Sunbelt Rentals Holdings, Inc. (AHT.L) Earnings Call Transcript & Summary

Hello and welcome to the Ashtead Group plc Q3 Results Bondholder Call. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to present Michael Pratt, Finance Director. Please go ahead with your meeting.

Thank you. Good afternoon, everyone. With me today are Brendan Horgan, 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 will refer to the slides during our call. So I'll begin by commenting on some of the highlights from the release in the event you missed the webcast, and then open the call for questions. As an overview, it's been another good performance in the quarter. Our North American markets remain supportive, and we've continued our strategy of growth through greenfield openings and bolt-ons supplementing our same-store growth. The group's results for the 9 months are shown on Slide 5, and as I did at the half year, I set out the results on both the pre- and post-IFRS 16 basis. I'm only going to comment on the pre-IFRS 16 figures given since these -- that are consistent with the prior year. The group's rental revenue increased 12% on a constant currency basis. The EBITDA margin remained strong at 47%, while -- all while opening 47 greenfields and completing 17 acquisitions. With an operating profit margin of 28%, underlying pretax profit increased to GBP 969 million, while earnings per share increased 11%, 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 9-month results in the U.S. Rental and related revenue was up 12%. As expected, this rate of revenue growth has slowed as we progress through the year with the comparators becoming more challenging, in part due to prior year hurricane activity. In contrast, this year, the hurricane season was much quieter even to the extent that it was a small drag on our results. The EBITDA margin was strong at 49%, although it does reflect some pressure from the relatively lower rate of growth when compared with prior years and the drag effect of the significant number of new locations over in the last couple of years. This contributed to a drop-through rate for rental revenue to EBITDA at 48%. Operating profit improved 10% to $1.33 billion and to 31% margin and ROI is a healthy 23%. Turning now to Sunbelt in Canada on Slide 7. Rental and related revenue growth of 26% reflects the benefit from acquisitions over the last year, including William F. White acquired in December. Organic growth was a healthy 11%. This revenue generated EBITDA of $121 million and an operating profit of $57 million at margins of 38% and 18%, respectively. The Canadian business is performing as we expected and is benefiting from last year's fleet investment as the fleet acquired in the second half of last year is put to work. Turning now to Slide 8. A-Plant's rental and related revenue was down slightly at GBP 316 million. The small increase in total revenue reflects a higher level of used equipment sales than a year ago as we de-fleeted underutilized and low-returning assets, consistent with the plan we outlined in June. The cost of these used equipment sales was also a key contributor to the 10% increase in operating costs. The market in the U.K. remains relatively flat and competitive. This environment, combined with small losses on the de-fleet compared with gains on sale last year and the cost of realigning the business, have contributed to weaker margins with an EBITDA margin of 31% and an operating profit margin of 10%. As a result, A-Plant's operating profit was GBP 37 million. Slide 9 sets out the group's cash flows for the first 9 months of the year. The strong margins we discussed earlier produced cash flow from operations of GBP 1.8 billion giving us substantial flexibility to enhance shareholder value within our capital allocation framework. This resulted in record free cash flow of GBP 363 million for the 9 months after funding all our fleet expenditure, both replacement and growth as we continue to take market share in the U.S. and Canada. In addition, we spent GBP 407 million on bolt-on M&A as we broadened our specialty capabilities and hence, our geographic footprint and GBP 376 million on our share buyback program. Slide 10 updates our debt and leverage position at the end of January. As expected, net debt increased in the period 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 to debt on the first of May. Leverage was within our target range at 1.9x on a constant currency basis, excluding the impact of IFRS 16 and 2.3x including it. Both our leverage and well-invested fleet continue to provide a high degree of flexibility and security in support of our strategy. In November, we took advantage of good debt markets and issued $600 million or 4% of 4.25% notes and used the proceeds to redeem the $500 million of the more expensive 5 5/8% notes during 2024 and pay down amounts of the ABL facility. This provides us with access to more capital for a longer period of time at a lower cost and with a smooth maturity profile. Our debt serves are committed for an average of 6 years at a weighted average cost of 4%. The final slide I reference before I open the call for Q&A is our updated view of CapEx for this year and our preliminary view for next year, which appears on Page 18. As we trailed at the half year, we expect CapEx to be at the lower end of our previous guidance for this year at around GBP 1.4 billion. For 2021, we expect gross CapEx spending to be in the range of GBP 1.1 billion to GBP 1.3 billion, which should result in -- or should enable us to target mid to high single-digit rental revenue growth in the U.S. next year. This concludes my comments, and so we'll move on to Q&A. Operator, could you please provide instructions for Q&A?

[Operator Instructions] Our first question comes from the line of Yilma Abebe from JPMorgan.

A couple of questions from me. I guess, firstly, if we look at Slide 15, I was hoping to get your thoughts on how you think of the forecast, the Dodge forecast in 2021 and then 2020, if you could give us a bit of your -- what you are seeing relative to your business and what you feel, what you think of this forecast here.

Yes, sure. This is Brendan. I think as we -- we've been very consistent with this. And I think it all really plays out quite true, frankly. Albeit, I would have mentioned on the results call this morning, we definitely saw a tapering off of the market as it relates to forecast as we progress through 2019. As I look back or with hindsight, so to speak, I really think 2019 was really kind of flat throughout the year. In other words, I don't really think we had an entry point of say plus 2%, plus 3%, and then we found ourselves down to a minus 2%, minus 3% sequentially which would all -- equal out to about 0. The reason why we felt as though there is a reasonable amount of just sort of credibility or instinctive check as it relates to 2020 and 2021 really boils down to 2 things. Let's say, it's an election year. It's been a reasonably good decade, if you will, from an overall business perspective. By that, I mean, pretty slow and steady growth. And there's an election coming up and what will happen, being the question, let's face it, it's not exactly a benign administration. If there were to be a change, what would that amount to? So why wouldn't you just pause a bit? And that's why, as these forecasts began to come clear, the 2020 looked to moderate and 2021 looked to go down a bit. It kind of made sense. When you have a pause, if you will, from a planning perspective, it's always going to lead to a year with a bit negative, like it is shown in 2021. That's number one. Number two, it's just a capacity thing. From a construction standpoint, there's not a lot of extra capacity out there, frankly, right now, particularly when it comes to labor, so this was bound to happen. So I think it's -- to us, it feels reasonably right. It's not -- they're not our forecast. All we can do is sort of interpret them. Hence, the reason why we've been talking about it in the way that we have. I hope that answers your question.

It does. And then the second question I had is, is related to sort of the energy market and the volatility that we're seeing, at least as it relates to -- and oil prices. Maybe if you can give us a sense for what's -- what you're seeing in the oil market as it relates to perhaps equipment coming off of that market. And if there is any parallels or comparisons we could draw this time around versus '15, '16 when we had this kind of volatility?

Yes. No. First of all, keep in mind, our upstream oil and gas business is circa 2% of our revenue and the same thing for profit. I -- you would have seen in the results that oil and gas as an individual segment was down just slightly for the year. Actually, profits are up just slightly. I don't anticipate that to be the case all year. They will move more toward flattening. Yes, I think you can compare and contrast what we saw happen in '15, '16, as you said, kind of 2014, 2015. First of all, I think it's not been very well documented how well our industry in total actually tolerated at the time a very volatile market as it relates to oil and gas. And certainly, it was sort of boom time as it relates to rental in that arena. We chose very consciously and strategically not to enter at the level in which we would have been before, pound for pound. So it's not going to have as much of an impact on us. I do think, when I talked earlier, and you could see a little bit of upward capacity or slightly weakening in terms of time utilization across the entire industry. And there's no question about that. Given others spend more time in it, that's got a little bit of an impact as we are today. But I think -- remember, we've not had -- all those being volatile, we've had nowhere near what those peaks were in the market, and it's nowhere near as broad as it was in the years you referenced. So the tar sands at Alberta, Canada are not as robust as they were. Bakken is not as robust, Marcellus, Eagle Ford, Permian, et cetera. So it's all just a bit more of a moderate sort of oil and gas space to begin with. And as a result, it's just going to be somewhat less volatile.

And then the final question I had is maybe if you can update us in terms of what you're seeing in the M&A front. Any deals in the pipeline that sets up interest and maybe then in what context in terms of the size of sort of deals? Any takeaways there or any updates there?

Yes. There's -- look, there's lots of bolt-on potential out there. There's no shortage of discussions that we're having. We're in a pretty nice position. There aren't a lot of buyers out there that are interested in the size of deals that we are. That being said, we have generally steered to -- we think the year coming will be a bit more modest, a year of bolt-on M&A. We've had a pretty robust last 2 years. It's not as a result of there not being quality businesses out there. We just are kind of the determining factor, if you will, as to when some may go. Obviously, there are always a few out there that we've always earmarked or liked or would like a combination with over the years. And if those came, that could change. But generally speaking, that's how I see it. But rest assured, there is a long, long runway of bolt-on M&A remaining in our industry, just look how fragmented it is.

But the nature of that pipeline is probably more akin to the typical size of transaction we do as opposed to -- we've had the -- they're highly large, but I would characterize $100 million, $200 million plus size deals as being at the larger end of what are our typical bolt-ons, where that pipeline is more in the sort of the traditional size, which I would put at sort of that $50 million and sub-$50 million really.

[Operator Instructions] Next question comes from the line of James Kayler from Bank of America.

Maybe just first on used equipment. The Rouse data has, kind of throughout the year, had shown some softness in the used equipment market. I think what we've heard is that the retail market has been better than the auction market. Just curious for your color and what you're seeing. And if you think that's telling you anything about the market?

Yes. I mean, look, retail is always better than auction. So it doesn't really matter what time you are throughout a cycle. Again, the auction market is actually pretty strong. If you look at the latest Rouse information that would have just come out, there is a bit of -- keep in mind, let's use the term softness gently because compared to historic sort of point, it's relatively robust. But it goes back to the earlier question related to oil and gas. The type of product you see that is softening just a bit is the product that you would see in the world patch that makes all of the sense in the world. If you listen to some of our peers' results, they would have talked about that specifically in terms of, obviously, needing to move some of that fleet. So I just don't think it flags anything all that particular.

And if -- I think also in the early part of last year, some outside -- it was in the sort of that larger earthmoving type of equipment as opposed to the more traditional range of kit.

And a few of that's going to come off patch as well.

Right.

Yes. And the feet on the ground we would have had at the recent Orlando auctions, which was a big auction of the year, the initial feedback we got from our feet on the ground, as I said, was good, strong activity and reasonable volumes.

Very good. And maybe -- and also just kind of maybe a broader sort of industry question as it relates to your strategy. Maybe just in terms of capital investment, it feels like throughout the industry, everyone is tempering investment a little bit. Maybe you could just give us a sense for how you feel about sort of level of capital investment, either yours or industry-wide? And if you think there's more likelihood that people continued, those numbers go lower or if there are certain scenarios where capital investment increases as the year goes on?

Yes. Look, it's -- I think it's a great question and an even more important point. It is a point of emphasis. Obviously, from a capital markets perspective, everyone looks at this business, in this industry to say -- and they compare and contrast it to the Great Recession and if you think about that as it relates to comparison. And by no means is anyone suggesting or forecasting we have any sort of economy coming our way like that. My reason for saying all that is the industry didn't prepare as we went into what we -- what ended up being a surprise sort of economy in 2008, 2009. It was invest, invest, invest and then all of a sudden, we found ourselves in this extraordinary, let's hope, once in a professional career recession. It's different this time. I mean the answer to the question in terms of why you have businesses like ourselves behaving the way that we are, we all look at forecast. We all look inside of our own business. Yes, things are good. It is a market most would freeze for a long time. That being said, there is some notable difference in terms of time utilization as small as it might be. In businesses like ours, if you get an extra 1%, 2% time utilization, that's a big deal. So I think it does seem as though, particularly from leaders in the industry standpoint, everyone seems to be trying to demonstrate a degree of discipline. And let's not forget, we are also all the ones who can ramp up the fastest if we so choose. So I have zero hesitation -- if what we're seeing in the market is even more demand, you better believe it, we will follow our capital allocation priority, and the first priority is investing in rental fleet for our existing locations, and that's exactly what we would do. So us and a few others, really -- I should say, us and other, have the ability to do that, and I'm sure that we will.

As there are no further questions, I'll hand it back to the speakers.

Great. Well, thanks very much for your interest, and we will speak to you again. And we have a Capital Markets Day at the end of April, and then we'll speak -- look forward to speaking you again after our Q4 results in June. Thank you.

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