Ashtead Group Regulatory News (AHT)

Ashtead Group Plc

3 March 2020

Unaudited results for the nine months and

third quarter ended 31 January 2020

Nine month highlights

· Revenue up 13%2; rental revenue up 12%2

· Operating profit of £1,069m (2019: £963m)

· Pre-tax profit3 of £947m (2019: £888m); £969m excluding the impact of IFRS 16

· Earnings per share3 up 11%2 to 154.3p (2019: 138.9p)

· £1,256m of capital invested in the business (2019: £1,290m)

· Record free cash flow of £363m (2019: £72m)

· £407m spent on bolt-on acquisitions (2019: £491m)

· Net debt to EBITDA leverage2 of 1.9 times (2019: 1.8 times)

Ashtead's chief executive, Brendan Horgan, commented:

"We have enjoyed another quarter of industry-leading rental revenue growth, resulting in an increase in rental revenue of 12% in the nine months and an increase in underlying earnings per share of 11%, excluding the impact of IFRS 16, both at constant exchange rates.

Our North American end markets remain supportive and we continue to execute well on our strategy of organic growth supplemented by targeted bolt-on acquisitions in a moderating growth environment. This strategy reflects the structural growth opportunity we see in the business as we broaden our product offering, geographic reach and end markets. In contrast, the UK market remains challenging and we are therefore refocusing A-Plant on leveraging its platform to deliver long-term sustainable results, while generating strong cash flow.

We invested £1.3bn in capital and a further £407m on bolt-on acquisitions in the period, which added 82 locations across the Group. As discussed at the half year, we expect capital expenditure for the year to be at the lower end of our previous guidance (c. £1.4bn). Looking forward to 2020/21, we anticipate gross capital expenditure of £1.1 - £1.3bn, which should result in mid to high single digit revenue growth in the US.

We remain focused on responsible growth. Our increasing scale and strong margins are delivering growing earnings and significant free cash flow. This provides significant operational and financial flexibility, enabling us to invest in the long-term structural growth opportunity and enhance returns to shareholders, while maintaining leverage within our target range of 1.5 to 2.0 times net debt to EBITDA excluding IFRS 16. We spent £376m under our share buyback programme in the period, in line with our expectation to spend a minimum of £500m on share buybacks in 2019/20. The programme will be extended for the financial year 2020/21, with an anticipated spend of at least £500m.

In North America our business continues to perform well in supportive end markets, while in the UK we have taken decisive strategic action to refocus the business in the challenging market conditions. Although construction markets are moderating, we expect results to be in line with expectations and the Board continues to look to the medium term with confidence."

Contacts:

Brendan Horgan and Michael Pratt will hold a conference call for equity analysts to discuss the results and outlook at 8am on Tuesday, 3 March 2020. The call will be webcast live via the Company's website at www.ashtead-group.com and a replay will be available via the website shortly after the call concludes. A copy of this announcement and the slide presentation used for the call are available for download on the Company's website. The usual conference call for bondholders will begin at 3pm (10am EST).

Analysts and bondholders have already been invited to participate in the analyst call and conference call for bondholders but any eligible person not having received details should contact the Company's PR advisers, Maitland/AMO (Audrey Da Costa) at +44 (0)20 7379 5151.

Forward looking statements

This announcement contains forward looking statements. These have been made by the directors in good faith using information available up to the date on which they approved this report. The directors can give no assurance that these expectations will prove to be correct. Due to the inherent uncertainties, including both business and economic risk factors underlying such forward looking statements, actual results may differ materially from those expressed or implied by these forward looking statements. Except as required by law or regulation, the directors undertake no obligation to update any forward looking statements whether as a result of new information, future events or otherwise.

Nine months' trading results

1 Segment result presented is operating profit before amortisation.

Group revenue increased 13% to £3,928m in the nine months (2019: £3,394m) with good growth in the US and Canadian markets. This revenue growth, combined with a continued focus on drop-through, generated underlying profit before tax of £947m (2019: £888m) or £969m excluding the impact of IFRS 16. This performance reflects good profit growth in the US, a more moderate improvement in Canada as we invest in the business and a drag from the weakness in the UK.

The Group's strategy remains unchanged with growth being driven by organic growth (same-store and greenfield) supplemented by bolt-on acquisitions. Sunbelt US and Sunbelt Canada delivered 13% and 29% rental only revenue growth respectively, while A-Plant's rental only revenue decreased 1%, reflecting the more competitive landscape within a more uncertain UK market. The growth in Sunbelt Canada continues to reflect the impact of recent acquisitions, including William F. White acquired in December 2019.

Sunbelt US's revenue growth continues to benefit from cyclical and structural trends and can be explained as follows:

Sunbelt US's revenue growth demonstrates the successful execution of our long-term structural growth strategy. This growth is against a back-drop of a construction industry, just less than half of our end markets, which did not grow in 2019 and is forecast to be again flat in 2020. In this moderating growth environment, we continue to capitalise on the market opportunity through a combination of organic growth (same-store growth and greenfields) and bolt-ons as we expand our geographic footprint and our specialty businesses. We added 64 new stores in the US in the nine months, approximately half of which were specialty locations.

Rental only revenue growth was 13%, driven by increased fleet on rent. This is a good performance after the last two years which were impacted favourably by significant hurricane activity, whereas the 2019 hurricane season was much quieter. Sunbelt US's total revenue, including new and used equipment, merchandise and consumable sales, increased 14% to $4,280m (2019: $3,759m).

A-Plant generated rental only revenue of £272m, down 1% on the prior year (2019: £274m). This resulted from a 1% reduction in fleet on rent. The rate environment in the UK market remains competitive. A-Plant's total revenue increased 1% to £365m (2019: £360m) reflecting higher used equipment sales as A-Plant defleeted, selling under-utilised and lower returning assets. This defleet programme combined with targeted fleet investment has contributed to improved utilisation.

Sunbelt Canada's rental only revenue increased 29%, including the benefit of recent acquisitions. On an organic basis, rental only revenue increased 11%. Sunbelt Canada's total revenue was C$321m (2019: C$257m).

We continue to focus on operational efficiency as we look to maintain or improve margins. However, while US growth continues to outpace the market, the relatively lower rate of growth compared with recent years has put some pressure on drop-through, both in some of our mature stores and from the drag effect of greenfield openings and acquired stores. In Sunbelt US, excluding the impact of IFRS 16, 48% of revenue growth dropped through to EBITDA. This contributed to a reported EBITDA margin of 51% (2019: 50%) and an 11% increase in operating profit to $1,339m (2019: $1,210m) at a margin of 31% (2019: 32%). Excluding the impact of IFRS 16, the EBITDA and operating profit margins were 49% and 31% respectively for the current period.

The UK market remains competitive and after a period of sustained growth for the business, the focus is now on operational efficiency and improving returns. The EBITDA margin of 33% (2019: 37%) reflects the drag effect of the increased fleet disposals, the challenging rate environment and investment in the infrastructure of the business. Excluding the impact of the de-fleet exercise and the adoption of IFRS 16, A-Plant generated an EBITDA margin of 34% (2019: 37%). Operating profit of £38m (2019: £55m) at a margin of 10% (2019: 15%) also reflected these impacts.

Sunbelt Canada is in a growth phase as it invests to expand its network and develop the business. Significant growth has been achieved while delivering a 41% EBITDA margin (2019: 37%) and generating an operating profit of C$58m (2019: C$47m) at a margin of 18% (2019: 18%). Excluding the impact of IFRS 16, the EBITDA and operating profit margins were 38% and 18%, respectively.

Reflecting the performance of the divisions, Group underlying operating profit increased to £1,114m (2019: £999m), up 9% at constant exchange rates. Net financing costs increased to £167m (2019: £112m) reflecting the impact of the adoption of IFRS 16, which resulted in an incremental interest charge of £33m in the nine months, and higher average debt levels. As a result, Group profit before amortisation of intangibles, exceptional items and taxation was £947m (2019: £888m). After a tax charge of 25% (2019: 24%) of the underlying pre-tax profit, underlying earnings per share increased 8% at constant currency to 154.3p (2019: 138.9p). Excluding the impact of IFRS 16, Group profit before exceptional items, amortisation of intangibles and taxation was £969m and underlying earnings per share increased 11% at constant currency. The underlying cash tax charge was 12%.

Statutory profit before tax was £885m (2019: £851m). This is after amortisation of £45m (2019: £37m) and, in the current year, an exceptional charge of £16m ($21m). The exceptional charge relates to financing costs associated with the redemption of our $500m 5.625% senior notes in November 2019. Included within the total tax charge is a tax credit of £15m (2019: £9m) which relates to the amortisation of intangibles and exceptional items. As a result, basic earnings per share were 144.1p (2019: 133.1p).

Capital expenditure and acquisitions

Capital expenditure for the nine months was £1,256m gross and £1,028m net of disposal proceeds (2019: £1,290m gross and £1,138m net). Reflecting this investment, the Group's rental fleet at 31 January 2020 at cost was £9.0bn. Our average fleet age is now 34 months (2019: 32 months).

We invested £407m (2019: £491m), including acquired borrowings, in 17 bolt-on acquisitions during the period as we continue to expand our footprint and look to diversify our specialty markets.

For the full year, we now expect gross capital expenditure to be at the lower end of our previous guidance (c. £1.4bn at a $1.30 sterling exchange rate). For 2020/21, we expect gross capital expenditure to be in the range of £1.1 - £1.3bn which should result in mid to high single digit rental revenue growth in the US next year.

Return on Investment

Sunbelt US's pre-tax return on investment (excluding goodwill and intangible assets) in the 12 months to 31 January 2020 was 23% (2019: 24%). In the UK, return on investment (excluding goodwill and intangible assets) was 7% (2019: 10%). This decline reflects the competitive nature of the UK market and the rate environment and the weaker performance of the business. In Canada, return on investment (excluding goodwill and intangible assets) was 12% (2019: 11%). We have made a significant investment in Canada including the recent acquisition of William F. White and, as we develop the potential of the market, we expect returns to increase. For the Group as a whole, return on investment (including goodwill and intangible assets) was 17% (2019: 18%). For comparability, return on investment excludes the impact of IFRS 16.

Cash flow and net debt

As expected, debt increased during the nine months as we continued to invest in the fleet and made a number of bolt-on acquisitions but also due to the adoption of IFRS 16, which added £883m to debt as at 1 May 2019. During the period, we spent £376m on share buybacks.

In November, the Group took advantage of good debt markets and refinanced its debt facilities by issuing $600m 4.0% senior notes maturing in May 2028 and $600m 4.25% senior notes maturing in November 2029. The net proceeds of the issues were used to repurchase the Group's $500m 5.625% senior notes which would have matured in 2024, pay related fees and expenses and repay an element of the amount outstanding under the ABL facility. These actions ensure the Group's debt package continues to be well structured and flexible, enabling us to optimise the opportunity presented by end market conditions. The Group's borrowing facilities are now committed for an average of six years at a weighted average cost of 4%.

Net debt at 31 January 2020 was £5,443m (2019: £3,725m), resulting in a net debt to EBITDA ratio of 2.3 times on a pro forma 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 January 2020 was £4,359m, while the ratio of net debt to EBITDA was 1.9 times (2019: 1.8 times) on a constant currency basis.

At 31 January 2020, availability under the senior secured debt facility was $1,446m, with an additional $2,949m of suppressed availability - substantially above the $410m 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).

In line with these priorities, our share buyback programme will continue through the 2020/21 financial year, with an anticipated spend of at least £500m.

Current trading and outlook

In North America our business continues to perform well in supportive end markets, while in the UK we have taken decisive strategic action to refocus the business in the challenging market conditions. Although construction markets are moderating, we expect results to be in line with expectations and the Board continues to look to the medium term with confidence.

CONSOLIDATED INCOME STATEMENT FOR THE THREE MONTHS ENDED 31 JANUARY 2020

* EBITDA is presented here as an alternative performance measure as it is commonly used by investors and lenders.

All revenue and profit is generated from continuing operations.

Details of principal risks and uncertainties are given in the Review of Third Quarter, Balance Sheet and Cash Flow accompanying these condensed consolidated interim financial statements.

CONSOLIDATED INCOME STATEMENT FOR THE NINE MONTHS ENDED 31 JANUARY 2020

* EBITDA is presented here as an alternative performance measure as it is commonly used by investors and lenders.

All revenue and profit is generated from continuing operations.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED BALANCE SHEET AT 31 JANUARY 2020

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE NINE MONTHS ENDED 31 JANUARY 2020

CONSOLIDATED CASH FLOW STATEMENT FOR THE NINE MONTHS ENDED 31 JANUARY 2020

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1. General information

Ashtead Group plc ('the Company') is a company incorporated and domiciled in England and Wales and listed on the London Stock Exchange. The condensed consolidated interim financial statements as at, and for the nine months ended, 31 January 2020 comprise the Company and its subsidiaries ('the Group').

The condensed consolidated interim financial statements for the nine months ended 31 January 2020 were approved by the directors on 2 March 2020.

The condensed consolidated interim financial statements do not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The statutory accounts for the year ended 30 April 2019 were approved by the directors on 17 June 2019 and have been mailed to shareholders and filed with the Registrar of Companies. The auditor's report on those accounts was unqualified, did not include a reference to any matter by way of emphasis and did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.

2. Basis of preparation

The condensed consolidated interim financial statements for the nine months ended 31 January 2020 have been prepared in accordance with relevant International Financial Reporting Standards ('IFRS') as adopted by the European Union, including IAS 34, and the accounting policies set out in the Group's Annual Report and Accounts for the year ended 30 April 2019, except for the adoption of IFRS 16, Leases ('IFRS 16'), further details of which are set out below.

The directors have adopted various alternative performance measures to provide additional useful 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 within the Glossary of Terms on page 38.

The condensed consolidated interim financial statements have been prepared on the going concern basis. The Group's internal budgets and forecasts of future performance, available financing facilities and facility headroom (see note 13), provide a reasonable expectation that the Group has adequate resources to continue in operation for the foreseeable future and consequently the going concern basis continues to be appropriate in preparing the condensed consolidated interim financial statements.

The exchange rates used in respect of the US dollar ($) and Canadian dollar (C$) are:

IFRS 16, Leases

IFRS 16 has been applicable for the Group from 1 May 2019 and provides a new model for lease accounting under which lessees recognise a lease liability reflecting future lease payments and a right-of-use asset on the balance sheet for all lease contracts other than certain short-term leases and leases of low-value assets.

Under IFRS 16 the Group recognises depreciation of right-of-use assets and interest on lease liabilities in the consolidated income statement, whereas under IAS 17, Leases ('IAS 17') operating leases previously gave rise to a straight-line expense included within other operating costs. In addition, right-of-use assets will be tested for impairment in accordance with IAS 36, Impairment of Assets. This replaces the previous requirement to recognise a provision for onerous lease contracts.

Under IFRS 16 the Group separates the total amount of cash paid for leases that are on balance sheet into a principal portion (presented within financing activities) and interest (presented within operating activities) in the consolidated cash flow statement. Under IAS 17 operating lease payments were presented as operating cash outflows.

Details of the Group's accounting policies under IFRS 16 are set out below, together with a description of the impact of adopting IFRS 16. Significant judgements applied in the adoption of IFRS 16 included determining the lease term for those leases with termination or extension options and determining an incremental borrowing rate where the rate in the lease could not be determined readily.

Accounting policy under IFRS 16

The Group assesses whether a contract is a lease, or contains a lease, at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets. For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed.

The lease liability is measured initially at the present value of future lease payments at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate. Lease payments included in the measurement of the Group's lease liability comprise:

· fixed lease payments, less any lease incentives received; and

· variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date.

The lease liability is presented as a separate line in the consolidated balance sheet.

The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made.

The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever:

· the lease term changes, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate;

· the lease payments change due to changes in an index or rate, in which case the lease liability is remeasured by discounting the revised lease payments using the initial discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used); or

· a lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.

The right-of-use asset comprises the initial measurement of the corresponding lease liability, lease payments made at or before the commencement date and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses.

Right-of-use assets are depreciated over the shorter period of the lease term and the useful life of the underlying asset with depreciation commencing at the commencement date of the lease.

Variable lease payments that do not depend on an index or rate are not included in the measurement of the lease liability and the right-of-use asset. The related payments are recognised as an expense in the period in which the event or condition that triggers those payments occurs and are included in the line "other operating costs" in the income statement.

For short-term leases (lease terms of 12 months or less) and leases of low-value assets (such as photocopiers, vending machines, etc.), the Group has opted to recognise a lease expense on a straight-line basis as permitted by IFRS 16. This expense is presented within other operating costs in the consolidated income statement.

Approach to transition

The Group has elected to apply IFRS 16 using the modified retrospective approach, with the right-of-use asset equal to the lease liability on transition subject to required transitional adjustments. As such, the cumulative effect of adopting IFRS 16 of £8m has been recognised as an adjustment to opening retained earnings on 1 May 2019 with no restatement of comparatives.

The Group's weighted average incremental borrowing rate applied to lease liabilities as at 1 May 2019 was 4.5%.

Practical expedients adopted on transition

As part of the Group's adoption of IFRS 16 and application of the modified retrospective approach to transition, the Group elected to use the following practical expedients:

· a single discount rate has been applied to portfolios of leases with reasonably similar characteristics;

· right-of-use assets have been adjusted by the carrying amount of onerous lease provisions at 30 April 2019 instead of performing impairment reviews under IAS 36;

· hindsight has been used in determining the lease term and as such the Group has assumed that all available lease extension options are taken unless there are plans to exit a location based on our historical experience; and

· leases where the remaining lease term on transition was less than 12 months have been excluded from the lease liability on transition.

Financial impact

The application of IFRS 16 to leases previously classified as operating leases under IAS 17 resulted in the recognition of right-of-use assets and lease liabilities. The table below sets out the adjustments recognised at the date of initial application of IFRS 16 in relation to the opening balance sheet:

The table below presents a reconciliation of the minimum operating lease commitments disclosed at 30 April 2019 to the lease liabilities recognised at 1 May 2019 under IFRS 16:

In terms of the income statement impact, the application of IFRS 16 resulted in a decrease in other operating expenses and an increase in depreciation and interest expense compared to IAS 17. The impact on the consolidated income statement is detailed below where pro forma adjustments have been made to eliminate the depreciation and interest which arise under IFRS 16 and to include the operating lease costs within EBITDA which would have been recorded under IAS 17.

3. Segmental analysis