Lavendon Group plc 2004 Preliminary Results Presentation

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Lavendon Group plc2004Preliminary Results
Presentation

• March 2005

2
Agenda

• Highlights and issues
• Market review
• Restructure of Germany
• Financial Performance and Trading Review
• Cash Flow and Debt Reduction
• Summary

3
Highlights

• Return to revenue growth in the UK
• Germany restructured in line with plan
• Sustaining growth in the Middle East
• Disposed of loss making Austrian business after
  year end
• Reduced net debt levels by 20.5 million
• Refinancing of Group successfully completed

4
Issues

• Continued poor market demand in Germany
• Extent of restructuring in Germany
• Level of UK investment required to reverse
  revenue decline

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Agenda

• Highlights and issue
• Market review
• Restructure of Germany
• Financial Performance and Trading Review
• Cash Flow and Debt Reduction
• Summary

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General Market Overview

• The US powered access market has returned to
  solid growth after some 5 years in the doldrums
• Capacity of US manufacturers now stretched,
  resulting in extended delivery lead times (6-12
  months) for machines
• Extended lead times should ensure present over
  supply in the European market is not further
  aggravated
• Early signs of European market consolidation
  taking place

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UK Market Overview

• Steel-frame construction markets improved during
  second
• half of the year
• Repair and maintenance market softened during
  the year
• Delayed implementation of Working at Height
  Regulations
• until Autumn 2005, restraining growth in
  non-construction
• sectors timing issue only
• No pressure on hire rates
• Competitive landscape improving as forced
  ownership
• changes take place

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Market Overview-Other Markets

• French construction sectors forecast to resume
  growth
• Consolidation of French market beginning to take
  place
• Spanish construction market slowing
• Middle East market remains strong, underpinned by
  resumption of suspended projects in Saudi Arabia

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Agenda

• Highlights and issue
• Market review
• Restructure of Germany
• Financial Performance and Trading Review
• Cash Flow and Debt Reduction
• Summary

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Trading History
Operating profits have been declining since 2000
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Management Response
Costs were reduced during 2003 (6) and 2004 (4)
but there was a limit to further cost reduction
without radical change
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Market Penetration Comparison
ESTIMATED MARKET PENETRATION RENTAL UNITS PER
GDP 2002
Number of active rental units per Bn GDP 2002
Source Chalcraft Consulting analysis, Lavendon
Group analysis
Our estimates of powered access penetration were
historically based on measures of machine per
of GDP or head of population. Experience in the
German market led us to re-examine the global
applicability of this measure.
13
Comparative Sector Importance
Source Chalcraft Consulting analysis, Lavendon
Group analysis
The use of powered access by the steel frame
construction and building RM sectors in Germany
is small in comparison to the UK
14
Importance of Construction Methods
Source Statistisches Bundesamt, AISC, Corus
The modular steel-frame share of non-residential
construction volume is significantly lower in
Germany than in either the US or UK.
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Recent Market Trends
Market Demand

• Market demand for German powered access has
  fallen around 14 since 2000
• Zooom is particularly exposed to the construction
  sector (70 of volume) which has fallen even
  faster (c. 28)
• Market fleet numbers have risen by an estimated
  20 (4200) during a period when demand has fallen
  by 14

Market Supply
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Current Market Features
POWERED ACCESS RENTAL(2000 -2006) THOUSANDS OF
EUROS (constant at 2003 prices)

• Economy is weak and predicted to remain so
• Steel frame construction is dependent on the
  retail, factory and warehouse sectors, but
• the out-of-town retail sector less developed than
  the US, UK and France
• there is excess building capacity
• Consumer confidence is low with no sign of an
  improvement which might drive retail expansion
• warehousing and factory construction moving east
• the concrete lobby remains strong and steel
  prices are high
• RM sector is less developed in Germany (12bn)
  compared to the UK (17.5bn)

CAGR 03-06 (0.9)
Other structures
Refurbishment and maintenance
New build
Source Chalcraft Consulting
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Principles for Restructure

• Marginal improvements to the existing structure
  would not deliver a business which could break
  even in the current market environment
• Removal of a significant proportion of the fleet
  was essential to addressing the market imbalance
  between supply and demand
• The cost base needed to be lowered significantly
  to give the business a realistic prospect to
  breakeven in the next 24 months, even if revenues
  reduced

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Outline of Restructure

• Reduce number of depots from 44 to 24,
  concentrating the remaining network in areas of
  high economic activity
• Reduce rental fleet from 3,750 to 2,750, by
  removing under-utilised assets without impacting
  revenue generation capabilities
• Reduce headcount from 375 to 295, without
  impacting the ability to service the customer base

Overall cost base reduced by 7.5 million
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Depot Selection Criteria

• Located in centres of high relative economic
  activity
• Depots which have been historically the most
  profitable
• Potential for fleet holding of 100 units
• Potential for an average utilisation over 65
  units on hire in own depot area

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Evaluation of Revenue Risk
Closed depot revenues serviceable from retained
depots May Closed depots revenues serviceable
from retained depots Sept
of revenues from expected length of contracts
running on snapshot day
Weighted average September 39
Weighted average May 29
Using two samples (May and September) we estimate
that revenue retained from to-be-closed depots
due to increased transport distances (gt 50kms)
will be between 29 and 39 of 2004 revenues
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Management of Revenue Risk

• Minimum changes to customer order points
• Maintain capacity of telephone sales operation
• Extensive marketing support during transition
  period
• Incentive schemes in place focusing on revenue
  retention
• Increasing fleet sizes and improving product mix
  in areas of high economic activity

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Impact on Breakeven Point
BEP c.1675 units
BEP c.2300 units
BEP c.1775 units
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Agenda

• Highlights and issue
• Market review
• Restructure of Germany
• Financial Performance and Trading Review
• Cash Flow and Debt Reduction
• Summary

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2004 Preliminary Results
Sterling

• Before exceptional items of 6.1m in 2004 and
  0.8m in 2003

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Trading Review - UK
Units on Hire

• Revenues increased 4 to 61.5m (59.2m)
• Operating profits reduced to 7.4m (9.2m)
• Rental related income per machine up 4.6 on 2003
• Machines on hire, down 1 on 2003
• Management team complete and stable
• Improved order taking and logistics systems
  rolled out

Revenue/Unit on Hire - Index
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Trading Review Germany
Units on Hire

• Revenues decreased by 8 to 41.6m (45.4m)
• Operating losses increased to 5.0m (2.8m)
• Rental related income per machine down 3 on 2003
• Machines on hire down 6 on 2003
• Restructure plan successfully implemented at year
  end producing annual cost savings of 7.5m

Revenue/Unit on Hire - Index
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Trading Review France
Units on Hire

• French revenues increased by 6 to 7.8m (7.3m)
• Operating losses reduced to 0.9m (1.0m)
• Rental related income per machine up 5 on 2003
• Machines on hire up 1 on 2003
• Standard Group IT system implemented in April
  2004
• Network increased to 9 depots

Revenue/Unit on Hire - Index
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Trading Review Spain
Units on Hire

• Spanish revenues down at 5.3m (5.4m)
• Breakeven result (0.3m)
• Rental related income per machine down 3.0 on
  2003
• Machines on hire down 6 on 2003
• Market remains highly construction dependent
• Focusing efforts on the two broader based markets
  of Madrid and Murcia

Revenue/Unit on Hire - Index
29
Trading Review Middle East
Units on Hire

• Middle East revenues up 9 at 7.2m (6.6m)
• Operating profits increased to 2.7m (2.4m)
• Rental related income per machine up 8 on 2003
• Machines on hire up 22 on 2003
• Sterling growth impacted by weakness of US
• Demand tempered by terrorist incidents in Saudi
  Arabia

Revenue/Unit on Hire - Index
30
Group Turnover
Turnover millions

• Group revenues stable at 108 m
• FX impact not significant

Turnover Increase/ (Decrease) by Country
millions
2.3
0.6
0.3
0.0
0.1
0.2
(3.0)
(0.1)
UK
France
Austria
Spain
ME
Total
Germany
30
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Summary of Operating Profit
Analysis of Operating Profit
2004
2.7
(0.6)
(3.4)
(0.0)
7.4
(0.3)
5.8
(14.5)
(8.7)
0.9
(2.2)
(0.3)
0.1
4.0
2.5
(0.3)
2.2
31
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Exceptional Costs
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Agenda

• Highlights and issue
• Market review
• Restructure of Germany
• Financial Performance and Trading Review
• Cash Flow and Debt Reduction
• Summary

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Cash Flow
EBITDA (m) as a of Revenue

• Decline in EBITDA mainly due to the reduced
  operating profits
• Reduced working capital requirement of 0.6
• All operations generating cash

Analysis of Operating Cash Flow
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Depreciation

• Depreciation policies unchanged
• All equipment RM costs expensed as incurred
• Capex invested 2.3m for 2004
• Depreciation will reduce in 2005 by circa 2.0m
  reflecting reduced fleet in Germany

Depreciation Charge ('m) and as a of Revenue
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Free Cash
Analysis of Movement in Net Debt
Calculation of Free Cash

000 Net operating cash flow
29.1 Interest
(5.4) Tax
0.5
Capex
(0.7) Dividends
(2.6) Free Cash
20.9
Operating Cash Flow m

• 20.9m of free cash generated in the year
• Continued focus on debt reduction in 2005
• Proceeds from disposal of Austria and fleet held
  for resale will accelerate debt reduction

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Financing
Net Debt (m) and Gearing

• New 85m banking facility in place since 30 June
  2004
• Interest covered
• 5.4 times by EBITDA
• 6.0 times by net operating cash
• 1.0 times by operating profit
• Blended interest rate at 31.12.04 of 5.34
• Fixed 6.00
• Variable 4.43

Currency of Debt
Mix of Fixed and Floating Rates
37
31
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Agenda

• Highlights and issue
• Market review
• Restructure of Germany
• Financial Performance and Trading Review
• Cash Flow and Debt Reduction
• Summary

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Summary

• UK has returned to revenue growth
• Restructuring of Germany lowers the cost base
  significantly, whilst still providing the ability
  to retain a substantial proportion of 2004
  revenues
• French market showing some encouraging signs
• Middle East producing strong performance
• Disposal of surplus assets will generate a cash
  inflow in 2005
• Capex requirements in 2005 remain small
• Net debt continues to reduce
• Resumption of dividend payments will be based on
  future trading performance

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• Questions

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Main Potential Areas Where IAS will Affect
Lavendon

• IAS 16 Need to annually re-assess
  residual values
• IAS 17 Classification of leases (property
  and land)
• Classification of
  operating leases
• IAS 19 Short term employee benefits
  (holiday pay)
• IAS 32, 39 Financial instruments

In addition to these main accounting policy
areas, the format of the pl a/c, B/S and cash
flow statement will alter and further detailed
disclosure is required