Ashtead Technology Holdings (LSE:AT.) — Interim Results

0:01 Good afternoon, and welcome to the ASHTEAD TECHNOLOGY HOLDINGS PLC Interim Results Investor Presentation. Throughout this recorded presentation, investors are in listen only mode. Questions are encouraged and can be submitted at any time by the Q and A tab situated in the right hand corner of screen. Simply click q and a, scroll to the bottom, type your question, and press send. Company may not be in a position to answer every question received during the meeting itself. However, the company review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, we'd just submit the following poll. Now like to hand you over to Ingrid Stewart, CFO, and Alan Perry, CEO. Good afternoon. Great. Good afternoon, everyone. Thank you very much for joining us. By way of introduction, my name is Alan Perry. I'm the CEO. I joined ASHTEAD Technology in 2009 as CFO. I became CEO in 2012. My career background is I trained with KPMG in Aberdeen, professional in '99, and I've been in subsea services businesses ever since.

0:54 And I've as I said, I've been with ASHTEAD since 2009. And I'm Amy Stewart. I'm CFO. I joined the business in January 2021. And prior to that, I'd started my career at Deloitte, and I trained very quickly into corporate finance, and I qualified. Spent the first sixteen years of my career in professional services with Deloitte, and then Matthew is the director of the Simmons Energy practice. And then joined industry with EnerMech, which is a mechanical services business. I was there for eight years as corporate development director. So quick company history. ASHTEAD started in Aberdeen in 1985. Entrepreneurial start. It was acquired by ASHTEAD Group PLC in 1990 who held the business until 2008 when it was acquired by Phoenix Equity Partners, a London based and mid market PE house, who held the business until 2016 when it was acquired by Partners and Apicore.

1:47 I, as I said, joined the business in 2009. But we cut the the last decade into two parts. First part of the decade was very much strengthening the foundations of the business. We upgraded the management team. We upgraded the facilities. We put a new ERP system in place. We divested of an onshore business that we had in The US, and that really created the foundation to be able to grow the business, which we did in the period sixteen through twenty just before COVID hit, not only by doing the business organically, but by doing five acquisitions. And that was all to increase the breadth, depth, and reach of the business. So what are we? We're a subsea technology rental business. We support the installation, inspection, maintenance, repair, and decommissioning of offshore energy infrastructure.

2:38 We're the market leaders in what we do. We've been doing it for thirty seven years. We've got a strong track record supporting the largest subsea contractors globally. We've got two end markets. Oil and gas has been very much a focus of our business since the beginning. And in recent years, we've been building our position in offshore wind. The roots of our business are obviously very much in oil and gas, but our journey into offshore wind has been one that's been pulled by our customers because it's exactly the same techniques and equipment that's required to do tasks subsea across both end markets. And that's one of reasons why we've got some great exposure to the fast growing offshore wind market. Our equipment fleet consists of 17,000 items.

3:26 It's very well invested, highly fungible, 85% fungibility between both end markets, and our equipment is highly mobile as well. So we can move it in airfreight around the world very easily, so we're not tied to any one geography. So what do we do? You know, we support both the wind and offshore market. The wind activity is very much in the construction phase at the moment, whilst the oil and gas activities are focused on inspection, maintenance, repair, and decommissioning. We do this through three service lines. Surveying robotics is the provision of electronic equipment for survey, navigation, subsea operations.

4:12 That counts for broadly 58% of our revenue. Mechanical solutions, we've been building out through m and a in recent years and now accounts for 34% of our revenue. And asset integrity is solving customers' problems by packaging equipment together, both mechanical and serving robotics, so that we can collect data, so that our customers can then analyze that data to determine what intervention is required on their subsea assets, if if any. So we're building out three legged stool to do more for our customers, but to put that into action and and put that cost visually when I'm to run a a short video. So hopefully, that will just have given you

7:29 a better feel visually for, you know, what our business is all about. So the next few slides are very much focused on our first half trading. You know, it's a really exciting time for the business. We're trading strongly. The market is creating a strong growth runway for us. And at the time of that IPO, we talked about a perfect storm being created, and a number of features were coming together to create that strong growth runway. And what we've seen is that that runway has steepened and lengthened in in recent times. So first half results, 28.5% revenue growth for the period. For the first time in a long time, we've actually seen higher growth from coming from oil and gas. It's a 30% versus 26% in offshore wind, and we'll talk a bit a bit more about that in a minute.

8:19 We're seeing increase in cost utilization. We're seeing increases in pricing. We've done a number of things to position the business for further growth. We've invested 7,600,000 in CapEx so far in the in the first half of the year. We pulled forward CapEx to make sure that we didn't get caught with any supply chain challenges. We've strengthened the senior management team, which we'll talk about a bit later. We also increased headcount by 7%. We've expanded facilities, not only in West Hill, but we're in the process of doing the same in The US. We've achieved ISO certification for health and safety and environmental for the first time. That may not necessarily win us new work, but we're very much focused on building strong foundations to support continued growth in the business.

9:05 So actually having processes and procedures in the business that are externally audited and verified on an annual basis is part of that plan. We're very much focused on continuing growth and not only organically, but through m and a. And part of that is consolidate a fragmented market. We're delighted to see that we signed the acquisition of WeSubsea a week past Friday. When we look at the market, now the key change that has happened since we IPO ed in November last year is the focus on energy security and energy affordability. That has definitely provided an increase in oil and gas activity, but we are very much focused on the energy transition. We came to market as an energy transition theme that's still very much what we're focused on.

9:57 With that background and, you know, the forward look for the rest of the year, the board is increased increasingly confident about the outlook at former business, and we expect FY 2022 to be at least in line with market expectations. I'll hand over to Ingrid who will talk us through some numbers, and then I'll come back and talk about the market and some other operational aspects. Thank you. So we're very pleased with the performance of the business across all our metrics in the first half of the year. The results are very much in line with expectations and up significantly on the prior year. The market has strengthened through FY 2022, and that's allowed us to increase utilization and also to push pricing, and we've got some slides coming up later on that. As a matter of note, when you compare FY 2022 with the first or FY 2022 with the first half of last year, Last year was very much a year or two halves, so the first half being much more impacted by COVID than the second half. So bear in that mind when looking at these numbers. But in terms of where we're at, 28.5% growth in revenue, 48% growth in EBITDA, delivering margins 25.8% EBITDA margins, which translates to ROIC of 19%, all up on the full year results.

11:08 And terms of balance sheet, very strong balance sheet position at 0.9x leverage. When you look at that and historically, for those of you that haven't seen this graph before, the dark blue bars and and the and the full year results are our actuals. And then what we've done here is we've layered on the yellow the form of the acquisitions that we've done. So you can see the the growth that the business that the business was in prior to COVID, the impact that that COVID has on the business, and then the growth sense. You know, top line growth, and as I said, 28 and a half percent in the half year comparisons last year. And EBITDA margins of 39%, and these will be consistently kind of around about 40% EBITDA margins delivered in this business. We are down slightly on prior year, and that's really just as a result of the business line mix, but also the reintroduction of some cost post COVID, and the biggest one being the reintroduction of the bonus scheme, which we haven't paid out on since 2019.

12:05 And we've also, in these numbers, got our first period of listed company costs as well. Overall, delivered on adjusted EBITS up 25.8%, and that's actually a higher percentage than we achieved during our pre COVID higher years. Our revenue growth continued to come from both oil and gas and renewable markets. And as Alan said, 30% from oil and gas, sort of just under 26% from renewables. We've seen, for the first time in a while, oil and gas growth higher than renewables. We've really seen a resurgence of oil and gas activity due to concerns around energy security. Our gross margin has improved due to the mix of business and improved pricing, but we've also increased admin costs as mentioned on the previous slide. But overall, higher activity has a strong flow through to the bottom line on our P and L.

12:57 On cash flow, there are three kind of major areas to focus on on cash flow. It's EBITDA and working capital and CapEx, and those are areas that move and or that drive the cash flow. And we've seen a slight on working capital, we've seen a slight improvement on debtor days since the year end. Our creditors have also increased as a result of our increased CapEx spend. And so despite the increase in revenue, that has resulted in a minimal impact in the first half from working capital. Our CapEx of $7,600,000 in H1, and we've actually pulled forward quite a significant chunk of our CapEx spend and for the full year, our budget for the year was low double digits. And we chose to spend CapEx early to make sure that we can minimize lead times and also make sure we have the kits available for the busy summer periods.

13:46 Overall free cash flow conversion, when you look at the two halves together, they're broadly in line with the prior period. As I said, we've got a very strong balance sheet with net debt down at 0.9% at 0.9 times EBITDA. Our target net debt level is one to two times, and that is our medium term target, think about M and A going forward. I'll come on to capital allocation in a minute. In terms of working capital, as I said, our debt fees have come down slightly, and that has allowed us to reduce our working capital as a percentage of LTM revenue and as well as obviously as a result of the CapEx creditor increase. Our ROIC as a result of the improved EBITDA has increased to 19%. Just moving on to capital allocation.

14:35 In terms of our priorities for growth, and we see these coming under three piece of stools. Firstly, organic fleet growth. We have been focusing on organic growth through the first half of the year, investing $7,600,000 in CapEx during that period. In terms of M and A, we signed our first acquisition two, five years ago, and we're continuing to build our pipeline for M and A opportunities. Being mindful of both current organic and M and A opportunities, we intend to declare our first dividend in conjunction with our final results for FY twenty twenty two. By the a reminder for those that we've spoken to before, you'll be aware that we very much see this as a gold stock, but we have consistently talked about introducing a small progressive dividend. We recognize that that's important to some investors, but also creates capital discipline across the business.

15:25 Great. Thanks so much, Ingrid. So the next slide focuses on the market before we we get into more operational matters. So as I said at the start, you know, the market's created a strong growth runway for us. The graph on the left hand side of the page is showing a CAGR growth CAGR of 16% from 2021 through 2025. There was a similar slide or similar graph included in the emission document at IPO time, which showed 11%. So there's been very little movement in in offshore wind that's gone from 19% to 20%. The big change has been in oil and gas, subsea inspection, interest bearing, construction support, which has gone from 7% to 14%. Some of that has also been driven by the events in Ukraine, which has really, you know, brought in focus energy security and energy affordability, which is now obviously headline news and impacting, you know, the general public.

16:21 What we've seen so far in 2022 is an uptick in oil and gas activity, recognizing that it actually takes time for operators to put plans in place. And we are a business that gets involved right at the end when they splash the water. So before you get to that point, there's the front engineering that needs to be done. There's procurement that needs to be done. So, you know, we are of the view that we haven't really seen the impact of, you know, increased oil and gas activity that's been that that is coming our way because of the events in Ukraine. Yeah. That will come through '23, '24, and '25. There has been some noise around minor delays in offshore wind projects.

17:06 You know, that is to be expected because delays and offshore are two words that generally go together. Offshore wind is more exposed to inflation pressures than than oil and gas given the contracting background and because a lot of those projects are at procurement and installation phase. However, you know, the outlook for offshore wind is as strong as it's ever been, And we, you know, definitely see a market that's an inflection point where, you know, access to vessels, to people, to equipment is getting tight. We've got an offshore wind market that's the biggest that's ever been in history, and we've got an oil and gas market that's coming back quite strongly. So as we look into the future, you know, what do we see? Oil and gas operators are recording record free cash flows.

17:52 Free cash flow from oil and gas upstream activities. Last year was something like 810,000,000,000. Forecast for this year is 1,400,000,000,000. So there is a wall of cash that's being generated. Some of that will find its way back to investors in various forms through dividends and share buybacks and the like. But we we we fully expect some of that to be invested in accelerating the energy transition, it's offshore wind, in hydrogen, in solar, but also to extend field life, extend production, and and also stimulate construct new construction work in oil and gas. So when we look at all these factors, you know, we see a strength in the market that's fundamentally better than when we when we IPO ed, and we are very well placed to benefit both from the uplift in oil and gas and offshore wind given the transferability of skills and capability that we've got in the business and the fact our fleet is highly fungible.

18:55 So how does that translate into what we're seeing in the in the business? We're seeing tightening market conditions. Quote activity by value is 2029% higher in the first half versus the prior year. I think that is a proxy for market activity rather than necessarily revenue because within that, it will be bid for bid. So not everything in that quote activity is something that we can win. Cost utilization is now at 44%. We've pointed in the past to a good utilization cost utilization target for us being at four to 5% plus. And from the pricing graph, you can see that we also, you know, be increasing pricing.

19:41 There are inflationary aspects to your business. The the obvious place is payroll. The cost of new equipment is also increasing, but the increases that we're getting from pricing is offsetting any inflation that we see. Excuse me. One of the challenges that that we're currently facing is is the shortage of people, certainly quality people. We have increased headcount by 7% through first half of the year. We now have a headcount at June 219. We've added to that subsequently. We're delighted to see that we've strengthened the senior management team. We have Phil Middleton has joined us as serving robotics director. That's a brand new role to look after that service line.

20:29 Ross McLeod, who's been with us for over ten years in the asset integrity role, has been promoted to integrated projects director to, you know, look after larger projects that span the three service lines, and we're delighted that Bob Gillespie has joined us a couple weeks ago as commercial director. Bob's background is from the contractor or from the customer set, Food Group Technique McDermott, both being some of his previous employers. Culture is also, you know, very important. We've introduced things like Star Wars, which appear to be a recognition program, which is is gaining traction. As I said earlier, we've we've, you know, secured ISO certification for health and safety and environmental to strengthen the foundations of the business, and we've also expanded facilities.

21:21 So we're taking a number of actions not only to to grow the business, but to, you know, put in place strength of foundations for growth going forward. One of the fourth growth one of the four growth drivers that we spoke about at a time period time was was m and a. And we developed our m and a strategy in 2015 prior to Buckthorn and that we acquired in the business. And it's very straightforward. It's to consolidate fragmented market, build up business of international scale to do more for our existing customers. And central to that is expanding geographically, expand the range of products and services, and also expanding into wind. And whether we look at it through the lens of our four regions, whether it's through the three service lines or the two end markets, there's multiple opportunities for us to grow and develop through M and A.

22:14 We're delighted to say that we have signed the SPA for the acquisition of eSubsea, and this is, you know, almost a textbook example of ASHTEAD technology acquisitions, a privately owned business, an off market deal, technology that's highly complementary to existing mechanical equipment range, consolidates a fragmented market. We can internationalize the products through the ASHTEAD network. We can refocus the efforts of the business towards renewables. It's highly attractive from a multiple perspective. Last year, it generated 58% EBITDA margin and 47% EBITDA margin.

23:00 So we're delighted to have got this acquisition signed, and we will complete the deal in Q4 of this year. So when we look at the the outlook for this business, as I said, the business is trading strongly. The business is very well placed to benefit from the changes in the market. We've got increased confidence in the medium term outlook for the business that is supported by the likes of, you know, the data that's coming from the right side that we that we spoke about earlier. We're seeing higher customer propensity to rent, which is driven by some supply challenges within the market. We are we are confident that we can continue to make good progress not only organically, but through through m and a, you know, through this year and next.

23:53 On a cautionary note, you know, there is a lot of uncertainty in the world. You know, there's there's obviously inflationary factors, but energy is at the center of of the big debate. We feel that we're very well placed to benefit from that. And therefore, you know, the board is increasingly confident about the, you know, the outcome for this year to be at least in line with market expectations. And then finally, you know, this is the the final slide that we showed at IPO stage. I think we've made good progress as a PLC since November. And when we look at these six points, each of these six points are stronger today than they were in November last year. You know, we've got a great exposure to the offshore renewables market that's continued to go from strength to strength. There has definitely been an uptick uptick in in oil and gas activity. Customer propensity to rent is increasing given the increase in market activity and supply chain challenges and securing new equipment.

24:55 Yeah. I think we've demonstrated that we've got a really strong platform that we can expand geographically and we can push more products and services through. Ingrid has talked us through the numbers. This business generates strong cash flow, high returns, and we've got a great opportunity to grow the business through M and A as well. So that concludes the slides. We'd be more than happy to take questions now. Fantastic. Thank you very much indeed for the presentation. Ladies and gentlemen, do please continue to submit your questions using the Q and A tab situated on the right hand corner of your screen. Just want the team to take a few minutes to review those questions submitted already today. I'd like to remind you the recording of the presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard on the Investor Meet company platform. If I may just hand over to you just click on that q and a tab, and where appropriate to do so, if you could just read out the question and give you a response, that would be fantastic. Thank you very much indeed.

25:48 Okay. The first question, with the structural shift in oil and gas, how are you managing securing enough equipment And how does your funding availability impact your growth profile? So I answer the second half of that. I'll let you do the first part. So I'll I'll take I'll take the first part. You know, given the increasing market shifting, we're ideally placed to benefit from this because we've got the biggest independent fleet in the market. We have certainly seen increase in lead times for new equipment. Some of that is tied to the global shortage of electronic chips, certainly for serving robotics equipment. But what that means is, you know, we need to do things quicker and earlier than we necessarily have done in the past. So lead times can be anything from a few weeks to a few months to half a year at the moment.

26:39 But we're making investment decisions on equipment that will last ten, fifteen, twenty years. And what we need to do is is put orders in early. So we've already started putting in orders for '23 CapEx. And we for for '22, we put orders in probably a couple months earlier than we normally would. So by by being proactive, we can certainly deal with the supply chain challenges that we've got. We're letting good talk about funding. Yeah. From a funding availability perspective, we've got a £40,000,000 RCF through HSBC and place our bank. It was taking place when we IPO last November. We've also got a £10,000,000 accordion facility over and above. So we're at June, we're at 0.9 times leverage even with the drawdown for the VCC acquisition, and we will be at less than one times by the year end. So there's still sufficient availability of cash in terms of our existing facilities, but there's also open dialogue with with banks at the moment to see how far can we we pull that. We're targeting a one to two times leverage in the medium term.

27:48 So the next question is visibility of revenue. Can you talk through what we typically see in the order book? So I think the first point there is that we're not a backlog business. You know, we've got good visibility out probably, you know, two months. However, top 10 customers are very stable. About 50% of our revenue comes from the top 10 customers. We talk to them on a daily basis. You know, with some customers, we sit in their weekly planning meetings. We've got really good visibility on what they're tending, what their vessel scheduling is like. And and because a consequence of that, we can't forecast with with very good accuracy. However, as I say, we don't have a backlog. Our average project duration is something like forty seven days. So this is a high volume, high turnover business.

28:39 Next one, who are our main competitors and estimated market share? So we've got a number of competitors on the certainly in the product side. The top three are all private equity backed. One being Citronics, which is part of the acting group, which is KKR backed, Unique Maritime, which is backed by Blue Water Energy, and the third one being subsea technology rentals, which is backed by Bear Capital. Our biggest competitor in the survey in the robotics space is actually our customers. We own probably 65% of the equipment in the market. So we would estimate the market share in survey and robotics to be about 20% of the of the rental market. When it comes to mechanical solutions, it's highly fragmented.

29:26 So we've got competitors in cutting, we've got competitors in trenching, we've got competitors in ROV tooling. So it's very difficult to actually work out what our market share is there, but we see that as an area that is right for market consolidation and and we're guessing a number of opportunities in that direction. So do you expect the current energy crisis to feed into meaningful increase of demand for your services? So that it's a good question. You know, our view is that there has been a fundamental change in the outlook for energy. For sure, the energy transition is gathering momentum, and, you know, offshore wind is a major part of our business now. You know, it makes up, you know, more than 30% of our revenues.

30:19 I think what had been overlooked in the past is the place the oil and gas can play in the energy transition. And gas in particular is very much part of that transition. I think the events in Ukraine and the impact on pricing not only in oil and gas, but also in other forms of power means that that does need to be focused on where energy is coming from. It needs to be secure. It needs to be affordable, and it also needs to be sustainable. And I think all those factors are positive for our business and will lead to increased demand for our services going forward. The next one, are your increased staff numbers and inflation within staff and costs covered by increasing prices, I. E, will margins be affected?

31:06 Obviously, inflation is a concern to all businesses at the moment. The two areas that we see that, you know, is mostly around staff costs and in CapEx costs, but we fully expect that that will be covered by increased prices. So we don't we're not anticipating any margins to be affected. And then over what period of time is equipment written off and how frequently do you have to undergo additional write offs. So we depreciate most of our equipment on it's five to seven years, but the majority is over seven years. The reality is that within that within that, if you look after the equipment, if it's well maintained, your electronic equipment can survive for ten to twelve years.

31:52 In terms of other write offs, it's very rare that we would write any equipment off and it still has a a net value. And if our if our equipment goes out on higher to customers and they damage it, it's written into our terms and conditions, but they effectively pay for that. So when you see our p and l, you'll see there is a and our other operating income line. That is the profit we generate from the disposal of assets, and that is generally coming from our ability to charge our customers for damage or loss. Fantastic. Thank you very much indeed. I think you've covered all the questions that we've had through. Of course, there any further questions that come through, the company will be able to review all questions submitted and publish responses where appropriate to do so. Alan, before redirecting investors to provide you with their feedback, which I know is particularly important to you and the team, if I could just ask you for a few closing comments, please. Great. Thanks so much. Well, thanks so much everyone for joining us this afternoon.

32:46 You know, we have been encouraged by the progress that we've made as a PLC through the first half of this year. You know, there is a number of factors that we've talked about that are, you know, supporting the growth runway for this business. There's a lot of things that we can do. And from an investment perspective, you know, we believe that we can provide or through through ASHTEAD technology, we can provide exposure to the international offshore energy market, not only oil and gas, but also offshore wind in an asset light basis, which is quite a unique proposition on on on the on the market. So thank you very much for your your interest, and, you know, hopefully, we'll be able to continue doing these broadcasts in the future as well. That's fantastic. Alan Ingrid, thank you very much indeed for updating investors today. Could I please ask investors not to close the session? It should be automatically redirected to provide your feedback, and all the team can better understand your views and expectations.

33:53 This will only take a few moments to complete and is greatly valued by the company. On behalf of the management team of ASHTEAD TECHNOLOGY HOLDINGS PLC, we'd like to thank you for attending today's presentation. That concludes today's session. Thank you, and good afternoon to you all.