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City News: Good news from HSS Catherine Stratton was one of a select number of analysts invited to venture capitalist 3i’s offices to discuss the 2006 results from HSS. The
indication
of
recovery
at
HSS
is
very
good
news,
not
just
for
this
major
player
in
our
market,
but
also
for
tool
hire
as
a
whole.
Despite
its
overall
buoyancy,
recent
years
have
seen
several
leading
companies
like
HSS,
A-Plant,
Hewden
and
Hire
Station
all
struggling
and,
as
a
consequence,
undertaking
varying
degrees
of
re-organisation;
now
most
are
seeing
a
revival
in
their
fortunes.
It is, however, HSS that merits our full attention this month. The company felt it had such a good story to tell that it called a meeting of interested parties to announce its 2006 results and present its annual accounts, which were prepared on similar disclosure lines to those of a quoted company. This is highly unusual for a venture capital financed company and clearly had the backing of HSS’ financiers, 3i, in whose offices the gathering was held. There are pressures on venture capitalists to be more open about their investments; so 3i may well have welcomed the HSS initiative, but, most importantly, the occasion was one when HSS clearly told its competitors that it is now back not just on the recovery track, but beginning to move ahead. ‘Exiting’ HSS Last summer there were rumours that 3i was looking to ‘exit’ its investment in HSS, which had been the subject of a £143m Management Buy In (MBI) in January 2004; there followed the replacement of Paul Nolan as Chief Executive by Chris Davies last August. (Readers might be interested to know that the notes to the 2006 accounts state that the Employee Benefit Trust acquired £6.1m shares from Paul Nolan when he left last September). Notes: Operating profit is stated after exceptional operating expenses of £3,848,000 (2005: £2,681,000); the profit before tax is stated after the exceptional operating expenses and exceptional finance costs of £587,000 (2005: nil). The exceptional operating expenses relate to the re-shaping of the branch network, while finance costs relate to re-financing- see text. Whether or not there was real substance to the ‘For sale’ rumours, all the signs are that 3i has renewed confidence in HSS, which in February completed a re-financing exercise that extended its Senior Debt facility by £15m to £133m and, at the same time, the group re-negotiated the terms of an existing £15m acquisition facility to extend its use to include capital investment. The first two or three years of a MBI are always difficult because of the high level of gearing; it is particularly tricky for capital intensive companies, such as hirers, where the problems may have been exacerbated by the previous owners’ reluctance to invest further capital when they are about to sell. The HSS 2006 accounts show that, in 2004, its capital expenditure of £9.3m was just to maintain fleet investment levels; while the following year it invested £11m for growth in addition to £15m maintenance expenditure. Last year, however, saw a decline to £13.4m on maintenance with no growth expenditure. The improved debt facilities mean an expansion this year with the company forecasting growth expenditure of £10m, together with a £17.5m maintenance spend. This indicates the growing confidence of both the HSS management and its financiers. Re-configuring the business The past three years at HSS have seen a significant re-configuration of the business and one that, perhaps, has not been entirely appreciated by the wider tool hire market. Historically, HSS has been viewed as a high street presence catering primarily for the DIY market and small tradesmen but, for a variety of reasons including the availability of cheap tools for direct purchase and the difficulty of high street parking, HSS has had to re-focus its activities. This has inevitably led to a considerable and continuing re-configuration of its property portfolio with a withdrawal from small high street premises to much larger strategically sited locations - the most recent example being at Edinburgh Airport, with two more major openings imminent at Park Royal in west London and in Sheffield. As many of HSS’ high street properties were leasehold, the company has been able to assign the leases in most cases. Thus, HSS now has a national network of approximately 300 locations, compared with a peak of around 400, prior to the MBI. The past year saw 26 closures. The network is now organised on a ‘hub and spoke’ basis with Premier Centres providing a full service and acting as suppliers to the smaller branches. Such a major re-organisation makes it difficult to fully assess HSS’ performance, but the company says that its 2006 ‘like-for-like’ turnover was up 10% on the previous year. Chief Executive Chris Davies says that this has been calculated on the usual basis of branches open at the start and end of the period. The
big
changes
in
its
property
portfolio
reflect
the
company’s
HSS describes itself as “moving beyond a traditional hire contract”. Chris Davies believes “the route to success is a genuine service company that understands customers’ needs and meets them. It is not about individual hire rates, but a partnership which takes out cost for our customer and allows us to make the profit to continue to grow our business.” • Other news in brief • Speedy has issued a trading statement covering the first eleven months of its financial year, which ended on 31 March; its preliminary results will be announced on 23 May. Speedy states that revenue for the period increased 34%. Revenues in the Equipment Division were up by 58%, helped by the acquisitions of LCH Generators and Lifting Gear Hire. Tool Hire saw a revenue advance of 14%, with ‘like-for-like’ up 7.2%. Speedy states that its “markets remain solid” and it continues “to win market share”. • Vp, which has the same accounting year as Speedy, has also issued a trading statement ahead of its results on 7 June. The company says it has enjoyed “a year of substantial growth” with trading in line with the Board’s expectations. It goes on to describe the outlook as “positive” as the markets Vp serves are in “good health with solid growth prospects”. The statement concludes with an expectation of making “further tangible progress in the forthcoming financial year”. More recently, Vp has announced that its Hire Station subsidiary has acquired Cool Customers, an Alfreton-based company specialising in the hire and sale of air conditioning units, dryers, heaters and chillers, for £1.0m cash. Cool Customers, which has traded for ten years, has a wide range of customers including the disaster recovery market and had revenues of £1.2m in the year ended 31 March 2006. Its business will be integrated into, and its management transferred to, Hire Station’s Climate Hire operation, which offers a range of cooling, heating and environmental products. The deal is described “an important stepping stone in Hire Station’s plans to accelerate the development of Climate Hire”. • Executive Hire News › Archives › May 2007 › City News › Good news from HSS
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