Earnings Call: Q1 2019

Sep 11, 2018

Good morning, and welcome to the Ashtead Group Q1 Results Call. With me this morning is our Group Finance Director, Michael Pratt and Group Chief Operating Officer, Brendan Horgan. As always, this is one of our shorter updates. So after a brief explanation of the financial performance and operational trends we are seeing in the market, we'll move on swiftly to Q and A. So let me begin with a few highlights from the Q1. So clearly, it's been another strong quarter with pleasing growth in both revenue and profitability. We continue to execute well in support of markets, and this combined with the benefits of tax changes and the share buyback resulted in a very healthy 46% increase in our earnings per share. We made further progress on our strategic objectives with 19 greenfields opened in the U. S. And the number of acquisitions completed in or just after the quarter, which are detailed in this morning's press release. Cover a couple of these deals in a moment as I think they highlight the range of opportunities available to us to both grow and diversify the business. Having committed £300,000,000 to date, you will have also seen from today's press release that we have increased and extended the share buyback program, which I'll cover in more detail later. This level of buyback allows us to continue to focus on investment in organic growth and bolt on M and A whilst maintaining leverage within our target range of 1.5 to 2 times EBITDA. So once again, a consistent execution of our low stated capital allocation priorities and an adherence to responsible growth. The business continues to perform well with support of end markets and a clear operational strategy for further growth. So with the benefit of weaker sterling, we now anticipate results ahead of our original expectations, and we can look to the medium term with confidence. So with that, I'll now hand over to Michael to cover the financial detail for the quarter. Thanks, Jeff, and good morning. The group's Q1 results are shown on Slide 5. And as Jeff said, it's been an encouraging start the year with strong growth in revenue and profitability. The group's rental revenue increased 19% on a constant currency basis. Margins were broadly flat despite opening 20 greenfields and completing 5 acquisitions in the quarter. The EBITDA margin was 48 percent and the operating profit margin 30% in the quarter. As a result, our underlying pre tax profit was 286,000,000 pounds an increase of 23% at constant currency. The more significant 46% increase in earnings per share reflects the benefit of the lower U. S. Tax rate, resulting in an overall effective tax rate of 24% compared with 34% a year ago. Turning to the businesses. Slide 6 shows Sunbelt U. S. 1st quarter results. Rental and related revenue was up 18% as Sunbelt continued to benefit from generally strong end markets. The operational efficiencies of mature stores offset the drag effect of new stores, thus maintaining the EBITDA margin of 51%. As a result, operating profit improved by 22% in the quarter at a 33% margin. Turning now to Sunbelt in Canada. Slide 7 illustrates how the scale of our operations in Canada was transformed by the acquisition of CRS last year. As a result, year over year comparisons are not particularly meaningful. In absolute terms, Canada contributed revenue of $77,000,000 and an operating profit of $40,000,000 in the quarter. As we discussed in June, we expect EBITDA margins of around 40% and operating profit margins of around 20% for the Canadian business, absent the effects of M and A. Consistent with these expectations, Q1 margins were 37% for EBITDA and 19% for operating profit, which Jeff will comment on later. Turning now to Slide 8, A Plant's rental and related revenue grew 3%. This reflects a 5% increase in pure rental revenue, but a lower rate of growth in ancillary revenue. The market in the UK remains relatively flat and competitive. As a result, the EBITDA margin remained at 38% for the quarter, while the operating profit margin was 18%. Slide 9 updates our debt and leverage position at 31 July. As expected, net debt increased in the quarter as we continued to invest in fleet and bolt on acquisitions and continued our buyback program. At the end of the period, our leverage ratio was towards the lower end of our target range of 1.6x at 1.6x EBITDA. And as shown on the bottom right, there's a healthy gap between the value of our net debt and secondhand value of our fleet. Both our leverage and well invested fleet will continue to provide a high degree of flexibility and security as we go forward. The structure of our debt is shown on Slide 10. We said previously that the strong balance sheet gives us competitive advantage and positions us well for the medium term. During the quarter, we took advantage of good debt markets to strengthen our balance sheet position further, extending our debt maturities and increasing our flexibility. We issued $600,000,000 of 5.25 percent bonds, which mature into 2026, providing access to more capital for a longer period of time. A key feature of our debt is the profile. We have no imminent maturities, and the extended profile is smooth with no large individual refinancing needs. Our debt reserves are committed for an average of 6 years at a weighted average cost of less than 5%. And with that, I'll hand back to Jeff. Thanks, Michael. So let's start our operational review by first looking at the revenue growth in Sunbelt. So as you can see from the chart on Page 12, it's been a good start to the year with organic growth particularly strong at 17%. And mature stores continue to perform well, as do the newer stores we've opened both this year and last year. Both on growth is lagging behind our original plan, but this is just a timing issue, and in particular, the Mabey deal which we completed at the end of the quarter and the interstate deal which came just after were expected to close earlier. We remain committed to our strategy and we've got a good pipeline, so we anticipate further developments during the year. I would just stress that whilst this is a very strong performance versus our full year forecast, there are much harder comps ahead from September as we lack hurricane activity. So remember, there was $100,000,000 of revenue in the final 8 months of last year, which may or may not reoccur this year. Notwithstanding the anomalies of hurricanes, the overall trends remain good. Rates continue to tick positive in the plus 2% to 3% range, and the mix continues to trend towards longer rental periods, reflecting both the strength of the market and the changing habits of our customers as they continue to switch to rental. There was a 2% improvement in yield as we balance out rates, contract length and product mix. As I said before, I'm not sure this yield metric tells you a lot in current conditions, but we continue to report the number for what it's worth. What is notable, however, is the continuation of our strong margins, highlighting the strength of the underlying business given the inevitable drag in the quarter from 19 Greenfields and the integration of 11 acquired stores. Most encouraging is the continued improvement in ROI, reflecting our better rates and fleet profile. This is also reflected in dollar utilization, which has improved to 55% from 53% last year and is detailed in the press release. So as I said at the start, some really encouraging trends so early in the new financial year. That's about it for the performance in the quarter in the U. S, but on Pages 1415, I just want to demonstrate how we continue to implement our 2021 strategy. We completed 2 deals in the late July early August, which demonstrated different ways that we can continue to develop the business. So let's start with Mabey, which is a bridgehead into 2 specialty markets that have significant growth potential, ground protection and trench shoring. Ground protection, as you know, is a business where we are the market leader in the U. K. And where we've been growing our presence in the U. S. From a small start. It's a market which is growing and has significant cross selling potential, particularly in markets such as transmissions, entertainment and oil and gas. This deal significantly increases our fleet size in this product, expands our geographic coverage and brings a strong management team. It's a very obvious platform for further national growth. Trenchoring is an area where we are aware that others have a strong position we've been a bit of a player in a highly profitable $1,000,000,000 plus rental market. What we've been looking for was a credible in house engineering capability to form the platform for the growth and roll up strategy. Mabry with 8 locations focused in this field and a 1st class reputation, particularly for more complex groundworks provides us. And therefore, we anticipate further expansion in this area, both organically and through further bolt on M and A. Therefore, excited about the midterm potential for Mabey, a business which we first approached many years ago. Thank you. Well, hello again. I'm glad you've been able to rejoin us. Over recent years, we've had a number of firsts at Ashtead, but that's certainly the first time we've had to evacuate during a call. Look, I will kick off from where we left off, which I think is Page 15. We've got 3 or 4 slides to pass through, and then we'll, as quickly as we can, get on to Q and A. So starting again on Page 15, where we're looking at the recent acquisition of Interstate, limiting. This is a very obvious geographic infill. With a market leader in a small geography, with a narrow product range, where it's very clear that we can fill out the cluster and cross sell. So this enhanced cluster will generate all the market share and margin benefits we've just discussed before, most recently at the Capital Markets Day. So it's a well worn path for us. If you look at the map, Baltimore and Washington, D. C, are geographies where we've had clusters and significant market share for some time. So it's always been a plan to move north and east into the significant markets of Philadelphia and New York. And you recall the acquisition of Pride that many of you visited recently, which started the ball rolling in New York, and we believe interstate will have a similar impact in both Philadelphia and the New York market. So again, it's recognized the importance of buying a dominant player in its geography and products and then leveraging our breadth and scale to enhance market share and margins. So this is a deal that fits all of those criteria. Moving on to Canada on Page 16, and a lot of good progress here also. The business continues to have strong underlying growth, as you can see from the chart. And we've completed 2 further acquisitions in the quarter. So good progress in a market where we still have low market share and lots of opportunity. There's a bit of confusion at the year end around the margins in Canada. So let me just try and explain some of this as the trends are positive. We continue to have a lot of moving parts as we develop Canada, and therefore, it's easy to get distortions when you're dealing with small numbers in a new business. Results in Q1 are exactly in line with what we said at the year end, And we need to adjust for fleet disposals from acquisitions where we have the revenue, but no gain on sale in these assets because these assets are fair valued on acquisition, which is what we've how we've done it for some time now. When you make this adjustment, the EBITDA margins are 39% and the EBITDA margins are 20%, the key being obviously the EBITA margin. Importantly, in terms of long term margin development, dollar utilization is a very healthy 59%. So in summary, the 40% EBITDA and 20% EBITDA margins for Canada that we guided to at the year end are clearly very achievable even with high activity levels and a little noise from M and A. As we said at the year end, it's very much a year of consolidation at A Plant, as we show here on Page 17. And as Michael detailed earlier, it was a good stop to see flat profits year on year after what was a difficult period towards the end of last year. As you can see, there remains volume opportunity, but there's also rate pressure, which we anticipate as well. So focus on costs, fleet spend and physical utilization will deliver a solid performance after a good start to the year, but there's no easy wins in the current market. But I do remain hopeful of year on year profit growth over the balance of the year. Moving on to capital allocation, and our priorities remain unchanged. You can see from Page 18 here that our priority remains investment in the business through both fleet spend and bolt on M and A. And after this, we'll return to shareholders always mindful of our leverage targets. So with this reminder, we determined that it's appropriate to increase and extend our share buyback program. So against the original £500,000,000 to £1,000,000,000 program ending in April 2019, where we most recently guided to £600,000,000 our outlay will now be £675,000,000 In addition, for the year to April 2020, we will complete a further buyback of no less than £500,000,000 We keep this program under constant review, and we'll update on both the scale and duration of the program where appropriate. But the key here is that with our strong margins and cash generation, we see the buyback program as an integral part of our medium term strategy to enhance shareholder value. To summarize then, it's only the Q1, and there will be some unusual hurricane related comps to deal with in the rest of the year, but there is no doubt that this is an encouraging start to the year. Strategically, we continue to execute well on our 2021 plan with good same store growth, a number of greenfields and some exciting bolt on M and A. Importantly, this growth supported by very healthy margins and cash generation, which provides us with a range of options to further enhance shareholder value. The bond which we successfully completed in July gives us a balance sheet that provides a long term platform for further responsible growth. We've also increased and extended the share buyback program. So finally then, our business is performing well. We've got a positive outlook, and we continue to benefit from weaker sterling. And as a consequence, we expect full year results to be ahead of our original expectations, and we look to the medium term with confidence. And so with that, I'll hand over to the operator, and let's get on to Q and A. Thank Our first question comes from the line of Rajesh Kumar from HSBC. Please go ahead. Your line is now open. Hi, good morning, Jeff. Just looking at your share buyback guidance this morning, How are you thinking about capital allocation, especially given that United Rentals have just done a large acquisition, which potentially forces them to limit future M and A and look inwards. So do you think you have got an opportunity in the U. S? Or will it be like before focused on expanding Canada and a bit in the U. S? Yes. Look, I don't think the proposed acquisition of BlueLine by United changes our capital allocation at all. As we've said many times and is laid out on the chart there, our priority remains organic growth, and that will always be our priority. So if market opportunities present themselves, we will very readily spend more on food growth. And so if market share gains are available in the U. S, we will certainly go after them. And I think the whole point of the scale of the buybacks that we have proposed, even working within our leverage guidance of 1.5 to 2 times, there's still plenty of flex in there for incremental CapEx and there's flex in there for incremental M and A. So we're trying to pick a sensible path where we leave those options open to us, but also recognizing the benefit of share buybacks when we've got such strong cash generation from very strong margin. So it doesn't change anything. There's the ability to still do a little bit more in all categories. And do you think that with the increased KO, they may have an advantage over you when it comes to procurement? Or is the advantage not differentiable at your scale? I don't think it. I think when you get to this stage when you've got 2 very significant players like ourselves and United, I think it is highly unlikely that there's any significant opportunities for bigger purchasing leverage. And I think clearly, the likes of ourselves at United and some of the smaller players, there is we have some advantage, but I don't think this makes a whole heap of difference. What you also got to look at is, what are they buying? And there's going to be some significant fleet reconfiguration. And therefore, is that actually going to be significantly more organic spend than we put in? And I think that answer to that has historically been known. Understood. Thank you very much. Thank you. Our next question comes from the line of Bilal Aziz, UBS. Please go ahead. Your line is now open. Morning, all. Sorry to disappoint. It's actually Rory McKenzie at UBS. You're not in disguise, are you? I promise you, I wasn't hiding. I just arrived late to buy in. So kindly help me out. No trickery, I promise. So questions then. Firstly, on yield. Do you think that the headwind from mix of more monthly rentals is starting to stabilize? It looks more stable year on year in Q1 than in Q4, for example. Yes. I think there's a chance that's the case. There's still the look, there's been a big shift. Could 72 go to 73? Yes. But relative to the scale of headwinds we've had in most recent years, that's unlikely. It will depend on all kinds of things like weather, quantity of hurricanes. So in terms of precision, I'm not swearing that there will never be further headwinds from mix, but you're right, the scale is likely to mitigate from now on. Okay, great. And actually, I did want to ask about the comparators ahead and what we should expect. Of course, we can't forecast hurricanes and weather even as Florence appears to be heading to North Carolina. But can you remind us on the phasing of the comps from last year and what it might mean this year? Yes. Look, for the 1st 4 months, it's sort of it's really if you look at it, it was what, 25th September, Brendan, when August 26th was the first, then September 10 was number 2. Then September was number 2. So basically, we started seeing the impact in September. So if we look at our August year on year revenue growth, it was still around that sort of 19%, 20% level that we've seen all through the Q1. So we're still seeing it from month 2 of quarter 2. We had $100,000,000 of revenue, which we sort of allocated to the hurricane activity. And the question is, what will it be and how will we lap it thereafter? So the biggest quarter was quarter 2. And then it sort of it sort of trickled down into quarter 4. But even quarter 4, there was $15,000,000 to $20,000,000 of revenue. So we'll have an impact. Do we know if Florence is going to hit or not hit? I can give you some color on that. I mean, will we have the storm center open since Sunday? Yes, we have. I mean, as you would expect, we have that very early activity before the storms, which is the first responders and the municipal agents, if you will, state and city preparing for what could be a landing, but we're still far away from being sure at all. 1, if it lands and 2, where it lands, I mean, it looks like it's reasonable it has a reasonable degree of certainty, but time will tell. And then of course, it's a matter of what the extent of that would be. But I think Rory, if you look at it, you'll notice on Slide 23, that would have our time utilization both as our general equipment business and our specialty business. And you'll see there where you see the specialty business lapping the hurricane activity that we had a year ago, albeit very strong underlying utilization. Can see some of those comps that we're going to decline in the months to come. Yes. Great. That's helpful. And then just lastly, if I may. The drop in rates around 50% same as it is in Q4. Do you still expect it to improve into the low 50s this year overall? And I guess it kind of relates to the weather, obviously, the cost comp, it almost gets easier on your other side. Yes. Look, I mean, it depends on a whole bunch of things. It will depend on the precise mix across the weather, but also the quantity of greenfields and bolt on M and A. Because of 19 greenfields in the quarter is a bunch of greenfields. Already in the Q2, well, we've done 7 or 8. So there's a high greenfield activity right now. If you look at the business, like the size of Mabry, within total 10 locations, that's there's going to be a fair bit of integration there, too. So it's going to be 50 percent to 51 percent, 52 percent. It's going to be in that area precisely will as much depend on what happens with the greenfields and the bolt ons and the one off costs as it does to the underlying pace of margin improvement in mature stores. Okay, great. Very helpful as always. Thank you guys. Thanks, Rory. Thank you. Our next question comes from the line of Andy Murphy from Merrill Lynch. Please go ahead. Your line is now open. Thank you. Good morning, gentlemen. I've got a few. I just want to kick off just following up on the margin question. In the U. S, EBITDA margins came down a little bit, EBIT margins were up a little bit. So can you just talk us through the drivers there of what is really on an underlying basis driving those margins up and down? Well, you're into roundings, aren't you, on EBITDA? And as we say, you've got the one off costs, etcetera, on integration, etcetera. Underlying margins are still consistent on a positive trajectory, but when you've got all the greenfield, etcetera, it impacts it. In the past, where when you get into a position where you're getting good rate, etcetera, and the inflationary impact on fleet has dropped away, you haven't got the drag from depreciation. So your fleet is able to generate, as you would, the positive rates, etcetera. You're getting better dollar utilization, which then flows through. So you've got your drop through, but you haven't got depreciation and fee tax already more. So you end up, just the math works you through to an EBITA margin, which moves forward slightly. But there's just noise you're into the roundings, it's just noise around the numbers as much through one off incremental costs that just flow through. I mean, there's a lot of Mike's right. Remember, we've talked a lot in the past of what originally was taking ROI and dollar utilization backwards and a lot of it was to do with fleet inflation and the sort of imbalance of the quantity of new fleet we were buying. Now we're in more steady state and now we've lapped some of that significant Tier 4 inflation. You can see that's what's helping us drive that very positive trend in our ROI. So there's nothing significantly happening within the business. A lot of this is just nuts as we balance a few things out. Okay. And second question I had was on the UK. Your yield came down 3%, but your drop through was very high. I kind of would expect it as the other way around, the drop through would be very low. Well, not really. I mean, yes, it's really straightforward. We think the U. K. Came out with a tougher market, and we're aggressively we've been aggressively reducing costs. It was one of the reasons why the drop through was so low in the second half of last year because the exceptional cost, which as you know, we don't have exceptional costs, reducing our cost base were included in the operating numbers. So it's a reflection of how we see the makeup of the year, which is relatively flat with a little bit of top line growth, some rate pressure, but we will overcome the rate pressure by a more diligent approach on overheads. Now we continue to invest in some key areas like IT, for example. But again, you'll see the lower fleet spend too. So we are cutting our clock accordingly based on our outlook for the U. K. Market, which is not terrible, but it's certainly not a big growth market either. Okay. And then finally, thank you for that. Just on the CapEx, at what point for the current year do you sort of shut up shop in terms of what you think your CapEx expectations will be? Are we sort of through the hump where you it's unlikely that CapEx could go up this year because of that because of the timing? No, no, not at all. I mean, really, the most important in terms of as you know, we have a seasonal business. So we have a very busy period from May till October. Brendan and I sit down and do a budget every single year and the climb in fleet on rent from May to October is always a slightly scary one and then we always seem to do it. So an important period for us is around that October, November, December period where we start thinking what do we need for summer of the following year that we need to bring in, in March, April, May, that year. So no, I mean, we are probably going to the most important period where we are reviewing our CapEx in the next couple of months. As I said, if you go back over time, we certainly tend not to comment on CapEx at Q1 because it's too early in the season. But when we have looked at CapEx and changed our guidance, it is typically Q2 and then we do a further revisit when we get to Q3. The biggest area, as Jeff said, is what is that Q4 spend and what is our view of next year as opposed to this year, recognizing that actually whatever you spend in that Q4 has very little, if any, impact on our earnings for 'eighteen, 'nineteen because it comes in so late in the year. So if you go to Page 24 in the pack, it's always best to look at this in dollars because currency has an impact in all of this. And we have spent 3.66 in the Q1 in growth CapEx as against an outlook of 8.50 to 950. Might spare math than me. So I'm guessing that means in 25% of the year, we spent 40% of our It tends to be front end loaded. And so if you're looking at growth from you can go easily go back to last year's Q1 presentation. So our growth CapEx this year is slightly ahead of where we were last year in that period. What we have done, we spent because of just the timing of things and dynamics, we spent a little bit more on replacement in Q1 than we necessarily within the year ago. So the likely risk is to the upside in terms of our capital guidance. But again, as we said, hey, let's see what happens in terms of needs for hurricanes or not needs for hurricanes, and it's the Q1. Let's get to December. Because as much as anything else, it gives us a chance to look at next summer. But as we sit here today, Brendan, what's your forecast on fleets spend? I look no further than the slide that we have that shows time utilization end rates. Look, if you think about an end market in terms of the activity that we are experiencing today, when you have a supportive end market that has been able to absorb from a utilization standpoint all of our fleet growth, not just in our same stores, but in our greenfields as well as in our bolt on locations. And you have a rate environment in this 2% to 3% range that we've been experiencing, we would be pretty bullish, I would believe, and I would Thank you. Our Thank you. Our next question comes from the line of Will Kirkness from Jefferies. Go ahead. Your line is now open. Thanks. Good morning. I just had a couple of questions. And firstly, just thinking about the capital allocation point. The sort of even with the buyback and CapEx, depending on the bolt ons, it doesn't look like you would trouble the top end of that leverage range. So I just wondered what your thoughts were around that. Well, we won't trouble it unless we spend a bit more on CapEx, which we've maybe hinted at a little bit in the last question. And perhaps we've got a reasonable pipeline of M and A too. So it's our objective isn't to hit a leverage guidance number, but our objective is to grow responsibly, allocating capital, as we said. So you're right, there is a room for more bolt on M and A. There's room for more organic fleet growth. But again, as we said in an earlier question, what we said for the following year is a minimum number, but a maximum number. And so I think we're trying to pick this path where we keep a little bit of headroom, which could be allocated in any of the key areas that we see important in terms of enhancing shareholder value. That's it's we think it's very straightforward. But yes, there is headroom available to us. The specialty bolt ons, what sort of EV EBITDA range are they in, has that changed much? No, I don't think so. No, I mean clearly, the specialty is a little bit different. The multiples are typically a little bit higher, but it depends how you're looking at it, like which multiple. So we've had this sort of question before. People get overly hung up on EBITDA multiples because that's how everybody values businesses. We believe revenue multiples, EBITDA multiples, but as importantly, multiples of the fleet that you are acquiring are all important metrics. I wouldn't have said the multiples have gone up significantly. Of course, we're further along in a cycle. Therefore, the sums are higher because people are tending to do better at this stage in the cycle than perhaps we're doing earlier in the cycle. But multiples haven't changed materially. Okay. And just one follow-up question, if I can, on BlueLine. I think they were low prices in the marketplace. Is that think that would be helpful for a rate perspective or do you think that's just more volume that could come your way? Look, I believe that consolidation in the marketplace typically improves the pricing environment. It's true. BlueHaim, we're not premium prices in the marketplace. If you do the maths from what each United has said about the NPV, the tax losses, there's about over $800,000,000 of tax losses carried forward. That isn't a business that made a lot of profits, all priced very high. So it being under the ownership of United undoubtedly will help the overall environment as does our consolidation. So I think that's a very important point. I think it's we talked about this a lot at the year end. We talked about this gap between ourselves and United and the rest. And I think it just further enhances that gap as do our bolt as does our bolt on M and A. Great. Thank you very much. Thank you. Our next question comes from the line of Steve Wolf from Numis Securities. Please go ahead. Your line is now open. Good morning, guys. I'm left with sort of wage growth sort of finding people in the market at the moment. Can you just sort of talk about those elements of sort of with employment in the U. S. At the moment? Thanks. Yes. Look, it sucks, which is why I'll leave it to Brendan to answer that question because he's dealing with more hands on than I am at the moment. Yes, Steve. I think that it's obviously we've talked about it quite a bit. It is not easy to find, particularly I think when you look at the employee base that we refer to as the skilled trade positions, drivers, technicians, etcetera. But I will say probably similar to what we would have said at full year, when you think about where those employees can go to work, where potential employees can go to work, I think it is the likes of us and maybe others out there that are more likely to attract those that are career minded and looking for opportunities to advance. So by no means am I saying it is easy. There's no question it is a burden to a degree on the business. But let's not forget also that that is one of the tailwinds from a structural change standpoint. So we see the benefit of that in that our customers, if we struggle when it comes to drivers and mechanics, think about a small shop that may own a couple of 1,000,000 in kit or maybe 1,000,000, they will really struggle. So we see the advantage of that. And then it's also from time to time when we do augment our greenfield program with some of these bolt ons like what we did with interstate. You look at that interstate business in that geography, which was so important to us, that comes with not only a great sales force, but a very seasoned and tenured group of mechanics and drivers who are very well known in the market. And we bear hug those employees like we do new recruits as well. So complicating for sure, but I think in a way a helping win. Date of this call, and we look forward to speaking to you again in December. Thank you very much indeed. Thank you.