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Edited Transcript of AHT.L earnings conference call or presentation 10-Sep-19 3:00pm GMT

Q1 2020 Ashtead Group PLC Earnings Call (Bondholders)

Leatherhead Sep 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Ashtead Group PLC earnings conference call or presentation Tuesday, September 10, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brendan Horgan

Ashtead Group plc - CEO & Executive Director

* Michael Richard Pratt

Ashtead Group plc - Group Finance Director, Group Treasurer & Director

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Conference Call Participants

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* James Forristall Kayler

BofA Merrill Lynch, Research Division - MD

* Sean-M Wondrack

Deutsche Bank AG, Research Division - VP & Senior Credit Analyst

* Yilma Abebe

JP Morgan Chase & Co, Research Division - Executive Director and Senior High Yield Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the Ashtead Group plc Q1 trading update bondholder call. (Operator Instructions) Just to remind you, this conference call is being recorded. Today, I am pleased to present Finance Director, Michael Pratt. Please go ahead with your meeting.

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Michael Richard Pratt, Ashtead Group plc - Group Finance Director, Group Treasurer & Director [2]

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Good afternoon, everyone. With me today are Brendan Horgan, our Chief Executive; and Will Shaw, our Director of Investor Relations. The webcast of our earlier analyst meeting and the related slide presentation are available on our website, and I'll refer to the slides during our call.

So I'll begin by capturing some of the financial highlights from the release in the event you missed in the webcast and then open the call for your questions. As an overview, it's been another quarter of strong growth in revenue and profitability. Our North American end markets continued to show strength, and we will continue to have strategy and growth through greenfield openings and bolt-on, supplementing our same-store growth. As you are aware, we adopted IFRS 16 on the 1st of May. I think it's worth reiterating while its adoption impacts our financial statements, it does not affect the economics of lease transactions, our cash payments, our business plan or our capital allocation policy.

The group's results for the first quarter are set out on Slide 5. As a result of the adoption of IFRS 16, our measures of profitability and margins are not directly comparable to last year. And so as you can see, we set our performance on both a pre- and post-IFRS 16 basis. I'm only going to comment on and draw comparisons from the pre-IFRS 16 figures given that it is these that are consistent with the prior year.

The group's rental revenue for the quarter increased 16% on a constant currency basis. The EBITDA margin was strong at 47%, but it does reflect the drag effect from the significant number of locations [and] last year, and we opened 18 greenfields and the completion of 6 acquisitions this quarter.

The operating profit margin of 29% underlying pretax profit increased 9% at constant currency to GBP 326 million, while earnings per share increased 12%, reflecting the profit improvement and the impact of the share buyback program.

On the next 3 slides, I'll review the divisional numbers, beginning with Sunbelt in the U.S. Slide 6 shows Sunbelt's first quarter results in the U.S. Rental and related revenue was up 18% as Sunbelt executed well on its organic and bolt-on growth strategies and continued to benefit from strong end markets. The EBITDA margin was strong at 50%, although it reflects the drag effect and the significant number of new locations added in the last year.

Operating profit improved by 15% in the quarter to $443 million at a 32% margin. It is worth highlighting that ROI remains strong at 24%, despite the ongoing significant investments in the business.

Turning now to Canada on Slide 7. Rental and related revenue growth of 22% benefited from the full year effect of a number of acquisitions over the last year. This generated EBITDA of $35 million and an operating profit of $16 million and margins of 37% and 17%.

The Canadian business is performing as we expected, with year-over-year comparisons affected by M&A activity over the last year. Including the impact of the lower-margin Voisin's business, we continue to drive operational improvement from the acquired businesses and our follow-on fleet expenditure and expect margins to improve towards 40% and 20% over time.

Turning now to Slide 8. A-Plant's rental and related revenue was broadly flat at GBP 109 million. The 5% increase in total revenue reflects a higher level of used equipment sales than a year ago as we defleet underutilized and low-returning assets consistent with the plan we outlined in June.

The market in the U.K. remains relatively flat and competitive. These factors have contributed to weaker margins in the quarter, with an EBITDA margin of 32% and an operating profit margin of 12%.

Slide 9 updates our debt and leverage position at 31st of July. As expected, net debt increased in the quarter as we continue to invest in fleet and bolt-on acquisitions and continued our buyback program. In addition, the adoption of IFRS 16 added GBP 883 million of debt on the 1st of May, in line with the guidance we provided in June.

Leverage at 31st of July was 1.8x on a constant currency basis, excluding the impact of IFRS 16 and 2.1x including it. Our debt facilities are committed for an average of 5 years at a weighted average cost of less than 5%. Both our leverage and well-invested fleet will continue to provide a high degree of flexibility and security in support of our 2021 plans.

That concludes my comments. So we'll move on to take Q&A. Operator, please do provide the instructions for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question is from Yilma Abebe from JPMorgan.

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Yilma Abebe, JP Morgan Chase & Co, Research Division - Executive Director and Senior High Yield Analyst [2]

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A few questions from me. I guess firstly, if you can comment on sort of the M&A environment. So what are you seeing kind of in the market in terms of some evaluations and also your appetite for doing larger deals?

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Brendan Horgan, Ashtead Group plc - CEO & Executive Director [3]

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Well, we have mentioned on our call this morning -- we had a similar question. In reality, the multiples haven't changed. We've been active in the bolt-on markets for quite some time now. And there are only so many buyers out there on the size that we like that are part of our plan, and they've just been -- we've been -- they haven't changed is the short answer.

Another thing is, I think, worth noting, if you will, is from time to time, we will use what we're trading at as a bit of a high watermark, like any good management team should think. We should be trading a lot higher. But anyway, it works for us in that regard as well. So there's been no change in terms of multiples.

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Yilma Abebe, JP Morgan Chase & Co, Research Division - Executive Director and Senior High Yield Analyst [4]

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How about in terms of your appetite for the larger deals?

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Brendan Horgan, Ashtead Group plc - CEO & Executive Director [5]

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Our strategy is exactly what it was. The definition of bolt-on may have changed between 2010 and today, just to give a more overall scale of the business. But we have -- not that we won't take a look when there's book around, but we have no strategic change in our heading in terms of large versus bolt-on. We like bolt-on for all the reasons we've explained over the years.

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Michael Richard Pratt, Ashtead Group plc - Group Finance Director, Group Treasurer & Director [6]

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I'd say that's an important thing we've got, as Brendan [touched on]. We -- when books are around and with large deals, we look at them, but they've got to make sense to us. And so if the returns aren't there or it doesn't make sense operationally or otherwise, then they are -- they're of no interest to us at that point. So it's not that we don't look. It's just that we -- if they don't make sense, then we don't pursue it.

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Yilma Abebe, JP Morgan Chase & Co, Research Division - Executive Director and Senior High Yield Analyst [7]

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And then in terms of the dividend markets and (inaudible), any notable changes in the most recent quarter versus the prior quarter in terms of either positives or negatives that you want to point out?

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Brendan Horgan, Ashtead Group plc - CEO & Executive Director [8]

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Well, I think really more than anything, it -- I would point the positives. I mean we've got -- if you look at the last quarter, specifically, last 3 -- the actual last 3 months, we've had 3 months of stores improved sequentially. I think it's worth -- if you have the slides in front of you. If you look at Slide 15. Slide 15, a similar slide to this, we would have spent quite a bit of time on -- as part of the full year results. There are 2 things there to point out. So if you first look at the bottom right, this is what we've been talking about from a -- if you go from a headline perspective, we've said for some time now, the markets, meaning the capital markets, perhaps are far too focused on when there may be a construction downturn rather than to what extent there may be one. So what we put out here would be the forecast that Dodge has, and you'll see that they forecast '19 to be another year of modest growth at plus 2%, which feels about right. And keep in mind, we're 9 months into now the calendar year, and that's going to become an actual or estimate pretty soon. And it also points to, we're pretty close to solidifying a big part of what 2020 will look like, but they're forecasting a minus 1% and minus 2% in 2020 and 2021 before a recovery. If that is right, if that is right, we're going to see a trough in 2021, which is in absolute terms, the same size that the market was in 2018, which is really the primary month, if you will, of our full year just ended in June, where we had a pretty strong year by any measure, really.

The other thing that's important is, as I relate to those starts, those starts in the top left-hand graph on Slide 15 are exactly tied or correlated to that put in place forecast [low]. So we've seen a few months of sequential growth in starts, and where we are on that line is getting near that sort of peak the way it's forecasted. Now we haven't seen it happen yet. But if it starts to decline, and they do decline per the forecast, keep in mind, we'll have several months there of declining starts. Then we'll have a flattening out period before we have an improvement. And that will -- if that happens, we'll start -- the bottom right forecast is what will happen and put in place. But other than what I would call broad feedback from our customers speaking to recent big project starts or recent big project returns from a construction standpoint, those would be the big highlights as of late. And I'll remind you, of course, construction is less than half of our business.

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Yilma Abebe, JP Morgan Chase & Co, Research Division - Executive Director and Senior High Yield Analyst [9]

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Okay. What sort of turn out do you have relative to the Dodge forecast as you pointed out on the slide?

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Brendan Horgan, Ashtead Group plc - CEO & Executive Director [10]

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We are [thrilled] viewing this field. It feels about right. The closer -- the further we get through 2019, as I said, the less likely there is any significant change in 2020. If I -- talking to people who run other businesses, just like we run this business, will there be some that, in an election year, particularly the type of election year we're in, where you have the degree of change we've experienced with this administration. I don't think businesses care so much what exactly the rules are, but they do want to know what the rules are. So could you sense sort of a slight pause in 2020 that might carry over in 2021? Yes. So I mean I think that makes sense. Now yes, these are our forecast [using] Dodge. I would mark Dodge with the highest marks in terms of those that are out there that actually need very granular data to build their forecast, so I would mark them highly. So I would say this feels like you could (inaudible).

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Yilma Abebe, JP Morgan Chase & Co, Research Division - Executive Director and Senior High Yield Analyst [11]

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And then a final question. I'll pass it on. I've asked this in the past, but I'll ask it again. Your bonds are not rated investment-grade on both sides. Do you have an investment-grade financial policy at this point in time?

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Michael Richard Pratt, Ashtead Group plc - Group Finance Director, Group Treasurer & Director [12]

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No. As we've always said, our policy is -- the ratings are an output, not an input. So we will continue to manage the business in accordance with the prices we set out, which is -- it's clearly IFRS 16. It's the 1.5x to 2x net debt-to-EBITDA leverage, slightly higher by taking into account IFRS 16. And the ratings were far from that. Do I think we are now, as you said, we are now investment grade given the nature of this business and the opportunity it has ahead of it. Do I think those metrics, et cetera, improve over time? I think they do, but it's not to say that -- we're not sitting here saying, well, we can't do that because we need to maintain investment grade. We'll do what's right for the business, then the ratings will follow.

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Operator [13]

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(Operator Instructions) Our next question is from James Kayler from Bank of America.

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James Forristall Kayler, BofA Merrill Lynch, Research Division - MD [14]

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I actually just had one question just on the used equipment market. I think that the Rouse sort of commentary has been relatively negative, I would say, or at least tempered, but talking to other operators, it seems like sort of realized retail values are okay. I'm just curious what you're seeing in the used equipment market and if you think it's sort of healthy or if you can kind of recognize some of the stuff that Rouse was talking about at all.

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Brendan Horgan, Ashtead Group plc - CEO & Executive Director [15]

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Yes. No. Well, as you might not be surprised to hear, I had a conversation with Gary Rouse -- I'm sorry, Gary McArdle at Rouse the day after it came out. And I was wondering who interpreted the actual data into the headline. And if you actually look at the data, I don't know how the hell you get the headline. Pardon me for saying it that way. I say that because they're not really tapping the quality of the used equipment end markets in the right light. We are at -- we are at relative highs. We're actually at relative really highs across the vast majority of the products that we carry and we sell. And I can tell you, and I'm sure Gary would not be surprised at all to get a call from you. He would very, very much agree. He had someone who doesn't usually do the write-up do the write-up. And they were talking about a difference between 1 quarter to the next quarter rather than looking at it in perspective of several years. And I think, basically, that would have been the second best year that we've had in 10 years' time. So the used equipment market is very strong right now. For anything to be indicative of or telling of what times to come would be, it would have to be far more drastic change than what they would have seen, but I thought the actual write-up was not very good at all.

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Operator [16]

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(Operator Instructions) And we have a question from Sean Wondrack from Deutsche Bank.

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Sean-M Wondrack, Deutsche Bank AG, Research Division - VP & Senior Credit Analyst [17]

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Just at Slide 12 here, where you have the specialty utilization and you show year-over-year. What do you attribute to the small decline year-over-year? Are your markets as active? And with some of the industrial activity that we've seen in the U.S. kind of coming down, are you feeling the impacts of that?

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Brendan Horgan, Ashtead Group plc - CEO & Executive Director [18]

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Sean, I'm glad you asked that question, and it's a question that we didn't get on our earlier call today. It's exactly why I put it there. That is pure and simple, the makeup of 3 things very specific. In that April through July period a year ago, we would have had Puerto Rico on full tilt, so our specialty business would have been very active in Puerto Rico, which is all our generators. In that same period a year ago, we would not -- we would have not owned a business called Temp-Air, which we acquired in February last year, and Temp-Air is a heating business. So obviously, we rolled out all that fleet, which is a zero time utilization in effect today.

And then the third piece would just be our expansion and growing out of our specialty product mix and suite of businesses. So when you think about businesses like flooring, which run at a characteristically lower time utilization but at a higher return in dollar utilization level, not to mention they're just lower. There's the impact that you have. So again, it's why we broke apart the reporting that we used to do, which was just total. And we said, "Hey, you have to look at it general tool and you have to look at it specialty." So I would take away very positive from that. You see it's the highest -- the second highest out of 4 years in our specialty business. So those are the various specific reasons. If we added those 2 things that [sells] back, we would be as strong as last year's April through July.

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Sean-M Wondrack, Deutsche Bank AG, Research Division - VP & Senior Credit Analyst [19]

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Okay. All right. That's helpful. And I think you mentioned the fact that rental penetration within your specialty markets are lower than within general rentals. Do you have a rough estimate or an idea as to where that might be?

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Brendan Horgan, Ashtead Group plc - CEO & Executive Director [20]

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The aggregate of our specialty businesses would be less than 10%. So if you compare that to gen rights or general equipment, that's generally agreed upon to be 55%, area work platform is 90%. It's one of the reasons why we're so excited is we are creating a platform from which there becomes a reliable alternative to ownership to our customer base and our increasingly new customer base outside of construction, in particular. So again because I just used flooring as an example, I'll tell you that the flooring rental penetration is plus or minus 3% today, meaning 2.5% to 3.5%.

We will be holding a Capital Markets Day in Washington, D.C. in April of 2020. And I think you'll see that we will unveil some real math and numbers behind what we call this white space, which is our previously unrecognized rental space. Although we participated in some of these, they aren't necessarily accounted for in the overall IHS Global Insight kind of $7 billion figure. If -- I'll give you -- for instance, that flooring space in of itself is a plus $1 billion industry, and we're just beginning.

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Sean-M Wondrack, Deutsche Bank AG, Research Division - VP & Senior Credit Analyst [21]

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Wow. That's great to hear. Just another quick question. When I look at your capitalization right now, you have a decent amount drawn on your revolver. Is there any thought to maybe potentially terming any of that out?

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Michael Richard Pratt, Ashtead Group plc - Group Finance Director, Group Treasurer & Director [22]

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It's something we think about on an ongoing basis. You'll note -- when you look at it over time, we manage the balance between the long-term fixed debt. And the idea, I would say, it's one of those things we depend on. What our plans are, we continue to evaluate, so no different from what we have done. So we continue to look at it.

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Sean-M Wondrack, Deutsche Bank AG, Research Division - VP & Senior Credit Analyst [23]

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Okay. And then just lastly on the leverage target. I think you've said consistently between 1.5x and 2x. I think you sort of were the trailblazer for these companies with that lower target initially. You're sort of up near the higher end of that range. Is this -- do you foresee yourself sort of delevering from here?

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Michael Richard Pratt, Ashtead Group plc - Group Finance Director, Group Treasurer & Director [24]

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Well, I'd say what we would say, we are comfortable within the 1.5 to 2x range. So we will -- different point here. If you go back a year ago, and I think even at July but certainly at April 2018, we were at 1.6%, which was -- it was artificially low in reality because we knew we got a couple of deals that actually, we might -- thought might have closed and impacted that number and pushed it higher, but they didn't close until later. So there's always a timing with these sorts of things. We're at 1.8x, and now we've just done the King transaction. So anywhere -- we're comfortable within that 1.5x to 2x, and we look at it as we go through the cycle.

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Operator [25]

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(Operator Instructions) And there seem to be no further questions at this point, so I will hand the word back to the speakers for any final comments.

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Michael Richard Pratt, Ashtead Group plc - Group Finance Director, Group Treasurer & Director [26]

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Now just to say thank you very much for your interest, and we look forward to talking to you again after our Q2 in December. Thank you very much.

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Operator [27]

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This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.