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

Good morning, and thank you for joining our Trading Update Call. With me on the line are Michael Pratt and Will Shaw. Before getting into Q&A, I'll briefly cover the current and anticipated trading as outlined in this morning's update and add some end market color. We will, on December 5, announced another record quarter and first half results with strong rental revenue and EBITDA growth of 13% and 15%, respectively. This performance is driven by strength in our North American end markets, the ongoing momentum and execution in our business as we follow our Sunbelt 3.0 playbook and the very clear structural progression being realized in our industry. The rental rate environment continues to be strong, demonstrating one of the outputs of structural progression in the business now very much demonstrated -- creating the structure and discipline as business service companies do. Each of these drivers remains fully intact with all signs and relevant forecast supporting a continuation through the year and beyond. Combining these realities with the specific current year circumstances surrounding absence of natural disaster in the prolong writers and actors strikes puts us in a position to modestly lower our rental revenue guidance for the year to a still strong 11% to 13% growth at the group and U.S. levels. This amounts to rental revenues of roughly $200 million to $250 million on $10 billion in rental revenues. That clarity, the lack of last year's levels of hurricane, wildfire and other extreme weather events with the assumption this continues through the balance of the year, coupled with the film and TV impact amounts to between $140 million and $150 million. In addition, there's a carryforward of somewhat lower absorption of fleet landing than we anticipated, which is reflected in today's guidance and consistent with what has been recovered more broadly in the industry. Let me be clear, this is not a sign of lack of demand, rather fleet investment to fuel new and ongoing megaproject wins in addition to ordinary fleet planning for our existing and new branch location network. What one should take away from today's update is that the business continues to perform very well in strong end markets and is actively leveraging the very tangible tailwinds of structural progression in our business and industry. And for the immediate period ahead, we're just growing slightly less than we would have done, not for the specific circumstances we've covered today. It is for these reasons, we continue to look to the future with confidence. And with that, Laura, please open the line for questions.

[Operator Instructions] We'll now take our first question from Suhasini at Goldman Sachs.

Just 3 for me, please. You indicated that your new guidance incorporates not only the reduction in lower emergency response. Second aspect is right of strike, and after strike impact. And the third one was actually lower absorption of fleet landing. Just want to understand what's driving that lower absorption of fleet landing? I appreciate that maybe because the new guidance implies a slower growth in second half of the year versus first half. So what's driving that? Is there any key end market that's planning to change? The second one, is there any change in the drop-through rates to EBITDA, given the lower revenue guidance change? And the third one is on your CapEx guidance, which has remained unchanged at this point in time. Why is that given that the revenue guidance change is why haven't you reduced the CapEx guidance and therefore protect the free cash flow is something that you managed to do in the past. If anything has changed, should we be anticipating any increased sale of used equipment, for example, to redress the balance?

Yes. Thank you. I'll address those. First of all, to be clear, as I've said in the opening remarks, this is not an end market driver, absent those very specific items that we would have listed. If you think about this in terms of the -- that piece -- that piece in terms of absorption, -- it really comes down to one word, which is just fleet. We have a bit more fleet that will be absorbed at high utilization levels, while at the same time, the age fleet will be sold. So consider that a transitory, if you will. And to do that, you have to think about the supply chain circumstances. Yes, they have improved, particularly as it relates to the OEMs meeting delivery commitments, EG, time and quantity. However, in many instances, lead times do remain longer than what we would have experienced in say, pre-pandemic. And there does not seem to be much latent capacity and OEM production capabilities. So this still influences our fleet planning, whereas an ordinary course, which we very much do today, we meticulously plan for our fleet needs and that's both replacement and growth for our location network as well as built in agility to accommodate for some of the anticipated megaproject wins. And the other thing too to consider in that absorption is literally the profile of megaprojects. It is different than or they are different than the smaller or more ordinary commercial projects. However, as that absorption improves, which it will do, it will yield a larger and longer crest. So it has nothing to do with sort of end market movements. In terms of drop-through, we'll touch on full year drop-through on December 5. But as -- for instance, Q2 drop-through in the U.S. was a very strong 53%. In terms of CapEx and not changing the guidance, the first reason why we're not changing the guidance is this is not an end market sort of driven takedown or slightly take down in the rental revenue. The CapEx that we have coming our direction is indeed needed for the business. One thing I think it's important that everyone to understand, with this emergence, if you will, an ongoing growth in that mega project arena, what you shouldn't be doing, yes, you should have agility. But what you shouldn't be doing is not feeding your core, your existing brick-and-mortar network where there still remains very high demand. You don't want to sell assets that are ready for replacement with new assets heading in their direction and divert those to a mega project because you're just going to over time degradate, if you will, to that core. So what we're doing here really is we're just running the business, taking advantage of a strong end market and one that has certainly good forecast in the years to come. So I think that addresses all of your questions unless you think I've missed any.

No, that's very clear. And just to clarify, this feels more like a shift in the phasing of the revenues rather than an abrupt change in the end market growth rate. Is that the way to put it?

Yes. It's just -- it's absorption. That's what it is. And we fully expect that we -- look, I should have mentioned, we are running at really high time utilization levels. We're just running a bit below where we thought we would coming off of almost anomalous years over the last 2 years. But when we look at the time utilization levels today, historically, when you set aside the last 2 years, we would be top 1 or 2 years over the last 10 years.

And we'll now take our next question from Karl Green at RBC.

Just a couple of follow-ups from me, please. The first one, and apologies if you said this, it's early Monday morning, but the rain probably not fully in gear. Just can I clarify just how big the revenue streams are from emergency response and then the film and TV stream? And then what the variance you're expecting this year is. So the actual prior year context full year and then what [ would vary ] you expected for this year? That's the first question. And then the second question, again, something which you've been putting [indiscernible] historically is whenever there's been slight month of bumps on the underlying revenue, you often compensate for that through bolt-on M&A. Is there any comments you can make just about what's happening on the latest bolt-on M&A activity, please?

Sure. Well, to break down that $140 million to $150 million, I would have talked about in revenues. -- in the opening comments, it's about $100 million as it relates to the year-on-year natural disasters, hurricanes, winter freeze, wildfires, et cetera, that we would have enjoyed last year. And for the record, we always flagged that, that those are extraordinarily large periods, and we just happen to have had in 2020, 2021 and 2022 large years as it relates to that. When it comes to film and TV, we'll see an absence of about $50 million in revenue. One big piece of that, of course, coming from the actual film and TV business directly. And then there is some contagion, if you will, that comes by way of our other business lines, whether it be our general tool business or the aerial work platform, power and HVAC, climate, et cetera, that also sells or cross-sells into those markets. And that's in Canada for sure, but it's also in the U.S. in markets like New York City, Chicago, Atlanta, New Orleans and to some degree in Los Angeles. So that's sort of that breakdown, if you will have not really amounts for the vast majority of what we're sort of taking down at the moment. From a bolt-on loan standpoint, what we don't do is go out and do deals to bridge the gap. As I've said a few times here, we just run the business. We -- there is remaining very much so a robust runway for bolt-on M&A. But we deal with those as we get to those conversations whereas deals come out. So there's no real change in trajectory in that regard.

[Operator Instructions] We'll now move on to our next question from Allen Wells at Jefferies.

Just a couple of follow-ups from me. Firstly, just on the emergency services side, most response side. I noticed it just wasn't called out by your peer URI, which was you reiterated guidance back in the last month. I mean is there any nuances there that we need to be mindful of? I can you might be a little bit more exposed, but maybe you can just kind of comment why you might be more impacted than those guys? And then secondly, just on the interest and depreciation guidance was obviously up again. I think we increased that in Q1 as well. Sorry if I missed this, is that more linked to the fleet pulled forward that the interest and depreciation has gone up? Or is that [indiscernible] there? Or is that more linked to potential to kind of bolt-on M&A? And what else is going on around that part of the business?

Yes, I'll take the first and then turn the second over to Michael. Emergency response, certainly, this is something that for years and years as a business we have targeted, and we are quite good at it. So certainly, I'm not here to speak for URI. I will say comfortably that proportionately, it is a larger part of our go-to-market strategy. We're not alone in terms of having to mention that. There will be some others. And again, I won't call them out by name, who have mentioned the fact that last year. And remember, too, there's quarterly -- calendar quarterly reporters and us in our fiscal year. So this, to be clearer in terms of when we sort of realize that part of the revenue, it doesn't come until October. So the quarter through October would have shown no blemish, if you will, in August or September, that would begin in October and sort of carry on through December to January. So I think that's part of the reason. But again, this is something that we're happy to continue to pursue. And then I'll turn that over, if that's clear enough to Michael, Allen interest and appreciation.

Yes, Allen. Yes, you're right. There is a degree of commonality between the 2 because the increased depreciation is due to a larger fleet, which has sort of 2 components. Yes, it's bolt-on M&A but -- and also the fleet landings that we've talked about. And that then has a knock-on effect on interest. So it's -- the fleet that comes in from the acquisition, the larger fleet from the fleet landing and also a piece of rating there compared with where we were back at Q1 and then certainly earlier in the year. So the rate piece is different. The other 2 bits are effectively interrelated.

So there isn't one part that's stronger than the other in terms of driving that increase? If it's kind of combination of 3, is that fair?

Sorry on depreciation?

Yes, on the depreciation side, like is it more M&A linked to bolt-on? Or is it more fleet timing linked in terms of why that number...

I don't want to say it's easily split, but it's not far here. It's a bit about the understanding we just said so as a combination of landing and fleet acquired through acquisition, we just ended up with a higher average fleet size for the rest of the year than we had previously.

Thank you. And we'll now take our next question from James Rose at Barclays.

Just a quick one on mega projects. Are you seeing any slip in sort of the timing of those? Are they taking longer to get up to speed than you expected? Is there any change at all in your take on mega projects for this year going into next.

Yes. Thanks, James. The only change, if you will, in mega projects would be more of them. And it's something that we've flagged all along here. They just have that different profile, as I would have mentioned, meaning you load in sort of day 1 more fleet than the project may need, but it doesn't mean that they don't want that. So you sort of load in, whether it be $20 million or it be $40 million of fleet on these mega projects, which will grow over time. But the distance between starting the project and that crest is far longer than it is on other projects. However, where you get the big benefit is when you do approach that crest, you get a very, very long crest. So no change in that whatsoever. It should the way that these mega projects are. And as I said, there's no change whatsoever in terms of quantum of projects out there. Indeed, what we're finding is it's virtually daily when there's another mega project that we're in discussions about. So it's a very strong timeline.

And we will now move on to our next question from Daniel Johansson at BanTech.

And perhaps, perhaps this is to simplify too much, but thinking about the CapEx, how far away are you from considering to maybe cut it?

Yes. We are -- we are not cutting CapEx for this fiscal year. We always dynamically as best we can, if you will, massage or modify a precision in those landings based on OEM flexibility, that fleet, which we will [indiscernible] in this year will indeed ultimately be absorbed based on our network and the opportunities that we have for this fleet. It's very precise in terms of our fleet planning. And then what we will do as we get through sort of this winter, we will embark on our fleet planning for next fiscal year. And we'll take into account what we're seeing in terms of activity levels, what the needs are from a replacement standpoint, what our plan is in terms of greenfield expansion, et cetera. But we would have to see degradation in our end markets in order to begin to change what our overall CapEx plans are.

Okay. And if you were to embark on such a route, are you able to significantly cut CapEx this fiscal year given the lead times and everything that has had -- we had a big COVID impact, some backlogs along and all of that with OEs?

Yes. I mean, there would be some degree of flexibility late Q4 in terms of cancellations. But when it comes to what you really do, how you run the business is at that stage, if you find -- at some stage, if you find less need, you work that into your next year's plan. So if I landed 10,000-pound telly handlers in Miami, late Q4, and there were 5 machines that are up for replacement in Q1 next year that we all of a sudden decide we don't need that I'll use some of the telly handlers I landed in Q4 in order to fuel or satisfy the need for replacement in Q1. So one must look at this over a few quarters' time when it comes to when that circumstances, which we're not seeing today, arises that you're sort of setting the stage for here, that's how you handle it.

We have no further questions in the queue currently. [Operator Instructions] We'll take our next question from Lush at JPMorgan.

The first just on rental rates. I guess you're not the only ones that said that you've had more fleet coming than expected in the quarter. I guess, is there any sort of change on your stand there for the year?

As I have said in my opening remarks, rental rate progression remains strong. Year-on-year, we see good gains, and we will yield that for the entire year. I would have also pointed to in the opening remarks, just the structural progression and that being a hallmark of tangibly getting to that point, both in terms of rental penetration, but also the second piece of the big getting bigger and then driving more discipline around rates. I see years ahead of raping far more mechanical and far more de-linked with time utilization. Frankly, we've seen that in the industry for the last 5 quarters, where time utilization has been lower. However, rates have progressed, and we expect that to be very much the same as we go forward.

And just the second one on sort of the actors’ and writers’ strike, not as close to as you guys have that. I think the actors strike just ended. Would you typically see like a big resurgence in activity so if you may pick up for some of that lost activity or how does that [indiscernible] play out?

No, you're exactly right. You see it's over. I would just -- I would say, given how long this has gone on, I'm not going to sort of say it is over until there is a contract signed. And that is scheduled for the 4th of December. So I'll be happy to give you an update on that on the 5th of December with our half year results. But yes, we would fully expect not terribly different than the pandemic to see a resurgence. The timing is not the best, given we're in the holiday season when that gets signed and then you get into sort of -- so we're really expecting to see that come through in our Q4, so February 3, April and then, of course, pick up on that momentum as we enter next year.

Okay. We'll now move on to our next question from Will Kirkness at Societe Generale.

Just 2 quick ones hopefully. Firstly, on monthly trends if you're happy to talk about and just August was plus 15%. So I guess, October sort of maybe mid-single digit, perhaps you can just help there. And then in the second half markets, just wondered how used pricing has held up. I think some of your peers have talked about channel mix I just wondered, particularly in October, whether you've seen any maybe softness on disposals or pricing?

Yes, I can -- I know Michael is digging out the sequential month to month. So I'll let him answer that. But when it comes to secondhand market, I would characterize them as still strong, very strong and actually, historically speaking, but not quite as over-the-top as they were previously, but there was nothing notable in terms of the month of October or September. It's been more rather consistent as we've gone throughout the year. So still a perfectly liquid market. Yes, there is some channel mix between what you do in auction, retail and wholesale. But really, what we focus on there is Will, and I think you certainly know this from conversations in the past. It's just about selling the fleet that you have when it reaches that useful life. And there's no doubt about it, just given what the supply chain constraints were for quite some time through and following the pandemic. There's a bit of a buildup there in fleet and considering how much fleet is getting to the secondhand market and how good those values still are, is a very positive sign. Remember, one of the leading really factors when it comes to what that value looks like over time is what is the cost to buying new one. And that's exactly what we're seeing hold true. Given new equipment is so much more expensive than it was 7 to 8 years ago, if you will, that factors into that secondhand market. But I'll open it to Michael to touch on your second point, your first rather.

Yes [indiscernible] in the habit of giving monthly trends, et cetera. But suffice that what we saw was the drop-off we saw was when we sort of got to October, and October year-over-year was 9% to 10%. And sorry, well, let me just add on that, and actually, that was predominantly the real driver of that, which goes to the emergency response side of stuff with our specialty businesses. So the power of the client -- that side of things, where the general tool business was pretty consistent with the rest of the month this year to date.

Thank you. And we will now take our next question from Arnaud Lehmann at Bank of America.

One question left for me, please. So your EBITDA guidance a bit lower and your financing costs are a bit higher and your CapEx is unchanged. So I guess we're going to get a bit less operating cash flow and free cash flow as well. Where would you expect the net debt to land? And does this change in guidance has implications for your buybacks or dividend plans?

Yes, we'll update that we'll give better guidance when we -- in a couple of weeks' time. But you're right, the lower a little bit less EBITDA interest will reduce free cash flow guidance we'll still work within the same leverage range as we've talked about. What you will find is -- and this isn't totally unexpected from internally, we will be at about 1.8% at October. Now we'd expect that to come down during the second half of the year. Our buybacks will be at a similar sort of level or we've been doing a very low level buyback because of the opportunity of deploying fleet and volatile M&A. And as we've always said, buybacks are the -- almost the balancing figure, and there's still no real change to that preference. We do still prefer that lower half of the range. And so you'll see that $1.8 billion will sort of return to that sort of level as we go through the second half.

Okay. And if I may, just a quick one to finish. I guess working on your Ashtead 4.0 plans for next year. Are there any reason to be a bit more cautious heading into those plans?

Well, it will be the Sunbelt 4.0, but no I wouldn't say that there's any reason to be more of cautious. I think you will see that we will put out a ambitious but realizable strategic growth plan. But as we always do, we assess the end markets, and we take a view on that as we put together those plans. But I think that will be universally very well accepted on the third week of April when we launched that.

There are no further questions in queue. I will now hand it back to Brendan to closing remarks. Thank you.

Great. Thank you for taking the time this morning, everyone. And as we've said, we will give a more thorough update and along with our record results, as we said, for Q2 and half on December 5, and we look forward to speaking with all of you then. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.