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Ashtead Group achieve record free cash flow for the first quarter of £447m

Ashtead Group plc (LON:AHT) has announced its unaudited results for the first quarter ended 31 July 2020.

First quarter
2020

£m
First quarter
2019
£m
Growth1
%
Underlying results2,3
Rental revenue1,0811,165-8%
EBITDA548627-14%
Profit before taxation208319-35%
Earnings per share34.7p51.4p-33%
Statutory results
Revenue1,2031,278-7%
Operating profit249358-31%
Profit before taxation192305-38%
Earnings per share32.0p49.1p-35%

Highlights3

·       Resilient performance during the COVID-19 pandemic

·       Operating profit of £249m (2019: £358m)

·       Pre-tax profit2 of £208m (2019: £319m)

·       Earnings per share2 of 34.7p (2019: 51.4p)

·       Record free cash flow of £447m (2019: £161m)

·       Net debt to EBITDA leverage1,3 of 1.8 times (2019: 1.8 times)

·       Resumed greenfield opening programme with three openings

1 Calculated at constant exchange rates applying current period exchange rates.

2 Underlying results are stated before intangible amortisation.

3 Throughout this announcement we refer to a number of alternative performance measures which provide additional useful information. The directors have adopted these to provide additional information on the underlying trends, performance and position of the Group. The alternative performance measures are not defined by IFRS and therefore may not be directly comparable with other companies’ alternative performance measures, but are defined in the Glossary on page 26.

Ashtead Group’s chief executive, Brendan Horgan, commented:

“In a quarter of ongoing market and operating environment challenges, our dedicated team members throughout North America and the United Kingdom once again delivered for all our stakeholders.  I am extraordinarily proud of, and grateful for their collective response and execution, doing so while keeping our leading value of safety at the forefront of all we do.

In these challenging markets, the Group delivered a strong quarter with rental revenue down only 8% at constant exchange rates.  This resilient performance illustrates the successful execution of our long-term strategy, which we embarked upon after the last recession, to broaden and diversify our end markets and strengthen our balance sheet. This positioned us to capitalise on our ever increasing scale, while remaining agile, particularly during these unprecedented times.  The actions we took to optimise cash flow, reducing capital expenditure and operating costs, resulted in record free cash flow for the first quarter of £447m (2019: £161m) contributing to reduced leverage of 1.8 times compared to 1.9 times at year end.

Looking forward, the strength of our business model and balance sheet positions the Group well in these more uncertain markets.  Assuming there is no significant COVID-19 second wave leading to major market shutdowns, like we experienced earlier this year, we expect full-year Group rental revenue to be down mid to high single digits when compared with last year on a constant currency basis.  The benefit we derive from the diversity of our products, services and end markets, coupled with ongoing structural change, enables the Board to look forward to a year with free cash flow in excess of £1bn, continued strengthening of our market position and the medium term with confidence.”

Overview and markets

Our first quarter has been dominated by the impact of the COVID-19 pandemic.  Our response to these unprecedented times has been impressive.  Our robust model has enabled us to continue to serve all our customers in all our geographies.  Throughout this period our focus has been on our people, our customers, our communities and our investors, in particular:

·     ensuring the health and safety of our team members and customers;

·     continuing to serve the needs of our customers and communities, including supporting government and private sector responses to the pandemic; and

·     taking steps to optimise cash flow, reduce operating costs and strengthen further our liquidity position during a period of suppressed activity.

While trading volumes were lower than last year as a result of the pandemic, this has been mitigated, in part, by emergency response efforts throughout our business units but particularly within our specialty businesses.  Sunbelt Rentals is designated as an essential business in the US, UK and Canada and has supported government and private sector responses to the pandemic.  This includes providing vital equipment and services to first responders, hospitals, alternative care facilities, testing sites, food services and telecommunications and utility companies, while continuing to service ongoing construction sites and increased facility maintenance and cleaning.

As a result of these market dynamics, rental only revenue in the US was only 8% lower than the prior year.  This consisted of our general tool business which was 9% lower than prior year, while the specialty businesses (excluding oil and gas) demonstrated the benefit of a broader range of products and end markets with rental only revenue 6% higher than last year.  This contributed to Group rental revenue in the first quarter 8% lower than the prior year at constant exchange rates.  The degree of impact on volume has varied significantly across our geographical markets and is correlated to the severity of infection rates and associated market level restrictions.  Activity levels have increased consistently through the quarter such that we have almost as much fleet on rent in the US and Canada as last year and slightly more in the UK. With some impact from Hurricane Laura, US August rental revenue was 7% (3% on a billings per day basis) lower than last year.

A skilled workforce is instrumental to the Group’s long-term success and we have made every effort to preserve our committed workforce for the impending recovery.  Therefore, we have not made any team members redundant as a result of the impact of COVID-19 and have not sought assistance from any government support programmes such as the UK’s Coronavirus Job Retention Scheme or similar schemes in Canada.

Looking forward, we believe that the impact of the COVID-19 pandemic will continue to give rise to market uncertainties over the coming months.  However, with strong market positions in all our markets, supported by good quality fleets and a strong financial position, we believe that we are well positioned to respond to this market uncertainty and continue to support our customers and team members as well as taking advantage of opportunities to invest for the longer-term strength of the business.

Group revenue for the quarter decreased 6% (7% at constant exchange rates) to £1,203m (2019: £1,278m).  This resilient revenue performance, in a challenging environment, reflects the benefit of our long-term strategy which is focused on broadening and diversifying our end markets, at the same time as increasing our scale and market share.  However, this sudden fall in activity levels had a significant impact on profit in the quarter as a large proportion of our costs are fixed in the short term.  This profit impact reflects, in part, our decision to not make team members redundant as a result of COVID-19 and use the opportunity presented by lower activity levels to ensure our fleet was well maintained and serviced in preparation for activity levels improving.  As a result, underlying profit before tax for the quarter was £208m (2019: £319m).

Although COVID-19 has influenced the Group’s short-term planning and actions, our strategy remains unchanged with long-term growth being driven by organic investment (same-store and greenfield) supplemented by bolt-on acquisitions.  In the US and Canada, we experienced 8% and 2% rental only revenue decline respectively, while in the UK, rental only revenue decreased 9%.

In the US a moderate rental only revenue decline represents a strong performance in difficult market conditions, demonstrating the benefit of our strategy of growing our specialty business and broadening our end markets.  In the quarter our specialty business (excluding oil and gas) grew 6% while the general tool business declined 9%.  US total revenue, including new and used equipment, merchandise and consumable sales, decreased 7% to $1,284m (2019: $1,381m).

The UK business, which was rebranded Sunbelt Rentals with effect from 1 June 2020, generated rental only revenue of £80m, down 9% on the prior year on a comparable basis (2019: £88m).  This was a strong performance as the breadth of our product offering and commitment of our team members enabled us to provide essential support to the Department of Health in its COVID-19 response efforts.  Total revenue decreased 6% to £123m (2019: £131m).

Canada’s rental only revenue decreased 2% on a reported basis.  Excluding the impact of the acquisition of William F. White (‘WFW’), rental only revenue of the legacy business decreased 11%.  Total revenue was C$90m (2019: C$95m).

In all our markets we took action to reduce operating costs and eliminate discretionary expenditure.  However, as discussed earlier, we took an early decision to not make any team members redundant as a result of COVID-19, not seek assistance from any government support programmes and to continue investment in the business, including our technology platform and the condition of our rental fleet.  As a result, in the US, 74% of the revenue decline dropped through to EBITDA.  This contributed to a reported EBITDA margin of 48% (2019: 52%) and a 27% decrease in operating profit to $324m (2019: $447m) at a margin of 25% (2019: 32%).

Last year we launched Project Unify in the UK with the objective of improving operational efficiency and returns.  This has resulted in significant investment in the operational infrastructure of the business which, when combined with the impact of COVID-19 on activity levels, contributed to an EBITDA margin of 29% (2019: 33%).  Operating profit of £8m (2019: £15m) at a margin of 7% (2019: 12%) also reflected these factors.

Canada is in a growth phase as we invest to expand its network and develop the business.  The most recent acquisition was WFW and, while the prospects for this business remain bright, it was a significant drag on Canadian performance in the quarter.  Film and TV production activity in Canada ceased in March and is only just about to restart.  As a result, WFW contributed virtually no revenue in the quarter but we retained all the team members and infrastructure of the business.  This resulted in a loss for the WFW business of C$11m in the quarter which impacted Canadian margins adversely.  The legacy Canadian business, excluding WFW, maintained its EBITDA margin at 40% (2019: 40%) and generated an operating profit of C$11m (2019: C$16m) at a 13% margin (2019: 17%).

Overall, Group underlying operating profit decreased to £265m (2019: £373m), down 30% at constant exchange rates.  Net financing costs increased to £57m (2019: £54m) reflecting higher lease interest costs.  As a result, Group profit before amortisation of intangibles and taxation was £208m (2019: £319m).  After a tax charge of 25% (2019: 25%) of the underlying pre-tax profit, underlying earnings per share decreased to 34.7p (2019: 51.4p).  The underlying cash tax charge was 40%.

Statutory profit before tax was £192m (2019: £305m).  This is after amortisation of £16m (2019: £14m).  Included within the total tax charge is a tax credit of £4m (2019: £3m) which relates to the amortisation of intangibles.  As a result, basic earnings per share were 32.0p (2019: 49.1p).

Capital expenditure

Capital expenditure for the quarter was £98m gross and £24m net of disposal proceeds (2019: £521m gross and £451m net).  We expect gross capital expenditure to be c. £500m for the full year but have the ability to flex this subject to market conditions. Second hand markets remain healthy and the Group disposed of fleet, including old oil and gas fleet, as planned.  As a result, the Group’s rental fleet at 31 July 2020 at cost was £9.0bn and our average fleet age is now 38 months (2019: 33 months).

Return on Investment

The Group’s return on investment metrics have been affected adversely by the decline in activity levels and their impact on profits from mid-March onwards as a result of COVID-19.  This has led to return on investment (excluding goodwill and intangible assets) in the US in the 12 months to 31 July 2020 of 19% (2019: 24%).  In the UK, return on investment (excluding goodwill and intangible assets) was 5% (2019: 8%).  As a result of the actions taken during the prior year through Project Unify and the strategic plans for the business, we expect returns in the UK to improve post COVID-19.  In Canada, return on investment (excluding goodwill and intangible assets) was 6% (2019: 11%).  We have made a significant investment in Canada including the acquisition of William F. White last year and, as we develop the potential of the market, we expect returns to improve.  For the Group as a whole, return on investment (including goodwill and intangible assets) was 14% (2019: 17%).  Return on investment excludes the impact of IFRS 16.

Cash flow and net debt

The Group generated free cash flow of £447m (2019: £161m) during the quarter, a record for the business.  As a result, and with the benefit of stronger sterling, net debt reduced in the quarter by £541m.

Net debt at 31 July 2020 was £4,822m (2019: £5,161m), resulting in a net debt to EBITDA ratio of 2.2 times (2019: 2.2 times) on a constant currency basis.  The Group’s target range for net debt to EBITDA is 1.9 to 2.4 times following the adoption of IFRS 16.  Excluding the effect of IFRS 16, net debt at 31 July 2020 was £3,726m, while the ratio of net debt to EBITDA was 1.8 times (2019: 1.8 times) on a constant currency basis.  The Group’s borrowing facilities are committed for an average of six years at a weighted average cost of 4%.

At 31 July 2020, availability under the senior secured debt facility was $2,831m with an additional $1,949m of suppressed availability – substantially above the $460m level at which the Group’s entire debt package is covenant free.

Capital allocation

The Group remains disciplined in its approach to allocation of capital with the overriding objective being to enhance shareholder value.  Our capital allocation framework remains unchanged and prioritises:

·     organic fleet growth;

–      same-stores;

–      greenfields;

·     bolt-on acquisitions; and

·     a progressive dividend with consideration to both profitability and cash generation that is sustainable through the cycle.

Additionally, we consider further returns to shareholders.  In this regard, we assess continuously our medium term plans which take account of investment in the business, growth prospects, cash generation, net debt and leverage.  Therefore the amount allocated to buybacks is simply driven by that which is available after organic growth, bolt-on M&A and dividends, whilst allowing us to operate within our 1.9 to 2.4 times target range for net debt to EBITDA (1.5 to 2.0 times pre IFRS 16).

The Group paused its share buyback programme in March as we took action to optimise our cash flow and strengthen further our liquidity position due to the uncertainty arising from the COVID-19 pandemic.  We resumed greenfield openings in the quarter and, within the context of our balanced capital allocation policy, leverage range and macroeconomic backdrop, we continue to assess bolt-on opportunities and the appropriate time to resume the buyback programme.

Current trading and outlook

Looking forward, the strength of our business model and balance sheet positions the Group well in these more uncertain markets.  Assuming there is no significant COVID-19 second wave leading to major market shutdowns, like we experienced earlier this year, we expect full-year Group rental revenue to be down mid to high single digits when compared with last year on a constant currency basis.  The benefit we derive from the diversity of our products, services and end markets, coupled with ongoing structural change, enables the Ashtead Group Board to look forward to a year with free cash flow in excess of £1bn, continued strengthening of our market position and the medium term with confidence.

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