Ashtead Group plc

Good day and welcome to the Ashtead Group Q2 Results Analyst Call. Please note this call is being recorded.

At this time, I would like to turn the conference over to our end markets in terms of activity and forecast. We continue to deliver on each of the five actionable components of our strategic growth plan, Sunbelt 3.0, the results of which will have delivered a remarkable three years of expansion, revenue, and profit growth. while importantly forming a foundation for our next growth plan, which will be launching April 30th during our capital markets event in Atlanta. Before getting into these items, I'll begin by addressing our Sunbelt team members listening in today. Beginning with a thank you. A thank you for engaging in our recent safety week with a level of enthusiasm, professionalism, and buy-in that I thought could not be topped in 2022. Throughout the first week of October, each of you practiced the very spirit of Engage for Life by taking in the topics and lessons learned from your team members from across our business, then spending time discussing the takeaways and applying them to your individual branch and market circumstances. For me personally, it was a highlight of the year seeing the firsthand our teams in action and the results that followed added affirmation of the very principles of Engage for Life. as we recorded one of our best ever months from a safety statistics standpoint. So thank you for your efforts and commitment, and please keep leading positively and safely out there. Now let's begin with the highlights on slide three. We delivered strong performance in the second quarter, contributing to another record quarter and half. This performance was 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. For the half, group revenue and rental revenues increased 16% and 13% respectively, while the U.S. revenue improved by 18% and rental revenue by 14%. Group EBITDA improved 15% to $2,583,000,000, while adjusted PBT was $1,312,000,000. growing 5%, leading to EPS of $2.26. From a capital allocation standpoint, and in accordance with our priorities, we invested $2.5 billion in CapEx, which fueled our existing locations and Greenfield additions with new rental fleet and delivery vehicles. We expanded our North America footprint by 74 locations, 45 through Greenfield openings, and 29 via Bolton. Further investing $705 million in on 16 bolt-on acquisitions in the half and returned $411 million to shareholders through dividends and buybacks. And announced today an interim dividend of 15.75 cents, a 5% increase. Following these investments, our net debt to EBITDA leverage is 1.8 times, comfortably within our long-term range of 1.5 to 2. These activities demonstrate our confidence in the ongoing health of our end markets and the fundamental strength in our cash generating growth model. Let's move on to our outlook. Slide four details our full year guidance for rental revenue, capex, and free cash flow. Consistent with our November 20th trading update, we're guiding to revenue growth of 11% to 13% in the US, 14% to 16% in Canada, 6% to 9% in the UK, combining for 11% to 13% at the group level. As detailed on the 20th, these adjustments reflect the specific year-over-year effects of extreme weather events, prolonged riders and actor strikes, and slightly lower fleet utilization than planned, however, still at historically strong levels, indicating strength in demand and further supported by healthy and market activity levels and forecasts. Consequently, our CAPEX guidance is unchanged. And the detailed CapEx slide can be found in the appendix. As a result of the somewhat lower revenue growth and impact to EBITDA and increased interest costs, we now anticipate free cash flow of circa $150 million. So on that note, I'll hand it over to Michael, who will cover the financials in more detail. Michael? Thanks, Brendan, and good morning.

The group's results for the six months are shown on slide six. Robust end markets in North America have enabled the group to increase rental revenue 13% in the six months on a constant currency basis. This growth was delivered with strong margins, an EBITDA margin of 46%, an operating profit margin of 28%, delivering an operating profit 12% higher than last year. After an interest expense of $251 million, 64% higher than this time last year, which reflects both higher absolute debt levels and the significantly higher interest rate environment, adjusted pre-tax profit increased 5% to $1.3 billion. Adjusted earnings per share were $0.226 for the period. Turning now to the businesses. Slide 7 shows the performance in the US. Rental revenue for the six months grew by 14% over last year, which was on top of growth of 28% last year. This has been driven by a combination of volume and rate improvement in strong end markets. The rate piece continues to be an important part of the equation, given the increased costs we face, whether the interest costs, as you saw on the previous slide, or the impact of inflation on our rental fleet and operating cost base. The total revenue increase of 18% reflects higher levels of used equipment sales than last year. As we've discussed before, fleet landings have become more predictable, enabling us to reduce physical utilization from the record levels we have seen over the last couple of years. Although, as Brendan commented earlier, it's lower than we anticipated. We have used the opportunity this provides to take advantage of strong secondhand markets to accelerate the disposal of some of our older fleet planned for later in the year. This lower level of utilization is a principal explanation for the depreciation charge increasing at a faster rate than rental revenue. This factor, combined with the increased level of used equipment sales, is a drag on margins in the near term. Profit was $1.5 billion at a 31% margin, and ROI was a healthy 26%. Looking forward, our revised revenue guidance will result in a lower level of drop through in the second half, particularly the third quarter. As a result, we now expect drop through in the high 40s rather than low 50s for the full year. Turning now to Canada on slide eight. Rental revenue was 12% higher than a year ago at $382 million. The major part of our Canadian business is performing well as it takes advantage of its increasing scale and breadth of product offering as we expand our specialty businesses and look to build out our clusters in that market. In contrast, our film and TV business has been impacted significantly by the strikes in the North American film and TV industry, which have persisted for longer than we anticipated. This has also had some impact on the rest of the Canadian business, given our success in cross-selling our more traditional rental product into the film and TV space. There has been a similar knock-on impact in our US and UK markets. The disconnect between rental revenue increase and the increased depreciation charge is exaggerated by the film and TV impact, but as in the US, physical utilization is lower than we had anticipated. Despite these challenges, Canada delivered an EBITDA margin of 43% and generated an operating profit of $80 million at an 18% margin, while ROI is 14%. Turning now to slide nine, UK rental revenue was 3% higher than a year ago at 301 million pounds. Excluding the prior year impact of the demobilization of the Department of Health work, rental revenue was up 12% as we take market share. While we continue to make progress on rental rates, this has not kept pace with the inflation environment in the UK, which has impacted margins. As a result, the UK business delivered an EBITDA margin of 28% and generated an operating profit of £33 million at a 9% margin, an ROI of 7%. Slide 10 sets out the group's cash flows for the six months and the last 12 months. This emphasises the strong cash generation capability of the business, and this cash has been deployed in accordance with our capital allocation policy, with capital expenditure of $2.5 billion, funding principally fleet replacement and growth, and $676 million invested in bolt-ons. The significant increase in capital expenditure results in a free cash outflow for the six months of $355 million. Slide 11 updates our debt and leverage position at the end of October. Our overall debt level increased in six months. In addition to CAF expenditure and bolt-ons, we returned $368 million to shareholders through our final dividend for 2023 and $43 million through buybacks. As a result, leverage was 1.8 times, excluding the impact of IFRS 16, in the middle of our target range. Our expectation continues to be that we'll operate within our target leverage range of 1.5 to 2 times net debt to EBITDA but most likely in the lower half of that range as we continue to deploy capital in accordance with our capital allocation policy. Our debt services are committed for an average of six years at a weight average cost of 5%.