04.03.2009

Lavendon up 34%

Lavendon, Europe’s largest aerial lift rental company, owner of Nationwide Platforms, Panther, DK rentals has reported full year 2008 revenues of £248 million, an increase of 34 percent on last year. In addition to the benefits of the Platform Company acquisition in March, the company also benefited from favourable currency factors – at constant exchange rates the revenues would have increased 26 percent.

Pre-Tax profits after restructuring costs, increased 22 percent to £22.5 million this after allowing for one off integration and restructuring costs. This included higher debt and interest costs resulting from the conversion of its Euro based borrowings into Sterling.

In terms of geographical split revenues and operating profit increased in every region and were as follows:

UK revenues up 24 percent to £131.4 million while operating profits increased 20 percent to £21.6 million.

Germany reported revenues of £52.8 million, up eight percent in sterling terms, but down six percent in Euros, following the integration of the Zooom and Gardemann operations. Operating profits benefited significantly increasing almost 35 percent to £7.9 million.

France and Belgium saw revenues more than triple to £28.3 million thanks to the full year addition of DK rentals. Operating profits went from barely more than break even to £7.3 million.

Spain, which also benefited from the addition of a DK rental business, saw revenues double to £13.3 million while operating profits were up 70 percent to £2.2 million, reflecting the difficulties in that market.

Finally in the Middle East revenues climbed 37 percent to £22.6 million, while operating income rose by more than 43 percent to £7.3 million.

The company says that while the results are positive, trading became considerably more difficult in the fourth quarter of 2008, and that it has continued into 2009. It is therefore conserving its cash and reducing its dividend payment along with its already announced capital expenditure reductions.

Capital expenditure this year is unlikely to be more than £20 million for essential replacements or niche products. As the company continues its policy to age the fleet. It says that it still has considerable potential to continue with this policy before needing to resume more normal capital expenditure plans.

During the year the company sold over 1,500 used machines from the fleet – over six percent of its year end fleet. Generating £9.3 million in cash.

Lavendon chairman John Gordon said:
"The Board was pleased that the Group performed in line with its expectations and grew revenues, profits and earnings per share. This was a good result despite the challenging economic environment."

"During the year the Group focused on strengthening market positions and integrating the acquisitions to streamline its operations, which has made a more efficient business with increased scale in each of our geographical markets. The strengthened cash flows in the year will continue to underpin the financial stability of the Group."

"Despite the progress made during the year, trading conditions in the UK and European operations became more challenging, particularly in the final quarter of 2008. Although we have developed a more diverse geographical spread of profit and cash flows, the current market conditions in these markets makes future demand patterns extremely difficult to predict. The Middle East still presents a small, yet exciting growth opportunity for the Group."

"The Board remains cautious about the outlook for the Group. The Board will continue to work to offset the impact of the challenging market conditions by reducing capital investment, focusing on making the operations more cost efficient and generating free cash flow to reduce debt levels."

"I will be stepping down at the AGM and have thoroughly enjoyed working with the Board over the last 13 years, and wish it all the best for the future."

Note: David Hollywood, currently chairman of the audit committee and a non-executive director will take over as chairman on Gordon’s retirement.

Vertikal Comment

There is no question that this is a very positive set of results in terms of expansion in a challenging market and well within expectations.

What many people will be looking at and considering are the benefits accruing from the acquisition of the Platform Company. UK revenues are up £25.5 million while the pro-rata nine month contribution of The Platform Company would have been £23 million. So given the tough market conditions and a reduction of the combined fleet this looks quite positive.

In terms of UK operating profits, these increased £3.7 million, while The Platform Company’s pre-tax profits were £4.4 million on a nine month pro-rata basis. So not looking so hot given what seems to have been a substantial price paid for the business. That price - £79.1 million, part cash part shares over three years with a cash top up to six pounds for the 1.77 million shares being issued over the next 14 months.

What this simplistic exercise cannot do is predict what might have been or be - had the acquisition not occurred of course. The true benefits of the move will or rather could accrue this year if Lavendon has the discipline and the nerve to make it happen through strong market leadership.

The key benefit of the purchase is the consolidation of the UK market prior, to what could be a protracted slow down, as well as renewing its fleet without adding to the UK machine population.

For Lavendon to truly gain from its investment it needs to use its market position to help keep rental rates realistic and lead the market in this by not participating in unnecessary rate cutting. Something that is far far easier to say than to do and if anecdotal reports are anything to go by something that it might already be struggling with.

Moving to a highly positive note, the DK and Gardemann acquisitions have transformed what were struggling operations in France and Germany, which have repeatedly dragged down the strong performance of the UK and Middle East businesses. They are now solid leaders in their markets and should play a strong positive role through the current economic slow down.

Finally while these results are excellent for the industry, there will be two groups of ‘stakeholders’ that will be less than happy. Shareholders hoping for a better final dividend/short term return, given the battering the share price has taken recently; and Equipment suppliers, who are effectively partners - using rental companies such as Lavendon as a distribution channel for their equipment.

With many larger rental companies such as Lavendon cutting them off almost completely, pressure is building as they try to maintain their businesses. If the rental companies do not acknowledge this and react, something will have to give which could damage both parties’ prospects in the years ahead.

Manufacturers need rental companies and rental companies need a strong manufacturing sector. They are partners and cannot operate in isolation without creating serious long term problems.