9 December, 2008
Unaudited results for the half year and second quarter ended 31 October 2008
Read and download the second quarter results for the Ashtead Group. You can also view the latest webcast.
Audited results for the year and unaudited results for the fourth quarter ended 30 April 2008
|Underlying operating profit1||110.0||109.7||0%|
|Underlying profit before taxation1||76.6||71.5||+7%|
|Underlying earnings per share1||10.0p||8.9p||+12%|
|Profit attributable to equity shareholders||80.7||46.7||+73%|
|Basic earnings per share||15.8p||8.5p||+87%|
1 See explanatory notes below
- Good first half profits and earnings growth in slowing market conditions
- Prompt action initiated to reduce cost base by £45m to right size the business for the levels of demand we anticipate next year
- On track to generate £200m cash inflow this year and a minimum of £100m in 2009/10
- All our debt is committed for the long term and structured to remain covenant free
- Maintained cash outlay on interim dividend at £4.4m or 0.9p per share (2007: 0.825p)
Ashtead's Chief Executive, Geoff Drabble, commented:
"Ashtead has continued to perform well against the background of weakening market conditions. Our strong and diversified market positions have and will continue to benefit the Group but it is also important that we take prompt actions based upon realistic assumptions of the future trading environment.
We are, today, announcing a restructuring programme which will right size the business for the anticipated lower levels of demand. Based upon the success of our ongoing focus on operational efficiency, we are confident that this programme will generate cost savings of £45m per annum. Whilst generating an exceptional cost to the business the programme also has the benefit of being cash positive due to the fleet disposals.
We continue to be confident in the strength of our debt package which is committed for the long term and structured to support us through the cycle. We remain on track to deliver £200m of cash generation this year and expect a minimum of £100m in 2009/10 thereby significantly reducing our future borrowing needs. In addition our asset based debt package is effectively covenant free and we anticipate it remaining so even allowing for a long and deep recession.
Whilst the outlook for the operational trading environment in the second half is weaker and difficult to predict, we will benefit significantly both from lower interest costs and the stronger dollar. Longer term, our strong market positions, long term committed debt facilities, cash generative and flexible business model and the decisive restructuring exercise which we are undertaking allow the Board to view the future with confidence."
|Geoff Drabble||Chief executive||020 7726 9700|
|Ian Robson||Finance director||020 7726 9700|
|Brian Hudspith||Maitland||020 7379 5151|
- Underlying profit and earnings per share are stated before exceptional items and amortisation of acquired intangibles. The definition of exceptional items is set out in note 4 to the attached financial information. The reconciliation of underlying earnings per share and underlying cash tax earnings per share to basic earnings per share is shown in note 7 to the attached financial information.
- IFRS requires that, as a disposed business, Ashtead Technology's after tax profits and total assets and liabilities are reported in the Group's accounts as single line items within our income statement and balance sheet with the result that revenues, operating profit and pre-tax profits as reported in the Group accounts exclude Ashtead Technology. Prior year figures have been restated accordingly.
Geoff Drabble and Ian Robson will host a meeting for equity analysts to discuss the results at 9.30am on Tuesday 9 December at the offices of UBS at 1 Finsbury Avenue, London EC2. For the information of shareholders and other interested parties, the analysts' meeting will be webcast live via the link at the top of this release and there will also be a replay available from shortly after the call concludes. A copy of this announcement and the slide presentation used for the meeting are also available to download at the top of this release. There will also be a conference call for bondholders at 3pm (10am EST).
Analysts and bondholders have already been invited to participate in the meeting and conference call but anyone not having received dial-in details should contact the Company's PR advisers, Maitland (Kerryn Jahme) at +44 (0)20 7379 5151.
The impact of financial constraint and economic uncertainty on our markets has become increasingly apparent towards the end of the first half. All major forward indicators now point towards a somewhat greater reduction in non-residential construction activity than that expected at the end of our first quarter.
The private sector has been first to see a slow down, particularly amongst the smaller builders. Sectors which are most exposed to consumer spending, such as retail, are being affected first and a number of projects have been postponed or cancelled.
Infrastructure work is likely to remain good for the medium term with particular areas of strength being utilities, prisons, schooling and transportation. Future strength, however, depends on central funding and both US and UK administrations have highlighted the need for increased public sector investment to improve ageing infrastructure and support employment. These statements of intent, whilst encouraging, are not supported as yet by firm financed commitments and, therefore, we have decided to right size our business to the lower level of demand we expect in the near term.
We would, however, anticipate that initiatives such as the Obama infrastructure package and the UK government's intention to bring forward £3bn of infrastructure spending could start to impact our markets towards the end of 2009. A combination of financial constraint and uncertain order books will result in contractors, particularly in the US, increasingly choosing the rental option. We therefore anticipate that the established trend towards increased outsourcing of equipment supply in the US will accelerate.
In addition, the rental industry remains fragmented with a number of smaller rental companies surviving on leasing finance often with low or zero cost interest rates subsidised by equipment manufacturers. This source of finance has become increasingly scarce and substantially more expensive. We therefore expect the rental market to consolidate further during the downturn, benefitting the larger, better financed players such as ourselves.
Therefore, with strong market positions in both the UK and US, supported by young fleets and sound long term debt facilities, we would anticipate emerging from the current downturn with greater market share and, in the US, in a market with enhanced rental penetration.
The impact of exchange rate fluctuations on our business
Both Sunbelt and A-Plant earn their revenues, pay their costs and fund their working capital needs in their respective currencies of the US dollar and sterling and are unaffected by changes in the exchange rates. The Group's currency exposure therefore constitutes a translation exposure which only arises in the preparation of the consolidated accounts.
When the US dollar strengthens against sterling, as was the case in the second quarter and particularly during the month of October, then the sterling value of Sunbelt's profits and of our dollar based interest cost increases as does the sterling value of Sunbelt's assets and liabilities including its dollar debt which makes up the vast majority (around 97%) of the Group's total debt.
In the half year the average rate of exchange used for translating our earnings was $1.88 = £1 whilst the closing exchange rate at 31 October 2008 used for balance sheet translations was $1.62 = £1. The equivalent rates a year ago were $2.01 = £1 for earnings and $2.08= £1 for the balance sheet whilst the balance sheet rate at both 30 April and 31 July 2008 was $1.98 = £1. This means that whilst the exchange rate impacting half year earnings has strengthened by just 7%, the effect on balance sheet rates is much more significant with 22% appreciation compared to last year of which 18% has occurred in the second quarter.
Principally as a result of the large balance sheet rate movement, there is a net translation gain of £40m in first half reserves which represents the amount by which the increase in the sterling value of Sunbelt's assets (primarily its rental fleet and receivables) exceeded the increase in the sterling value of its liabilities (primarily the Group's largely dollar based debt).
First half results
|Sunbelt in $m||821.7||809.1||320.8||330.5||187.0||196.6|
|Sunbelt in £m||436.8||401.9||170.6||164.1||99.4||97.6|
|Group central costs||–||–||(3.6)||(4.4)||(3.6)||(4.4)|
|Net financing costs||(33.4)||(38.2)|
|Profit before tax, exceptionals and amortisation from continuing operations||76.6||71.5|
|Ashtead Technology - discontinued operations||2.8||5.2|
|Exceptional profit (net)||30.5||0.2|
|Amortisation of acquired intangibles||(1.4)||(1.2)|
|Total Group profit before taxation||108.5||75.7|
Sunbelt's first half revenues grew 8.7% to £436.8m (2007: £401.9m) as reported in sterling and by 1.6% in dollars to $821.7m (2007: $809.1m). The underlying growth reflected weakness in construction activity in a number of Sunbelt's markets, particularly in Florida and California whilst other markets, particularly Texas, continued to grow strongly.
Operating costs grew by 3.6%. Delivery costs increased markedly as a result of both the increased fuel cost in the period and increased expenditure on fleet transfers into busier markets. Costs in other areas increased at rates in line with or below inflation.
$207.3m (2007: $313.3m) was invested in the rental fleet which as a result was, on average, 6% larger than in the first half of last year. Physical utilisation in the first half was flat at 70% whilst second quarter rental rates increased 2% sequentially from the rates experienced in the first quarter. As a result the decline in rental yield for the second quarter relative to last year was just 1%, significantly lower than the 5% reduction in the first quarter. For the half year as a whole, the yield decline was 3%. Sunbelt's underlying operating profit declined by $9.6m to $187.0m but grew by 1.8% in sterling to £99.4m (2007: £97.6m).
First half revenues at A-Plant grew 0.9% to £109.5m in a market which was broadly flat in terms of non-residential construction but where there was a substantial fall in residential construction. Whilst residential construction represents only around 10% of A-Plant's revenues, the rapid and substantial decline in UK house building this summer limited overall revenue growth.
£51.0m was invested in the UK fleet (2007: £77.2m) in the first half including £21.7m for growth giving a fleet which on average was 14% larger than last year. The reduction in the housing market also had an impact on physical utilisation which was 2% below last year's level at 69% (2007: 71%). Rental rates in the second quarter were broadly unchanged from the first quarter but relative to the previous year, first half yield declined 9% as increasing apprehension about the outlook impacted rates in the competitive UK rental market.
Operating costs were kept essentially flat driving a 3.4% increase in underlying EBITDA to £38.8m (2007: £37.6m) but the increased depreciation charge on the enlarged fleet led to a £2.3m decline in underlying operating profit to £14.2m (2007: £16.5m).
After lower Group central costs, the underlying first half operating profit was unchanged at £110.0m (2007: £109.7m). Net interest costs reduced 12% to £33.4m (2007: £38.2m) due to both lower average debt levels and lower interest rates. As a result the underlying Group profit before tax (before the profit from the discontinued Ashtead Technology business, exceptional items and intangible amortisation) rose 7% to £76.6m (2007: £71.5m).
The sale of Ashtead Technology in June for £96.0m generated net cash proceeds of £89.8m which were applied to pay down debt. The sale also produced an exceptional disposal profit before taxation of £66.2m. Ashtead Technology's trading profit for the period up to the date of sale at the end of June was £2.8m (2007: £5.2m for the whole of the first half). There was also an exceptional charge of £35.8m relating to the programme to position the Group for the future discussed below. As a result the total Group profit before taxation was £108.5m (2007: £75.7m).
The effective tax rate was stable at 36% of the underlying pre-tax result (2008 full year: 35%). Reflecting the Group's capital intensive business and the utilisation of brought forward tax benefits, cash tax represented just 2% of underlying profit (2008 full year: 5%) with the balance being deferred tax.
During the first half, the Group repurchased 20.2m shares at a total cost of £13.5m. Reflecting the beneficial impact of this and the repurchases last year, underlying earnings per share for the half year grew faster than underlying pre-tax profits at 12% to 10.0p (2007: 8.9p) whilst basic EPS, including exceptional items and amortisation, was 15.8p (2007: 8.5p).
Positioning the Group for the future
Whilst the first half has seen good growth in pre-tax profits and earnings, the trends in our end construction markets discussed above have led us to develop a store closure, fleet downsizing and cost reduction programme. The programme will lower the cost base by about £45m annually. The majority of savings are expected to be realised by end April 2009 providing full benefit in the year to April 2010. The savings derive mostly from store closures, reductions in the number of delivery vehicles, head count reductions and from reduced depreciation as a result of the anticipated 7% reduction in fleet size.
Implementation of the programme is underway with significant activity during November although the equipment sales will take place throughout the second half.
We have taken an exceptional charge of £36m in the first half relating mostly to the impairment of assets which are to be sold in bulk in this programme and to provisions for future rents on empty properties at locations where closure has already been announced. We expect to take a further charge in the second half of around £19m (at October 2008 exchange rates) to conclude the programme which, under IFRS rules on provisioning, must only be booked as notification is given to the stores which are to be shut.
Most of the total expected exceptional charge relates to non-cash asset write downs and provisions for future empty property costs. The fleet downsizing will, however, generate immediate disposal proceeds. The programme is therefore expected to generate net cash inflows of around £25-30m by April 2009.
Capital expenditure in the first half totalled £201.5m (2007: £255.1m), including £179.3m on the rental fleet. Disposal proceeds totalled £40.7m (2007: £40.9m) giving net expenditure in the period of £160.8m (2007: £214.2m) whilst a net £145.8m was paid out in cash. The average age of the Group's rental fleet at 31 October 2008 was 32 months (2007: 27 months). Including the beneficial impact of the additional fleet sales to be effected in the second half outlined above, net capital expenditure payments in the second half are expected to total only around £15m giving total anticipated net payments for the year of around £160m. Next year's capital expenditure will also reduce significantly but, as usual, we will provide detailed guidance when we release our third quarter results in March 2009.
Cash flow and net debt
£108.6m of net cash inflow was generated in the first half including £18.8m from operations (2007: outflow of £41.8m) and £89.8m net of disposal costs from the sale of Ashtead Technology in June. £21.9m or 20% of this net inflow was applied in returns to equity shareholders with £86.5m used to reduce outstanding debt.
As a result net debt at 31 October 2008 was £1,076m (30 April 2008: £963m) which includes a translation increase of £197m due to the strength of the dollar. The Group's underlying EBITDA (excluding Ashtead Technology) for the last twelve months calculated at constant 31 October 2008 exchange rates was £432m. Accordingly the ratio of net debt to underlying EBITDA at constant rates was 2.5 times at 31 October 2008 (30 April 2008: 2.6 times) and we remain on track to achieve our previously announced year end debt target of $1,555m (£962m at 31 October 2008 exchange rates).
Our debt package is well structured for the challenges of current market conditions. We retain substantial headroom on facilities which are committed for the long term, an average of 4.9 years at 31 October 2008 with the first maturity on our asset based senior bank facility not being due until August 2011.
Availability under the $1.75bn asset based loan facility (including suppressed availability of $18m) was $764m at 31 October 2008 ($602m at 30 April 2008) well above the $125m of availability at which the entire debt package is covenant free. The strength of the debt structure is illustrated by our ability to absorb a 60% reduction in rental fleet values from their early 2007 peak more than double the peak to trough decline which occurred in the last cycle.
The availability calculation also compares a largely dollar based borrowing base with our substantially dollar based facility utilisation meaning that availability is largely unaffected by exchange rate fluctuations.
Return on investment
Return on investment (underlying operating profit divided by the weighted average net assets employed, including goodwill but excluding debt and deferred tax) which is measured on a rolling twelve month basis to eliminate seasonal effects was 12.9% for the year ended 31 October 2008 (14.0% for the year ended 30 April 2008). RoI for Sunbelt was 13.8% whilst A-Plant's RoI was 9.1%.
Following the rebasing of dividends last year when there was a 50% increase, the Board has decided to broadly maintain the £4.4m cash cost of last year's dividend on the reduced number of shares now in issue following recent share buy-backs and has therefore declared an interim dividend of 0.9p per share (2007: 0.825p per share). As we stated a year ago when announcing the rebasing, the Board's dividend policy is to seek to increase cash returns to shareholders progressively over time, considering both the underlying performance of the Group and the ongoing cash flow of the business. The interim dividend will be paid on 12 February 2009 to shareholders on record on 30 January 2009.
Current trading and outlook
Trading in November reflected the slower performance experienced in recent months, a trend that is likely to continue.
Whilst the outlook for the operational trading environment in the second half is therefore weaker and difficult to predict, we will benefit significantly both from lower interest costs and the stronger dollar. Longer term, our strong market positions, long term committed debt facilities, cash generative and flexible business model and the decisive restructuring exercise which we are undertaking allow the Board to view the future with confidence.