Earnings Call: Q3 2013

Mar 5, 2013

Good morning and welcome to the Ashtead Q3 Results Analyst Conference Call. Throughout today's call, all participants will be in a listen only mode and afterwards there will be an opportunity to ask questions. Just to remind you, this conference call is being recorded. Today, I am pleased to present Jeff Drabble, Chief Executive. Please begin your meeting, sir. Thank you, operator. Good morning, and financial results So following a brief overview from me, Sylvain will cover the financials and I will give an operational update. Predominantly, however, we will focus on Q and A to hopefully add some color to what are clearly another set of excellent results. You will not be surprised to hear that we are very pleased with the current performance of the business. The momentum established now for a number of quarters continued in Q3 with revenue growth for the group of 26%. It was pleasing to see a strong performance in both divisions and we are clearly gaining market share in both the geographies that we serve. Margins have again improved with group EBITDA rising to 39%. These margins allow us to continue to invest strongly in organic growth with the fleet being both larger and younger than a year ago. Despite this investment, we continue to delever as planned, as Suzanne will detail in a moment. So once again, with this strong ongoing performance, the board now anticipates full year profits ahead of its earlier expectations. And with that, I will now hand over to Suzanne to cover the financials. Thanks, Jeff, and good morning. I'm pleased to share with you on Slide 3 a strong set of numbers for the group. For the Q3, we reported an underlying pretax profit of £54,000,000 compared to £21,000,000 for the same period last year. Consistent with recent quarters, this profit performance was driven principally by our revenue growth. Revenue increased by 26% in the quarter, at constant exchange rates and the fall through of our incremental revenue to EBITDA was good. As a result, the group's EBITDA rose by 45% year on year and our EBITDA margin improved to 36%. Our results for the 9 months are shown on Slide 4. At constant exchange rates revenue increased by 19% and generated an underlying profit before tax of £194,000,000 EBITDA margin, as Jeff said, was 39% for this period and our operating profit margin improved to 22%. Further progress was also made in our return on investment, which we believe is a key indicator of the strength of our business. For the group as a whole, ROI, including goodwill improved to 15.3% in the 12 month period ended January 31. As we transition to Slide 5, we'll shift our focus from profitability to debt and leverage, the management of which is a key part of our strategy. As anticipated, the absolute amount of our debt increased at 31 January as we invested in our fleet and took advantage of market opportunities. However, from a leverage perspective, this was more than offset by higher earnings and therefore our net debt to EBITDA leverage ratio declined to 2.2 times. As shown in the chart on the top right of this slide, we expect this ratio at constant exchange rates to continue to trend toward 2 times at April 30. We steadily reduced our leverage since 2010, while at the same time continuing to grow our business either organically or through small bolt on acquisitions. As discussed in more detail during our last call, we believe our EBITDA margin will allow us to support further growth and still delever. Therefore, in the medium term, we expect to sustain leverage below 2 times. That concludes my comments on the results and therefore, I'll hand it back over to Jeff. Thanks, Suzanne. So let's first look at Sunbelt in a little more detail. As you can see from all three charts on Page 6, Sunbelt enjoyed another very strong quarter with rental revenue being up an impressive 27%. Port volume up 14% and yield of 11% continued recent strong trends. There was a one off impact from Superstorm Sandy in the quarter, which we calculate contributed about 5% to the quarter's growth. However, the strong underlying performance of the business is, I think, best demonstrated by the physical utilization chart on the right of the page. As we discussed in Q2, after running slightly behind last year in the early part of this fiscal year, we improved utilization year on year from September. This year on year improvement continued throughout Q3. But importantly, you can see just how strong January February have been, even though the initial restoration and remediation work relating to Sandy was over. Clearly, we are enjoying good market conditions and continue to gain market share. As a result of this strong performance, we have reviewed our Q4, Q1 fleet intake plan, which I would like to share with you now as it gives a first look into how 2013 2014 might shape up. Page 7 details our recent group fleet additions and disposals. And in the seasonal business, you can see the importance of Q4 and Q1. Sunbelt now intends to pull forward around $100,000,000 of capital previously scheduled for Q1 'thirteen, 'fourteen into Q4 of this year to satisfy existing demand and to smooth the seasonal buildup. As a result, Q4 and Q1 are shaping up to be very similar levels of spend to last year, and these have to be have been our focus periods. Whilst total dollar amount of the spends is broadly the same, I would just remind everybody that the maintenance element of the spend will be smaller as we benefit from the early cycle de aging of our fleet. Therefore, for 2013, 2014, gross CapEx is again currently scheduled to be broadly in line with this year. But I would remind you that we purchased fleets in relatively small increments on relatively short lead times, so there is significant flexibility in this plan. As yet, we have not finalized our disposal plans, but it again provides a high degree of flexibility to our fleet growth. Our capital plans are being driven by not only our current trading, but our continued assessment that we are at the early stages of cyclical recovery. We summarize our market outlook on Page 8. Calendar 2012 was a better year, which is encouraging, but we remain at historically low levels of construction and have as yet had no major benefit from cyclical recovery. We anticipate further improvement to our end markets in 20 13, but we do not anticipate a major step change. There will continue to be strong sectors such as residential and power, but other areas such as institutional spend will continue to be a drag. However, we anticipate that the overall trend will be positive, probably not dissimilar to 2012. Most encouragingly, we anticipate multi periods of steady growth as the markets eventually return to normalized levels of activity, and it is this that supports our plans for continued strong organic investments. So moving to A Plant on Page 9 and again a continuation of recent trends. The 11% growth in rental revenue, again demonstrating the progress that we are making in a difficult market. Relative to the group as a whole, the numbers remain small. But for a team that's been through a lot, I am pleased to see the business contributing more and I remain firmly of the view that we are making good long term decisions, which will allow us to benefit fully when markets finally recover. So to summarize, with the momentum in the business, we now anticipate a full year profit ahead of our earlier expectations. Encouragingly, with such a broad range of metrics already at record levels, together with a strong balance sheet to support medium term growth opportunities, the board looks forward with confidence. And with that operator, can we now move on to Q and A? Thank Our first question comes from the line of Andy Murphy from Merrill Lynch. Please go ahead with your question. Your line is now open. Good morning. Hi. Hello. I just wonder whether you could give us a bit of a flavor for the competitive environment in the space at the moment given the merger of 1 of your or 2 of your rivals a while ago, how that's playing out, whether that's presenting interesting opportunities and whether you're able to take advantage of any of those and perhaps comment on how that might be relating to or having any effect on pricing, please? Yes. I mean, we've talked in the past about the impact of the United RSC merger, a merger with 2 very good competitors. I mean, clearly, they have had to go through a period of significant disruption. I mean, they've closed stores the equivalent to 50% of the total number of stores we have in Sunbelt. You can't do that without a degree of disruption. And as a result, we and others have undoubtedly benefited from some of that disruption. They published their revenue performance. We publish ours and clearly there's a significant gap at the moment. I would anticipate that that will sort itself out over a period of time. As I said, I think the 2, they are now 1 combined excellent company. But it is undoubtedly one of the factors that's allowing us to deliver such strong revenue performance. So I think you can see that to date, despite that disruption, they have been very responsible and it has had no negative impact on our yields given the strength of the yield performance that we dropped through. But we've talked about gaining market share throughout this cycle. When I talk about gaining market share, the bigger issue is the gap in the quality of the service level delivered by both us and United relative to all of the smaller players. And the far bigger structural change in this market is undoubtedly that the big will get bigger given the scale of their fleet, the quality of their IT and the quality of their people. And so I believe that we mean we retain the opportunity to continue to gain significant market share. We have a short term benefit, and I think it was a short term benefit of some of the disruption created by the United Dollar Sea merger. Great. Thank you. Thank you. Our next question comes from the line of Alex Nagini from HSBC. Please go ahead with your question. Your line is now open. Good morning. A lot of people struggle with that. Good morning. Jeff, just to start off with the CapEx guidance. Just to understand properly, so we were guiding to €500,000,000 gross this year with €100,000,000 being brought forward now to $600,000,000 for FY 20 13. And if I understand correctly, the guidance is therefore for $600,000,000 gross in 20 14, is that right? Hi, Alex. It's Suzanne. Hi, Suzanne. The guidance for fiscal 2013 is 550 gross, 450 net and it's very preliminary to talk about CapEx for next year. As Jeff said, we're really most focused on Q4 this year, Q1 of next. And once we see how the spring season sorts itself out, we'll be able to make further comment. But preliminarily, we're talking about bringing in about £525,000,000 of gross CapEx for 2014. Okay, understood. And then just picking up on Slide 6, the improvement in physical utilization through what looks for a large part to have been a fairly difficult winter in parts of the U. S. With snow, Can you help just talk us through that? It looks fairly unusual given last year was a good summer and the physical utilization is running ahead of that. Yes. No, no, that's true. You're right. Last summer sorry, last winter, sorry, well, last winter was like a summer. This year has been more normal. I wouldn't have said it was a terrible winter, but it certainly was not as benign as the previous year. Yes, look, we are clearly very encouraged by the quantity of fleet that we have on rent and obviously, the physical utilization. We appear to be very busy across a very broad geography and across many sectors of the business. There's undoubtedly a little more activity from a construction perspective, and we are undoubtedly benefiting from the structural changes still and gaining market share. So we've got a lot of things all going in our favor. We've had a lot of stability in the business, Alex. We are a customer service business. That stability and that strong investment has clearly enhanced our service offering. And if I look at our customer retention statistics and the number of new customers we are adding, they're at record levels and that's very, very encouraging. Okay. You're fine. And then perhaps if I could just end off with just coming back to the United Rentals question. To the extent that they've now digested RSC and as we plan forward for the summer, if they were to start growing or if the growth discount that they have to you at the moment, would you anticipate if that were to close, would that start happening over the summer as sort of the sales teams start preparing for that push? In other words, will the next couple of months be sort of most telling in terms of where they're likely to be relative to you over the next couple of months? It's hard for me to predict the performance of another person's business. Look, you've seen our forecast. I'm not that good at predicting the performance of my own. So I'm not going to stop trying to predict the performance of somebody else's. Look, we have had and have no plans to have a specific focus on United Rentals. We have growth plans based on the structural changes in the industry and cyclical recovery. I would have said that the next quarter they report is unlikely to be a stellar one for a whole host of reasons. I would have thought the gap between our performance and theirs will sort of trend towards one another towards the back end of this year. But they're still in the throes of the significant upheaval. From everything I can see from a strategic perspective, they're doing an excellent job on the integration. But there is a lot of disruption in the field and that won't sort itself out in 1 or 2 quarters. It will take 12 months. Okay, understood. Thank you. Thank you. Our next question comes from the line of Justin Jordan from Jefferies. Please go ahead with your question. Your line is now open. Good morning, Jeff and Suzanne. I've got a slightly technical query. I was kind of looking at Sounds like one for Suzanne in that case. Jeff, it's a simple math query. So I'm sure even I with the calculation can work it out. So you can certainly answer with your brain. Now in truth, I've been working through the balance sheet and looking at the Sunbelt fleet at OEC at the end of January vis a vis the end of April 2012. And it looks like in dollar terms it's up 11% over the 9 months. And if you look at the branch count ex lows at Sunbelt, it's up some 3% in the same 9 month period. So you're obviously getting a lot more efficient per branch, I guess, in terms of putting additional kit into existing branch footprint. My question is, how much more do you think you can do in that vein? And how does how should we think about perhaps the drop through moderating as you potentially accelerate the new opening of branch plans in fiscal 2014 beyond? Yes. Look, that's a good question. And I think we've covered this once or twice in the past. Our assessment would be that within our existing footprint as it sits today, we could volume through those locations. And that's and we've been measuring that statistic for a while. However, consider this, to enhance whilst I get accused by the management team at Sunbelt of being a little blase about this, it is true that what is required to tweak that capacity is relatively little. It's we need a little bit extra yard space, which perhaps means renting a little bit of space in Mexico and we need some mechanics and we need some drivers. So there is incremental cost comes in with that capacity. But again, they are not long lead time items and they're not big step changes in terms of capital cost. As we announced recently, we do, however, also intend to open around 100 stores, predominantly in 2014 2015. We've opened 13 to date in the latter half of this year with probably another 3 or 4 scheduled between now and the year end. And that will help putting fleet into those new locations and broadening our geography will help spread the growth. Those two effects of incremental cost in existing locations, together with the drag effect of greenfield locations, we believe will take our long term drop through down to around 60% from the and we've and we've modeled it various, very ways and we're very comfortable that 60% is a good long term drop through statistic. Thank you very much. Can I just have one follow-up if I may just on FX? Obviously, we're seeing some pretty dramatic movements in sterling dollar at the moment. And I'm just wondering how that impacts your business and how we should be thinking about the impact on net debt and I guess impact on revenue PBT in fiscal 2014 potentially? Sure. We disclosed in the press release that Justin and you and others may have seen that a 1% change in FX is equivalent to about £2,000,000 of profit. So as the exchange rate moves downward, then you can expect to see a change in the P and L. Now we use an average FX for a quarter or for a half year, 9 month, 1 year period that pick your timeframe that is based on average exchange rates. So the movement will tend to be seen at a bit of a slower level in terms of the about the debt level. Balance sheets are struck based on the currency rate at the end of any given period. So whatever the rate may be April 30, debt will be struck at that level. So you will begin to see in debt, therefore, the effect of the exchange rate almost immediately. With that as background, we would still say, as I mentioned earlier in my remarks that whatever the exchange rate may be at constant exchange rates, we still expect our leverage ratio to be moving towards 2 times that was demonstrated earlier. Great. Thank you. Thank you. Our next question comes from the line of Mark Elson from OREO Securities. Mark Elson, Mark Howson, I think is good. Just can you just talk about what that improvement in yield, I mean, how much of that was rate specifically? Can you put a finger on that? It's first question. Yes. Not really. It's particularly because of Sandy, it is very, very difficult because within the emergency generation and power, there's so much in there for 24 hour working. There's a lot more labor support. I mean, if you look at another 11%, realistically, the sandy elements the 5% sandy element appears more in the yield element than it does in the volume element. So the 11% on a normalized basis is probably 7%, which makes it broadly in line with how things were with previous quarters, which again means it's probably 52%. But it's that is a good guesstimate, Mark, and averaging an awful lot of averages to get to those numbers. But underlying, the yield improvement is about 7%, which is normally split about 5% and 2%, 5% rate 2% yield. Okay. And just secondly on obviously, you mentioned that the CapEx for 2014 is early days and very preliminary to talk about that. I mean, I have to say We've never been close with CapEx guidance in the past because I know you're all desperate for a number, so you can plug it into a spreadsheet. The reality is I don't have to decide more than a quarter out what my CapEx is going to be. And frankly, I don't. So the number which is accurate is undoubtedly the Q4 number. And the Q1 is probably accurate, but the risk is probably on the upside, not the downside with regards to the number. The other factor which you need to consider is you need to look at disposables. If you compare our level of disposals with any of our peers, frankly, we're disposing it very, very little. And the reason why is because it's out on rental, we can't get it back to sell it. So be careful, Mark, in terms of the CapEx guidance more than 6 months out. Yes. And Joe, just wondering with the sort of I mean despite the point being made about the dollar impacts on the level of debt, I mean I still think you're sort of hurtling towards sort of 1.5 or 1 point is less than 1.5 net debt to EBITDA in a few years' time. The argument is there's more room to spend even than what you just said. Absolutely true. That's the key. When we did our calculations and adjusted that to give you a pound number, we've used our budget number for this year, which is £160,000,000 We've used constant currency so as not to confuse the issue. You're absolutely right that anything which happens with currency is going to be purely translational. We will have bigger debt, but we will have a significantly larger asset base too and obviously our profits. So everything will be it's purely translation. Basically, pretty much everything we're generating in profits at the moment in North America, we're investing in fleets. So it is purely, purely translational. But yes, you're absolutely right. But in our forecast for CapEx, we've used constant exchange rates. Yes. Are you seeing a final question for me. Are you seeing sort of decent acquisition opportunities come your way? I mean are they available? I mean is that something that you may well favor? Look, you'll see in the back of the press release, I mean, we announced JMR because it happened just after last quarter. We did another very, very small deal in Florida during the year. And frankly, since then, we've just completed another very, very small deal up in Milwaukee also. So there are a number of small bolt on acquisitions. We treat them broadly as capital. We aren't spending an awful lot more than the liquidation value of the fleet. And are in areas where we would have perhaps have opened a greenfield and instead we're doing a very small bolt on acquisition to just accelerate the pace at which we get up and running. So you will see, JMR, we will see you will see some small to mid sized and GMR, we will see you will see some small to midsized bolt ons, particularly around Specialty 2. You are unlikely to see a big transformational deal, But there are lots of opportunities out there. We're trying to balance focusing on what clearly is low risk, high return organic growth plus some small bolt on acquisitions. Thank you. Thank you. Our next question comes from the line of Andrew Nassy from Peel Hunt. Please go ahead with your question. Your line is now open. Good morning, Jeff. Good morning, Suzanne. A couple of brief ones from me. First of all, Jeff, I think in the past, you've just given us a little bit of a flavor in terms of what you're seeing movement wise in terms of the daily, weekly and monthly rates. Are you able to just give a little bit of flavor on that? Yes. Can, Andrew. I mean, we are basically exactly where we were in Q2, which is daily and weekly remain above previous peaks in the sort of 6%, 7% level. And we've had a bit of progress on the monthly rates and there's 6% or 7% below. We are just below previous peak rates to the point where I would frankly stop asking us about it because I think it's worth the level where it's not really relevant. Also, the danger of thinking, well, they've got back to previous peak rates, it sort of leads to the assumption, well, that's good enough. Well, frankly, it's not because we have inflation in our equipment. And therefore, my personal view is the better measure is where are you with dollar utilization because that's our revenue expressed as a percentage of the original cost of our assets. Because if I get back to previous peak rates only, over the period since our previous peak rates, I've seen inflation. I will have a lower dollar utilization. And what I want to do is get so I have to not only get back to previous peak rates, but I've also got to compensate for inflation. So dollar utilization is the important measure here to take account of both factors. I was really pleased that our dollar utilization on an LTM basis this quarter got into up to 60%, which is really good. Where do I think it should be? I think we can get to mid-60s. So therefore, what that means is over this cycle, I have to get rates up 10% more than the inflation that I get in equipment. If I just if I put rates up 3% and I get 3% inflation, then the 2 just must keep it right. So we are as close as a damage to previous peak rates on a weighted average still below on monthly. But the key focus for us now is really that whole dollar utilization. I don't want people Understand. And just secondly, any sort of anecdotal evidence or perhaps comments back from your customers maybe looking to buy kit rather than rent kit because they sort of see slightly better pipelines in their own business? Absolutely none. And if anything, I think the opposite happens in the 1st 2 years of cyclical recovery. Right now, they're wondering how they're going to fund any increases in working capital. At the early stages of any recovery, they're going to have to invest in labor and materials, and that is a big draw on their working capital. And so if anything, we're seeing an acceleration of people wanting to use our service and our offering as they see bigger start to see bigger draws on their working capital requirements. Okay, perfect. Thank you very much. Thank you. Our next question comes from the line of Alex Hu from UBS. Please go ahead with your question. Your line is now open. Good morning. Three questions from me, if that's right. First of all, any color on February trading you'd like to share? Then second of all, obviously, even stripping out sand, the yields were accelerating through the quarter. So thoughts on that into next year. And then the third question was just wondering if you can just give us a clue on what the actual growth the U. S. Fleet growth, the growth element of the CapEx would be in Q4, Q1 that you put on that plan on Page whichever page it was now Page 7. Yes. Okay. Let me kick those off. February is the easy one here. Look, you can see by the physical utilization chart, clearly, it was a strong February. On a like for like billings per day, which is how we always report the numbers, bear in mind, reported will be less than that because there was lesser days in this February. But on a like for like billings per day basis, the U. S. Rental revenue was up 28%. And encouraging, the air plant was also up 12%. So clearly, we had an exceptionally strong February, which is really encouraging heading into the spring. Sandy, look, yes, as you said, strip out the 4, yields are at about 7. Rolling into next year, look, comparators get tougher. We don't like to extrapolate. We don't get we don't panic when winter months are awful and we try not to get over excited when winter months are good also because they're not always good lead indicators. But we're probably looking at this sort of where we're budgeting at a 2% to 3% yield improvement for next year on across the whole of the year. I guess what you'd anticipate given the momentum we've got now that might be stronger in the earlier part of the year. But again, we'll see as the year goes on. And fleet growth for Q4, Q1, I don't think I've worked it out to be perfectly honest, Alex. I mean, we are Well, if you can't work it out, how am I going to work? Well, I can't work it. No, you can work it out. I haven't done so. I don't really know. It's not that what we're spending. Well, we're spending a couple of $100,000,000 in Q4 sorry, Q1. And the fleet size is $2,700,000,000 at original cost. So what's that? What's 200 divided? A little bit of math than I am, Alex. This is the calculation. Yes. Okay. Thank you. Thank you. Operator, sorry, go on. Sorry, we do have one question from the line of James Barrow from Please go ahead with your question. Your line is now open. Hi, there. It was just on the pricing front. Those strong increases, is that coming from the transactional rental side of things or the longer term rental rates? Yes. It's come actually it's come across the board actually. We've had a pretty good January in terms of some of the movements in our monthly rate. For this particular quarter, because of the strong impact of Sandy, which was transactional, you won't be surprised to hear that the quarter 3 was down predominantly to very strong transactional. However, it is true that when we look at the strong February and we look at the trends through January, we have closed that gap to previous peaks quite well as we would anticipate to do on the longer term contracts. But there's been for the accounts where we set rates in January, we had a strong rate environment in 2012. And as you would anticipate, there has been a degree of catch up required in the prices set in January 2013. And we've probably had a somewhat more receptive audience than we have had historically this January. Yes. Okay. Thanks very much. You didn't mention once Tottenham or Arsenal, Jean. I'm still high on the results. It's probably not sort of appropriate for the transcript, what I'd like to say. Okay. Thank you. We appear to have no further questions. So I return the conference to you. Thank you so much. Well, everybody, thank you very much for your interest once again in Ashed, and we look forward to updating you further with our full year results in June. Thank you very much indeed. This now concludes today's conference call. Thank you for attending. You may now disconnect your line.