GROUP OVERVIEW

Differentiated business model delivering continued growth

The first half of the year saw continued progress on our growth strategy and a strong financial performance, with notable growth within our Spanish rental business and for Redde in particular.  While vehicle supply constrained the UK&I rental proposition, the business delivered rental revenue growth of over 4%, reflecting strong demand and growth in ancillary and specialist products and pricing actions.

Our business model focuses on leveraging our significant asset base and industry-leading expertise, delivering a differentiated product offering for customers who are attracted to the breadth and scale of services we can provide in integrated and tailored solutions. We offer a broad range of value-added services and analytics delivering smart mobility solutions for a diverse and growing range of customers.

We utilise prudent levels of leverage, well below that of vehicle rental peers, to acquire vehicles supporting both vehicle rental and incident management service solutions. Our owned vehicle fleet provides significant asset backing for our borrowings, with fleet assets of £1.23bn compared to net debt of £755m at the half year. As we are in a growth phase, we expect to consume cash, investing in tangible assets on which we seek to achieve a return significantly above our cost of capital, whilst maintaining leverage within our 1-2x target range. 

Strength of demand

Across our businesses demand has continued to grow, significantly outstripping supply, from vehicle provision through to accident repair capacity.  We have therefore carefully managed our offering and customer exposures, focusing on supporting key customers. Allocation of supply is to sectors where we see sustainable growth opportunities, attractive margins and minimising risk exposures; vehicle rental utilisation rates also remain high at 91-92%.

Within vehicle rental, the diversity of the customer base provides resilience and multiple sources of demand, with no sector accounting for more than 15% in Northgate UK&I. Our recent specialist vehicle acquisitions FridgeXpress and Blakedale both increased their customer base in the period.  Spain grew across all product offerings, with 25% of new vehicles allocated to new customers, reflecting its growing market presence and improving vehicle supply.

Over 75% of Redde revenues were generated from multi-year contracts with more than 12 months to run and we renewed a number of contracts as well as adding a new specialist customer category to our coverage for a major insurance partner.  Credit hire and repair counterparties now in claims protocol or in discussions for joining is increasing, reflecting the strength of the offering and advantages insurers see in working with a trusted partner and the benefits of a more streamlined and efficient claims process. 

Vehicle supply constraints easing

Overall vehicle supply has been improving; however it remains both geographically and LCV category-specific and also at levels well below historic norms.  Both cars and LCVs are more readily available in Spain, which benefits from being a left-hand drive market and able to tap into pan-European supply systems.  Production volumes are still limited, and the business expanded its OEM range in order to service the strength of demand currently enjoyed. 

The UK&I saw a slight easing of supply liquidity, principally within the replacement car fleet, together with increasing pockets of supply within certain LCV categories. However, there remained a lack of consistent availability, in particular to service the high demand for short wheel base vehicles.  While the trend is positive, new LCV registrations remain at 10-year lows and continue to provide challenges for the UK&I business.

The consequence of limited supply is ongoing strength of LCV residual values in both countries, despite increasing levels of defleeting through our in-house sales channels of Van Monster which includes eAuction.  The average age of the Spanish fleet reduced from its peak in H1 2023 and now stands at 31 months.  The UK&I fleet age is now starting to moderate and this is expected to continue; both have been achieved while maintaining leverage in the midpoint of our range, at 1.6x (FY 2023: 1.6x).

Expanding growth opportunities

The Group continues to see attractive options both organically and inorganically and reviews a broad range of opportunities alongside its focus on fleet growth.  We see a healthy pipeline of potential opportunities and attractive market adjacencies to further expand the potential of our integrated mobility platform.  We have also sought to expand our capacity to better service both insurance partners and fleet customers, with initiatives and enhanced social media campaigns targeted at attracting technicians. 

We opened a new FMG RS facility in Hoddesdon and the development of a further new facility in Bristol is nearing completion together with a new combined Northgate and Auxillis branch in London which adds both workshop and replacement vehicle capacity in a much-improved location. Together with increasing our independent repair network to over 500 body shops in the period, we are expanding and improving our estate to help deliver an ever more responsive and efficient service to customers. 

We have also expanded capacity in Spain in response to strong market conditions, moving our largest workshop onto a two-shift working pattern and opened a new branch in November in the northwestern León province.  An additional service workshop in an underrepresented region has improved capacity and customer service and a further branch opening in the northeast region is scheduled for H2 2024.  

Supporting sustainability

While large-scale EV adoption will remain reliant on improving infrastructure, EV range and payload capability, there is growing demand for EVs and for our EV advisory and consulting services.  The UK&I team is fulfilling its largest single order, for 100 e-LCVs for an energy sector client and in Spain, the business was awarded a Moves II Plan grant by the EU to support the purchase of 500 additional EVs and 3,000 telematics units. Within the business EV charging is now installed in 89 of our UK sites and in most of our Spanish urban sites. 

The Group Sustainability Committee and working groups are looking at ways to further embed emissions reductions within the business, and within management performance targets, to help drive behavioural change.  Our recent employee survey recorded an 8ppt increase in employees feeling valued.  Industry awards are a good reflection of customer service perspectives, with Spain winning a prestigious Dirigentes customer award, Charged EV winning 'Best New Service', and the local council award for 'Contribution to the environment' for the Darlington-based volunteering team. We are shortlisted for a number of other UK awards due to be announced in the current awards season and were recently highly commended for our employee well-being programme at the 2023 FN50 awards.

Strong financial capacity and sustainable shareholder returns

Even after significant investment, leverage has remained at 1.6x and continues to have significant headroom on our committed banking facilities.  The Board has declared an interim dividend of 8.3p per share (H1 2023: 7.5p) to be paid on 12 January 2024 to shareholders on the register as at close of business on 15 December 2023.  The interim dividend represents 50% of the final dividend for the year ended 30 April 2023 in line with previous guidance. 

The current share buyback programme has been underway since August 2023, reflecting the attractive proposition of risk-free enhancement of shareholder returns.  As at the end of November 3 million shares had been acquired at a cost of £10m and are being held in treasury.

FINANCIAL REVIEW

Group Revenue and EBIT

Revenue

Total Group revenue, including vehicle sales, of £911.3m was 30.9% higher than prior period while revenue excluding vehicle sales of £733.8m (H1 2023: £627.6m), was 16.9% higher than the prior period.

Hire revenues increased 6.7% mainly due to pricing actions to address cost inflation; Group VOH was 1.2% lower than the prior period, with continued LCV supply challenges constraining Northgate UK&I, while Northgate Spain was able to grow, reflecting greater availability of new vehicles.  Claims and services revenue growth of 26.5% reflected higher activity including increased volumes from new business wins which have launched since the start of the previous financial year, and an industry-wide rise in chargeable costs reflecting inflation across the supply chain.

Group vehicle sales revenue increased by 158%. This includes £72.1m from sales of ex-Auxillis fleet cars and other non-fleet vehicles.  Excluding those vehicles, there was a 53.2% increase in vehicle sales revenue with a 79.3% increase in the number of vehicles sold, reflecting a change in mix of vehicles sold and some expected softening of LCV residual values compared to the prior period.

EBIT

Statutory EBIT increased 1.6%, while underlying EBIT of £115.0m grew 23.1% compared to the prior period; reflecting an increase in disposal profits, strong rental performance, and higher volumes in Redde.  The statutory EBIT includes a £7.6m credit (H1 2023: £28.2m) for adjustments to depreciation rates and £9.3m (H1 2023: £10.1m) amortisation on acquired intangible assets.

Rental profit increased 10.6% to £59.6m (H1 2023: £53.8m) with a £2.6m increase in Northgate UK&I and an £3.1m increase in Northgate Spain. Redde saw volume growth across its product offerings, resulting in a £5.9m increase in underlying EBIT, including income from associates, to £26.3m (H1 2023: £20.4m).

Total disposal profits for the period of £34.7m were 40.5% higher than the prior period with 18,800 vehicles sold (H1 2023: 7,600). This includes 4,900 sales of ex-Auxillis fleet cars and other non-fleet vehicles through the Northgate UK&I sales channels.  As expected, underlying LCV residual values have softened slightly compared to the prior period but remain higher than historical pre-COVID-19 levels.

Northgate UK&I

Rental revenue grew 4.4% in the period, with continued supply challenges for LCVs offset by growth in ancillary and specialist products alongside carefully managed pricing actions.  The ongoing focus on supporting key clients, targeting the most robust sectors and protecting margin, helped mitigate much of the constraints from lack of fleet supply.  Fleet ageing increased by 0.4 months during the period to 36.5 months, as we looked to support strong customer demand with many businesses keen to retain vehicles at end of current rental terms where replacements are not yet available.

Average VOH at 45,900 was 3,300 down on H1 2023 and the rental fleet was 49,100 at the end of October 2023 compared to 50,800 at the end of April 2023.  Pockets of LCV supply have become increasingly available but supply generally remains well below historic levels for right-hand drive vehicles, reflecting the continued limited number of LCV registrations in the UK which are still running at the low point of the past decade.  Vehicle sales increased to £132.4m as Van Monster have started to sell Auxillis cars once defleeted.  Disposal profits were similar to the prior period, reflecting the combination of strong LCV residual values and softening car residual values.

Ancillary service revenues grew 22% over the prior period, including for accident management support and fleet management services.   Seven EV customer experience days were held throughout calendar 2023 and the largest single EV order to date, for 100 vehicles, was received.  There continues to be structural momentum for fleet transitions to EV, with the business initiating an increasing number of conversations held with corporate customers on supporting their first strategic actions.

Growth investment included the acquisition of FridgeXpress, a leading provider of temperature-controlled LCVs and trailers acquired at the start of the period which has been integrated into our wider sales infrastructure.  The Inverness branch opened in May and will by the end of 2023 be joined by a relocated North London branch which adds new workshop and replacement vehicle capabilities, alongside an enlarged and refreshed vehicle rental facility. 

Financial overview

Northgate UK&I rental profit increased 9.2% to £31.4m (H1 2023: £28.8m) with rental margins 0.7ppt higher at 16.3% (H1 2023: 15.6%). The FY 2023 full year margin was 15.1%.

Disposal revenues increased 163% to £132.4m (H1 2023: £50.3m) reflecting a 135% increase in vehicle sales, including sales of 4,900 Auxillis cars and other non-fleet vehicles and was reflected in the overall PPU outcome of £1,600 (H1 2023: £3,800). Disposal profits remained strong at £18.2m compared to £18.8m in the prior period.

The net impact of the reduction in VOH, higher rental margin and reduced disposal profits was a 4.3% increase in underlying EBIT to £49.6m (H1 2023: £47.5m).

Rental business

Vehicle hire revenue in Northgate UK&I was £192.3m (H1 2023: £184.1m), an increase of 4.4%. A 12.5% increase in average revenue per vehicle reflected fleet mix, applied rate increases, and were offset by a 6.8% reduction in average VOH.

Average VOH of 45,900 was 3,300 lower than the prior period (H1 2023: 49,200) and compares to 48,900 average for FY 2023 with the shortage in supply of new vehicles restricting growth in the period.

Northgate UK&I's minimum term proposition accounted for 41% of average VOH (H1 2023: 38%). The average term of these contracts is approximately three years, providing both improved visibility of future rental revenue and earnings, as well as lower transactional costs.

Rental margin for the period was 16.3% compared to 15.6% in the prior period, and 15.1% in the full year FY 2023.  This was accomplished by increasing rates, partially offset by cost inflation and supported by the acquisition of FridgeXpress.

Management of fleet and vehicle sales

The closing Northgate UK&I rental fleet was 49,100 compared to 50,800 at 30 April 2023. During the period, 4,800 vehicles were purchased and acquired (H1 2023: 2,900) and 7,200 vehicles were de-fleeted (H1 2023: 3,700). The leased and contract hire fleet increased by 600 vehicles including those acquired with FridgeXpress. 

The average age of the fleet at the end of the period was 0.4 months higher than at 30 April 2023 and 2.9 months higher than at 31 October 2022. The fleet composition continues to be actively managed throughout this period of restricted market supply.

A total of 11,600 vehicles were sold in Northgate UK&I during the period, 137% higher than the prior period (H1 2023: 4,900 vehicles) as Van Monster sold 4,900 cars and other non-fleet vehicles including those which had been defleeted from the Redde fleet.  Disposal profits of £18.2m (H1 2023: £18.8m) were broadly in line with the prior period. The underlying LCV PPU was £3,500 compared to £3,800 in the prior period.

Northgate Spain

Rental revenue growth of 10.2% was achieved through a combination of increased VOH up 4.3%, and rate increases in both flex and minimum term offerings to mitigate cost inflation.  The business saw growth across its geographic regions and strong demand from all customer sectors, including for specialist vehicles (up 28%), ancillary services such as telematics and within its service network. 

There was progressive improvement in the supply of new vehicles, helped by a broadening of OEM suppliers, which accounted for a quarter of the new vehicles purchased in the period. After two years of fleet ageing as a consequence of limited supply, the average age of the fleet at the end of October 2023 had reduced by 2 months to 31 months from its October 2022 peak, as the business was able to de-fleet many of its oldest vehicles.  At the same time, PPUs remained strong and contributed to a significant increase in disposal profits.

Rental margin at over 20% remained close to historic highs and reflected the focus on operational efficiencies and managing high utilisation rates.  Growth initiatives included moving the largest workshop to a two-shift programme and continued use of parts recovery for use within the repair workshops.  An increase in workshop headcount and branch staff by over 60 employees reflected the strength of demand for the offering, with revenues from the initiative servicing third party vehicles up 38% on the prior year.  

Investment in capacity expansion included the opening of both a service centre in the south of the country, and a new branch in November 2023 in the northern León province, with a further two branches in development.  The focus on customer service excellence was recently recognised through three industry awards, including a prestigious Dirigentes Business Excellence Award.

Northgate Spain continues to be at the forefront of the low carbon transition, growing its EV and hybrid fleet by over 30% since October 2022. It was awarded a £1.2m grant by the EU (Moves flotas II) to support low carbon initiatives, which will include the purchase of over 500 EVs and telematics installation in over 3,000 vehicles.

Financial overview

Northgate Spain had a strong period with underlying EBIT of £44.7m, an increase of £13.7m or 44.1%, which was a result of 4.3% average VOH growth, strong rental margins of 20.8% compared to 20.4% in the prior period and higher disposal volumes with strong PPU's.

Rental business

Vehicle hire revenue in Northgate Spain was £135.2m (H1 2023: £122.7m), an increase of 10.2% (9.8% in local currency). Average VOH increased 4.3% and closing VOH increased 3.7% to 55,800.

Northgate Spain's minimum term proposition accounted for 35% (H1 2023: 35%) of average VOH. The average term of these contracts is approximately three years, providing visibility of future rental revenue and earnings.

The rental margin of 20.8% was 0.4ppt higher than the prior period from pricing increases and good management of direct costs.

The impact of the increase in hire revenue and rental margin resulted in rental profit increasing 12.3% to £28.1m (H1 2023: £25.1m).

Management of fleet and vehicle sales

The closing Northgate Spain rental fleet amounted to 63,300 compared to 61,400 vehicles at 30 April 2023.  During the period 9,500 vehicles were purchased (H1 2023: 5,700) and 7,600 vehicles were de-fleeted (H1 2023: 2,700 vehicles). The average age of the fleet at the end of the period was 2.1 months lower than at the same time last year.  This was due to replacement of older vehicles with improved market supply.

A total of 7,200 vehicles were sold in Northgate Spain during the period, 154% higher than prior period as the vehicle supply eased.

Disposal profits of £16.5m (H1 2023: £5.9m) increased 178% due to the increase volume of sales and an increase in PPU to £2,300 (H1 2023: £2,100) which resulted from a change in mix of vehicles sold and strong residual values.

Redde

Claims and services revenue increased 25.7%, with both increased volumes from existing customers together with contributions from new contracts launched since the start of the previous financial year, supported by a 12% increase in industry approved repair rates reflecting continued labour shortages.  Vehicle sales of £58.8m reflect recycling of the car fleet, as vehicle supply improved, the majority of which is sold through Van Monster.  EBIT margin of 6.3% was broadly in line with prior period.

Within the period, the business confirmed extensions to a number of multi-year contracts, expanded its service offering to one of its largest insurance partners with the addition of repair capacity support to a new specialist customer segment.  It also managed the go-live process in September 2023 for a contract with one of the largest leasing companies, Lex Autolease, which outsourced its accident management requirements in a multi-service contract for the first time. 

Externally owned fleet vehicles covered by our repair and claims management services increased in number to over 800,000, equally split between insurer and other fleets. There is a robust pipeline of opportunities and contract discussions across the business as existing and potential customers see the benefit of working with a trusted and expert partner who can demonstrate significant operational efficiency benefits at a time of high claims inflation. 

Over 60% of credit hire and repair counterparties (by claims volume) now operate within protocol arrangements as they see the benefits of greater process efficiency with further significant partners in discussions; this will improve cash collection and working capital which will also be helped by the settlement of historic claims at the point insurers enter protocol arrangements.

The business continues to invest in its people with a number of initiatives and social media campaigns targeted on attracting technicians, alongside enhanced training and expansion of our apprentice scheme, where there are now over 135 apprentices within the business. Repair capacity was also expanded through the investment in FMG RS's first greenfield site in Hoddesdon, and a new Bristol facility commenced at the start of H2 2024. This investment reflects the strong customer demand for repair capacity and our appetite for supporting expansion whether through organic growth or acquisition.

Financial overview

During the period EBIT has increased by 28.7% to £26.3m, with growth in repair and claims management services and credit repair services in the period.

Revenue and profit

Revenue for the period (excluding vehicle sales) increased 25.7% to £416.6m (H1 2023: £331.4m) reflecting the full impact of recent contract wins and the volume mix in repair and claims management services. These favourable variances were offset by a reduction in credit hire length in comparison to the prior period. The prior period was affected by macro challenges in supply chains for parts and labour which has begun to return to normal.

Gross margin of 19.7% declined 1.5ppt (H1 2023: 21.2%) due to volume mix within the business. 

EBIT for the period increased 28.7% to £26.3m (H1 2023: £20.4m) reflecting the increased revenues earnt through credit repair services and repair and claims management services.

Management of fleet

The total fleet in Redde closed the period at 16,900 vehicles, down from 18,500 at 30 April 2023 with the lower fleet holding reflecting eased demand from reduced credit hire lengths and seasonality. 

The average fleet age at the end of the period was 14 months (FY 2023: 15 months) reflecting the lower fleet holding period than in the UK&I and Spain businesses due to the different composition of the fleet and usage of those vehicles.

The Redde fleet operates a hybrid financing approach including ownership, contract hire and, during peak periods, cross-hiring when needed. 

Group PBT and EPS

Profit before taxation

Underlying PBT was 18.3% higher than prior period reflecting the higher EBIT across the Group. Statutory PBT was 4.4% lower including a £7.6m credit (H1 2023: £28.2m) relating to adjustments to depreciation rates on certain fleet as explained last year and further below.

Exceptional items

During the period, there were no items that were recognised as exceptional items (H1 2023: £nil).

Amortisation of acquired intangibles and adjustments to underlying depreciation charges are not exceptional items as they are recurring.  However, these items are excluded from underlying results in order to provide a better comparison of performance of the Group. The total amortisation of acquired intangibles charged in the period was £9.3m (H1 2023: £10.1m).

Depreciation rate changes

As explained at the FY 2023 year end, residual values have increased significantly over recent years due to the disruption of new vehicle supply which has increased demand for used vehicles. Up to April 2022, no changes had been made to depreciation rates on existing fleet vehicles as the extent and longevity of this buoyancy in residual values remained uncertain. However, it continued for longer than anticipated and uncertainty remains over how long it will take for supply of new and used vehicles to return to a more normal level. 

For this reason, there are a number of vehicles on our fleet where the depreciated book value is below or very close to the expected residual value at disposal. In line with the requirements of accounting standards, a decision was made to reduce depreciation rates from 1 May 2022 on certain vehicles remaining on the fleet which were purchased before FY 2021.

The total adjustment made to underlying depreciation in the period was a credit of £7.6m comprising £23.6m reduced depreciation offset by £15.9m reduced disposal profits.  The adjustment remains materially in line with expectations set out in the FY 2023 annual report.

Interest

Net finance charges increased to £15.9m (H1 2023: £9.7m) due to an increased average cost of borrowing and higher average debt compared to the prior period. The net cash interest charge for the period was £15.1m (H1 2023: £8.6m).

At 31 October 2023 56% of borrowings were held in fixed rate instruments.

Dividend

The Board has declared an interim dividend of 8.3p per share (H1 2023: 7.5p) to be paid on 12 January 2024 to shareholders on the register as at close of business on 15 December 2023.

The interim dividend represents 50% of the final dividend for the year ended 30 April 2023 in line with previous guidance.

Share buyback programme

As previously announced, the Group completed its share buyback programme in December 2022, where a total of 16,877,571 ordinary shares were purchased and held for a total consideration of £60.5m. The Group announced a further share buyback programme commencing in August 2023 for up to a maximum aggregate consideration of £30m.

During the period to 31 October 2023, 2,537,500 shares were purchased for a total consideration of £8.2m. 

Business combinations

In May 2023 the Group acquired 100% of the equity capital of FridgeXpress (UK) Limited for provisional consideration of £5.0m. The provisional fair value of net assets acquired was £2.9m resulting in the recognition of £2.1m of goodwill.

Group cash flow

Steady state cash generation

Steady state cash generation remained strong at £81.4m (H1 2023: £121.2m), driven by underlying EBIT performance, offset by an increase in net replacement capex and principal lease payments as improvements in vehicle supply enabled replacement of some older fleet.

Net capital expenditure

Net capital expenditure decreased by £17.0m to £104.8m (H1 2023: £121.8m) due to a £50.4m increase in net replacement capex¹⁰ and a £67.4m decrease in growth capex¹⁰.

Net replacement capex was £103.5m (H1 2023: £53.1m), £50.4m higher than the prior period as the fleet age was increasing in the prior period but has been reduced in the current period, mainly in Spain where there have been more vehicles available to do this.  The current period includes c.£25m of capex in order to reduce the age of the fleet during the period.

Growth capex¹⁰ of £1.3m (H1 2023: £68.7m) included £35.9m outflow to grow the fleet size in Spain and £34.6m inflow in Northgate UK&I and Redde where the fleet size was reduced due to short supply of vehicles and reduced credit hire lengths and seasonality.

Lease principal payments of £35.1m (H1 2023: £24.6m) increased by £10.5m due to a larger leased fleet size and final payments on legacy hire purchase contracts.   

Free cash flow

Free cash flow decreased by £9.4m to an outflow of £7.3m (H1 2023: £2.1m inflow).

Free cash flow is stated after taking account of investments that have been made in the year which will return future cash flow at a sustainable rate of return ahead of our cost of capital. This includes investment in net replacement capex of £103.5m, capex lease payments of £35.2m, growth capex of £1.3m, the acquisition of FridgeXpress of £4.1m (net of cash acquired), the share buyback programme of £8.2m and working capital in Redde. 

Net cash consumed

Net cash consumed of £17.7m (H1 2023: £48.8m), excluding principal lease payments of £35.1m (H1 2023: £24.6m), comprises free cash flow, £37.3m of dividends paid (H1 2023: £35.0m) and £8.2m (H1 2023: £40.5m) for treasury shares purchased as part of the previously announced buyback programme. Leverage has been maintained at 1.6x (H1 2023: 1.6x).

Net debt

Net debt reconciles as follows:

Closing net debt was £60.6m higher than opening net debt, driven by net cash consumption of £17.7m and other non-cash items of £44.8m, consisting primarily of new leases acquired. The foreign exchange impact on net debt was a £1.9m decrease.  The net book value of fleet on the balance sheet at 31 October 2023 was £1.23bn (H1 2023: £1.09bn).