Earnings Call: Q1 2011

Sep 7, 2010

Good morning, and welcome to the ACHTAD Group Q1 Results Conference Call. I'm Geoff Drabble, Chief Executive. And as always with me again today is Ian Robson, our Finance Director. As normal for Q1, we have a brief presentation of the results, which is available from our website, but we will move on swiftly to Q and A. Moving on to Page 2 of the presentation and the overview. We are pleased to report profit growth in both the U. S. And the U. K. With improving trends throughout the quarter. There is a large volatility in economic data at the moment with each data point apparently reflecting a record increase or decrease. Our experience on the ground has, however, been far less volatile, and we have continued to see steady improvement. Our fleet on rent has remained strong and improved throughout the calendar year. Yield is also stabilizing, and we appear to have some momentum particularly in North America. Therefore, we continue to hold our long expressed view that winter 20,009-ten was the bottom of our market, and we are now seeing a gentle recovery with a fuller recovery anticipated in financial year 2011, 'twelve. This recovery is being driven by sensible de fleeting throughout the industry, and we are certainly seeing the benefits of more outsourcing as customers choose not to reinvest in their fleet, given scarce cash and uncertain demand. We're also seeing a trend where we, together with all larger rental players, are benefiting from our scale and mobilization capability, particularly on some of the largest stimulus projects. I believe that in North America, this bodes well for the medium term structure of the rental market. For our part, we have begun to sensibly reinvest in our fleet, the focus being on replacement, not growth. It is our view that any growth capital would be irresponsible until returns on investment return to more sustainable levels across the industry. As a result of this, debt has remained flat and at 3.1x EBITDA, it remains well under control. Moving on to Page 3. On a group basis, reported profits before tax grew 35% to £12,000,000 or 18% on a constant currency basis. Continued strength the continued strength of group EBITDA margins at 33%. Looking at Sunbelt in more detail on Page 4, we can see total revenue increased 3%. However, the more relevant number is the 1 increase in rental revenue for the quarter. Operating costs have also increased 1%, but these figures do include the one off costs of closing 50 small Sunbelt at Lowe's stores in the period. Overall, therefore, operating profit improved 14% to $44,000,000 Turning to Page 5. When we look at the detailed trends in the key revenue drivers, you can see that these are very encouraging. You can see the improving trend established in quarter 4 continues, and we have seen month on month improvement in fleet on rent right up to the current performance. Therefore, whilst fleet on rent for the quarter was only up on average 1% year on year, by August, this increase was 6%. Similarly, the improving yield trends established towards the end of quarter 4 have also continued and therefore we can see that whilst average yields for Q1 were flat, they showed a 2% improvement in August. As you can see from the chart at the bottom right, encouragingly, this is coming from sequential yield improvement, not just a deteriorating comparative. Therefore, given that we are now operating at historically strong levels of physical utilization and we do not intend to grow our fleet, our focus will remain on yields. Moving on to the U. K. On Page 6. Rental revenue fell 6% in the period. However, with excellent cost control, we were able to report a small increase in profit. Once again, however, I would point to the strong EBITDA margins of 31%. Turning to Page 7. As in the U. S, what is driving the business is the key revenue drivers, and you can see that fleet on rent in the UK remains strong with improving year on year trends. The issue across the industry in the UK remains rates. And whilst there are some signs of stabilization, it is a long road ahead for the U. K. Industry until acceptable returns are achieved. As in the U. S, however, attempting to improve returns must continue to be a major focus for the balance of the year. So to summarize, I think you can see that we are experiencing stable, if fragile markets, which provide an opportunity for ongoing performance improvement given good execution of a sensible operational plan. We are not at the stage where we'd expect a step change in end construction markets, so there is no quick fix. But we never anticipated that we would be at this point in a recovery in this timeframe. Given the current performance and the medium term opportunities the changing market landscape provides and the financial and operational strengths of the company, we are looking forward with confidence. So operator, after that brief introduction, if we can now hand over to questions and answers, please. Thank you very much. We'll now begin the question and answer So the first question is from Jeff Allen of Arden Partners. Jeff, over to you. Morning, Cath. Morning, Jeff. Just wondering whether you know whether the other players in your markets are looking to increase their fleet sizes as yet. Although taking the same sort of attitude as yourselves that pricing is the first priority at the moment? Yes, I think that's what we seem to be seeing. I think given that everyone could CapEx significantly and have defeated significantly, I think our U. S. Peers have indicated probably growing capital expenditure in Q1 of next year. But our intelligence at the moment is that, that would be, as in our case, predominantly replacement rather than growth. Okay. Can I ask you one other thing? Do you have any expectation that the first Obama package will start to give you some benefit? And any thoughts about whether he's going to get the next one through? Are the political statements on the second one above my pay grade, Jeff, to be perfectly honest. Let me tell you about the first one. I mean, look, in overall terms, we have seen a positive result of the stimulus package. Now it is true that it's not as I think we said on numerous occasions, we've never expected it to be incremental. The states are facing big budget deficits. Therefore, it has been replacement expenditure. I think as I said in the commentary, I think we and I would be wrong for me to say it's a saloon, but I think the larger rental players are undoubtedly benefiting more from the stimulus package because some of the projects are in geographies under the scale whereby in order to meet the demands and be able to mobilize the fleet to meet those requirements requires a degree of scale. And so I we're seeing a lot of work. I think as we said at the full year presentation, to date, only 20% of the committed funds have been spent. So we are seeing an acceleration in the rate. I was recently down in South Carolina. There's a bunch of new nuclear power stations there, and we're very much at the early stages of that. Those projects are going to go on for 10 to 12 years. So there is work to come. I think we've done well at targeting that work, and I believe we're going to see increased rental penetration and increased consolidation within the rental market as a result of this stage in the cycle where you'd expect us and the larger players to benefit. Thank you. We now go on to Wayne Gary of Investec. Wayne, over to you. Good morning, Jeff and Iain. Can you just quantify the Lowe's related charge? And also, does will anything flow into Q2? And what's the size of the remaining estate? Yes. Look, we entered the year with 90 low stores. So we closed 50, so we're down to 40. The quantum to close them is about a couple of $1,000,000 in the quarter. What you'll see is over the balance of the year, given that these were loss making, the net effect will be virtually 0. Okay, great. Thanks. Look, as you know, we're not a believer sticking every $2,000,000 or $3,000,000 into exceptional items because if you do that, I'm not sure they're terribly exceptional if you do it every year, to be perfectly honest. No, no, except those. It was just to get a feel for the quantum. Yes. We have a couple of $1,000,000. Brilliant. Thank you. We now go on to Alex Magni of HSBC. Alex, over to you. Good morning. Thanks. Gents, a couple of quick questions. The slide on Page 5, can you just help me reconcile that? The growth in physical utilization as well as cumulative sequential change in yield, how does that translate to a 1% growth in rental revenue? I would have expected to see more given the year on year improvements and the sequential improvement. Well, the year on year also depends what sort of what sequential trends you were seeing in the prior year. I think the way to look at it, Alex, is the problem with physical utilization, of course, it doesn't reflect the size of your fleet. You can have a better physical utilization, but a smaller fleet. So you can have less fleet out on rent, but a higher physical utilization. So look, we put physical utilization in there because if we don't, everybody asks for it. I think the better way to reconcile the revenue number is to look at the absolute level of fleet out on rent. And as you can see, that increased 1% year on year, but you can also see that it was improving towards the end of the quarter, and we've carried that into August. And then what you've got underneath that is the year on year change on yield. Now you need to consider that in June of last year, we saw a sequential, I. E. June over May 'nine improvement in rates. So you have to to reconcile to revenue points, you need to look at average fleet on rents in the year on year change in yields. Okay. I'm with you. All right. I'll work that through. Two other quick ones. Just in terms of your debt cost, that seems to have been going up despite the de gearing or at least stable debt. Can you give us some guidance on what we'd expect? Well, Alex, yes, I don't think that's really a surprise. When we did the refinancing last November, we announced that the impact of the refinancing was broadly a $10,000,000 increase in interest expense. Obviously, that took effect from November. So, nearly half of it was in last year's numbers, but the Q1 and the Q2 will complete the picture. And then after that, that will then be in the run rate, and you'll then see the benefits of the reducing debt numbers. Okay. So final peek at it about these levels. And then final question, just on working capital, is there anything on the receivable side that we should be mindful of? It seems those have gone up sort of about 10% or even about just the timing. No, it's just reflective, Alex, that as Jeff had just been explaining, And so in a typical year, both monthly revenues and, therefore, the level of receivables rises as you go from February through to July and on to October, reaches a degree of stability as you move from July to October and then it declines, receivables decline as we go into the winter. The reason that we've got a year on year $20,000,000 increase in working capital this year is because effectively there was very little seasonal effect in the depressed cyclical bottom of the cycle last year in 2,009. So, this is just a normal pattern. Receivables grow in the Q1, hold about static in the second quarter, decline in the third quarter and the fourth quarter. Okay. Thanks for that. We now go on to Mark Howson of RBS. Mark, over to you. Good morning, chaps. Two questions, if I may. Just on that Page 5, that's sequential change in yield. I appreciate that's some of that will be seasonal versus a recovery. Can you just sort of split out your feel for how much of that is rate and how much of that is seasonal or nonseasonal? Yes. I mean, I think we can sort of apply that to both yield and fleet on rent, which may have been your second question for Mark. I wouldn't guess. Look, you're right. Look, we, like everybody else, have been sort of analyzing to death where we think we are in various cycles and have been going back over a lot of our historical data. Effectively, for the last 2 years, we virtually had no normal seasonality. The seasonality has kept things flat rather than improved things significantly. Going back to more normal times, then we have seen historically about a 4% improvement in yield from January through to the peak in the summer. Therefore, the 7%, a lot of which has come in August, is better than a normal season. But up until July, we were broadly in line with the normal season. I think the most stark change from normal seasonality is probably the quantum of fleet on rent. Again, very little impact in the last 2 years, but going back to peak years, mid teens is what we have seen seasonally as a pickup in fleet on rent. And what you can see this year is a 25% increase in fleet on rent. So the quantum of business that we have, the volume of business we had is markedly better we would typically see in just a normal season. And a different question. Are you seeing any pressure on staff costs? No, we're not. I mean, we're in the 2nd year of a pay freeze, which has held up well. We've kept levels flat. And no, I think notwithstanding the impact of the Lowe's closure, we'd have seen a decline in our operating overheads despite that increase in volume of work. So no, we're confident that we can hold our operating costs flat. And I think we have to do that. I think there is the opportunity with a good operational sales plan to gain market share, to grow revenue, but we're going to have to do it the old fashioned way by keeping costs tightly under control too. So no, we're not expecting significant increases in our cost base. And while we're waiting, we'll go over to Andrew Nussey of Peel Hunt. Andrew, over to you. Sorry, Andrew, we're just opening up your line again. I do apologize. Andrew, please go ahead. You got us, guys? Yes. Okay. All right. Good morning. Just sort of I suppose fleshing out a little bit more on Slide 7 and the yield in A Plant, which sort of been seems to be one of the trends perhaps not going in the direction we would wish. And any color you can give on that, whether that's the mix of markets, whether it's real customer pressure or if it's just competitors remaining particularly aggressive in the rating environment? I think the real answer is it's a little bit of all of those unfortunately. I mean, I think we are I think we may be at the point where the absolute craziness in the rates is starting to abate a little bit. And therefore, I think we may well be starting to see some degree of stabilization. I think there's been a number of instances where we and to be fair, some of our peers in the UK have just walked away from deals recently because the rates got so low. So I suspect we're about at the bottom in terms of rates. It's true the mix will be going against us. I mean, the work that is around, it's with the larger contractors for the bigger infrastructure work. Those are lower yield jobs as a general rule. So mix is going against us. 2, I would hope that the year on year trends would start to stabilize now and perhaps slightly improve. I guess a lot depends on what happens in the autumn in terms of spending cuts. I mean, if people start to get nervous again during the winter months of future volume expectations, it could get ugly again. The reality is there is no one in the UK making any decent returns. Therefore, the market has to address that. I think we are benefiting from the fact that, that correction has taken place in North America. Unfortunately, we're not quite there yet in the UK. Okay. Super. Thanks. Okay. We now go on to Mike Murphy of Numis Securities. Mike, over to you. Good morning, guys. Just returning to Page 5 of your presentation. Just in terms of August, can you give us some flavor for the 6% improvement in average fleet on rent and also in terms of the yield up 2%? And can you say, is there anything in there in terms of maybe abnormal revenues, maybe customer mix, maybe some of the smaller customers in there as opposed to the larger customers, which we know actually sort of pay less? I'm just trying to get a flavor for that August figure and then read on from that actually your views on H2 of this year. Yes. Okay, Mike. I mean, I think the thing sales, if you look at Page 5, the plus 6%, it's not as if April as August is massively greater than July or July was massively greater than June. So I think it's the continuation of an ongoing trend. So in terms of yield, yes, August, you probably see a bit more sort of landscaping going on, and we probably do see a better mix of the smaller contractors, and so that will have a marginal effect on the yield too. I think our expectation is that we would run these sort of trends would continue. We'd expect a continuation of this good performance for the Q2. $64,000 question is, of course, we're all a seasonal business, what happens in winter? I mean, we had a pretty tough Q3 last year. If you recall, we lost GBP 13,000,000 Deep fears of double dip recession together with tough weather will result in it still being a tough winter, which is why we're not trying to get ahead of ourselves here. We would expect a good first half. It's a bit early to call Q3. I think by Q4, we'll be coming out of it again. We are seeing the impact of more stimulus work on the ground. We are definitely seeing more sort of smaller type projects around the residential end. What we haven't got anything, Mike, is there's nothing in the middle. There's not that sort of privately funded non res construction in the middle. So you've got big stimulus, small housing type related remodeling and maintenance projects and not a lot in the middle. I'm feeling okay about Q4. I hate to call Q3 at this stage. Right. Okay. No, that's fair enough. We're very fragile. Yes. Look, I think we're doing well. I think we're gaining market share, as I think a number of the large players are. And I think there's lots of self help available. It will be wrong to say this is signaling a recovery in end construction markets just yet because clearly that isn't the case. Okay. We now go on to Alex Hu of UBS. Alex, please go ahead. Just a very quick one. I was wondering if you could talk a little bit about your overall views on how much the industry has deflated, but also in terms of what your customers are doing, so I. E. Rental penetration because we're hearing from elsewhere about rental penetration increases. Just wondering if you can kind of talk a little bit about that. Yes. I mean, we can get the problem is getting statistics on this. I can give you what statistics we have, and I can tell you anecdotally what our experiences are on the ground. Statistically, Rouss who do the valuations major equipment rental companies' fleets have reduced 15% from peak, which is the statistic I think we quoted at the year end because we've calculated it ourselves and it seemed about right. But at least we've had that sort of verified by an independent body, so that's good. We've seen a number of the smaller players go out of business. The last statistic we had said it was 6% of those have come out of business. And I would expect the lack of availability of low cost finance means that some of the smaller players that have not gone out of business will have defeated at least as much, if not more, than the larger players. So my guess is this 15% to 20% reduction in overall end fleets out there. We have absolutely seen that our customers are either wanting to talk to us about disposing of existing fleets or have not reinvested in their fleets, particularly over the summer months, because again, some of them would typically, during the summer season, tweak up their fleets and then sell it off in the winter. So it's almost impossible to get a statistic on that. And again, what I can tell you anecdotally is most recent auctions, you haven't seen rental companies selling fleets. You've seen dealers and you've seen our customers selling their fleets. So there is undoubtedly a trend towards, in my opinion, people are looking at not only the carrying cost of their fleet, but the operating cost of maintaining it and complying with what is becoming increasingly onerous health and safety and environmental issues in North America. So I think there is a trend towards outsourcing. I think it's logical given where we are in the cycle. Certainly, what happened, We've got a step change in rental penetration at the inflection point of the last cycle. It's just hard to give you a hard stat, Alex, I'm sorry. Yes. The only other bit of information that's around, Alex, is the sales, the North American sales from the major construction equipment manufacturers, and those are not as yet showing any significant increase. And any increase they are showing is, I guess, accounted for by the fact that we and United and RSC have increased our capital expenditure a bit this year. So that also would point to the fact that end customers are not reinvesting in their fleets as yet. Okay. Okay. That's very clear. Thank you very much. Okay. Okay. Again, before we go on to the next, if anyone has any further questions at this stage, please do use this opportunity to press 1 on your phone keypad. And we go back to Mark Howson of RBS. Mark, back to you. Good morning again, chaps. Just really firstly on manufacturing capacity, obviously, manufacturers will be supplying more as you and others up your CapEx. But I mean, so far, what I've seen from Caterpillar seems to be more relocation, relocating down to Texas and stuff like that. But can you give us a feel for how much you think manufacturers are going to add back capacity? Yes. I mean, the indications are very little at this stage. I mean, if they've put capacity up to 50%, and we have seen in for short periods of time, if a large so 1 or 2 of them have seen big orders coming in from Asia, Middle East, wherever. One big order pushes lead times out quite significantly. So they're absolutely not putting capacity back in. They're absolutely flexing their lead time. So as we sit here right now, that capacity remains out of the industry. I think they've been very responsible in that regard. It's one of the reasons why, as we said at the time, why we've gone for what we believe is a sensible replacement capital expenditure program because the last thing we need is everybody to wake up on the same day and think it's the end of this and place orders on the manufacturers. We're going to end up with extremely long lead times and machinery cost inflation. So that's why I think for those who have the financial capability to do so, a long term balanced fleet reinvestment program is a sensible solution. And secondly, just where would you say that where RAS is saying that secondhand equipment values are now down from the peak? We actually had a meeting with us last week. Down from the peak but the peak reduction was 28% from a sort of spring 2007 peak to the bottom of the market in about August, and we're up about 5% from there. So today, we sit at around a low 20s low 20% reduction from peak from previous peak. Just finally for me. Obviously, I mean, in the U. K, you cut your locations by 14%. Obviously, signals what you've cut them back to the more profitable ones. And that's just obviously Woolsey sold brand and tools to my estimate, somewhere between 4.5x and 5x EVEBITDA. I mean, did you have a look at that as a potential deal? Or can you give a view on what you think of that deal? No, we don't comment on what we may or may not have looked at or be going to look at from an M and A strategy. It's a small industry. It will be unusual for the transaction to be going on without being aware of it. It would be unusual and probably perhaps people who were looking to move businesses wouldn't be doing their job if they didn't approach the best funded rental business in the UK. So I can't possibly comment on the specific. But in your valuation in terms of what it's gone for is about in line with our own. Typically, transactions in this space have gone for those kind of multiples. Thank you. Okay. Geoff and Ian at this stage, there are no further questions in the queue. So can I please pass it back to you? Okay. Well, if there are no further questions, thank you for your time. And we look forward to talking to you again with our half year