Northgate, which specialises in light commercial vehicle hire both here and in Spain, has introduced new initiatives in an attempt to mitigate the impact of tumbling residual van values.
The company, which has a UK fleet of over 65,000 LCVs, said in its interim management statement, which was published last week, that “the used vehicle market has experienced a sharp decline, with reductions in residual values of between 5% and 10%.
"This will be reflected in a higher depreciation charge compared to the prior year”.
As a result the company issued a profits warning to its investors.
The company now plans to reduce its fleet by about 200 vehicles and keep the remaining vans for longer, increasing their lifespan past the typical 30-month defleet age.
“We will age the fleet by a few months,” confirmed chief executive, Steve Smith, who said Northgate also aims to increase utilisation above 90%.
“We will be running the business strictly for cash – we will become as efficient as possible and aim for maximum utilisation.”
There are several factors hitting LCV residuals, the most obvious is that supply is far outstripping demand.
“The outlook for the rest of the year remains uncertain, albeit the current price falls are generally commensurate with seasonal patterns,” said Alex Wright, sales director, commercial vehicles, Manheim Auctions.
“It is likely that a combination of high stock levels and continued economic instability will serve to keep pressure on prices, as trade buyers look to only replace sold stock, rather than just speculatively invest.”
Northgate also confirmed that it has experienced high levels of 'churn' with customers returning their rental vehicles more frequently.
“Our existing customers are less busy and so are returning the vehicles to us,” explained Mr Smith.
“Therefore we have to find new customers and that is what we are seeking to achieve.”
The management statement confirmed there has already been some success in this area: “We have maintained hire rates throughout the period.”
In Spain, where residual LCV values have fallen by 10%, the company stated that it may “not achieve further fleet growth in the coming months”.
Instead it is concentrating on developing its used van export capability.
Already this year, exports represent 23% of its total used van disposals compared to just 4% in the last financial year.
“We need to increase export volumes further in the coming months,” it said.
Looking to the future, the company said that the trading outlook is poor.
However, while likening the current conditions to those last seen in the UK in 1990/91, the company said it remains focused on the positive benefits such challenging times can bring.
“Our belief is that the economic environment we are operating in is similar to that last seen in the UK in 1990/91.
"At that time…the recession took hold and capital became increasingly constrained, causing companies to look at rental as an option for acquiring their fleets.
"This had a longer-term structural benefit in growing the rental market and, as a direct result, Northgate entered a period of sustained growth.”
Also helping the company is the successful renewal and re-profiling of the majority of its banking facilities.
£769m of its total facilities were due to mature by December 2009. Now only £79m will mature by this date.
What the experts say
Much of Northgate’s current problems stem from the poor performance of LCV residuals. Here’s what the experts say about the used van market.
“Last month’s brief positive sentiments have flown out of the window with retail dealers now having a tough time, although sentiment among LCV dealers has not nosedived. The next two months will be crucial.
“Looking forward to next year, there is some cautious optimism. But really what is happening is values are falling back to late 2006, which is before the supply issues with new LCVs came into play last year.
“But there is clear evidence of traders reducing stock levels and only offering serious bids for the cleanest vehicles.
There is over-supply of certain models, particularly the Combo, Ducato, Relay, Master, Movano and Vivaro.” - Ken Brown, CAP current valuation manager, light commercial.
“The marketplace is proving particularly difficult for rental and leasing companies with a lot of late year stock to shift, yet things are not looking quite as bad as some had feared. At least deals are being struck, albeit at prices that are well below those seen last year.
“Providing consumer confidence does not deteriorate much further, and the volumes of vans coming up for disposal are properly managed, it seems that the threat of plummeting prices in a dormant market has, for the time being, been averted,” - George Alexander, editor Glass’s Guide to Commercial Vehicles Values.
“With supply now outstripping demand, auction conversion rates have fallen back. Across the sector, August's overall average sale prices fell against July by 4.9% to £2794, which was in line with seasonal expectations.
The outlook for the rest of the year remains uncertain, albeit the current price falls are generally commensurate with seasonal patterns. This may indicate a level of stability arising, but the big proviso will of course be the dependency on continued activity in the retail market. It is likely that a combination of high stock levels and continued economic instability will serve to keep pressure on prices, as trade buyers look to only replace sold stock, rather than just speculatively invest.
The positive message for vendors is that there is still demand in the market,” - Alex Wright, sales director, commercial vehicles, Manheim Auctions.
“While there continues to be pressure in the used van market as average values fall across the board, it was notable the rate of decline slowed in August. The average value across all van sectors dropped to £3,214 in August, a fall of just £11 on the figure recorded in July.
“Compare this to monthly falls of nearly £200 earlier in the year and it seems the market might have found its level. Early signs are that demand has picked up in September and we may even see average monthly values climbing.
“So it is by no means all bad news and clean, straight panel vans still find a ready audience. The late-plate market is somewhat less buoyant than it was, now that many of the delivery problems on new vehicles have eased, but the best stock always sells well whatever the market condition,” - Duncan Ward business development manager - commercial vehicles