Earnings Call: Q1 2017

Sep 7, 2016

Hello, and welcome to today's Ashtead Group Plc Results for the First Quarter and throughout this, all participants will be in listen only mode. And afterwards, there will be a question and answer session. Just to remind you, this call is being recorded. And today, I'm very pleased to present Geoffrey Drabble, Chief Executive and Suzanne Wood, our Chief Executive. Please begin. Thank you. Good morning, and welcome to our normal shorter Q1 call. To me, this call has always signaled the end of summer, so I hope everyone is suitably refreshed after what's been a very interesting, if not historic, time. Since our year end results, we've had Brexit, a new Prime Minister, a Rubbish European Championship and a Great Olympics. Yet through it all, Afstead remained remarkably consistent, as you can see from the overview on Page 2. It's been a good quarter, reflecting the strength of both our model and our end markets. Not only have we seen further revenue growth and market share gains, but importantly, it's been very profitable growth with group EBITDA margins at a record 48% operating margins a very healthy 29%. We spent time at the year end detailing our capital allocation priorities as we entered a different fleet replacement cycle. The execution of this policy has been clearly demonstrated in our actions throughout the quarter. We've invested £328,000,000 in capital expenditure and a further £64,000,000 on bolt ons. We've also spent £17,000,000 on share buybacks and all of this was achieved whilst maintaining leverage with 1.7x EBITDA, well within our target range. Our strong margins and associated cash generation give us a wide range of options for continued EPS growth. Looking sterling given the size of our U. S. Business. As a consequence, we expect full year results to be ahead of our expectations, and the Board continues to look forward to the medium term with confidence. So with that, I hand over to Suzanne to take us through the financials. Thanks, Jeff, and good morning. The group's first quarter financial results are shown on Slide 4, and we were pleased to report an underlying pre tax profit of 184,000,000 pounds as compared to £161,000,000 for the same period last year. Weaker sterling improved profitability by approximately £17,000,000 However, this was broadly offset by the £12,000,000 impact of lower gains from used equipment sales, reflecting reduced replacement capital expenditure. We'll look at the used equipment sales and related gains in more detail in a moment. Rental revenue at the group level increased by 12% on a constant currency basis in the Q1 and margins continued to improve clearly indicating the profitability of our business model. EBITDA margin for the quarter was 48% and operating profit margin was 29%. On Slide 5, we've provided some additional for two reasons. First, this year's planned reduction in replacement CapEx has reduced both revenue and gains from the sale of used equipment. And second, in the Q1 of last year, we had particularly high disposals as we adjusted the size of our oil and gas fleet. Both of these factors caused anomalies in our year over year growth percentages. Excluding the sale of used equipment from both periods, revenue and underlying profit increased by 12% as compared to last year. Now a few of you may have spotted what appears to be an unusually low margin on sales this year. So let me address that point before we leave this slide. Each quarter, we record a fixed provision for estimated costs of shrinkage, meaning lost, stolen or scrapped assets. For a quarter with an unusually low level of asset sales, these fixed costs have a disproportionate effect on margin because there is no revenue associated with them. The actual margin realized on equipment sales this quarter was right in line with our experience in fiscal 2016. The ratio of sales proceeds to the cost of equipment sold also was in line with last year. On Slide 6, we show Sunbelt's 1st quarter results. Rental and related revenue grew by 11% as Sunbelt continued to benefit from strong construction activities and structural trends in its end markets. The operational efficiencies that we discussed in June were evidenced in the quarter by Sunbelt's overall drop through rate of 65%, which in turn pushed margins higher. EBITDA margin was a record 50% and operating profit margin increased to 32%. And at the bottom of the chart, we've shown the gains effect that I mentioned earlier. Operating profit increased by 4% as compared to last year, but excluding the gains on fleet disposals, the underlying year over year growth rate was actually 10%. Turning over to A Plant on Slide 7, we've shown the comparative figures. The U. K. Business continued to perform well with rental revenue growth of 14%. EBITDA margin was 38% and operating profit margin was 18%, reflecting good cost discipline in the quarter. Reduced replacement CapEx and lower gains also affected A Plant's comparative operating profit. Excluding gains, underlying operating profit for the U. K. Division increased by 23% year on year. On Slide 8, we provided some detail on our debt and leverage profile. Our net debt debt increased in the Q1 as we continued to invest in the fleet and made a number of small bolt on acquisitions. Weaker sterling also increased the level of our debt. However, our leverage ratio continued to decline ending the quarter at 1.7 times, a level which was in the middle of our target range of 1.5 to 2 times EBITDA. This range provides us with a high degree of flexibility and security through the cycle and as discussed in June allows a significant amount of capital to be available for discretionary spending such as on M and A and returns to shareholders. That concludes my comments. So I'll hand it back over to Tim. Thanks, Suzanne. So turning to Page 10. Let's now look at Sunbelt with the enhanced analysis we introduced at year end. Our general tool business was particularly strong in the quarter, which was to be expected given the strength of both construction and our broader markets. Employment levels in the U. S. Are high, as is disposable income, and we've seen the benefit of this across a range of sectors from a little due largely to mix. But as we will show in a moment, these trends are collectively very positive for margin. Specialty, which is 20% of our business, has seen 3% overall growth. We've included oil and gas in our total specialty business because this is where it should sit. It's of a size now where it does not want to be called out separately. But of course, in the short term, it does still affect certain metrics. So as always, we'll try to get the balance right in terms of our disclosures. Within the overall 3% growth, Specialty, excluding oil and gas grew 11% and oil and gas fell 46%. As always, it's important to remember that specialty demand remains event driven on a quarter to quarter basis, but over the long term provides consistent returns and remains an area which we aim to develop further. So outside oil and gas, a very positive performance once again. As I said in the introduction, the most encouraging element of our results over recent quarters has been our margin improvement and it's been the case again in quarter 1. As you can see on Page 11, same stores, that's Lowe's that existed since 1 May 2015, which represents 93% of our negative yield due to mix, efficiency improvements and a different transactional cost profile means it's not a factor in our profit performance. This is very much a continuation of the efficiency themes that we discussed at the year end presentation. Just to give us some perspective, for these same stores, 11% year on year volume growth was delivered with only 2% more hits. And it's this level of continuous improvement which supports our strategy of organic growth and explains why overall margins continue to improve. As always, due to the small changing population, some of the greenfield and bolt on data looks a little off. However, while not as good as same store drop through, it is still a very solid overall performance. The development of our greenfields and bolt ons over time remains an important long term margin improvement opportunity. In oil and gas, 40% of the revenue decline dropped to EBITDA this year, which compares to 193% last year. Therefore, I guess you could say it is slowly stabilizing, but the key is that it just continues to become less relevant as we move through the year. So moving on to CapEx on Page 12. And we are, in total, more or less where we expected to be. We are towards the upper end of our growth CapEx range, given our strong fleet on rent and high utilization and at the lower end of our replacement range for the same reason. The guys are sensibly holding on to their assets as they're out on rent on longer term rentals. Therefore, our disposals have been very low and are likely to be until La Quinta. Also, as we have discussed, the population due for disposal is just very low. The fact that we are in such a different replacement cycle is apparent when you look at the total spend, which as Suzanne highlighted earlier, does have implications for both gains on sale, but most importantly, cash. Given that we are broadly where we expected to be, we will update our full year guidance at the half year when our early 20 seventeen-eighteen planning is starting to take shape. This is the 1st year that our newly 5 year plan, which is designed to get us to broadly 900 locations by 2021. So that would be around another 300 stores or a 50% increase in our footprint. This imaginatively named Project 2021 will be the basis of our Capital Markets Day in October, where we will share a lot more detail than we have historically as to the future opportunity from greenfields and bolt ons and our experiences, particularly around clusters and relative margins. We have a well tested and exciting plan, and we're looking forward to sharing much of it with you when we at a time when we don't also have to cover results. And we've got off to a good start with 24 locations in the Q1. And you will see in the press release, we made some further small bolt ons in August. Therefore, we remain well on track for at least 60 new locations this year. So moving on to A Plant on Page 14. And again, a good quarter where we continued to take significant market share. Volume was good, at 17%, yields flat. And as you can see, utilization has continued to improve from the disappointing levels of a year ago. Importantly, as you can see on Page 15, we continue to grow profitably. We continue to be selective in the work we do. Its profitability and returns, not just share gains, are particularly important in the U. K. Market. It is good to see the growth in our Specialty business, and you will note that this remains the focus for our bolt on acquisitions as highlighted by the deals we've announced recently and you can see in this morning's press release. Of course, the big question for the U. K. Construction industry is Brexit, and the answer remains that it's too early to tell. Having said that, with a well financed and diverse group and U. K.-centric competitors, we see more long term upside and downside whatever the end market conditions as we continue to diversify and develop the business. So to wrap it all up on Page 16 before Q and A, let me just summarize a few key points. For the quarter, we've executed well in markets which continue to be supportive. It does remain a bit of a Goldilocks economy in both markets with some bits hot, some cold and others just about right. But looking forward, our view remains that we will see moderate, long term cyclical growth supplemented by further structural opportunity. Most importantly, we continue to grow both responsibly and profitably, adhering to our capital allocation priorities and posting record margins. Our high margins and strong cash generation give us a wide range of options for continued EPS growth. Both divisions are performing well. And with the benefit of weaker sterling, we expect full year results to be ahead of our expectations, and the Board continues to look to the medium term with confidence. And with that, I'll hand over to Hugh for Q and A. Thank you. Our first questions are also the line of James Sparrow at Barclays. Please go ahead. Good morning. A couple of questions, if I may. The first one, just given the impact of billing days on the Q1, could you perhaps give us a bit of color on how August has trended? And then the second question, given your comment about customers holding on to equipment for longer, larger customers, less transactional work, etcetera. How does that change how you manage the replacement cycle more broadly for the fleet moving forward? Yes, sure. Good morning, James. Yes, the billing days was a bit of an anomaly this quarter. We had 2 fewer billing days in July and 2 more billing days in August. So the Q1 results, as we announced for both Sunbelt and Air Plant, the rental revenue growth would have been 2% higher had we evened it. If you look at our presentation, our presentation from my slides is based on billing days. Just to give us some perspective, you think, well, how big a difference could it make? If you look at Sunbelt in July, which was included in our Q1 results, we reported 9% of rental revenue growth. It was 19% in August. Now nothing changed materially between July August. So the secret is to divide the 2 when you end up with 14.5 percent rental revenue growth, which is what we've done year to date. We've been consistently ticking along all the way through the year at about 14% to 15% rental revenue growth. It was the same in AA plan. We reported 11 percent rental revenue growth in July and a whopping 27% in August. Nothing got better in August. It was predominantly billing day. So again, if you average it out, you get to about 18%, which is what we've seen through the year. So we've seen a very consistent performance in each and every quarter. So a very good strong start into the 2nd quarter. And the whole billing days thing is just anomalies. 2 days on 20 days is 10%. It's as straightforward as that. Yes. Yes. The point about the replacement expenditure is an interesting one. As you know, as we have developed as we've added more larger accounts to bigger national accounts, a number of the dynamics in our business has changed. The transactional cost profile has changed, which is why even though we have a slightly negative yield, that's more than being compensated for by the lower transactional costs and or efficiency improvements. So we're very happy to pass on some of those cost savings within a lower yield for certain customers because from a bottom line perspective, it all makes a lot of sense. But it's also dynamic in terms of when you look at we have a relatively small population, but we have assets that come to the anniversary where they are due to be sold. If they're out on daily or weekly contracts, that's really, really easy. They come back in. And when they come back in, we sell them because it's the day to sell them. If they're out on rent for 6 months, 12 months or 18 months, what do you do? You say, Excuse me, can I have my asset back, please, because I want to sell it? The customers are really happy with it. Our fleet is not that old, and we're generating good returns on that. We could bring it back. That would increase our gains on sale. But we then just be lowering our return on investment because we're putting the brand new assets back out just for exactly the same rental. We'd have all the transaction cost of bringing it back, selling it and moving a new one out there. So it means that the replacement expenditure is likely to be back ended, not front ended because we'll do a bit of a catch up in the winter when naturally the utilization drops a bit. So it is another one of these transactional cost base is lowering as our business mix changes. Okay. Thank you. We are now over to the line of Josh Pudell with Berenberg. Please go ahead. Yeah. Hi, good morning. So my first question is on the same store growth. I wondered why you think you've seen a deterioration from 11% in Q4 to 6% in Q1. And then perhaps if you can give us a sense of how that same store growth has exposure. I just wondered what are you seeing in those end markets? The data appears to have slowed since Q1. And then also following on from that, I wonder if you could give us an indication of what your exposure to private expenditure versus public expenditure is within that? Thank you. That's an awful lot of questions, Joss. Right. Well, 1st and foremost, I think you've got to be careful that you pick up the right numbers. Let's turn to Page 11. And when we adjust for billing days and when we adjust for oil and gas, our same store performance, as you can see there on Slide 11, the fleet on rent is up 11%. So again, a very, very consistent and a very, very strong performance. The number you're quoting out of the press release incorporates same store oil and gas and doesn't separate out oil and gas, and it doesn't adjust for the 2 billing days. So I think that's just an anomaly between the numbers. And as you can see, the same store plus 11% remains very, very strong. But presumably, the Q4 Q4 number also the one I quoted the 11% in Q4 that doesn't adjust for oil and gas. So presumably if you adjusted that for oil and gas it would be materially higher. Well, again, I'm going to look at my numbers now because I think I've got the Q4 presentation in front of me now. I'll get Suzanne to pull out the slide. So we haven't is the pace of growth given the tougher comparator as a percentage of core is down a little bit. I think you've got to look at it that the market is growing at about 5 percent, and we continue to grow at around double the pace to go. In Q4, same store growth was 12%. So it's gone from 12 percent to 11% with tougher comps. So we think the activity levels remain very, very strong. And that's so I'm not quite sure if there's any achievable difference, that's not how it feels on the ground before. Okay. And then on the non resi exposure? We've always said that it's very, very hard to say precisely what our exposure is to any specific market. We have so many customers. They cover a multitude of sectors. It's no more or no less than it's been. It's probably slightly less as we broadened our specialty business and as we broadened our general tool more into restoration, remediation, entertainment and stuff. Our experiences on the ground is witnessed by these results and going into August remain very, very strong. I mean, I think, as we said, it's a bit of a goldilocks economy. We have had strong monthly data and weak monthly data every alternative month for the last 18 months. Back in October, the manufacturing data was terrible. Now then it was great. April labor numbers were bad. May labor numbers were great. Throughout the period, since people started to get a bit agitated about the U. S. Economy, which was around 18 months ago when oil and gas went down, the U. S. Economy, through various highlights and lowlights from a data perspective, has added 3,000,000 jobs. If you look at over the last 3 months, I know the August labor numbers were great. But if you average June, July August numbers and average amount, that's 232 1,000 jobs per month have been created through the summer in North America. Yes, look, there are sectors that are high. There are sectors that are low. And I know the consensus data now says that the public expenditure is down and private is up. I can point to a whole bunch of other data in MAXIMUS in both which would point to the opposite. So our experiences are that the market is still strong. There is an awful lot of construction activity out there as witnessed by a very strong August and a very strong start for September. We're now over to Emily Roberts of Deutsche Bank. Go ahead. Hi. It's Emily from Deutsche Bank. A couple from me, please. The first question is on your specialty growth, which I think you quoted was 11% ex oil and gas. Could you please give us some color on the split between volume growth and rate growth within that? And then secondly, sorry to stay on the same point as before, but I noticed that the market growth on your Slide 21 is now 4%. It was 6% in the last quarter. Could you give us a little bit more color on the particular end markets or verticals that might be driving that change in market growth, please? And then my final question, just looking at returns on investment and how that means with fleet age. Given fleet age is probably now me start with the first one in terms of the 11% Specialty growth. It is pretty much all volume yield was probably plus 1. It was north of plus 1. It's a bit it's not dissimilar to construction. The yield is neither one way or another. You've got be careful also, particularly with specialty because it just depends which specialty business. If it's kind of controlled, that's a very high yielding business, and that will change the mix. But And the overall environment for specialty businesses is not that dissimilar to construction, which is it's broadly flat. In terms of market growth, the markets are growing steadily. We call it a 4%. Whether it's 4%, 5% or 6%, I'm not terribly sure anyone particularly knows. They keep changing. I think the general consensus across all I believe, remains largely the same in all of our pipelines. I still think the biggest issue people have in terms of growth in the construction sector is the fact that there isn't labor available. So I think there is an absolute constraint to growth. It's why, as said in the summary slide, our expectation is around 4%, 5%, 6% growth for probably the next 4%, 5 years. That's our view and it's a view fairly commonly held amongst our customer base when they look at their pipeline of work. I mean, a big issue in America right now, particularly in the construction space, is the backlog of work. A huge number of projects are behind schedule and behind schedule because of access to skilled labor. So yes, the growth forecast has ticked down a smidgen. I don't think it's got an awful lot to do with any fundamentals within the U. S. Economy. I know there are different views on the U. S. Economy. Emily, I know you think we're close to 1930s style session. That's not our observation. It's the market is solid, the end, like 4%, might be 5%. But what we continue to see is good modular growth for the long term. More importantly, as we've been saying for multiple periods now, 2 thirds of our growth continues to be structural. And so we still see the biggest opportunity being to take market share, both in existing stores. We see market share opportunity from greenfields and bolt ons. And we still see an environment where despite very low cost to finance, our customers are choosing to rent rather than buy. So yes, look, it will be slightly slower than what we previously said. I don't think we're seeing anything fundamental in any particular segment of our market. And in terms of the as we age the fleet, then return on investment, you're right, should start to improve. Of course, we need to really split it between same stores in greenfields and bolt ons. Obviously, when we open greenfields and bolt ons, that's predominantly with brand new fleet. So that's a big drag on our that has been a big drag on our ROI. And yes, but as the fleet age flattens and then when it even takes up a little bit, ROI will improve. We haven't we said we went through that in some detail at the year end, but it takes time. And ROIs measured on a trailing 12 month basis. So we would expect ROI to flatten by the end of this financial year and start to improve during the course of the following year, which is exactly what we went through in a bit more detail at the year end. Great. Thanks very much. We're now over to Chris Gallagher at JPMorgan. Please go ahead. Good morning. A couple of questions. Just first around what you've seen within the yield number, what are you seeing in the underlying reopening quite difficult, but a like for like piece of equipment. And then just on maybe different geographies, if you've seen any difference in the growth rates around those geographies, could you call those out for us? Thank you. Yes. Hi, Chris. It's a good question. And I know one of our peers has been a lot more specific in tiny movements on a monthly basis in the way. We find that a hard concept to get online from because it's always going to vary. I mean, there is not a rate. There is a different rate for different customers in different geographies for different rental periods and different rental environments. And so precisely what's happening in rates on a month by month basis really is quite difficult to measure. In the range, rates are broadly flat. They may be up a smidgen, but they look a smidgen. And as you rightly identified, it varies very significantly between geographies. So what are the tough geographies? Well, not surprisingly, Texas remains a pretty tough geography anywhere of sort of like Eastern Ohio and Appalachians where there was again, you had Marcellus and you had big coal mining industries. Those areas are difficult. Well, it's good. California, Florida, upper Northwest, all good geographies all around the Carolinas, Alabama, that kind of area, rate environment is good. But again, it will depend on the segments. So it is better around remodeling, entertainment, restoration and mediation. It is tougher in big contracts, long term contracts with big construction companies. And you'd expect that. If you think about it sensibly, we have, through this cycle, seen a seismic shift in the structure of this industry. A number of very large construction companies who historically owned equipment have moved to rental, either totally or to a much greater proportion. We're at the stage where we are clearly, based on our performance relative to our peers, benefiting enormously from that shift. And so I guess the question is, if you look at this mathematically, you'd say, look at your volume growth, look at your fiscal neutralization, why not pull up rates faster? And there is some logic in that. But equally, what we're doing is we're cementing the structural change. And so against those bigger customers with far lower transactional costs, then we are it makes more if you look at our returns, it makes a lot more sense for us to embed that structural change this cycle during which period they will lose the infrastructure necessary to own fleets going forward, then it makes more sense for us to do that right now than it does to necessarily sort of get overly aggressive on the rates in that sector. Now we need to compensate for that by getting rate improvements in other sectors. So it's a complicated mix of sectors in geographies. But overall, if you look at our rates, they're about flat. If I was to really, really try and convince myself, I could convince myself they are roughly smidgen, but it's a smidgen and not worth talking about to be perfectly honest. But it's certainly not getting any worse. Okay. That's helpful. And just one more then on M and A. If you just stepped up a little bit this year, how do you see that going through the year on as other models that people are expecting comes in more hopefully from your perspective? Sorry, Chris, you just broke up for a second. Can you just repeat that question? Yes, of course. Just around M and A, it's stepped up a little bit this year and how you see that through the year or multiples that the targets are expecting a little bit more sensible than we have been in recent times? Yes. Again, it's a good point. As you can see, yes, we've been a little bit more than we did last year. I think we are predominantly new in dire in terms of strategy. So if we weren't happy with the multiples, then nothing was going to get sold. I mean, we did have a bit of a mix that can stand off for a period last year. Look, we have now a very good track record from our greenfield and bolt on acquisitions. We are as enthused as ever, arguably more so about the structural opportunity in this business. As I said earlier, if you think about it, that we've had a couple of years in good construction markets that you couldn't have a lower cost to finance and there's great deals available from manufacturers. And yet our customers continue to choose to rent rather than own. That is a massive structural shift that's taken place this cycle. I think it's particularly around certain products. And therefore, we are very keen to grow our footprint around those products, and that will form a big part of our Capital Day in October. So yes, I think the likelihood is that we will do certainly more than we did last year, which isn't tough because we didn't do very much last year. It's just hard to be precise. I mean, you can't multiply what we did in Q1 by 4 and say that's what we will do. We have to land the deals. And some of them have a long gestation. Yes, they do have a long gestation. But we remain very positive about bolt on acquisitions. I think we again will with you in October. I think we have a clearer view of when bolt ons make more sense than greenfields. And we've got a reasonable pipeline. Like I said, we will get ahead of ourselves. We'll do all this in October. But we now have a very clear path to get to 9 100 locations and increase our footprint by 50% by 2021. 2021 is not so far away. We've already accomplished the 1st 5 year plan, and we're now rolling into the 2nd 5 year plan with a lot more experience in doing what we do, a much better track record in knowing how to evaluate and integrate these businesses. So yes, it's going to be more than last year, hard to say precisely, hard to say precisely, how much Chris, I'd love to tell you, but I just don't know. Okay, great. Thank you very much. We're now over to Justin Jordan of Jefferies. Please go ahead. Your line is open. Thank you. Good morning, everyone. I just want to, I guess, explore a little bit more on yields for operating EBITDA margins. Firstly, just on the rental yields improving from minus 2% in Q4 to minus 1 in Q1. Is that should we infer easing energy headwinds? Or are there other sort of factors at play here? If I'm honest, I don't know. I know that's a terrible, terrible answer. I should have some wonderful mathematical calculation. It's down to mix. I mean, it's the problem is we have to quote a quarterly single ticket to you, which in all honesty is meaningless. The number which we can't share with you, I might as well just give you all of our management account, breaks it down by product, by sector, by geography. And that then is a meaningful number. And so as much as anything, Justin, it's just mix. Everybody wants to take every single tweak in every single metric and extrapolate it into the cycle or into a trend, and it's just mix. But the rates certainly have not got any worse. The mix clearly must be a bit better because the numbers are a bit better. But that's all it is, Justin. It's just me. And just a quarter ago, you were talking in terms of yields for fiscal 'seventeen overall being better in the second half of the year than the first half of the year? Is that still your view when you think about fiscal 'seventeen overall? Yes. I mean, I think I said my guesstimate was it was going to be 0 to minus 1. If I had to pick a number, I would have picked 0. But we would be we would carry forward the negative numbers we had in Q4 into Q1, Q2, and it will get better in the Q3 and Q4. And that still is my view. That's certainly how it feels. Now in fairness, it was a slightly dodgy answer because I knew I had up my sleeves, the fact that we had no heat and cold before. Therefore, unless we had a really warm winter again, I'm going to get a kicker in Q4 just because of heat. So it was a reasonably safe bet that it would get better in Q4, and I would have less of a negative headwind in oil and gas. So I'm not sure it necessarily tells you very much about the trajectory of the market, but the market is fine. I mean, look, it's Look at the margin. I mean, the key to all of this remains margin, which is why would we not cement this structural change with some of those key accounts right now when we are delivering the sort of drop through that we are delivering. I mean, if you think about this, 71% drop through is a phenomenal number. Clearly, our margins, it's just nuts. Our margins have to continue to improve. Remember, both in the air plans and the Sunbelt margins, we have no exceptional costs. So we have done all of the costs of our greenfields, all the costs of our acquisitions, any restructuring within those acquisitions are all included in our sort of 65% drop through that we called as a whole. So the incremental margin on this organic structural growth is remarkably high, and that's why we think it is both very profitable growth and very responsible growth. What's irresponsible is big speculative M and A. So but what we will continue to do is small sensible M and A and significant levels of organic fleet growth. Okay. And just I just want to carry forward on that sort of fall through. You're obviously very impressed with in fall through to EBITDA in Q1. You're just want to clarify, you're very comfortable sort of people modeling whatever 60% plus for 60% for fiscal year. We must have been saying model 60% drop through for about the last 5 or 6 years. And it's always been around about that number. Now there's going to be years when it's 58, there's going to be years when it's 62. But it's we have consistently delivered 60% incremental margin. And that is why, over time, quite naturally, obviously, there's a drag from greenfields and bolt ons, but naturally, our margins will continue to improve. That I have no doubt. Mehdi raises a good point, which is as we start moderating our fleet age and as greenfields and Broadcom become a smaller percentage of the total, that will also improve return on investment. There is a hiatus around fleet age at the moment, but that will improve. And that's our job. Our job is to grow the top line, gain market share, improve margins and material investment. Our job is not to improve yield by 2 tenths of a percent on a monthly sequential basis. That's a nice thing to be able to do, but it's not why we're here. Okay. Just one final mechanical question. Obviously, you generate 91 the sensitivity is on an the sensitivity is on annualized basis of, let's say, a 1% movement in FX to reported sterling properties? Sure, sure, Justin. A 1% change in the exchange rate is about £6,000,000 of PBT. Okay. Thank you. We are now over to Andy Murphy at Bank of America Merrill Lynch. Please go ahead. Your line is open. Good morning, Jeff. Good morning, Souda. Hi, Ali. Hi. Let's stop 3. Just wanted to follow-up on the same store growth slide, Slide 21. Just interested in the structural share gains. Just wanted to try and understand why that appears to have dropped from around 6% in the Yes. I mean, in all honesty, it's a rubbish slide, because it doesn't include the adjustment for the billing days. The truth of the matter is it should be plus 8% and it should be plus 4% and plus 4%. And if you go back to 11%, then our same store growth on a like billings today basis, like billings today basis, excluding oil and gas, is 11% or it's 10%, sorry, 11% volume minus 1% yield. So it's 10%. So look, we are broadly growing at 2x the pace of the market still. So that slide in the back was quite frankly, I thought that said it could come out and we obviously didn't. It's kind of misleading. Right. Okay. Secondly, another point of clarity. The oil and gas issue, is that broadly fallen out or about to fall out, the comps? It's about to fall out. I was looking at the numbers. So if I look at fleet on rent for the quarter, revenue volume was down 33%. I know I looked at it yesterday, and I'm not saying this is accurate, and it was down 20%. So and I would guess yields will be falling too. So quarter 2 is still it's a drag, but it will be a significantly less drag. It might instead of minus 46, it might be minus 30 or something like that. And then it $15,000,000 and $10,000,000 So it's still going to be a drag, but it's going to be a much smaller percentage on a much smaller percentage of our business. So it just kind of drifts away, Andy, as the year goes back. Okay, perfect. And then my final question was just a little bit of color around the competitive environment area, a little bit of noise saying that people are investing and the market is quite competitive. Is really your take on it? Or I mean, you obviously spend a lot of time talking about yield? Yes, no, we do. I mean, yes, when you look at our 2 largest peers, all of the peers, they're not spending, and they're a reasonable percentage of the market. Are some of the small and mid sized guys spending? Yes, absolutely, of course, they are. The market is good, and they are optimistic about the outlook as we are, because they've just seen the backlog of activity. They say this the projects that are scheduled. Now the danger is, particularly in the U. K, I can understand why there is angst about where the U. S. Economy is. I fully accept there is a whole range of data points, and month on month, they can be somewhat contradictory. And it is difficult. We sit and look at it and are equally perplexed by some of the numbers. We have the benefit of having so many feet on the ground out there who are talking to so many customers and seeing what's actually happening. And there's lots of activity out there. So yes, I think the small and midsized guys are spending more than they did because they can because they've had a period of very profitable growth. Listed peers would suggest. And therefore, we have to spend more. Has it is it materially changing the dynamic? No, I don't think it is because their reach and their access to certain accounts is somewhat limited. So as you know, we've had this discussion for over 18 months now. I have never bought into this broad brush view that there's an oversupply of equipment. I think there is in certain geographies and certain products, I think that is absolutely true. But across the vast majority of products and geographies that we serve, I think the market is just fine. But this is fantastic. Have we got a complete and utter open goal, which we probably had 2 or 3 years? So no, it's not as good as that, but it is still very, very solid. Would you characterize the spending by the smaller guys as more replacement and less growth or more growth and less replacement? I guess they've had they've been denied access to capital for quite a long time. See, I don't want to buy any of that. They haven't. People have been throwing them yet. And for about the past 2 years, it almost zero costs. People have been very responsible in how they have grown, be that our smaller competitors or our customers. I'm sitting across the table here from Suzanne. We get money thrown at us like it's going out of fashion at the moment, because everybody wants to give us really cheap money. That's no reason to take it. And the same is being true of our smaller competitors. I think they've had access to finance now for quite some time. I think they're growing sensibly. I think a good mix of it is replacement. But of course, as time go if you look at the average fleet age in the industry, it's still relatively high. So it's goodly proportion of it is replacement. But of course, some of it's growth. Of course, some of it's growth. But I mean, just look at I know percentages get smaller because of our scale. Just look at the quantum of incremental fleet we've got on rent. I mean, it's a huge, huge number. So clearly, the market has not sold that. But yes, of course, some of our smaller peers are spending money. Some of our larger peers, given their sector difficulties are choosing not to and given their returns and given those sector difficulties that makes all the sense in the world. But it's a good market. But we aren't the only guys in time we'll operate. That's absolutely true. Thanks, Jeff. We now over to Andrew Fonnel at Morgan Stanley. Please go ahead. Hi there, guys. Just a quick question. I just wondered on what factors would you need to see to raise the actual CapEx guidance range that you've got? Or is it just about getting more visibility as the year approaches? Yes. It's exactly the latter. And that's absolutely spot on. I mean, clearly, our growth CapEx is at the upper end our range. I mean, clearly, we came into this year saying that we predicted volume growth somewhere around double digits to mid teens. We're clearly at very comfortably at the upper end of that. And let's not forget, Air France is performing very, very well. 2, therefore, that would indicate the potential for raising our guidance. But why would we not people are right. They're all contradictory data points. We've just had Brexit. We've got a U. S. Election in November. We typically bit more precise in December rather than try and take a salvage in quarter 1. It's no more than that. Okay. And then just the other question. What's the difference between the 79% drop through in the statement and the 71% on the same store? Is that not a like for like number? Yes. 1, the interestingly, the 79% includes oil and gas, the 71% excludes it. So it's just the difference between what is included and what isn't. So it would seem odd to think about the inclusion of oil and gas actually raising the drop through level, but it is the math around how it works In oil and gas for the year over year period, revenues declined, but all of that revenue didn't fall through to the EBITDA line because we had a significant amount of cost reduction. So the inclusion of it just moved those numbers around a bit. Okay. All right. Thank you. We now go over to David Phillips at Redburn. Please go ahead. Good morning, everyone. Could I just ask about the margin in Q1? You made the point very clearly on the trading day situation, but presumably your cost base was the same as it was last year. So actually, the 10 basis point margin improvement in the States, as you go into Q2, will be slightly better year on year in terms of margin growth just purely because of our trading day situation? Yes, I mean, I mean, well, yes, generally speaking. But of course, some costs are just apportioned evenly through months irrespective of days, and some costs actually are incurred as they are incurred. So you can't adjust everything. Well, you do see this, I mean, it's a big explanation of why hasn't EBITDA margin improved to the same extent as EBITDA margin. It's because we just charge depreciation on a monthly basis. Therefore, you've had the full month's depreciation charge, but you haven't had the 2 incremental days revenue. And therefore, in the day margin will improve. So the biggest difference is depreciation. There are 1 or 2 I mean, I'm going into territory, but I should I know I really it's time to hand over to Suzanne. But as you so some costs clearly are direct costs which are incurred as they're incurred. Some are evenly apportioned through a month. So it's there will be some effect. It will be more on the EBITDA line than it will be on the EBITDA line. Yes. I mean the best other example of cost saves other than depreciation is when you think about people who earn a fixed salary, that's a fixed amount for the month and doesn't vary based on the number of revenue billing days that you have as opposed to what you pay your drivers and mechanics, for example, which would vary with the amount of activity. Yes. So it just feels like momentum will start to build again in that as we go through the quarters? Yes. That's true. I mean, for a whole host of reasons, given the 2 extra billing days and for the point you made, August is going to be recent bumper months. I mean, typically, October is our best of the profit month. There's every chance in the world that it could be August this month. In fact, every star is in alignment in both the costs and the revenue perspective. I haven't seen the August proper numbers yet, but I'm looking forward to that. The right thing, you can't because you don't have the numbers obviously is put the month of July and the month of August together. You sort of average them and then you get something that is a more appropriate run rate as I would call it. Yes. That's great. Very clear. Thank you. We're now over to Rajesh Kumar at HSBC. Please go ahead. Your line is open. Hi, good morning. Just thinking through the point you made about the smaller players spending on CapEx. Presumably, in your you've seen these players tend to run the assets longer than bigger players would. So unlike the bigger players, they are not enjoying the same CapEx holiday. And they would be replacing stuff they bought in 'six, 'seven and 'eight now. So would it be a fair assumption that they're going through a replacement CapEx phase and get a CapEx all day later, which is when there it will start improving. And the second question, which is linked to the same issue is, if we look at your incremental maintenance CapEx, obviously, it's gone down because you're doing the replacement CapEx on 09 assets and the return should improve. When should we think that replacement CapEx will start ramping up again? Yes. Okay. No, your point about the replacement CapEx for the smaller peers is a very good one. Yes, they have been deferring replacement expenditure. As a consequence, they're selling very old assets. I think we put a chart out at the year end, which shows the average age of assets being sold from RAS, which showed that very point that the average age of assets now being replaced in the market was older than it has historically been. And that's clearly the smaller guys catching up with replacement. Mean, that has a number of consequences. It means that they are it is a strain on their cash flow, certainly. But also remember, because they're buying they're replacing very old assets, and those assets are now Tier 4 engine assets, The number of assets that they can buy for the same quantum of dollars is significantly reduced. So people have to be careful when they look at spend levels that they think of actual quantum of assets in the marketplace. So for like levels of spend, the quantum of assets actually being replaced will be reduced by 25% to 30%, potentially depending on the mix of assets. So their CapEx now what they're banking on a bit like me is that the cycle is going to be long and shallow, long term moderate growth, which will mean if they can catch up with replacement, perhaps get a bit of growth, they will then go into the next downturn with a younger fleet age. So what they're looking to do is to have their CapEx holiday at the bottom of the next downturn, which makes all the sense in the world if you're running a small business and managing your own cash. So you're right, they are going to be using a lot of cash right now. It does affect how much they can buy. And but in the mail, we're seeing people doing it very, very responsibly. In terms of our old replacement CapEx, we have a particularly low year this year. It will tick up a little bit next year. And again, I think we've had a chart in the year end presentation, which is probably worth having to look at, which shows our fleet purchases by year of acquisition. But in all fairness, we just I think we put it in because of questions you asked around fleet age. And you can basically take that page, which I think is Page 21 in the year end presentation. You scroll forward 7 years and you can see our replacement cycle will look like our spend profile just moving that short 7 years forward. So if you look at it, we're now replacing what we spent in 2,009. We're going to have a lower replacement year 'ten, relatively a lower replacement year. So we've got probably 2 more years of very, very low replacement CapEx, and then it will start to ramp up. Thank you very much. We are now over to Rory McKenzie at UBS. Please go ahead. Hi, everyone. Just one for me. Might be a bit rambling there, so sorry about that. On Page 23, looking at the ROI chart, it's been declining since 2014. And as the fleet profile normalizes and new stores develop, that will help that. But in terms of the 2021 plans, there's still an awful lot of new openings. Now I know the percentage growth is slowing, but there's a difference between how will those new stores develop when they go into existing markets against new geographic geographic expansion and also the bolt on is now increasing again as well. So what does all that growing or even accelerating geographic spread mean for the group and ROI particularly, other than just some new great CMD locations like Hawaii, which I'm excited by? Yes. No, no. It's a bit like Miami in February. We're guessing any capital markets in Hawaii growing will be well attended. Where we can continue to add locations and continue to progress ROI. I would like to leave it till the 23rd October to lay that out. But you're absolutely spot on, which is the question now again, the last thing I want to do is do the October presentation now. But quite frankly, when we started off this program 4, 5 years ago, we could have chucked it out to map and probably we needed a location there. And some of our planning was as sophisticated as that, which is, hey, somebody wants a location. We know we don't have one there. Let's open one. It is now significantly more sophisticated. And as I said, introducing the day, the key is clusters. The key is to what extent now are we going into brand new geographies, which means it's a slower uptick. And to what extent are we going into existing clusters where the ramp up is much quicker? So you're absolutely right. We need to be now cognizant range of views range of views on the U. S. Economy and who knows who's right. If we stick with our premise that you've got 4 to years left, there's still going to be a danger. Question is, where do you open greenfields and maybe do bolt on? What were our experiences through the last cycle in terms of which markets suffered the Therefore, we are looking at where we put greenfields and bolt ons now based on where we get the fastest return, where we have the lowest market share and where we are And Maybe just one question, again, not to steal the thunder of October. But if you look at, say, Miami, where we were last time around, obviously, you had a huge market share in that market. Is that basically you think you kind of topped out in somewhere like that, where you've been so dominant for so many years that that's kind of off the table. I don't think there's anywhere where we are topped out because for a whole host of reasons, not least of which, what we define as the market continues to change. That's the bit where I think people are missing the point in this whole structure. We probably thought we were topped out in market share in Miami 5 years ago, and we just keep growing and we just keep growing market share. Now 5, 6 years ago, we didn't have a floor cleaning business. We didn't have a climate much control business. We have less of an industrial business. So there are we had a smaller entertainment business in Florida 5 or 6 years ago than we've got today. So a lot of it comes down to what is the market. Now around And I think it's too narrow to look at our business now as a construction business. And therefore, when you look at market share when we talk about market share in October, we will show you market share where we should vent all of our specialty business. Our market share is a fraction of what we quoted as being because we are in so many markets, which are not included in the denominator of the calculation. So no, we still think there's a lot of markets where we can gain further market share. Now in terms of looking at returns and where we put greenfields and bolt on, when something like Miami, you're absolutely right. And we've got a number of these locations would be our blueprint for how you should attack a major metropolitan area like Miami. Now you might have a different blueprint to how you approach Shaw, for example, because there are different cities and size complexity of doing business. So we need to break it out by products and by markets in order to show how we're so comfortable about our growth prospects and our ability to grow both margins and return on the business. And we need to do that away from the results presentation, Rory, because there's an awful lot of detail involved. We're bringing Brendan and 2 of his guys over from Sage 2, So we can spend a bit of time. And more question is spot on. It is exactly what we want to cover in October. Okay. Great. Well, I look forward to talking with you. Thank you much. We are now over to the line of George Gregory, Exane. Please go ahead. Your line is open. Good morning, everyone. 2 from me. And then just following up firstly on the same store yield dynamic. I appreciate that it is mixed that is perhaps driving down same store yields into negative territory. But just trying to understand really why mix would have got incrementally worse in the Q1 of this year if you had been driving key account growth through the duration of last year. So I don't know if there is anything you can call out there. And secondly, just in terms of the I know we've had a few questions around this, but in terms of the broader backdrop for the U. S. Non residential industry. I know we've talked about this in the past, but if we look at the starts activity within your 2 key end markets, the commercial and institutional, they're down year to date and clearly last year was a pretty flat year. Just wondering how you and the industry reconcile that with a robust future outlook. Do you does the industry expect an uptick in starts in the second half? If so, why just trying to square that circle because the 2 don't seem to quite sort of marry up very well? Thanks. Yes, sure. So I mean, in terms of the year, it's better than it was in quarter 4. And in terms of mix, you're right. Over a period of time, we have been adding more key accounts. The question is not how many accounts we've been adding. The question is what proportion of our work is that work. So clearly, when you add a new big key account, you are on a lower run rate to start with. You have to prove your capabilities. Clearly, we are gaining market share. We are growing well, we are growing and most of our larger peers aren't growing at all. So we're clearly growing much faster than our major peers, which means we are taking a bigger share of the wallet of those accounts. So if you take a bigger share of the wallet of those accounts, then it is a bigger proportion of our growth and which is consistent with nature of work going on in the U. S. At the moment. There is a lot of big accounts around. So that's why. And it obviously has an effect, which is more of our rentals are longer period. So we're doing more monthly billings, not daily and weekly billings. And as we've showed you in the past, they are lower yield. So we're doing more longer term transactions, then clearly that affects our yield. But there is this obsession with yields. Look at the margins. The key to this is that we are offering lower prices for longer term rentals than shorter term rentals, which has been much more compensated for by the lower transaction costs, either because inherently there's lower transaction costs or because we're more efficient. So everyone's got bogged down with this one measure. We look at the margins, we look at our share gains, we look at our revenue growth, we could not be delivering this revenue growth apparently with all of these statistics telling us how terrible the market is. And Jeff, what do you think I mean, I know it's difficult, but what do you think returns are doing on a same store basis at the moment? There's no question whatsoever. They are improving. Again, I would ask I mean, and this is a quick Q1 update. That's always the problem with the Q1 and the Q3s. I would suggest everybody goes back and looks at some of the charts at the full year, which shows how margins have evolved in our mature stores. There is nothing nothing has changed in this quarter either. But if you are growing your top line at 11% and you're only adding 2% more heads, then your returns are improving in your exit. You've got 71% drop through in your same stores. You're improving returns. And the second point in terms of the data points, our view is that the date I mean, there are lots of very inconsistent data, but we can point if you're particularly when you get into Dutch, and we've had this debate before, you need to get into line items of Dutch. And starts are not as good as they have been, say, 2 years ago. Last year, starts were good in the sectors which we look at. So I would recommend you look at buildings, you look at commercial and industrial, institutional and residential. And starts are fine. They're not great, but they're fine. We've also got the backlog. I'd also ask you to look at Dodge and look at the projected building starts for '17 and 'eighteen, too, which again are very positive. So we are taking that data and we're combining it with what we're seeing on the ground and what we're hearing from customers. And it is back to where no one is knocking the lights out in every sector and in every geography in America. That's been true for the last 12 to 18 months. But there is good steady growth. I would argue that good steady growth is the perfect environment for us. It is not so good that people are being reckless with capital investment. It's not our customers to change their mindset of shifting from ownership to rental. So within a 4%, 5% end market growth for multiple years, our biggest opportunity remains still shift to rental and our ability to take market share from our peers. This is my opinion, this is a perfect environment. If we suddenly got sell a draw with absolute clarity in terms of the outcome, everybody would invest more. We've took George, I've talked to you about this many, many times. Over the last 5, 6 years, what would have broken our model? An over injection of capital in the supply side of the equation. Clearly, against the backdrop we're discussing, that is not the case and has not been the case. Great. Okay. Our penultimate question is over the line of Chris Kallerhe at Exane. Please go ahead. Your line is ready. Sorry, Chris Gallagher, JPMorgan. I apologize. Please go ahead. That's okay. It's one more just from the U. K. I know you mentioned it's too early to make much of a comment, but if you could point to some of the things you see there, I think you have a bit more visibility in APAC and Sunbelt. Yes. Look, I mean, clearly, I mean, we've never talked about it. The UK is doing great. Brendan and SaaS are downstairs at the moment because we've got our AGM this afternoon. And I'm enjoying teasing Brendan with the fact that SaaS revenue growth bigger than here. So if anything is going to rev up the U. S. Revenue growth, it is that comment. So the U. K. Is doing fine. When we took a deep breath after Brexit, we thought, well, what does all of mean? In truth, we eased back on a little bit of capital expenditure and we eased back on a couple of store openings just whilst we assess the situation. One of our growth in the specialty sector, Wimbledon is going to happen, glass of goods going to happen, all these events are going to happen. People are going to need power. People are going to need climate control, whether there's a strong market or so we'll continue to invest in Specialty. We've seen very little to date. We have heard rumblings and concerns, but we haven't seen anything suspended. We haven't seen anything that we expected to start to start, probably with the exception of In Q Point, of course, but that's probably not the most normal of projects. And so we haven't we've seen very little thus far. Our view would be this, is that we are clearly have significant market share momentum. More importantly, we're making a profit, which is hard to find many of our certainly our listed peers who can say that. We're a well financed and diverse group. And therefore, we'll continue to take share whatever the market conditions are. But it's genuinely there's a lot of hot air about it at the moment, and we aren't seeing an awful lot now. I don't hold so I don't hold with the view that, hey, look, it's September and we've done Brexit and exactly what the consequences will be. But as we said before, we are rentals are late cycle business. Everything is here, I'm sitting here looking at the London skyline with cranes everywhere. All of those projects are going to finish off, and therefore, we will be busy on those projects. The big question will be, 2 years out, what's going to be on the drawing board 2 years out? And we just don't know that at the moment because we really don't. So we remain watchful in terms of what the conditions might be. But we also remain very optimistic about our relative strength to prosper in whatever the market conditions are. Great. Thank you. The final question today is from the line of Carl Green of Credit Suisse. Please go I've got a question for Jeff and one for Suzanne. Jeff, just in terms of your comments around construction labor skill shortages, let's assume that the cycle does continue for another 4 to 5 years and therefore potential wage pressures could build. Do you think that you may see some pressure down the line from the bigger construction clients who might be feeling some margin squeeze and then potentially looking to diffuse that via lower rates across any sleep over? And then secondly, just to Susan, much more prosaically, any sleep over? And then secondly, just to Suzanne, much more prosaically, given the FX movements in particular, could you just give us an update as to where you think full year interest charge should be sitting? Yes, Karl, let me answer the question. It's a good question. I think sitting down and contemplating what labor shortages mean to businesses is a very worthwhile exercise. So I do think you'll see wage inflation. I think we're seeing it already. Again, amongst the negative points around the U. S. Economy, I think the level of disposable income for employed people in America now is very, very high, and that's very positive because there has been 3% wage inflation, which is very, very positive. So yes, I mean, clearly, that wage inflation, people will look to defer it in some ways. So yes, that may well indeed put in a bit of price pressure. I think the counterbalance to that is, as I sat and thought it through and modeled it, which is, look, you just can't get labor. But what you need to be doing is recruiting core mission critical skills. Therefore, anything to do with owning or renting assets is non core, non critical because there's a very, very capable supply base available to supply to you. So I think, yes, I think it comes back to this whole dynamic of the structural shift in rental in terms of what does it mean for volume, what does it mean for transactional cost, what does it mean for rates. I mean, so I think the answer is possibly yes, that would be logical. But I think the counterbalance clearly would be that if you can't get labor, you are going to outsource more. So it's a valid consideration. Hard to know precisely how it will play out. But yes, it's something we think about a lot. Because we look at our own labor, the question is what is our core skills, what is our not core skills. All through the supply chain, people will be looking to do that. Therefore, I think outsourcing businesses generally where they can have economies of scale in the core activity will prospect in that environment. Understood. Okay. Thank you. And with respect to the second part of your question, depreciation for the year, we are predicting that that will be around £575,000,000 and for interest expense around £103,000,000 Now those numbers have been derived based on our set of assumptions in which we've used a 1.34 exchange rate for the full year. So to the extent you use a rate that is different from 1.34 for the full year, then obviously that would have a bit of impact on those numbers. But at 5.75 and 1.0 $3,000,000 in that neighborhood, you shouldn't be too far off. That's very helpful. And can I just clarify just for the interest that's assuming share buybacks executed year to date not anticipated buybacks further down the line? That's right. In terms of and you'll note that the interest expense number nudged up by maybe a couple of £1,000,000 excluding FX from the guidance we had given at the end of the year that reflects the M and A activity in the Q1 and it also affects the buybacks to date. Great. Thank you. Sure. Jen, can I just pass back to you for any closing comments at this stage? No, thank you, Dew. Just say once again, thank you, everybody, for their interest in the company. We are really looking forward to seeing you all in October, where we can, away from results, talk about some interesting evolution of the business. So we'll see you all in October. Thank you very much indeed. Great. Thank you. This now concludes the call. Thank you all very much for attending. And you may now disconnect your lines.