28.08.2009

Lavendon drops 7%

The Lavendon Group, the world’s largest specialist aerial lift rental company, has released its results for the first half of 2009, showing revenues of £114 million, a decline of seven percent on the same period last year.

The company benefited from the weakness of Sterling, with revenues at constant exchange rates down by 16 percent.

Underlying pre-tax profits were £5.3 million a fall of almost 63 percent on the same period last year, However it booked exceptional costs of $45.2 million during the period - £3.6 million of which was the cost of restructuring and integration most of its European businesses, while the rest was is made up of non-cash write downs of goodwill and other assets.

The net result was a pre-tax loss of £40 million, compared to a profit after exceptionals of £11.9 million in 2008.

Revenues declined at all of the group’s operations except the Middle East, which increased revenues by over 85 percent and more than double its profits. The following is a brief coiuntry by country review.

UK
UK revenues fell 20 percent to £52 million, however The Platform Company only joined the business in April 2008 so a ‘same store’ – like-for-like comparison shows a 30 percent decline in UK revenues.

The business generated an operating profit of £4.4 million before exceptionals and a loss of £7 million afterwards, compared to a profit last year of £8.9 million.

The company says that the changes it has made in the UK include a 34 percent reduction in the depot network, a headcount reduction of 28 percent, while the rental fleet shrank by 13 percent, the net effect of which will be to reduce its UK cost base by £11 million.

Germany
In Germany revenues in Euros declined 13 percent, however when converted to Sterling they were marginally up on last year at £26 million. The business posted an operating profit of £1 million prior to exceptionals but a loss of £8.6 million after exceptionals - compared to a profit last year of £3 million.

Belgium
Belgium - previously the DK Rentals business, saw revenues fall 13 percent to £7.8 million with profits of £1.7 million before exceptionals and a loss of £8.7 million after, compared to a profit of £4.7 million last year.

France
France, which is a combination of Zooom France and DK Rentals France, held revenues at levels similar to last year in Serling terms, with an operating profit before exceptionals of £200,000 and a loss of £195,000 afterwards compared to a profit of £500,000 last year.

Spain
Spain, which is a combination of Zooom Spain and DK Rentals Spain, achieved revenues of £5 million, a drop of 32 percent on last year, although in local currency the fall was 42 percent. The business just managed to break before exceptional costs, and posted a loss after these are included of £13.4 million, compared to a profit of £1.4 million last year.

Middle East
The Middle East was once again the jewel in Lavendon’s crown, with revenues up by more than 85 percent to £16.9 million. In local currency the revenue growth was a more modest 39 percent.

Operating profits more than doubled to £6.8 million and there were of course no exceptional costs to consider, although the business is still increasing its cost base significantly as it continues to expand.

Capital expenditure for the group was just £4.9 million during the period, compared to £24.6 million in the first half of last year. Cash generation remained strong at levels similar to those of last year.

Lavendon chief executive Kevin Appleton, said: "Market conditions in the traditionally quieter first half have been challenging, but the business traded in line with our revised expectations. The Group was strongly cash generative in the period and our debt reduction plan for the year is on track.”

“As European market leader, the current economic conditions are providing us with an opportunity to grow our market share, which we will look to continue to do in the second half of the year. We will also continue to manage the business tightly, with a focus on generating cash, to ensure we meet our debt reduction plan for the year."

Vertikal Comment

While the Group’s pre tax loss of £40 million in just six months might look shocking, most of it is a non-cash restatement of asset values, some of which could just as easily be written back when the good times return, as they surely will.

It might also pave the way for a more positive result in the second half which will also include a full six months contribution from EPL, the UK truck mounted rental business.

Given the size of the business and the large number of acquisitions- some of which were highly priced- that Lavendon made in the lead up to the current recession, this result - in what is likely to be the low point of a 20 year period - is much better than the headline loss or numbers might suggest.

The business has built a very powerful position within some of Europe's largest markets, and with Germany and France already emerging from the recession, and energy price rises giving a positive boost to the Middle East, it could bounce back quite quickly.

Assuming we see world wide upturn begin to take off next year, Lavendon could have a reasonable 2010 and then really benefit after that as most of the markets it operates in return to growth in what is still a young and growing market.

It will need such a scenario to take root within the next couple of years, as it cannot continue with its current capital expenditure levels much beyond 2010, without building a fleet imbalance problem that will become increasingly difficult to deal with.

It will also need to consider its growth strategies in markets such as France where the company is still only a middle rank contender and needs to grow if it is to follow its strategy elsewhere of being a market leader.

The same is true in Spain, although given the state of that market it will be better served waiting and watching for some bargain basement acquisition opportunities along the lines of the recent EPL deal.

The company is also not active in Holland, one of Europe's largest and most dynamic access markets or eastern/central Europe. While this has not been an issue until now, Dutch based Riwal - possibly the company's greatest rival as an international access rental specialist, is currently dipping its toe in the UK market - the two group's already compete in Spain and Belgium.

Given the considerable time and expense Lavendon has put into consolidatin its home market, the last thing it will want is to have a company like Riwal muscling in and taking advantage of that effort on a greenfield start up basis.

The current slowdown still has some time to run and there will be plenty more opportunities along the way. As the EPL deal proves, Lavendon is well placed to benefit from them as it leverages its advantages. What it also needs to do is to make sure that its disadvantages – that of a big company - do not hamper it too much.

Expect a stronger second half and possibly some more bolt-on distress sale acquisitions along the way.