Good morning and welcome to the Ashtead Group third-quarter results analyst call. Throughout the call, all participants will be in listen-only mode, and after, there'll be a question.
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Just to remind you, this conference call is being recorded. Please begin your meeting.
Good morning and welcome to the Ashtead Q3 results conference call. I'm Geoff Drabble, Chief Executive, and with me today is Ian Robson, our Finance Director. As is normal for the Q3s, this will be an abridged presentation, and therefore, I will run through a few slides to update you on our recent trading, but then I will move quickly on to the Q&A. Hopefully, those of you on the call will have access to the presentation, which I will refer to, which is available on our website. Beginning with an overview, which is on page two, it has clearly been a pleasing quarter, building on the momentum established over the past 18 months. Pre-tax profits of GBP 21 million are a record for the third quarter, driven by a focus on both top-line revenue growth and strong margin improvement.
For the nine months, Group EBITDA margins have risen to 35%, with Sunbelt delivering a very strong 37%. Despite significant investment in fleet to support our growth, our strong EBITDA margins have allowed us to fulfill our commitment to reduce net debt to EBITDA leverage to 2.5x at the 31st of January. Overall, therefore, a strong quarter, which was undoubtedly assisted by an unusually mild winter, following on from a number of other beneficial weather events in the year. However, the main drivers of growth remain our market share gains and improved operational efficiency. As a result, once again, I'm able to report that we anticipate our full-year profits to be significantly ahead of our earlier expectations. Moving to page three in Group revenue and profit for the quarter, you can see these growth drivers I have just referred to coming through clearly in the financial performance.
Group rental revenue has grown by 22% and EBITDA 40%, as once again, strong revenue growth has been matched by a continued focus on drop-through to the bottom line. Turning to the nine months to date, performance on page four, you can see how Q3 is very consistent with our recent trading history. For the nine months to the end of January, rental revenue is up 22% year-on-year to GBP 759 million, and EBITDA has risen by 36% to GBP 292 million. Depreciation, of course, has risen as we have invested in our fleet, but this has been more than compensated for by a reduction in the interest expense following our refinancing in spring of 2011. Overall, therefore, we are delivering a healthy 35% EBITDA margin and earnings per share of 13.3p, despite being at the low point in the construction cycle.
To have established a base performance at these levels, with cyclical recovery still to come at some point, is clearly very encouraging. Moving from Group to the two divisions, let's start with Sunbelt Rentals on page five. Again, what is striking is the consistency in the performance as compared to previous quarters, with rental revenues rising 25% year-on-year in Q3, despite the tougher comparators. Fleet on rent was up 15% and yield of 6%, as we continue to benefit from the structural changes in rental markets that we have discussed, despite a largely flat end construction market. This performance has undoubtedly been helped by favorable weather conditions, but also reflects the strong execution of our operational plans. Once again, we are at record levels of fleet on rent and physical utilization for this time of year.
Turning to A-Plant on page six, you can see that there is a clear consistency between the operating performance and our plans to improve returns. As in the previous quarter, fleet on rent is flat year-on-year as we focus on the markets and products that provide better returns in still uncertain overall market conditions. Rental revenue growth was driven by an 8% improvement in yield, which is very encouraging. However, as you can see from the physical utilization chart on the right-hand side, further de-fleeting will be required. We intend to proactively manage both the size and mix of our fleet in coming months to better position the business for acceptable returns in the medium term. Our commitment to strong organic growth and margin enhancement is demonstrated on page seven.
Clearly, our return to significant fleet investment in 2011 has been timely, with our Group fleet size being up 11% year-on-year and our fleet age being down some five months, with net investment in the rental fleet in the nine months to date being GBP 261 million. However, our strong EBITDA margin improvement ensures that this growth in the long-term strength of our business is being funded largely out of organic cash generation. Therefore, although as anticipated, our debt has risen to GBP 911 million, we have met our commitments to deliver to 2.5x EBITDA. Looking forward, we will continue to focus on organic growth, and our preliminary capital expenditure plan for next year is gross additions of around GBP 500 million, with net spending being circa GBP 400 million.
This level of expenditure provides clear growth opportunity, but will also allow us to further de-age our fleet as we further enhance our strong market positions. The majority of this investment will again be in the U.S., where the rewards of this strong organic growth strategy can be seen in the improvement in return on investment. Sunbelt's ROI for the 12 months to January 31, 2012, rose to 12.9% from 8.1% in the prior year. We anticipate that this level of investment, combined with continuing strong margins, will allow us to deliver further in financial year 2012-2013, consistent with our strategy for this phase of the cycle. To summarize, the momentum experienced in recent quarters is clearly now well established. To support these trends, we continue to invest strongly in our asset base funded by our strong EBITDA margins.
Despite this investment, we continue to deliver and both financially and operationally, we are well positioned to take advantage of current and longer-term market trends. As a result, we now anticipate that our full-year profit will be significantly ahead of our earlier expectations. That ends the presentation, and I will now hand over to the operator to administer the question and answer session.
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. There will be a brief pause while questions are being registered. Our first question is from Caroline de la Soujeole of Singer Capital . Please go ahead with your question. Your line is now open.
Good morning. At the half-year results, you indicated that you thought there'd be no cyclical upturn in 2012. Has that view now changed? If not, when do you expect to see a pickup in the cyclical recovery? Second question, market share gains. Could you say whether that's coming market share from taking from mom-and-pop shops or if you're taking that from the larger players, please?
Yeah, let me try and answer both of those questions. I think what we said at the half-year was that we were anticipating that end construction markets would probably in 2012 no longer be a headwind, but were unlikely to be a significant tailwind. I think that's probably broadly the same. I find myself here in Q3 being asked questions about significant recovery in North America, where in Q1 we had to do a special roadshow to explain how it wasn't double dip. Whilst sort of market perceptions of the U.S. economy have swung widely, ours have been fairly consistent, which is that we have seen gentle improvements over recent months. We expect that to continue. You have to bear in mind that there is quite a long lead time from improved general economy and significant construction. It needs to be a financing phase, a planning phase before construction starts.
I think our view of 2012 is unchanged. I think our view is now being more supported by some slightly better data coming out of North America, which is calendar 2012 will be a broadly flat to mildly improving market, but it will be mildly improving off a low base. If there's going to be a breakout year, then one would hope that would be 2013. Our overall market outlook has not changed materially. In terms of where we're getting the market share from, I think as we've said before, we think it's a combination of two things. We think it is we are gaining market share predominantly from the smaller players. I think it's not so much one of size, but one of financial strength. We're gaining market share from those who have not had the ability to invest, nor had the insight to invest early.
We're gaining share from those. I think that will continue. We're also gaining share from our customers in the sense that they are choosing to rent more rather than buy. I think the drivers of our market share gain are, once again, largely unchanged. It's becoming quite a dull, consistent story here. We think we're delivering very similar performance and the drivers remain the same. In terms of exactly who we are gaining market share from, in an industry where there isn't a lot of strong independent analysis, it's difficult to be precise. If you look at the compare our performance with overall market statistics, we are clearly gaining share from somewhere.
Okay, do you think you're gaining share from United Rentals and RSC? You were saying that as a result of the merger of the two companies, that was a strong possibility you should be able to take share there. Has that happened yet?
I have said that, but I mean, clearly, the United Rentals and RSC merger is yet to happen. It isn't going to happen until May/June. Therefore, in calendar 2012, depending on the timing of when they decide to make any changes to the operational base, will affect what impact there is in 2012. I mean, from our own experiences from the NationsRent acquisition and other closures that we made during the downturn, like everybody else, there is undoubtedly a degree of disruption. I have no doubt that United Rentals and RSC, they're two very well-managed companies, will manage that process effectively. Nonetheless, there is disruption from that degree of change. We would hope to benefit from that. Now, that's a short-term tactical benefit. The getting bigger in a more professional industry is advantageous to all of us in the long term.
Okay, great. Thanks.
Our next question comes from the line of Mark Rosen at Oriel Securities. Please go ahead with your question. Your line is now open.
Hi, good morning, chaps.
Morning, Mark.
Just the first question is obviously on the size of the U.S. fleet. I'm looking at it by sort of original value. I mean, is it feasible to think that you could get that somewhere between GBP 2.8 billion and GBP 3 billion by April 2015, or is that too optimistic?
Yeah, I mean, look, we remain a cyclical business. If you look through previous cycles, our fleet grows and our yields grow as we sit as we have a cyclical upturn. I think we are better positioned for a cyclical upturn than at any other time in our history, both financially in terms of the capacity we have within our balance sheet and operationally in terms of the stability of our business, the tenure of our workforce. What people forget is typically when you go into recovery, you've just been going through a massive cutting phase. We have not closed the depot in anger for about two years now. We've been stable in terms of our operations as we cut early and we have the ability to invest. We have a young fleet for this stage in the normal construction cycle, so we clearly have momentum within our sales force.
We're excited about the prospects of normal cyclical recovery from this space. When that cyclical recovery comes and its extent is yet unclear, I go back to the point that we were justifying non-double dip in August. Here I am in February talking about how great the recovery is going to be. Neither are as clear-cut as some people seem to suggest. Through a cyclical recovery, and I'd hate to put dates on this, you would expect our fleet to grow.
Yeah, but Mark, I've had the ability just to run the calculator over the question you asked while Geoff's been speaking, and to grow our fleet from the current GBP 2.3 billion to the lower end of the numbers you gave, GBP 2.8 billion is a 20% increase. If one were just to look at that on a compound basis over three years, I think you mentioned from April 2012 to April 2015, that would be a 6% volume growth a year. Yes, I think you can relatively easily see how, given our strong and improving margins, how Ashtead could fund that sort of fleet growth or indeed a little bit ahead of that with pretty much flat debt.
If the market conditions are strong enough to absorb that amount of fleet, we will invest in response to the demands that we see because we are very conscious of the need as a capital-intensive business to keep our returns up. As you know, our returns in the U.S. have recovered extremely well without as yet any improvement in the end economy. We're going to continue to focus on that, on returns, but we also will focus on growing the fleet and taking advantage of the market.
Yeah, just on the GBP 500 million gross capital expenditure for April 2013, can you just say how much of that would be for the U.S.?
Oh, no, but clearly, again, the majority of it, I mean, the U.K., we are in, you know, we'll be broadly around depreciation. We're in that sort of phase in the cycle because we'll be looking to neither, we'll probably reduce the fleet slightly in the U.S., but we don't, in the U.K., sorry, but we don't want to age it any further. We've given broad guidance there because it's an appropriate time to be looking particularly at debt levels, etc. We haven't actually done formal budgets yet for next year. We are just doing our Q3s. We actually start that process, Ian and I, are over in the States next week. It's going to be of that, if you thought of the U.K. as broadly being in line with depreciation, you're not going to be a million miles away.
Page 11 will show you, Mark, the depreciation charge in the UK is about GBP 40 million annually. Yeah, that's the order there for a tenth of then.
Just finally for me, just on when you spend this money, are you seeing sort of equipment price inflation from the manufacturers coming in at the moment?
Yes, we are. Again, particularly for anything which has a tier. There are two elements of inflation. There is exactly the same product type where we are seeing mild inflation. Then there is increasingly the influence of Tier 4 engine requirements on anything 75 brake horsepower and above, where the inflation is more significant. Therefore, the proportion of Tier 4 in everyone's fleet this year is going to be relatively small, but it's going to be an increasing proportion. That increased technological dynamic, together with the increased financial implications of Tier 4, is another reason why we think it helps drive us to continue to increase rental penetration. It is an impact, but it's an impact which is easier for us to manage than perhaps some of our smaller customers.
Okay, thank you.
Our next question comes to the line of Justin Jordan of Jefferies . Please go ahead with your question. Your line is now open.
Good morning, guys. Great quarter. I've just two kind of related questions. Firstly on pricing and secondly on fleet. Firstly on pricing, when you go back to the second quarter results, you were talking in terms of pricing at local customer level being sort of broadly similar to previous peak levels and the national accounts being, of course, materially below. Where are we now in that pricing dynamic vis-à-vis previous peak levels?
We are exactly the same place as we were at the half year. Nothing's going to change materially during a winter season. You keep the mix and you hang onto your hat. Where you tend to get swings is in quarter one and quarter two. I would expect us to be in a similar mix at the end of Q4 as we are at the end of Q3. You're absolutely right, Justin. We are back to previous peaks on average for the transactional business, and we're about 20% below where we were for the longer-term business. That's not going to swing massively in Q3s and Q4s. You tend to get the bigger change in dynamics in Q1 and Q2.
Great. Just following up on Mark's question on, I guess, fleet. Are you seeing any change in terms of OEM lead times on new equipment? I'm just conscious of the fact that it can be one of the issues if we get into more buoyant economic conditions.
I mean, lead times are undoubtedly longer. Particularly, it's a bit like in the old days getting a new car on the 1st of August. Everybody wants their new fleet in April and May. Therefore, if you want new fleet in April, May, or June, it's really not going to happen now. Lead times for core product types have undoubtedly extended. We have made, as I think we explained at the half year, we always make early commitments. We manage our supply chain progressively using the strength of our balance sheet and our recent experiences. We've got good commitments in there for certainly the first quarter of next year. If we were to go with looking for significant additions to core fleet now, you'd probably be looking at, you'd do well to get it by August.
Really? Okay. Thank you both.
Our next question comes from the line of Andrew Nussey at Peel Hunt. Please go ahead with your question. Your line is now open.
Good morning, Geoff. Good morning, Ian. A couple of questions, if I may as well. First of all, I think over the last couple of quarters on the calls, you've highlighted you felt the platform was capable of delivering sort of 25% more volume. I wonder if you could perhaps reiterate that and give us some comfort that, as that volume comes through, the network can handle it without significant cost creep.
Yeah, no, absolutely. Look, you're right. We explained that we felt there was 25% more volume growth available within our existing network. Obviously, we've done broadly half of that over the course of this financial year, and there remains that capacity. Again, as you'll have seen in the presentation, we continue to commit to focusing on organic growth with an eye on heavy drop-through and ROI improvement, and that remains our commitment. Precisely what that will be, particularly in the second half of the year, because we will open some greenfield sites. Frankly, we'll probably open some greenfield sites as a result of the United Rentals and RSC merger, where we see opportunities arising from that. If we are seeing significant economic growth and it is in particular geographies, then again, we will be putting in more greenfield sites.
There will be a greater proportion of greenfield sites which will have some impact on the drop-through in the coming year. I don't think it's going to be certainly anything like the proportion that it was in historical cyclical upturns. As I said, we're formalizing our budgets next week. For example, we know we're going to open up locations to support some of the shale finds in North Dakota, in Pennsylvania, and Ohio in the coming year. As I said, they may well, I don't know this, but it's reasonable to presume that we might think there are opportunities from other changes in the marketplace, i.e., the United Rentals and RSC integration, which might accelerate some greenfield operations. Fundamentally, we are focusing on growth on our existing footprint. As we head into cyclical recovery and as individual opportunities present themselves, we will support them with greenfield sites also.
That's great. You've answered the second question as well. I'll hang up for now. Thanks.
Thank you.
Our next question comes from the line of Alex Hugh at UBS. Please go ahead with your question. Your line is now open.
All right. I had a very similar question to Andrew, but I was wondering if you could just clarify something then. Roughly how many new depots do you think you might open in April 2013? The ones that you might open are presumably, if it's to support shale finds or if it's to support, or if it's going into the power generation business, then those are presumably higher returns than the average returns on a greenfield straight general equipment rental.
Yeah, that's right. I mean, look, as I said, we have just finished Q3s. We were literally going over to America next week to do the budgeting process. How many is it going to be? I don't know, 10-ish? It's not 20s, 30s, and 40s. It's in the 10- 15 range, something along those lines. Probably three or four pump and power would have been normal costs, similar to what we've done this year. Three or four because of specific power projects that we know are already in the pipeline. Then how many more because of either general economic growth or opportunities from a big integration? That's the bit that's done off. In the context of our total depot network, still relatively small. You're right. Typically, we say it takes 12 months for a location to break even.
I think these ones are likely to be quicker for two reasons. A, it's higher ROI business per se. Secondly, we've learned some lessons. It cost us a fortune to close down some rather grand locations which were on exceptionally costly long leases. We have to recognize that our business splits into two categories. There are major sort of urban areas where there is a good mix of work, where we are opening locations for long-term development. There are also going to be locations which are there to support specific projects or specific initiatives where we need a barn, a field, and we need a five-year lease. Having a far better understanding of that mix of requirement or to make the entry cost. Indeed, as we're talking about an upturn, there will be a downturn sometime again.
I keep reiterating we are a cyclical business, making the exit cost significantly lower than was historically the case.
Okay. Okay. Can you say in the last nine months what the growth in these specialty businesses was? Feel free to break that out between power and scaffolding and stuff if you want.
That's very kind of you.
It's your choice.
If I could remember, I would.
It was faster than the average, Alex, but we'll probably give you more details in June.
It was faster than the average. Look, you know it's an area where we continue to focus. Therefore, if you look at our average growth, then the specialty business, both because of its organic growth and because of the impact of Empire, is clearly greater than that. We would anticipate that continuing to be the case. I mean, it has been a big event year, so we've benefited from that. We've seen we've had this chain of events. If you look at insurance companies, they're all claiming it's been a massive claim year. If you look at FEMA in the U.S., they've said it was their biggest event year ever. You know, we have benefited this year from a stream of activities. I mean, gosh, even over the weekend, there were tornadoes again. You don't usually get tornadoes till May, June.
We're having tornadoes at the end of February, early March is very, very unusual.
Okay. In terms of the cyclical improvement, what do you think, without wishing to commit you to anything, but what do you think rates could do? Obviously, I'm thinking about the type of massive expansion you had in rates last time. What do you think rates could do if you do get an improvement in end markets? Let's call it calendar 2013.
I have consistently said that I think we will get back to previous peak rates. The question is, without knowing, and I know it sounds like I'm being terribly evasive, Alex, and I'm not trying to be, it depends on the shape of the recovery. Last time, we got a real bumper year because residential just took off. Most of the commentators we follow are suggesting that whilst we may have turned the corner, it may be a more gradual recovery, which means it will be supported by more gradual reinvestment. I think where we get to through the recovery will not change. What pace it will actually happen will be driven by the pace of the recovery. We are a cyclical business and rates will rise faster than they have been in that breakout year.
Okay. Okay. Nicely non-committal. Thanks for that.
If I knew, I'd be doing a better job than this, Alex.
Just a reminder, participants, that if you wish to ask a question, please press zero one on your keypad now and press zero two to cancel. There will be a further pause while questions are being registered. Our next question comes from the line of Alex Pease at HSBC. Please go ahead with your question. Your line is now open.
Thanks. Morning, gents.
Morning, Alex.
Just a quick sort of follow-up. In terms of the GBP 500 million gross capital expenditure next year, two questions. Number one, I suppose given the performance of the specialty businesses that there would be a healthy allotment, a sort of disproportionate allotment within that GBP 500 million for specialty.
That's true. That was true this year. That will be true again next year also.
Okay. Is there a hint of regional split on that? I presume a lot of it's going to be around Florida and the Gulf Coast?
No, probably not Florida. As I said, we haven't actually been through the, you know, we'll be delving down into PC level next week. There will be some regional differences. Certainly, Texas and the Gulf Coast have been a strong growth market for us. Actually, the Northeast has been a very, very strong market for us, and I think they will probably get a disproportionate amount of growth. It sounds tactical, and it is very, very tactical. I have no doubt we will be sitting down with a map of United and RSC locations and seeing where we think the most disruption is going to be. They may get a disproportionate amount also. There are a number of moving parts on that. We're seeing a lot of suggestions that the West Coast off a low base is leading some of the cyclical recovery.
You may recall from the half-year results, we bought the assets of a distressed aerial business in Los Angeles in the half year, and we've seen good growth in California too. It will be very much driven by what we're seeing in end markets, as well as some strategic investments in areas like power and specialty.
Great. Just one sort of further one. How, if at all, has your thinking on CapEx, your budgeting for CapEx, how has that changed by the RSC United deal? Did that change the emphasis of where you thought you might be?
That's a great question. Obviously, as you would anticipate, when a major event in your market takes place like that, you do sit back and reassess and reconsider your own strategy and decide, you know, does there have to be a change? We looked back on it and said, actually, no, we're very comfortable with our strategy of predominantly organic growth. I think we have been very nimble in reacting to and moving new fleet to where the opportunity presents itself. I think it just reinforced our view that it was going to be a big capital year, but also reinforced our view that, notwithstanding, as I said, those one or two long-term strategic investment plans that we have, a proportion of that spend needs to remain flexible to react to opportunities as they present themselves.
Okay, thank you very much.
Our next question is from the line of Mark Rosen at Oriel Securities. Please move your question. Your line is now open.
All right, chaps. Just a quick follow-up on some of the questions earlier. To just remind us of where we are rates-wise in the U.S. relative to the prior peak, how much further there is to get back to that?
We're down, you need to remind me, but 10% from where we were?
Yeah, we're at about 90 overall, Mark. As we showed at the half-year, the short-term daily business rates are at about back to the previous peaks, and it's still down about 20 on the larger long-term business.
Just finally, on greenfield openings this year, did I hear right about 10 or so?
It's about 10, and that's me speaking in London with nobody in America who's actually going to open one, having shown me a budget yet. There are a bunch that we knew which have been on the sort of the runway for about six months now. Yeah, I know six or seven, and I'm guessing there's going to be a few more, and we don't know what's going to happen in terms of other market changes which might create more. If we are heading into greater cyclical recovery, if by any chance there is some disruption through other micro market changes, we will be flexible enough to be able to react to those. We've actually put together a model where we could speedily enter a market with a Sunbelt Light type depot, which is a fast, low-cost introduction into a new market. We've been working progressively on that model.
Alex raised a point of, how quickly can you get returns? We've looked at both. Look, how do we make them more profitable more quickly? Equally, at the end of that opportunity, how do we get out of them less expensively too? There will be, if we are going into a phase of recovery, then there may be opportunistic greenfields that we will look at. It's very hard to be precise on those right now, Mark, because we don't know what they're going to be.
That compares, Mark, if you compare for that expectation for 12, 13, it compares with five depots opened this year. If you look at page 21, the final page of the statement, those are essentially all in the specialty business, I think.
What we are signaling is, look, there may be a few more than it was last year. This is not a, gosh, let's open 10% more locations. We're in huge growth mode. Let's go for big market share gains without focusing on drop-through. We are certainly not in that phase, but we're likely to open up a few more than we did in the year just gone.
Yeah, I just wondered, if we're just on staff costs again, something that was touched on earlier, I think it was the nine months or the quarter, they're up about 16%, 17%. Can you give us a feel for what the like-for-like element of that was or whether that was all like-for-like? So wage inflation and everything else.
Just trying to work out which, you're looking at the number for the quarter. There's a significant currency impact in that, Mark. If you want to come back to me offline, I'll give you the ex-currency comparison.
Wage inflation has been fairly small. If you turn to the numbers, I don't know what the precise numbers are. We've got, what, about 100 extra heads? There's very, very few extra heads come in. The actual staff costs remain relatively low. I don't know what impact Empire will have had in the quarter if you're looking at just pure staff costs.
That will be part of it because the recoverable scaffold erection and dismantling staff cost can move around on a quarterly basis. Empire is certainly Empire's E&D staff. This is the final quarter, the third quarter where Empire has a significant effect. A significant part of that 16% reported growth that you're seeing is going to be the recoverable erection and dismantling staff in Empire.
Like-for-like operating costs haven't moved significantly.
No, the headcount's up, 52 of those.
It is up 52 people, of which 42 of those are in the new pump and power stores. We have very, very flat heads. Wage inflation has been 2%, 3%. It has been relatively small. We continue to enjoy big drop-through because of the operational efficiency of the business.
You'll probably have seen, Mark, the drop-through is 69% for the nine months in the United States from rental revenues and still 61% in the third quarter. The cost base remains under good control, and we're very pleased to be achieving our targets at high drop-throughs, which is a significant part of what's driving the profit growth, as you know.
Okay, thanks.
Just a reminder, participants, that if you wish to ask a question, please press zero one on your telephone keypad.
Operator, if there's no further questions.
There are no further questions, so I'll return the conference to you.
Thank you very much, operator. Everybody, once again, thank you for your participation. We look forward to coming back to you with our full-year results in June.
This now concludes our call. Thank you all.