Sunbelt Rentals Holdings, Inc. (SUNB) Earnings Call Transcript

Hello, ladies and gentlemen, and welcome to this Ashtead Group plc Quarter 1 Bondholder Call. On the call are Chief Executive, Brendan Horgan; and Finance Director, Michael Pratt. Before I hand over, can I just remind you that this call is being recorded. [Operator Instructions] I'm now delighted to introduce Michael Pratt. Please begin your presentation.

Good afternoon. The webcast of our earlier analyst meeting and the related slide presentation are available on our website, and I'll refer to these slides during the call. So I'll begin by commenting on some of the financial highlights from the release in the event you missed the webcast and then open the call up for questions. As an overview, we performed strongly in all our geographies in challenging circumstances. The group's results for the first quarter set out on Slide 6. Group rental revenue declined 8% on a constant currency basis. This revenue decline had a negative impact on margins, reflecting, in part, our decision not to make any team members redundant as a result of COVID-19, not to take advantage of any government support programs and use the opportunity presented by lower activity levels to ensure our fleet was serviced, well-maintained and rent ready in advance of the recovery and activity. This contributed to a still healthy EBITDA margin of 46% and with an operating profit margin of 22%, underlying pretax profit was GBP 208 million. On the next 3 slides, I'll review the divisional performance. And following the rebranding in the U.K., I will just refer to the performance by geography, beginning with the U.S. on Slide 7. Rental and related revenue for the quarter was 8% lower than last year at $1.2 billion. As we discussed in June, we took a number of actions to manage the cost base, including a hiring freeze and reducing discretionary staff costs, use of third-party front holders and other operating expenses, consistent with reduced activity levels. However, a significant part of our cost base is our people, and we took an early decision not to lay off anyone as a result of COVID-19 or reduce pay levels. This enables us to maintain customer service levels and prepare for market reopening. As a result, drop-through of rental revenue to EBITDA for the quarter was 74%. While this approach has had a negative impact on margins, I think you'll agree, our approach has been more than vindicated by our market outperformance as we take share. Margins were also affected adversely by used equipment sales. While secondhand values remained strong overall, our proceeds were affected by both the type of assets we sold and the sales channel selected for disposal. We disposed of old oil and gas assets, which typically have a harder life and sales were predominantly through the auction channel, which results in lower realizations. This was a 1% to 2% drag on margins. Despite these factors, the EBITDA margin was still healthy at 48%, and operating profit was $324 million at a 25% margin and ROI was 19%. Turning now to Canada on Slide 8. Rental and related revenue was 3% lower on a year -- than a year ago on a reported basis at $74 million. On a more comparable basis, excluding the impact of William F. White acquired in December, rental revenue was 11% lower than a year ago. The White business was our most severely affected business by the pandemic. It has performed strongly since acquisition, but in March, it ground to a halt as all film and TV production stopped and is only now just about to restart. As a result, it contributed virtually no revenue in the quarter, but we retained all team members and the infrastructure of the business. This resulted in a loss for the White business of $11 million in the quarter, which impacted Canadian margins adversely. The legacy Canadian business, excluding White, maintained its EBITDA margin at 40% and generated an operating profit of $11 million at a 13% margin. This good performance demonstrates strong cost discipline in what is still an immature business, which does not yet have the benefit of well-developed clusters or the depth and breadth of our full range of specialty businesses. Slide 9 shows performance in the U.K., where rental and related revenue was 10% lower than a year ago at GBP 99 million. This was a strong performance as the breadth of our product offering and commitment to our team members enabled us to support all our customers and more and provided essential support in response to COVID-19. The cost base reflects not only our continued investment in the operational infrastructure of the business as part of Project Unify, but also our decision not to lay anyone off nor utilize the government's coronavirus job retention scheme. These factors resulted in an EBITDA margin of 29% and operating profit margin of 7%. As a result, U.K. operating profit was GBP 8 million for the quarter. Slide 10 sets out the group's cash flows for the quarter and the last 12 months. This slide, again, tells a powerful story and demonstrates the strength of our business model. We maintained a strong focus on working capital management, particularly the collection of receivables, which has resulted in cash flow from operations of GBP 543 million for the quarter, the same as in this period last year. This, combined with the decisive action we took to reduce capital expenditure in the current environment, result in record free cash flow for the quarter of GBP 447 million, more than we generated in the whole of our second best ever year for cash flow generation in 2018. As a result, we generated GBP 1.1 billion of free cash flow in the last 12 months, and that is after GBP 1.3 billion of capital expenditure. It is this cash flow dynamic within the business that gives us confidence to expect free cash flow generation this year in excess of GBP 1 billion compared with last year's GBP 792 million. Slide 11 updates our debt and leverage position at the end of July. We used the cash generated in the quarter to reduce debt and leverage, which at 1.8x, excluding the impact of IFRS 16, was in the middle of our target range. As we have said on many occasions, a strong balance sheet gives us a competitive advantage and positions us well for the medium term. This balance sheet strength and strong cash flow has enabled us to reduce leverage from 1.9x in April despite the severe economic shock from the pandemic. Furthermore, we have continued to invest in the business, whether that be through retaining our people or returning to greenfield openings, enabling us to outperform the market and take market share. Our debt facilities are committed for an average of 6 years at a weighted average cost of 4%. Both our leverage and well-invested fleet continue to provide a high degree of flexibility and security and enable the business to be on the front foot despite these more uncertain times. The final slide I'll reference is Slide 4, where we have summarized our reintroduced guidance and tried to add some clarity by providing revenue guidance by business unit and overall group capital expenditure and free cash flow information. In terms of the U.S., we anticipate rental revenue being down on the prior year mid to high single digits. While in Canada and the U.K., revenue will be at a similar level to last year. In terms of capital expenditure, our range is consistent with our June guidance at around GBP 500 million. And the result of all of that, we expect free cash flow in excess of GBP 1 billion. That concludes my comments, and so we'll move to Q&A. Operator, please provide the instructions for Q&A.

[Operator Instructions] Our first question is from the line of Yilma Abebe from Stifel.

This is actually Yilma Abebe from JPMorgan. I guess, firstly, if we can talk about the used equipment market. You talked about it being relatively strong. As, I guess, a lot of rental companies that try and dispose fleet, are you surprised in the strength around the used equipment markets?

Yes. I'm happy to take that one. This is Brendan. I don't know if I would use the word surprised to describe it. I think we knew that we were still in a relatively robust period from secondhand market value. So they had come down a bit before COVID. So the key to it really is, as we've said -- so if we look at Q1 last year versus Q1 this year, again, there was virtually no movement in the results of our own disposal. So our retail proceeds as a percentage of original costs were the same as a year ago and auction was the same, literally all within 100 basis points in either of those 2 measures. I think it really just speaks to, one, the condition of the equipment, the overall lack thereof from a supply standpoint, from an OEM supply side. So we'll see how it hangs in for the balance of the year. But thus far, again, maybe not a surprise but affirmation of what we may have thought would have been the case.

I guess the next question I wanted to sort of touch on is in terms of restart of projects that have been paused due to COVID versus new greenfield type of projects that has driven demand. Can you comment on that? Are you seeing activity around sort of new projects being restarted as opposed to paused projects being resumed?

Yes. Well, there's definitely both. When you have that big of a fall-off in starts, you're going to have some degree of pent-up demand, so to speak. So there's certainly a degree of that. But I think there's also just been a relatively healthy return to starts in more ordinary case. Earlier on the call, for instance, we would have sort of cited some of the projects that have come to bear over this period of time, ranging from distribution centers to some infrastructure work. I had referenced a big project in Seattle, tech campuses, data centers, those are emerging, and they're going as was planned. Certainly, there could have been some of those that would have been caught up in a bit of a delay. But I think one of the notes -- one of the areas that we spoke to a bit this morning was the bid pipeline. So Dodge, of course, tracks very closely starts but also bids. So before something can start, you will have a bid period that it's in. And we saw a significant drop in just actual bid activity right when you would have thought in that week of March, the 9th, we began to see a decline there. And that decline was quite pronounced through sort of mid to late April. And then we saw -- we began to see that bid activity level getting closer to where it was last year. And in the latter part of July and through August thus far, it doesn't look very different than last year. So I think that's a healthy sign in terms of bidding. Also worth noting is the statistical data between bid time to start. And what's interesting is in all this time this past, there's nothing statistically different versus the bid to start time as what we would have seen a year ago. So I hope that gives some color.

Yes. That's good color. Then the final question I had is really around financial policy. Maybe if you can update us if there have been any changes in terms of your financial policy, capital allocation, leverage targets, anything like that in light of sort of this most recent downturn as you look forward here? And then more -- maybe perhaps a little bit more specifically, your commitment to maintaining the current ratings on the bonds.

Michael?

Yes. In terms of our capital allocation point, and you'll have seen really from the quarter, it is -- we affirmed in the slide, it is unchanged. And so -- and we put that into practice in the quarter. You will have seen -- we've been spending capital expenditure. We've moved back to opening greenfield. So we opened 3 greenfields in the quarter, and we've talked to a plan of 25 to 30 for the coming year. We continue to look at bolt-on M&A opportunities. Now from our perspective, it's got to be the right transaction, et cetera. And typically, when you buy good businesses, they are -- if their earnings are depressed, they're unlikely be in a position where they want to sell. So they're prepared to wait. We're in no rush. So if it makes sense and it's right for the business at the right time, we'll continue to do M&A. And then you see we will -- we declared a final dividend back in June. We will pay that later this week. And then within our 1.5 to 2x, excluding IFRS, which is still our target leverage range, then surplus after that depends on our outlook and view of market conditions, other opportunities, et cetera, we would look to buy back shares. We are -- we've always -- we've had this long-term leverage commitment. We would expect to stay within that range. And we've always talked about ratings being an output rather than input, but we are well in that investment-grade rating. And I would say this wouldn't tie, but I think Moody's review of where we were back in April, May, June, they took the right answer or we've got right answer, and they left the rating unchanged. Fitch and S&P moved it to negative. But I think you will see, we were 1.9 when we went into all of this. We're 1.8, in the middle of our range. In reality, that 1.8, around our numbers, that's actually GBP 1.07. So we're close to the middle as we can be. And we will continue to generate cash this year. So we are -- nothing in terms of our policies or practice has really changed. We're just doing what we've said for a long time we're going to do and we would do in a downturn.