 1,303 (153)Foreign exchange differences on retranslation of interest inassociate 413 -Net foreign exchange differences on long term borrowingsheld as hedges (1,571) 1,635Net fair value gains on cash flow hedges 2,956 -Adjustment for share options granted 20 88Net deferred tax credit recognised directly in equity 882 1,084Actuarial gains on defined benefit scheme 356 - -------- -------Net income recognised directly in equity 4,359 3,685 Profit attributable to equity holders 40,594 39,231 -------- -------Total recognised income and expense for the year 44,953 42,916 -------- ------- Consolidated Balance Sheetas at 30 April 2006 2006 2005 £000 £000Non-current assetsGoodwill 44,582 12,448Other intangible assets 18,208 4,866 +----------+----------+Property, plant and equipment: vehicles for hire | 643,824 | 531,843 |Other property, plant and equipment | 50,236 | 37,851 | +----------+----------+Total property, plant and equipment | 694,060 | 569,694 | +----------+----------+Interest in associate 41,927 - ---------- ---------- 798,777 587,008 ---------- ---------- Current assetsInventories 8,918 6,696Trade and other receivables 116,939 92,841Cash and cash equivalents 24,048 41,375 ---------- ---------- 149,905 140,912 ---------- ---------- Non-current assets classified as held for sale 14,705 11,464 ---------- ----------Total assets 963,387 739,384 ---------- ---------- Current liabilitiesTrade and other payables 57,584 44,769Tax liabilities 19,715 7,231Short term borrowings 30,024 48,410 ---------- ---------- 107,323 100,410 ---------- ---------- Non-current liabilitiesLong term borrowings 518,485 403,819Deferred tax liabilities 15,846 10,124Retirement benefit obligation 1,444 - ---------- ---------- 535,775 413,943 ---------- ---------- ---------- ----------Total liabilities 643,098 514,353 ---------- ---------- ---------- ----------Net assets 320,289 225,031 ---------- ---------- EquityShare capital 3,538 3,209Share premium account 64,998 62,544Revaluation reserve 1,054 1,054Own shares (3,331) (2,471)Merger reserve 67,463 4,721Hedging reserve 2,956 -Translation reserve 1,627 1,482Retained earnings 181,984 154,492 ---------- ----------Total equity 320,289 225,031 ---------- ---------- Consolidated Cash Flow Statementfor the year ended 30 April 2006 2006 2005 Notes £000 £000 Net cash from operating activities 5 172,178 150,457 -------- -------- Investing activitiesInterest received 1,931 1,957Proceeds from disposal of vehicles for hire 150,849 116,895Purchases of vehicles for hire (306,273) (274,517)Proceeds from disposal of other property, plantand equipment 3,307 378Purchases of other property, plant and equipment (12,208) (7,613)Purchases of intangible assets (927) (19)Acquisition of subsidiary undertakings, includingnet cash and bank overdraft balances acquired 4 (130,047) (19,353)Purchase of interest in associate (37,972) - -------- --------Net cash used in investing activities (331,340) (182,272) -------- -------- Financing activitiesDividends paid (13,459) (11,874)Repayments of obligations under finance leases (36,994) (279,243)New finance lease agreements - 93,663Increase in bank loans and other borrowings 130,988 221,166Proceeds from issue of share capital 65,525 722Proceeds from sale of own shares 511 -Payments to acquire own shares (1,371) (1,141) -------- --------Net cash from financing activities 145,200 23,293 -------- -------- Net decrease in cash and cash equivalents (13,962) (8,522) Cash and cash equivalents at 1 May 34,057 42,675 Effect of foreign exchange movements 164 (96) -------- --------Cash and cash equivalents at 30 April 6 20,259 34,057 -------- -------- Consolidated Statement of Changes in EquityFor the year ended 30 April 2006 2006 2005 £000 £000Amounts attributable to equity holders of the parentCompanyGains on revaluation of land and properties - 1,031Foreign exchange differences on retranslation of netassets of subsidiary undertakings 1,303 (153)Foreign exchange differences on retranslation of interestin associate 413 -Net foreign exchange differences on long term borrowingsheld as hedges (1,571) 1,635Net fair value gains on cash flow hedges 2,956 -Adjustment for share options granted 20 88Actuarial gains on defined benefit pension scheme 356 -Net deferred tax credit recognised directly in equity 882 1,084 ------- --------Net income recognised directly in equity 4,359 3,685Profit attributable to equity holders 40,594 39,231 ------- --------Total recognised income and expense for the year 44,953 42,916Dividends paid (13,437) (11,916)Issue of Ordinary share capital (net of expenses) 65,525 722Net increase in own shares held (860) (1,141) ------- --------Net changes in total equity 96,181 30,581 ------- -------- Opening total equity as at 1 May 225,031 194,450Transitional adjustment on adoption of IAS32 and IAS39 (923) - ------- --------Opening total equity after adoption of IAS32 and IAS39 224,108 194,450 ------- -------- ------- --------Closing total equity as at 30 April 320,289 225,031 ------- -------- Notes 1. Segmental analysis The Directors consider the United Kingdom and Republic of Ireland to be a singlegeographical segment on the grounds that the results and net assets ofoperations in the Republic of Ireland are not material to the Group as a whole. UK & Republic Spain Total of Ireland 2006 2006 2006 £000 £000 £000 Revenue 300,771 71,838 372,609 Gross profit 102,724 21,834 124,558 Administrative expenses (43,883) (6,850) (50,733) Amortisation (692) (535) (1,227) ----------- --------- -------- Profit from operations 58,149 14,449 72,598 ----------- --------- -------- UK & Republic Spain Total of Ireland 2005 2005 2005 £000 £000 £000 Revenue 283,414 55,968 339,382 ----------- --------- -------- Gross profit 103,509 20,776 124,285 Administrative expenses (40,646) (6,547) (47,193)Amortisation (321) (534) (855) ----------- --------- -------- Profit from operations 62,542 13,695 76,237 ----------- --------- -------- 2. Restructuring costs In February 2006 the Group acquired Northgate (AVR) Limited (formerly ArrivaVehicle Rental Limited) (see Note 4). To the extent that employees could not beintegrated, termination terms were agreed and, to the extent that propertieswould not be utilised in the future, amounts have been provided in respect ofonerous contracts. 2006 2005 £000 £000 Redundancy costs (net of pension credit) 1,673 -Onerous contracts 934 - -------- -------- 2,607 - -------- -------- 3. Earnings per share 2006 2005(a) Basic and diluted earnings per share The calculation of basic and diluted earnings pershare is based on the following data: Earnings £000 £000Earnings for the purposes of basic and dilutedearnings per share, being net profit attributable toequity holders of the parent 40,594 39,231 ----------- ----------- Number of shares Number Number Weighted average number of Ordinary shares for thepurpose of basic earnings per share 66,481,499 64,598,909 Effect of dilutive potential Ordinary shares:- share options 464,060 465,690 ----------- -----------Weighted average number of Ordinary shares for thepurpose of diluted earnings per share 66,945,559 65,064,599 ----------- ----------- Basic earnings per share 61.1p 60.7p ----------- ----------- Diluted earnings per share 60.6p 60.3p ----------- ----------- (b) Earnings per share before amortisation andexceptional restructuring costs £000 £000 Earnings for the purpose of basic earnings per share(above) 40,594 39,231 Amortisation 1,227 855Exceptional restructuring costs (net of UKcorporation tax at 30%) 1,825 - ----------- ----------- Earnings for the purpose of basic earnings per sharebefore amortisation and exceptional restructuringcosts 43,646 40,086 ----------- ----------- Basic earnings per share before amortisation andexceptional restructuring costs 65.7p 62.1p ----------- ----------- 4. Acquisitions Fleet Technique Limited On 23 January 2006, the Group acquired the entire issued share capital of FleetTechnique Limited ("FTL") for a cash consideration of £6,583,000 includinggoodwill of £3,589,000. £000 Book value 1,014Fair value adjustments 1,980 ------ Fair Value 2,994 ------ Goodwill 3,589 ------ Acquisition cost (including expenses) 6,583 ------Fair value of consideration:Cash 6,583Net cash with subsidiary undertaking acquired (908) ------ Cash outflow in year on acquisition of FTL 5,675 ------ Northgate (AVR) Limited On 3 February 2006, the Group acquired the entire issued share capital ofNorthgate (AVR) Limited (formerly Arriva Vehicle Rental Limited) ("AVR") for acash consideration of £50,316,000, including goodwill of £28,055,000. Thetransaction has been accounted for in accordance with the purchase method ofaccounting. £000 Book value 40,668Fair value adjustments (14,188) -------- Fair Value 22,261 -------- Goodwill 28,055 -------- Acquisition cost (including expenses) 50,316 --------Fair value of consideration:Cash 50,316Net cash with subsidiary undertaking acquired 74,056 -------- Cash outflow in year on acquisition of AVR 124,372 -------- In both of the above acquisitions, the fair values represent the Directors'current estimates of the net assets acquired. In accordance with IFRS 3, thevalues attributed may be revised as further information becomes available. 5. Reconciliation of Group profit from operations to net cash inflow from operating activities 2006 2005 £000 £000 Profit from operations 72,598 76,237 Adjustments for:Depreciation of property, plant and equipment 136,209 120,831Exchange differences (16) -Amortisation of intangible assets 1,227 855(Gain) loss on disposal of property, plant and equipment (209) 39Defined benefit pension credit (386) -Share options fair value charge credited directly back toequity 20 88 -------- ------- Operating cash flows before movements in working capital 209,443 198,050 (Increase) decrease in inventories (2,191) 1,665Increase in receivables (1,131) (7,735)Increase (decrease) in payables 3,139 (3,634) -------- ------- Cash generated from operations 209,260 188,346 Income taxes paid (15,156) (15,241)Interest paid (21,926) (22,648) -------- -------Net cash from operating activities 172,178 150,457 -------- ------- 6. Cash and cash equivalents Cash and cash equivalents consist of cash in hand and at bank, investments inmoney market instruments and bank overdrafts. Bank overdrafts are included within cash equivalents on the grounds that theyare repayable on demand and form an integral part of the Group's cashmanagement. Cash and cash equivalents, as described above, included in the cash flowstatement comprise the following balance sheet amounts. 2006 2005 £000 £000 Cash in hand and at bank 22,201 39,601Short term investments 1,847 1,774 -------- -------Gross cash and cash equivalents as reported 24,048 41,375Bank overdrafts (3,789) (7,318) -------- -------Net cash and cash equivalents 20,259 34,057 -------- ------- 7. Analysis of Consolidated net debt 2006 2005 £000 £000 Cash at bank and in hand 22,201 39,601Short term investments 1,847 1,774Bank overdraft due within one year (3,789) (7,318) -------- -------- 20,259 34,057 Bank loans (518,393) (382,221)Vehicle related finance lease obligations (12,326) (48,642)Deferred consideration (10,290) (9,548)Preference shares (500) (500)Property loans and other borrowings (3,211) (4,000) -------- -------- (524,461) (410,854) -------- -------- 8. Basis of preparation The results for the year ended 30 April 2006, including comparative financialinformation, have been prepared in accordance with International FinancialReporting Standards ("IFRS"), as issued by the International AccountingStandards Board, that are endorsed, or are expected to be endorsed, by theEuropean Commission. Northgate plc ("the Group") has adopted all IFRS in issue. The Group previously prepared its annual and interim consolidated accounts underUK GAAP. The date of transition of the Group to IFRS is 1 May 2004, with theexception of IAS 32 and IAS 39. The date of transition of the Group for IAS 32and IAS 39 only is 1 May 2005. As part of the transition to IFRS, on 21 December2005 the Group published the restatement of certain comparative financialinformation under IFRS for the year ended 30 April 2005 and for the six monthsended 31 October 2004. This information is available from the Group's website atwww.northgateplc.com. IFRS 1 (First-time Adoption of IFRS) contains several transitional exemptionsfrom the full requirements of IFRS for those companies adopting IFRS for thefirst time. The details of the IFRS 1 transitional exemptions that the Group hastaken advantage of, along with all of the accounting policies adopted by theGroup, are detailed within the restatement of comparative information under IFRSpublished on 21 December 2005, as referred to above. The financial information set out above does not constitute the Company'sstatutory accounts for the years ended 30 April 2006 or 2005, but is derivedfrom those accounts. Statutory accounts for 2005 have been delivered to theRegistrar of Companies and those for 2006 will be delivered following theCompany's Annual General Meeting. The auditors have reported on those accounts;their reports were unqualified and did not contain statements under Section 237(2) or (3) of the Companies Act 1985. The Report and Accounts for the year ended 30 April 2006 will be mailed toshareholders no later than 1 August 2006. This information is provided by RNS The company news service from the London Stock Exchange