15.08.2008

Rami up 19% as profits slip

Ramirent the Finnish based international rental company has reported revenues up almost 19 percent to €343 million while pre tax profits slipped nine percent to €56.4 million.

Rami blames the poorer profits on slower activity in Latvia, Estonia and Hungary, as well as a softening market in Norway and Denmark. Construction activity in Finland, Sweden and the rest of Eastern Europe continues at a strong pace.

Operating profits for the period are flat – while falling as a percentage of sales from 22.7 to 19 percent – due to a steep rise in the number of employees - 4,134 compared to 3,484 this time last year, an increase in the number of locations from 296 to 357, - and “higher maintenance costs following a period of high utilisation”.

Higher depreciation and interest cost caused the fall in net profits – before and after tax.

The company says that it invested 17 percent more in the first half of 2008 than in the same period of 2007, however it is now restricting any further investment for the year in order to boost cash flow. If this is the case it would result in a drop of 20 percent on the full year 2007.

The geographic breakdown of revenues for the first half is as follows

Finland - €73 million – up 18 percent
Sweden - €87 million – up 20 percent
Norway - €76 million – up 11 percent
Denmark - €29 million – up 8 percent
East Europe - €43 million – up 13 percent
Central Europe - €38 million – up 69 percent

Of these regions only Finland and Sweden reported higher operating profits for the period. As per its earlier profits warning the company now expects profits for the year to be below those of 2007.

Chief executive Kari Kallio said: “Ramirent´s strong growth continued during the first half of the year, however, the operating profit declined due to the further softening of markets especially in the Baltics. Overall, the market sentiment weakened during the second quarter and the economic downturn had a negative impact on the investments and construction activities in many of our countries. The market development is diverging more between different countries.”

“In the Nordic countries, our business operations in Finland and Sweden continued on a good level, while in Norway our operations weakened due to the slow down in the construction market. In Denmark, construction activities are still
decreasing, which continues to burden our operations, especially through tough
price competition.”

“In Europe East, strong growth continued in Russia, Ukraine and Lithuania, while
our business volumes and operating profits decreased in Estonia and Latvia
compared to the last year. In Europe Central, growth was strong in Poland, Czech
Republic and Slovakia, while in Hungary our operations stayed on low level due
to the weak market.”

“We expect the rental market growth to continue to slow down. We have adjusted our investment plans to the market situation. We aim to take advantage of our wide geographical presence and will reinforce the process of re-allocating fleet capacity to countries facing favourable market conditions. We have increased focus on cost reduction in the countries with weak market expectations and unsatisfactory profitability.”

“As the majority of the investments for 2008 have been completed, we will delimit our investments and expect cash flow to be positive for the second half of the year and gearing to improve.”

Vertikal Comment

Rami has had an excellent run and has managed to expand its business through strong organic growth as well as by acquisition. However in the past six months or so it has allowed its costs to spiral just at the point where the market looks less certain.

A good deal of the cost is of course involved with the strong organic growth programme and in many areas this could be exactly what it needs to be doing. The rental business is one that involves a step type growth, to grow rapidly organically. The company invests in extra equipment, extra people and new locations and they then work to build that business up to the point where it becomes profitable.

Do too much of this at the same time and profits will slip, do too much when the market is growing more slowly and profits will plummet as one fights with competition to win a bigger slice of the pie.

In a private company the lower profits can be looked on as an investment in the future – as long as the owner is satisfied that the additional people, equipment and locations can bring in more business and therefore more profit over the long term.

In a public company the situation is different – public investors have little interest in jam tomorrow. Falling profits is something that is not palatable – falling profits with rising revenues - virtually intolerable. Unless the management team can dazzle and impress the big investors enough to follow a long term strategic plan.

Problem is that at times like this any such attempt is seen as smoke and mirrors no matter how logical and well thought out the plan.

Rami has a few big long term investors that it has a close relationship with and as such might well be able convince them to see lower profits as ploughing money back into the business in order to gain long term benefits. However reading between the lines it does not look as though the management is keen to follow such a strategy.

We may therefore see a suspension of capital expenditure and a round of cost cutting right on the tail of a major expansion, always a dangerous recipe which creates the circumstances to make mega rental companies such as Rami vulnerable to well managed local competitors.

With both Rami and Cramo reporting lower profits on higher sales, might this be the beginning of a period where the European rental consolidation trend slows, stops or reverses? Much will depend on how the relevant managers of these companies and the others, such as Loxam, Lavendon, Gam and Hune react.