Good morning, 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, after a brief explanation of the financial performance and operational trends we are seeing in the market, we'll move on swiftly to Q&A. Let me begin with a few highlights from the first quarter. 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 in the share buyback, have 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 a number of acquisitions completed in or just after the quarter, which are detailed in this morning's press release. I'll 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 GBP 300 million 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&A whilst maintaining leverage within our target range of 1.5 to 2 times EBITDA. Once again, a consistent execution of our long-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. 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. With that, I'll now hand over to Michael to cover the financial detail for the quarter.
Thanks, Geoff, good morning. The group's first quarter results are shown on slide five, as Geoff said, it's been an encouraging start to 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 five acquisitions in the quarter. The EBITDA margin was 48% and the operating profit margin 30% in the quarter. As a result, our underlying pre-tax profit was GBP 286 million, 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 six shows Sunbelt U.S.'s first 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 at 51%. As a result, operating profit improved by 22% in the quarter at a 33% margin. Turning now to Sunbelt in Canada, slide seven 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 CAD 77 million and an operating profit of CAD 14 million 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&A.
Consistent with these expectations, Q1 margins were 37% for EBITDA and 19% for operating profit, which Geoff will comment on later. Turning now to slide eight, A-Plant 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 U.K. 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 nine 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 at 1.6 times 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 a 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 million of 5.25% bonds, which mature into 2026, providing us with 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 debts are committed for an average of six years at a weighted average cost of less than 5%. With that, I'll hand back to Geoff.
Thanks, Michael. Let's start our operational review by first looking at the revenue growth in Sunbelt. 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%. Mature stores continue to perform well, as do the newer stores we've opened both this year and last year. Bolt- 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, the real hard comes ahead from September as we lap hurricane activity. Remember, there was GBP 100 million of revenue in the final eight 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 +2%-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 lengths, 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. 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 14 and 15, I just want to demonstrate how we continue to implement our 2021 strategy. We completed two deals in late July and early August, which demonstrated different ways that we can continue to develop the business.
Let's start with Mabey, which is a bridgehead into two 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. Trench shoring is an area where we are aware that others have a strong position, and we've been a bit player in a highly profitable billion-dollar-plus rental market.
What we've been looking for was a credible in-house engineering capability to form the platform for a growth and roll-up strategy. Mabey, with eight locations focused in this field and a first-class reputation, particularly for more complex groundworks, provides that, and therefore we anticipate further expansion in this area, both organically and through further bolt-on M&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'll be 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. I will kick off from where we left off, which I think is page 15. We've got three or four slides to bash through, and then we'll, as quickly as we can, get on the Q&A.
Starting again on page 15, where we're looking at the recent acquisition of Interstate Aerials. 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. This enhanced cluster will generate all the market share and margin benefits we've just discussed before, most recently at the Capital Markets Day. 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. There's always been a plan to move north and east into the significant markets of Philadelphia and New York.
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. 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. 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 two further acquisitions in the quarter. Good progress in a market where we still have low market share and lots of opportunity. There was a bit of confusion at the year-end around the margins in Canada.
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 how we've done it for some time now. When you make this adjustment, the EBITDA margins are 39% and the EBITA 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%.
In summary, the 40% EBITDA and 20% EBITA 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&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. As Michael detailed earlier, it was a good start 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 anticipated. A 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. I do remain hopeful of year-on-year profit growth over the balance of the year.
Moving on to capital allocation, Our priorities remain unchanged. As you can see from page 18 here, that our priority remains investment in the business through both fleet spend and bolt-on M&A. After this, we look at returns to shareholders, always mindful of our leverage targets. With this in mind, we've determined that it's appropriate to increase and extend our share buyback program. Against the original GBP 500 million to GBP 1 billion program ending in April 2019, where we most recently guided the £600 million, our outlay will now be £675 million. In addition, for the year to April 2020, we will complete a further buyback of no less than £500 million. We keep this program under constant review, and we'll update on both the scale and duration of the program where appropriate.
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, look, it's only the first quarter, There will be some unusual hurricane-related comps to deal with in the rest of the year. 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&A. Importantly, this growth is 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.
Finally, our business is performing well. We've got a positive outlook, We continue to benefit from weaker sterling. As a consequence, we expect full-year results to be ahead of our original expectations, We look to the medium term with confidence. With that, I'll hand over to the operator, Let's get on to Q&A.
Thank you, ladies and gentlemen. If you wish to ask a question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. There will be a brief pause while questions are being registered. Our first question comes from the line of Rajesh Kumar from HSBC. Please go ahead. Your line is now open.
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&A and look inwards? 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.?
Yeah. 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 charter, our priority remains organic growth, and that will always be our priority. If market opportunities present themselves, we will very readily spend more on fleet growth. If market share gains are available in the U.S., we will certainly go after them. 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&A.
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 margins. It doesn't change anything. There's the ability to still do a little bit more in all categories.
Do you think that with their increased scale, they may have an advantage over you when it comes to procurement, or is the advantage not differentiable at your scale?
I think when you get to this stage, when you've got two very significant players like ourselves and United Rentals, I think it is highly unlikely that there's any significant opportunities for bigger purchasing leverage. I think clearly the likes of ourselves and United Rentals and some of the smaller players, we have some advantage, but I don't think this makes a whole heap of difference. What you've also got to look at is what are they buying? There's going to be some significant fleet reconfiguration. Therefore, is there actually going to be significantly more organic spend than we put in? I think the answer to that has historically been no.
Understood. Thank you very much.
Thank you. Our next question comes from the line of Rory McKenzie, UBS. Please go ahead. Your line is now open.
Morning, all. Sorry to disappoint. It's actually Rory McKenzie at UBS.
Rory.
I will-
You're not in disguise, are you?
I promise you I wasn't hiding. I just arrived late to dial in. Kindly help me out. No trickery, I promise. Questions then. Firstly, on yields. Do you think that the headwind from mix of more monthly rentals is starting to stabilize? It looked more stable year-on-year in Q1 than in Q4, for example.
I think there's a chance that's the case. There's still the opportunity. Look, there's been a big shift. Could 72 go to 73? Yes. Relative to the scale of headwinds we've had in most recent years, that's unlikely. Look, it'll depend on all kinds of things like weather, quantity of hurricanes. 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. Actually, I did want to ask about the comparatives 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. Can you mind us on the phasing of the comps from last year?
Yeah
What it might mean this year?
Look, for the first four months, if you look at it was what? 25th of September, Brendan?
August 26th was the first, then September 10 was number two.
September was number two. Basically, we started seeing the impact in September. If we look at our August year-over-year revenue growth, it was still around that sort of 19%, 20% level that we've seen all through the first quarter. We'll start seeing it from month two of quarter two. We had $100 million of revenue, which we allocated to the hurricane activity. The question is, what will it be and how will we lap it thereafter? The biggest quarter was quarter two. It sort of trickled down into quarter four. Even quarter four, there was $15 million-$20 million of revenue. We'll have an impact. Do we know if Florence is going to hit or not hit? Brendan can give you some color on that. I mean, well, we had the storm center open since Sunday.
Yeah, we have. 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. We're still far away from being sure at all, one, if it lands, and two, where it lands. I mean, it looks like it has a reasonable degree of certainty. Time will tell. Of course, it's a matter of what the extent of that would be. 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. You'll see there where you would see the specialty business lapping the hurricane activity that we had a year ago, albeit very strong underlying utilization.
You can see some of those comps that we're going to confront in the months to come.
Great. That's helpful. Just last year, if I may. The drop-through rate's around 50%, same as it is in Q4. Do you still expect to improve into the low 50s this year overall? I guess it kind of relates to the weather, obviously the cost comp-
Look.
might get easier on the other side.
Look, it depends on a whole bunch of things. It will depend on the precise mix because of the weather, but also the quantity of greenfields and bolt-on M&A. 19 greenfields in a quarter is a bunch of greenfields. Already in the second quarter, what have we done? Seven or eight? There's a high greenfield activity right now. If you look at the business, the size of Mabey within total 10 locations. There's going to be a fair bit of integration there too. It's going to be 50 to 51, 52. 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. 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. 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? As we say, you've got the one-off costs, et cetera, on integration, et cetera. Underlying margins are still consistent and on a positive trajectory. When you've got all the greenfields, et cetera, it impacts it. In the past where when you get into a position where you're getting good rate, et cetera, and the inflationary impact and fleet has dropped away, you haven't got the drag from depreciation. Your fleet is able to generate as you would positive rates, et cetera. You're getting better dollar utilization, which then flows through. You've got your drop-through, but you haven't got depreciation and fleet accelerating more. You end up, just the math works you through to an EBITA margin, which moves forward slightly. There's just more
You're into rounding, it's just noise around the numbers as much through one-off incremental costs that just flow through.
There's a lot of it. 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. There's nothing significantly happening within the business. A lot of this is just math as we balance a few things out.
Okay. Second question I have was on the U.K. Your yield came down 3%, but your drop-through was very high. I kind of would expect it as being the other way around, the drop-through would be very low.
Well, not really. It's really straightforward. We think the U.K. market is a tougher market, 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 costs, which, as you know, we don't have exceptional costs, reducing our cost base, were included in the operating numbers. 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, we will overcome the rate pressure by a more diligent approach on overheads. We continue to invest in some key areas like IT, for example. Again, you'll see the lower fleet spend too. We are cutting our cloth 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. 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-
Never
through the hump, where you-
Never
It's unlikely that the CapEx could go up this year because of the timing?
No, not at all. As you know, we have a seasonal business. We have a very busy period from May till October. Brendan and I sit down and do a budget every single year, the climb in fleet on rent from May to October is always a slightly scary one, we always seem to do it. 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? No, we're probably going to the most important period where we are reviewing our CapEx in the next couple of months.
As we say, if you go back over time, we certainly tend not to comment on CapEx at Q1 because it's too early in season. When we have looked at CapEx and changed our guidance, it is typically Q2, we do a further revisit when we get to Q3. The biggest variable, as Geoff 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 18/19 because it comes in so late in the year.
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. We have spent GBP 366 in the first quarter in growth CapEx, as against an outlook of GBP 850-GBP 950. Mike's better at math than me. I'm guessing that means in 25% of the year, we spent 40% of our CapEx.
Well, it tends to be front-end loaded. You can easily go back to last year's Q1 presentation. Our growth CapEx this year is slightly ahead of where we were last year. In that period, what we have done, we've spent because of just the timing of things and dynamics, a little bit more on replacement in Q1 than we did a year ago.
The likely risk is to the upside in terms of our capital guidance. Again, as we said, hey, let's see what happens in terms of needs for hurricanes or not needs for hurricanes. It's the first quarter, let's get to December, because as much as anything else, it gives us a chance to look at next summer. As we sit here today, Brendan, what's your good feel on fleet spend?
I look no further than the slide that we have that shows time utilization and rates. Look, if you think about an end market in terms of the activity that we're 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%-3% range that we've been experiencing, we would be pretty bullish, I would believe, and I would anticipate us being on the higher end of that spectrum.
Okay, great. Thank you very much.
Thank you. Our next question comes from the line of Will Kirkness from Jefferies. Go ahead, your line is now open.
Thanks. Morning. I just had a couple of questions. Firstly, just thinking about the capital allocation point. Even with the buyback and CapEx, depending on the bolt-ons. Doesn't look like you would trouble the top end of that leverage range. 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. Perhaps, we've got a reasonable pipeline of M&A, too. Our objective isn't to hit a leverage guidance number, but our objective is to grow responsibly, allocating capital, as we said. You're right, there is a room for more bolt-on M&A. There's room for more organic fleet growth. Again, as we said in an earlier question, what we've said for the following year is a minimum number. There's a maximum number. 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. We think it's fairly straightforward. Yes, there is headroom available to us.
The specialty bolt-ons, what sort of EV/EBITDA [are range A in]? Has that changed much?
No, I don't think so, no. Clearly, 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 multiples. 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. 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 they perhaps were doing earlier in the cycle. Multiples haven't changed materially.
Okay, thanks. Just one follow-up question if I can on BlueLine. I think they were low prices in the marketplace. Do you think that'd be helpful from 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, BlueLine were not at premium prices in the marketplace. If you do the maths from what United has said about the NPV of the tax losses, there's about over GBP 800 million of tax losses carried forward. That isn't a business that made a lot of profits or priced very high. It being under the ownership of United undoubtedly will help the overall environment, as does our consolidation. I think that's a very important point. 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 does our bolt-on M&A.
Great. Thank you very much.
Thank you. Our next question comes from the line of Steve Woolf from Numis Securities. Please go ahead. Your line is now open.
Morning, guys. I'm left with sort of wage growth and finding people in the market at the moment. Can you just talk about those elements with employment in the U.S. at the moment? Thanks.
Look, it sucks, which is why I'll leave it to Brendan to answer that question, because he's dealing in more hands-on than I am at the moment.
Steve, I think that 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, et cetera. 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 or potential employees can go to work, I think it is the likes of us and maybe a couple others out there that are more likely to attract those that are career-minded and looking for opportunities to advance. By no means am I saying it is easy. There's no question it is a burden to a degree on the business. Let's not forget also that that is one of the tailwinds from a structural change standpoint.
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 million in kit or maybe GBP 1 million. They will really struggle. We see the advantages of that. It is 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. Complicating for sure, but I think in a way, a helping wind.
Okay. Excellent. Thanks very much.
Thank you. There are currently no more questions in the queue, I'll hand the call back to you speakers.
Okay. If there's no more questions, like I said, I apologize for the rather disruptive nature of this call, we look forward to speaking to you again in December. Thank you very much indeed.
Thank you.