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 Geoff Drabble, Chief Executive. Please begin your meeting, sir.
Thank you, operator. Good morning, and welcome to the Ashtead Q3 Results conference call. Suzanne and I will follow the usual format for what is a more abridged version of our quarter view results. Following a brief overview from me, Suzanne will cover the financials, and I will give an operational update. Predominantly, however, we will focus on Q&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. With that, with this strong ongoing performance, the board now anticipates full-year profits ahead of its earlier expectations. With that, I will now hand over to Suzanne to cover the financials.
Thanks, Geoff, and good morning. I am pleased to share with you on slide three a strong set of numbers for the group. For the third quarter, we reported an underlying pre-tax profit of GBP 54 million, compared to GBP 21 million 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 nine months are shown on slide four. At constant exchange rates, revenue increased by 19% and generated an underlying profit before tax of GBP 194 million. EBITDA margin, as Geoff 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 31st. As we transition to slide five, 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. 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 2.0 times at April 30th.
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. In the medium term, we expect to sustain leverage below two times. That concludes my comments on the results. Therefore, I'll hand it back over to Geoff.
Thanks, Suzanne. Let's first look at Sunbelt in a little more detail. As you can see from all three charts on page six, Sunbelt enjoyed another very strong quarter, with rental revenue being up an impressive 27%. Both 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. 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. Importantly, you can see just how strong January and 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 2013/14 might shape up. Page seven details our recent group fleet additions and disposals. In the seasonal business, you can see the importance of Q4 and Q1. Sunbelt now intends to pull forward around $100 million of capital previously scheduled for Q1 2013/14 into Q4 of this year to satisfy existing demands and to smooth the seasonal buildup.
As a result, Q4 and Q1 are shaping up to be very similar levels of spends to last year. These have been our focus periods. Whilst the 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 2013-14, gross CapEx is again currently scheduled to be broadly in line with this year. I would remind you that we purchase fleet 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 this 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 eight. Calendar 2012 was a better year, which is encouraging. 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 2013. 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. It is this that supports our plans for continued strong organic investment. Moving to A-Plant on page nine, 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. For a team that's been through a lot, I am pleased to see the business contributing more. 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. 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. With that operator, can we now move on to Q&A?
Thank you. Ladies and gentlemen, if you do have any questions towards today's conference, please press the zero followed by the one on your telephone keypad now. If you wish to withdraw your question, you may do so by pressing the zero two to cancel. There'll be a brief pause while participants register for questions. Our first question comes from the line of Andy Murphy from Merrill Lynch. Please go ahead with your question. Your line is now open.
Morning.
Hi, Andy.
Hello. I just wondered whether you could give us a bit of a flavor for the competitive environment in the States at the moment, given the merger of one or two of your rivals a while ago, how that's playing out, and 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.
Yeah. We've talked in the past about the impact of the United RSC merger, a merger of two very good competitors. Clearly, they have had to go through a period of significant disruption. 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. As a result, we and others have undoubtedly benefited from some of that disruption. They publish 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 two, they are now one combined excellent company. It is undoubtedly one of the factors that's allowing us to deliver such strong revenue performance.
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. 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. 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. I believe that 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 RSC merger.
Right. Thank you.
Thank you. Our next question comes from the line of Alex Nagirny from HSBC. Please go ahead with your question. Your line is now open.
Morning. A lot of people struggle with that. Geoff, just to start off with the CapEx guidance, just to understand properly. We were guiding to GBP 500 million gross this year with GBP 100 million being brought forward now to GBP 600 million for FY 2013. If I understand correctly, the guidance is therefore for GBP 600 million gross in 2014, is that right?
No. Hi, Alex. It's Suzanne.
Hi, Suzanne.
The guidance for fiscal 2013 is GBP 550 million gross.
Okay.
GBP 450 net. It's very preliminary to talk about CapEx for next year. As Geoff said.
Sure.
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. Preliminarily, we're talking about bringing in about GBP 525 million of gross CapEx for 2014.
Okay. Understood. Then just picking up on slide six, 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, et cetera. Can you help just talk us through that? It looks fairly unusual given last year was a good summer and the physical utilization's running ahead of that.
Yeah. No, that's true. You're right. Last winter was like a summer. This year has been more normal. I wouldn't have said it was a terrible winter. It certainly was not as benign as the previous year. Yes, look, we are clearly very encouraged by the quantity of fleet 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. 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.
If I look at our customer retention statistics and the number of new customers we are adding, they're at record levels. That's very encouraging.
Okay. Fine. 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, 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 team 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?
Oh, look, 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. I'm not going to start 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've 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. They're still in the throes of a significant upheaval. From everything I can see from a strategic perspective, they're doing an excellent job on the integration.
There is a lot of disruption in the field, and that won't sort itself out in one or two 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, Geoff and Suzanne. I've got a slightly technical query.
Sounds like one for Suzanne in that case.
Geoff, it's a simple math query, I'm sure even I with a calculator can work it out. You can certainly answer with your elephant-sized brain. 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 $ terms it's up 11% over the nine months. If you look at the branch count ex-Lowe's at Sunbelt, it's up some 3% in the same nine-month period. 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 should we think about perhaps the drop-through moderating as you potentially accelerate the new opening of branch plans in fiscal 2014 and beyond?
Yeah, look, that's a good question. I think we've covered this once or twice in the past. Our assessment would be that within our existing footprint as it today, we could probably put another 10%-12% of volume through those locations. We've been measuring that statistic for a while. However, consider this. While I get accused by the management team of Sunbelt of being a little blasé about this, it is true that what is required to tweak that capacity is relatively little. We need a little bit extra yard space, which perhaps means renting a little bit of space next door, and we need some mechanics, and we need some drivers. There is incremental cost comes in with that capacity. 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 and 2015. We've opened 13 to date in the latter half of this year, with probably another three or four scheduled between now and the year-end. 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 broadly 70% on an annual basis we have been experiencing to date. We've modeled the various 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. 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 GBP 2 million of profit. As the exchange rate moves downwards, then you can expect to see a change in the P&L. We use an average FX for a quarter or for a half year, 9 month, 1 year period that, pick your time frame. That is based on average exchange rates. The movement will tend to be seen at a bit of a slower level in terms of the results performance. With respect to the balance sheet, however, you're right to bring up the point about the debt level. Balance sheets are struck based on the currency rate at the end of any given period.
Whatever the rate may be at April 30th, debt will be struck at that level. 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 the times that was demonstrated earlier.
Great. Thank you.
Thank you. Our next question comes from the line of [Mark Elton] from Oriel Securities. Please go ahead with your question. Your line is now open.
Hi. Good morning to them, rather. [Mark Elson, Mark Halsen], I think is more the one.
That's right.
Just can you talk about of that improvement in yield, how much of that was rates specifically? Can you put a finger on that? First question.
Yeah. Not really. 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. If you look at another 11%, realistically, the 5% Sandy element appears more in the yield element than it does in the volume element. 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 5% and 2%. That is a good guesstimate, Mark, and averaging an awful lot of averages to get to those numbers. Underlying the yield improvement's about 7%, which is normally split about 5% and 2%. 5% rate, 2% yield.
Okay. Just secondly on, obviously, you mentioned that the CapEx for 2014 is early days and very preliminary to talk about that. 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.
Yeah.
Frankly, I don't. 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 disposals. If you compare our level of disposals with any of our peers, frankly, we're disposing of very little. The reason why is because it's out on rental, we can't get it back to sell it. Be careful, Mark, in terms of the CapEx guidance more than six months out.
Yeah. I just wondered whether, despite the point being made about the dollar impact on the level of debt, I still think you're hurtling towards sort of 1.5, or less than 1.5 net debt to EBITDA in a few years time. The argument there's more room to spend even than what you just said today.
No, absolutely true. That's became when we've done our calculations and adjusted that to give you a GBP number, we've used our budget number for this year, which is GBP 160. We have used constant currency, so as not to confuse the issue. You're absolutely right. 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. Obviously our profits. Everything is purely translational. Basically, pretty much everything we're generating in profits at the moment in North America, we're investing in fleet. It is purely translational. Yes, you're absolutely right. In our forecast for CapEx, we've used constant exchange rates.
Yeah. Final question from me. Are you seeing decent acquisition opportunities come your way? Are they available? Is that something that you may well favor?
Look, you'll see in the back of the press release, we announced JMO because it happened just after last quarter. We did another very small deal in Florida during the year, frankly since then, we've just completed another very small deal up in Milwaukee also. 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. They are in areas where we would have perhaps have opened a greenfield, instead we're doing a very small bolt-on acquisition to just accelerate the pace at which we get up and running. You will see a continuation of that theme of small bolt-ons. Then as you did with Topp and JMO, you will see some small to mid-size bolt-ons, particularly around specialty too.
You are unlikely to see a big transformational deal. 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 Nussey from Peel Hunt. Please go ahead with your question. Your line is now open.
Good morning, Geoff. Good morning, Suzanne.
Morning, Andrew.
A couple of brief ones from me. Geoff, 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?
Yeah. I can, Andrew. We are basically exactly where we were in Q2, which is daily and weekly remain above previous peaks, in the 6, 7 level. We've had a bit of progress on the monthly rates, and they're 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 at the level where it's not really relevant. Also, the danger of thinking, well they've got back to previous peak rates, it leads to the assumption, well that's good enough. Well, frankly it's not because we have inflation in our equipment. 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.
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. What I want to do is I have to not only get back to previous peak rates, but I've also got to compensate for inflation. 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 back up to 60%, which is really good. Where do I think it should be? I think we can get to mid-60s. 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 put rates up 3% and I get 3% inflation, the two just mask each other out. We are as close as we've been to previous peak rates on a weighted average, still below on monthly. The key focus for us now is really that whole dollar utilization. I don't want people resting on their laurels because they think they've got back to previous peak rates.
Okay. Understand. 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. If anything, I think the opposite happens in the first two years of cyclical recovery. Right now, they're wondering how they're going to fund any increases in working capital. In the early stages of any recovery, they're going to have to invest in labor and materials. That is a big draw on their working capital. If anything, we're seeing an acceleration of people wanting to use our service and our offering as they start to see bigger draws on their working capital requirements.
Okay, perfect. Thank you very much.
Okay.
Thank you. Our next question comes from the line of Alex Ho from UBS. Please go ahead with your question. Your line is now open.
Morning. Three questions from me, if that's all right. First of all, any color on February trading you'd like to share? Second of all, obviously, even stripping out Sandy, yields were accelerating through the quarter. Thoughts on that into next year. 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 whichever page it was. No, page seven.
Yeah. Okay. Let me kick those off. February is the easy one. You can see by the physical utilization charts that 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 less days in this February. On a like for like billings per day basis, the U.S. rental revenue was up 28%, and encouragingly, A-Plant was also up 12%. Clearly we had an exceptionally strong February, which is really encouraging heading into the spring. Sandy, look, yeah, like I said, strip out the four, yields are at about seven. Rolling into next year, look, comparators get tougher. We don't like to extrapolate.
We don't panic when winter months are awful, and we try not to get overexcited when winter months are good also because they're not always good lead indicators. We're probably looking at this sort of a-- We're budgeting at a 2%-3% yield improvement for next year 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. Again, we'll see as the year goes on. Fleet growth for Q4, Q1, I don't think I've worked it out, to be perfectly honest, Alex.
if you can't work it out, how am I going to work it out?
you can work it out. I just haven't done so.
Just checking.
I don't really know. It's not that what we're spending. We're spending a couple of $100 million in Q4, sorry, Q1, and the fleet size is $2.7 billion at original cost. What's that? What's 200 divided You're better at math than I am, Alex. You do the calculation.
Yeah. Okay. Thank you.
Thank you. Ladies and gentlemen, if you do have any questions towards today's call, please press the zero followed by the one on your telephone keypad now.
Operator. Sorry, go on. Sorry.
Sorry. We do have one question from the line of Jane Sparrow from Barclays. Please go ahead with your question. Your line is now open.
Hi there. It's just on the pricing front. Those strong increases, is that coming from the transactional rental side of things or the longer-term rental rates?
Yeah. Actually, it's come across the board. Actually, we've had a pretty good January in terms of some of the movement 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 quarter three 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, too. 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 probably had a somewhat more receptive audience than we have had historically this January.
Yep. Okay. Thanks very much.
You didn't mention once Tottenham or Arsenal, Jane.
I'm still high on the results there. 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, I return the conference to you.
Thank you so much. Well, everybody, thank you very much for your interest once again in Ashtead. 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.