18.07.2011

Lavendon to pull-out of Spain

Lavendon has announced that it will withdraw from the Spanish rental market later this year, the statement is included in a first half trading statement issued this morning that shows revenues climbed eight percent in the first six months of the year.

While growth in the second quarter was generally not as strong as that of the first, it was above management forecasts.

Revenues in the second quarter increased at all of its operations, giving all but the Middle East a positive first half. Belgium led the charge, in percentage terms, with 17 percent growth, followed by France with 16 percent. The two operations now represent 15 percent of the group’s revenues.

The UK and Germany both posted 10 percent increases with the UK now representing 49 percent of total revenues to Germany’s 21 percent.

While Spain has been earmarked for closure its revenues grew five percent, but the business now only represents four percent of group sales. In the Middle East second quarter revenues were two percent higher than the prior year but a very poor first quarter kept things negative, with first half revenues two percent below 2010.

The statement says that the first half revenue growth is accompanied by a “marked improvement” in the group's profitability, with increased operating margins and returns on capital. The company expects this trend to continue through the second half.

Net debt has been reduced by £6.6 million to £133.7 million, in a constant currency comparison the reduction would have been more impressive. The company says that it expects the reduction to accelerate during the second half of the year.

The company will also include some one-off credits and charges in its first half results. It also expects the pull-out from Spain to cost £1.25 million in cash after disposals of equipment not transferred elsewhere, with a £5 million write-off in its full year accounts.

John Standen – interim executive chairman said: "The group performed ahead of the board's expectations in the first six months, with overall revenues, on a constant currency basis (excluding ex-fleet equipment sales), growing by eight percent compared with the prior year and six percent in the second quarter.”

“Due to the weak long-term outlook for our market in Spain, we have concluded that the capital currently invested in our Spanish operation will achieve better returns if substantially re-deployed to our other markets. Consequently we have made a strategic decision to exit the Spanish powered access market during the second half of 2011”

“The first half has seen a solid improvement in both revenues and margins. Whilst mindful of the continuing economic uncertainties, we believe that if the current momentum in our underlying trading is maintained, coupled with the anticipated improvement in our operational efficiency, the results for the year will exceed the board's previous expectations.”

Vertikal Comment

This is a very positive set of results from Lavendon and departing chief executive Kevin Appleton will feel justifiably pleased with them and for the company’s prospects for the rest of the year.

The results also confirm the wisdom of the company’s management to rebuff the takeover offers made at the turn of the year. The company says that it spent £3 million on consulting charges in the first half, one assumes that these are partly related to fighting the takeover attempts? And partly for the external consultants it brought in to assist with its “operational and business plan reviews” earlier this year?

The pull-out from Spain is no great surprise, although it looks like a significant shift in strategy. Until now the programme, wherever it operated, was to ‘hunker down’ in tough times and look for an opportunity to acquire a wounded competitor. The Spanish market will though take many years to recover - however recover it will - and unlike Ireland it will once again be a major market for access rental.

The question is which costs more? hanging in there while keeping the cost of doing so to a minimum or pulling out and then buying in again when the market turns? Or is this a signal that Lavendon’s geographic expansion plans have come to end, at least for the foreseeable future?

There is of course unlikely to be an answer to this and much will depend on market developments, opportunities and who eventually takes over as chief executive. In the meantime the company is looking increasingly solid and should prove a good mid-term investment for its shareholders.