Earnings Call: Q4 2016

Jun 14, 2016

Good morning, and welcome to the Ashtead Group Full Year Results Presentation. As usual, Suzanne and I have a short presentation, which will hopefully add a little more color to the strong results that we've published today, but also we'll be looking to provide a little insight into our current thinking about both the current year and beyond. So let me kick off first of all with a very brief overview. Well, it's been an interesting year. We continue to see strong growth in revenue in both divisions, which I think is a testament to both our diversity, the flexibility of our business model and in no small part due to the ability of the team to execute. Importantly, our growth continues to be very profitable as you can see from our improving margins and I'll cover this in more detail in a moment but in short, we continue to see very good progression in our mature stores which offsets any short term drag effect from greenfields and bolt ons. In addition, we continue to see some significant operational efficiency benefits, which I'm going to cover in more detail in a few moments. So these strong margins together with naturally moderating replacement CapEx provide us with very strong cash generation. Suzanne will cover our capital allocation priorities in a moment, but we now have a range of options available to us. Therefore, you'll have seen today that we've rebased the full year dividend, up 48% to 22.5p and announced a share buyback of up to £200,000,000 Our priority remains investment in our long term structural opportunities But we'll also continue to grow responsibly and it was encouraging to see that our leverage was at the midpoint of our range at 1.7 times EBITDA. The new financial years got off to a good start. Markets are robust. Our structural drivers are still in place And we have a very strong balance sheet to support the execution of our plans. Therefore, we're able to look forward to the medium term with confidence. So after that brief overview, I shall now hand over to Suzanne. Thanks, Jeff, and good morning, everyone. Our Q4 results are shown on Slide 4, and as you can see, it was a strong finish to the year. Our underlying pre tax profit for the quarter was £163,000,000 up 42% year over year at constant exchange rates. The group's rental revenue grew by 16% in the quarter and margins increased significantly, reflecting ongoing operational efficiencies in both of our businesses. Our EBITDA margin improved from 42% to 46% and our operating profit margin rose from 24% to 28%. On the next slide, we've shown the group's financial results for the full year and certainly we were pleased with our performance. Our underlying pre tax profit increased by 24% to £645,000,000 Rental revenue was 17% higher than the prior year as we continue to grow at more than 2x the pace of the market. The strength of our margins was key to our performance and continues to be a clear indicator of the profitability of our business model. EBITDA margin improved to a record 46% and our operating profit margin increased to 29%. Turning now to Slide 6, we'll look at the numbers on a divisional basis, beginning with Sunbelt. Sunbelt's rental revenue grew by 18% as continued to benefit from strong construction activity levels, structural trends in our end markets and the diversification of our business. 2016 was also a period of major investment with the addition of 58 greenfield locations and 10 acquisition locations. This together with the weaker energy markets did create a bit of a drag on margins. Therefore, it was very encouraging to see operational efficiencies, particularly in our mature locations, helped to deliver an overall drop through rate of 60% for the business. This drop through allowed us once again to improve our margins. EBITDA margin increased to 48% for the year, while operating profit margin improved to 31%. On the next slide, we've shown A Plant's results for the full year and we were also encouraged by its success. Rental revenue grew by 9% and focused cost to discipline helped to drive an 84% drop through rate. As a result, A Plant's EBITDA margin increased from 34% to 38% and operating profit margin improved from 14% to 18%. On Slide 8, we summarized our cash flow profile for the year. The key points from this chart are that the group generated £1,100,000,000 of cash flow from operations, a 27% increase over the prior year. It's this cash generation capability that provides us with flexibility and options as we go forward. In 2016, we chose to invest heavily in the fleet given the higher returns we generate from that investment. However, even after investing £1,100,000,000 on fleet, we were still broadly breakeven from a cash flow perspective. This is the benefit of our strong EBITDA margins. We can basically fund mid teens volume growth from organic cash flow. Slide 9 is one you've seen many times, but it's key because our focus on leverage and balance sheet management has been and will remain an important financial discipline underpinning our business. At April 30, our leverage had been reduced to 1.7x and this level was in the middle of our target leverage range of 1.5x to 2x EBITDA. We believe that this is a conservative range given the strength of our margins and the significant underpin that our well invested fleet provides. We view our debt as being not only supported by strong cash flow, but also by our fleet, which is a highly liquid tangible asset. Our fleet today is the youngest and highest quality it's ever been. And you can see this most clearly in the chart on the bottom right of the screen, where the green bar represents the value of our fleet at its original cost. The orange bar represents the secondhand value of our fleet as measured by Rouss appraisal and the black bar represents our net debt. The key takeaway from this chart is the gap that exists between the secondhand value of our fleet and our debt. That gap is widening and is now 1 point £3,000,000,000 It's this relationship between the value of our fleet and our net debt, which puts us in a strong position relative to prior years and to our peer group. As a result, we believe that our leverage range provides us with a high degree of flexibility and security through the cycle. Now we've referred several times this morning to our cash generation capability. And on Slide 10, we look at what that means for 20 17 in more detail. I'll begin by confirming that our capital expenditure plan remains unchanged from our last market guidance. We expect to invest between £700,000,000 £1,000,000,000 This range reflects our lower replacement CapEx requirement and will generate anticipated double digit volume growth in the U. S. And mid to high single digits growth at A Plant. Jeff will comment on this further in a few minutes. With our strong margins, we are now entering a phase where we anticipate both good earnings growth and significant free cash flow. On a pre M and A and pre shareholder returns basis, we expect our free cash flow for 2017 to range from £100,000,000 to 400,000,000 pounds The range is broad, reflecting the broad CapEx range. On an earlier slide, we reaffirmed our target leverage range and that at April 30, we were comfortably in the middle of it. We plan to broadly maintain our leverage at the current 1.7x and therefore, a significant amount of capital becomes available for discretionary spending such as M and A and returns to shareholders. This has caused us to turn our attention to our capital allocation strategy, which we have outlined on the next slide. The overriding goal of our capital allocation strategy is to enhance shareholder value. We believe there are a number of ways to do this. Here you can see our clear priorities, which should come as no surprise given our long standing growth strategy and progressive dividend policy. So let's look at each of the priorities in turn. We continue to believe that there is a long term structural opportunity to grow our business through same store fleet investment and the opening of new greenfield locations. The returns generated from this investment are strong. Therefore, our capital allocation framework is focused on ensuring that this priority is appropriately funded. With respect to bolt on acquisitions, we completed 12 during the year just ended and another 4 since then. We will continue to apply the same disciplined approach to acquisitions and target those with appropriate returns which support our expansion plans or grow our specialty business. The 3rd priority in our capital allocation framework is our regular dividend. And this morning, we announced a proposed final dividend of 18.5p, the full year dividend to 22.5p. It represents a 48% increase as compared to last year and effectively rebased the dividend. Going forward, we will follow our long stated progressive dividend policy, raising the dividend generally in line with profit growth to a level that we are certain is sustainable through the cycle. And finally, if having achieved these first three priorities, further funds are available within the parameters of our stated leverage range, then we will consider further returns to shareholders in the form of share buybacks. Additional capital returns to shareholders will be Additional capital returns to shareholders will be kept under regular review reflecting these priorities. That concludes my comments. And so I'll hand back over to Jeff. Thanks, Suzanne. Before we get into the specifics of the year, I think it's important to remember that this remains a long term structural story. Since 2,005, we've grown at 4x the pace of both the construction and the rental markets. And over the last 10 years, we have seen through the cycle compound annual growth of 14% with higher margins and lower leverage. So scarily, back in October 2006 when I became CEO, look, did anyone have any idea how bad 2,009 2010 would be? Certainly not. But I think we all underestimated the true potential from increased rental penetration and market consolidation. So as I look forward today, we remain just as positive as to the long term potential from these structural opportunities. If anything, there are more established trends now. We have greater scale advantages and our plans are supported by a stronger balance sheet. Look, of course, there will be a cycle to contend with at some point in time and we can all debate when it might be and what shape it might be. For our part, we continue to see multiple years of growth, not unlike what we've seen in recent years. And if you look at the chart on the right, we are in fact tracking a very similar path to the 90s. That is a long term moderate growth cycle. And that's why when you turn to Page 14, you can see that it's encouraging. Look, still 2 thirds of our growth continues to be structural. That is share gains in existing stores and growth from bolt ons and greenfields. Look, it was a year when there was a lot of noise around the impact of oil and gas, both on our specialty sectors and the market as a whole. However, despite this, we just need to step back and recognize we still delivered 19% revenue growth, which demonstrates the strength and the diversity of our model. So now to the detail of the quarter and the year. And an important element of our revenue growth and margin evolution has been our diversity and the changing mix of our business. Therefore, look, we've enhanced our disclosure by splitting the key revenue drivers by business segment. For those of you who want the old presentation, it's in the back of the appendices somewhere too. But let's start with General Tool, some 77% of our business. We've seen very strong volume growth and a 1% yield improvement for the year with flat yields in the 4th quarter. Overall, physical utilization was up 1%, but on the graph you can see how closely it's followed recent seasonal trends, reflecting the continued strength of our end markets. Then the Specialty excluding Oil and Gas, 21% of our business. A very strong performance with volume up 25% and a positive 1% yield. The Q4 was tough due to a very mild winter impacting our heat revenue. Although I guess toughs are relative to their statement, we still saw 16% revenue growth. Looking, you can see from the physical utilization graph that this business is somewhat less predictable. It can be driven by one off events. So for example, in August due to an outbreak of avian flu than we did in February due to a mild winter. And finally, the oil and gas, which we've spoken about many times. We have flat lined in terms of fleet on rent since October. Look, utilization has improved in the winter, but that's largely because of fleet disposals. By the end of Q1, it becomes a far easier comparator, but the biggest takeaway from oil and gas is just how little Contagion there has been in both our general tool business and our other specialty businesses. For completeness, as we've been reporting like this all year, we've also included the format by store type. Unsurprisingly, very similar highlights to the previous slide. Good solid performance across all metrics from same store with drop through again being particularly strong. Greenfields and bolt ons are showing good progression. But remember, the data is somewhat skewed by the small population. And finally, oil and gas, where it's been a very difficult year, but where the worst is getting behind us. Look, obviously, we would have preferred a better overall yield environment and flat for the year. But we obviously faced headwinds in our mix and oil and gas. However, it was nowhere near as bad as some predicted. And the important takeaway for me is our ability to deliver such strong incremental margins even in a zero rate improvement environment. Looking forward, I expect yield to be around flat again for the coming year with the likelihood of the second half being better than the first half as we deal with some unusual seasonal comps. However, the key point to remember is that the biggest pressure we face is mix not rate. And as a consequence, the counterbalance will be strong physical utilization and lower transactional costs. Therefore, we anticipate both good revenue growth and further margin improvement in the coming year. Slide 17 shows our strength through the cycle and shows the evolution in revenue, margins and ROI. But clearly, we've seen some impressive multi year improvements, and we continue to set new highs. But what I want to get into now is what's been driving these long term improvements. Slide 18 compares our current store profile with that of 2,008, our previous peak margins. And this is a slide you've all seen before. Because you can see, there's a large range of operating margin dependent on the size of store. So for example, currently the average operating margin for a store with a fleet size of greater than $15,000,000 is 41% and is 25% for those with a fleet size of less than $5,000,000 and so on. So simply, we now have a significantly greater number of larger stores which explains in part our improved margin as we leverage scale. However, this does not explain what is happening on a store by store basis as stores mature. So to investigate further, I want to focus on that original 35 stores that were large in 2,008 and the 174 that were medium, which you can see highlighted on the chart. So the key is how is this set of population evolved between 2,008 and 2016 and what are the drivers of that performance. So let's start to explain this very busy chart by looking on the left in the 35 original stores. But again, we're comparing 2016 here with 2,008. So working down, in those 35 stores, we've seen 44% revenue growth with a 46% volume increase and a negative 1% yield. Remember, this is a yield number and these larger stores have probably seen the biggest mix change. Anyway, what's clear is that it's not yield that's driving our improved performance. But let's get down to returns and margins. Now look, EBITDA margins are now 64%. EBITDA much improved much improved financial metrics and much better than our reported average. And what's driving these margins is significant improvements in operational efficiency. Those of you that were in Florida last year saw firsthand the technological improvements we've made in key processes such as delivery and pickup and maintenance. And here is the financial realization of these improvements. With 46% more volume is generated today with 9% fewer heads. So rental revenue per head is up 58%. That's obviously a material improvement in our profitability. But another key operating metric is delivery cost recovery. This looks at the total cost of transportation. So trucks, drivers, fuel, maintenance, etcetera, relative to how much we recover from the customer. You can see that again there's been significant improvement. It's gone from 62% to 91%. As an example of our improved efficiency, look at how we've delivered our volume growth with 12% fewer trucks than what we had in 2,008. And finally, to drop through, which pulls it all together. In 2,008, 61% of our revenue growth dropped to EBITDA and today it's 84% in our mature stores. So this clearly demonstrates the true strength of our incremental margins in our more mature stores. And if you look over to the right, it's exactly the same story for the 174 medium stores, a very impressive performance. I think this operational efficiency is just yet another area together with mix where we are a very different business to what we were in 2,008 which is why historical benchmarks are so misleading. This is why we think it's important to split our operating performance between stores older than 3 years and under 3 years. Remember, around a third of our stores now are less than 3 years old. So our aggressive store rollout program is generating exciting market share gains, but it's just not the operational leverage in these stores that there is in the more mature stores. So they are a short term drag on our returns. But in the early days, it's far more important to focus on customer service and developing a good reputation in the marketplace, not operating metrics. That comes, as you can see, from the progression from years 1, year 2 and year 3. However, we are able to open these stores and still develop overall margins because our mature stores continue to grow at twice the pace of the market overall and the average margins we highlight here are not reflective of their full potential as we've just demonstrated. The one area where you could probably argue there's not been the progression we might have anticipated given the margin improvement is ROI. The issue here is the denominator of the calculation and the value of our fleet. High growth on Greenfields has seen us with a distorted fleet profile in a very young fleet age. Around half of our fleet is now under 2 years old. Therefore, as our fleet profile normalizes and our replacement expenditure moderates, we will see the benefits in our ROI. Our assessment is that a normalized fleet age improves our ROI by about 2%. Now this new chart is very much an output of discussions after our Capital Markets Day in April. There seems to be a misconception that our rental rates are currently at some unsustainable level or that they are expensive relative to the cost of new or used equipment and neither is accurate. First, let me remind everyone that we deal with 540,000 customers last year. So the average revenue per annum is around $5,500 Therefore, for these shorter term, low value rentals, I just don't believe that the cost of equipment be that new or old is relevant in the decision making process. However, I would accept that for longer term rentals, it could have some bearing. So on the slide here are 2 representative high volume products, a skid steer and a backhaul. And what we've done is we've indexed the following information to 2,008. So original cost, secondhand value or OLV, monthly rental rates, weekly rates and daily rates and they are rates not yields. So to be clear, a new skid steer, the product on the left, a new skid steer costs 41% more than it did 8 years ago. And our monthly rental rate is 12% higher. Today, a similar aged secondhand skid steer costs 28% more than it did in 2,008. So what are the takeaways? Look, we have seen significant inflation in the original cost of our assets, particularly diesel products due to their Tier 4 impact. 2nd hand prices for the products we have in our fleet are also much higher than in 2,008. And against this backdrop, rental rates, particularly for long term rentals, have not progressed. Daily rates and weekly rates have progressed better. But rates overall have not kept up with inflation. And you can see that if you compare our dollar utilization today with historical high dollar utilizations, it's much lower. And it's because of that relationship between rental rates and original costs of assets. Encouragingly, as more rental companies catch up with replacement expenditure, they'll have to recognize this new cost base too and therefore we are positive for rental rates going forward because of that catch up. So in summary, rental rates, particularly longer term rates, are much cheaper relative to ownership than historical norms. So let's get back to the structural story. We continue to see growth in rental penetration. Rental is, as we've just demonstrated, relatively inexpensive. Also for more specialized products with very low rental penetration, the larger players continue to improve the awareness and availability of these products. And so we are effectively creating the rental market and increasing rental penetration. Also don't underestimate the ever growing legislative burden to own feet. I was talking to a customer recently who said, look, all of the fund has been taken out of owning stuff. And that's absolutely true. You now need a significant infrastructure to own fleet and without it you can't just add small increments of fleet cost effectively. Of course, some people do have that infrastructure. And as the economy improves, they will add some more. But that won't that might change the pace of the direction of travel, but it won't change the overall direction of travel. Look, in terms of consolidation, also the big just keep getting bigger. Our scale, our technology and service offering are changing a highly fragmented industry. And if you look at the RER 100, the top 10 players grew 10% in 2015 and 16% in 2014. So overall about 2 times the pace of the market. So yes, some of our high profile peers have had a difficult time of late and lost share due to their exposures to oil and gas and or Canada. However, these are short term exceptions. And overall, the consolidation has and will continue. So we continue to increase our footprint and gain share. And not surprisingly this is a strategy which we will continue. Look you've seen this chart many times and you will continue to see it because the map just keeps getting greener and that will be the trend for the foreseeable future. In addition, we continued to see success from our cluster concept. It provides superior service and therefore share gains, and we consistently see better overall returns in these markets. Page 26 shows the level of coverage and fleet density for Charlotte, an example of a well established cluster that we believe we can broadly replicate in the top 100 markets in America. So looking, for example, at 2 of our newer markets of Minneapolis and Denver, these collectively represent an opportunity for at least another 20 locations and another $200,000,000 of fleet in those two markets alone. So if you roll that out on a national scale, you can see how much runway for growth we continue to have in still very major markets. So for the coming year, we've another 57 Greenfields plant, so a similar level to the year just finished. And again, relative to the size of the business, there'll be a focus on specialty with 22 new stores. Remember, these can be very different to the general tool locations in size. So the old reference point of revenue per store or fleet per store is no longer relevant. Interesting, when you look at where they're being located, only 16 are in what we would call new markets, which is a much lower proportion than historically. And we typically see a faster ramp up in profitability where we have an existing presence. So it will be interesting to see how that plays out as the year through. But the number of places where we now have nothing is certainly diminishing fast. In fact, you've seen in a press release that we've just done a bolt on that added 4 locations in Hawaii. No, the next capital day is not in Hawaii. However, you know, it's impossible to say precisely how many locations we're going to open from M and A because we're not going to change we're not going to chase deals. We always have the option of doing greenfields instead. But it's interesting, in the 1st 6 weeks of this year, we spent as much on bolt ons as we did in the whole of last year. So clearly, there are all going to be more locations added by way of bolt on acquisitions. So overall, we anticipate further gains in market share as we continue to add fleet at a pace that supports our ambitions as you can see from the chart on the right. Importantly, this spend is supported by high levels of physical utilization, strong margins and the leverage well within our stated range. In other words, very responsible growth. So on to Air France. And it's been another good year. Good growth in rental revenue as they gained market share. And you can see that our decision to moderate CapEx slightly at the half year has allowed them to get back to where they should be from a physical utilization perspective. Again, I think this just demonstrates the flexibility in our model and our ability to react swiftly to changing market conditions. 2% yield in Q4 looks great, but don't get carried away. It's a bit of an anomaly around mix in the same way as heat is an anomaly in the Q4 negatively in the U. S. Overall, I'd say the rate environment is the same as in the U. S. That is broadly flat, but hopefully with the potential for improvement as the year unfolds. However, what I think is really encouraging and sets A Plant apart from its peers is its ability to grow profitably. As you can see, since we refocused the business on a broader customer base and wider product mix, our returns have shown great progression. Also we are starting to see a number of the scale advantages and efficiency benefits we have in the U. S. I know this surprises some people, I'm not sure why, but long term rental rates are not that dissimilar between the UK and the U. S. The difference in margin reflects mix and leveraging scale and therefore I believe that we will continue to set new highs in terms of returns in the UK as we execute our plan of growth and diversification. So bringing it all together for both divisions, then they've got momentum. We've seen very encouraging fleet on rent improvement through the spring. And therefore, our capital plans, as Suzanne mentioned earlier, remain unchanged. Although the eagle eyed amongst you will note that our full year 20 fifteen-sixteen spend was actually £40,000,000 more than we forecasted Q3 as we pull forward some of the expenditure from Q1 in order to meet the strong needs in Sunbelt. For the current financial year, we continue to see double digit organic growth in the U. S. And mid to high single digit growth in the U. K. And as we discussed at length in Q3, replacement expenditure does naturally moderate as we lap 2,009, twenty 10 spend years, which brings down the total. Look, in Q3, we said we're going to remain watchful in terms of our Q4 spend, and nothing's really changed. We have no need to make any commitments until the half year, but we retain the flexibility to continue to review our capital needs as the year unfolds. And that's of course what we will do as we always have done. So to summarize, look, we've enhanced our disclosures today to reflect some important changes in our business. Our business mix is much broader and we operate at different levels of scale and efficiency than we did at the time of our previous peak margins. But we're just a different business and our model has evolved as evidenced by a wide range of improved metrics. Our relative performance this year clearly shows the strength and flexibility of that model and we are well placed for further growth in the coming year. A notable aspect of our growth has been the incremental margins we generate and we would also expect that to continue in 2016 2017. We're very cash generative which provides us with a range of options for both growth and returns to shareholders. We'll be flexible in our approach and we'll regularly review the best options to enhance shareholder value. And as always, we will grow responsibly, maintaining leverage within our stated range of 1.5 to 2 times EBITDA. It's been another good year and we've continued to build on our momentum with a good start to the new financial year. We see multi year moderate growth in our end markets. We continue to benefit from the structural changes in our industry and we have a great balance sheet which allows us to execute our plans efficiently. Therefore, we continue to look to the medium term with confidence. And with that, we'll move over to Q and A. And if you could just follow the usual protocols of stating your name and organization for those listening in on the web. Hi. I'm Justin Jordan from Jefferies. Just start with sorry, two questions. The fall through in Sunbelt in fiscal 'sixteen, the 60% fall through of marginal rental revenue to EBITDA. Yes. That's obviously improved in Q4 vis a vis the prior quarters. Are there any sort of please don't take us in the fence, we're not funny in there? Or is that sort of just, as you said, just genuine margin improvements and operational efficiencies within the business? I think it's just general margin improve. I think it's general margin. Look, in any individual quarter, you get swings. Like you're going to have a bad debt 1 year and not a bad debt. You can have provisions, I don't know, a hit in terms of healthcare costs 1 year. So you're always going to get small swings around the mean in any individual quarters. You can get overexcited about an individual quarter. I think if you look over a long period of time, you've seen an improving drop through performance, particularly from our mature stores. I mean, at some stage, either the second or third question is going to be about minus 2% yield in the 4th quarter. Look, we have seen a significant mix change in terms of the key account work and the average length of some of our contracts. You have to remember, whilst that affects you in yield, the lower transactional costs are significant. If you go back to 2,008, 60% of our transactions were monthly rental contracts. Last week, when I last checked, it was 72% WER. Now that is a big drag. That is a huge drag on yield. But if you're delivering it once a month instead of 4 times a month, if you're repairing it once a month instead of 5 or 6 times a month, then clearly there is a big benefit in your transactional cost. And what people need to balance as our mix of business has changed as we why we took the day out in April to explain that is some of the metrics have changed too. And so that higher drop through is very important. You can see from those the 35 and 174 stores we analyzed, which were our larger, more mature stores, we're getting 84% drop through in those stores. Why? Because you're now only adding variable cost. You are not you've gone way beyond the fixed and semi fixed cost base as you're leveraging the scale. So the drop through is a reflection as much as anything of the business mix. Thank you. Just one quick follow-up. We've been all lettered diets of falling residual values for I think 15 months or so now. Your residual profit is up dramatically year on year on disposals. Yes, but most people so I mean, again, people need to be careful. The grouse give out great data, but you've got to make sure you understand what it tells you, and a lot of people don't. The as we said, our rental rates are low relative to the cost of new equipment. And you can see that by a reference point in our dollar utilization. Our dollar utilization is about 20% down relative to what it was at the previous peak of last time. Our margins are much higher because of our improved operational efficiencies. 2nd hand equipment values are still much higher than they were and you can reference that. If you look at our margin, our margins are really high. So then our profit margins on I think we recovered 40 percent of original cost of our assets were recovered this year and it was 39 point something or other last year? It was 39% last year. This is proceeds as a percentage of OEC sold, 39% last year and 40.5% this year. So if you look at it quarter over quarter for the past 2 years, it just comes in at around 39% or 40%. Yes, I mean, the last few years, we've tracked around 39%. Look, have secondhand values come a little bit off their peak from the, like you say, December 2014, January 2015 when oil and gas was very, very strong? Yes. But actually, there's a slide in the appendices here. Please, if people are going to start quoting ROCE all the time, which seems to be which it seems to have taken over from the ABI as an index nobody really understands but quotes all the time. Then please make sure everyone just understood where are the appendices not in here? You're past it. Did I go past it? Oh, sorry. I'll go back again. Let me see. Let's just sorry. It should be Page 38. Page 38, sorry about that. By the end of 2 weeks, we know what every page is. Okay. Let me try and explain these two rights indices for you so everybody finally understands it. The line everybody gets agitated about is this yellow line because that's what they quote. It is their OLV index. It is not a measure of OLV. It is OLV as a percentage of the OEC of equipment. So it's how much are you getting for equipment when you're selling it today as a percentage of what it would cost you to buy a new one, okay? So off its very, very peak, the OLV you'll see has ticked down from, I think, peaked at 45.2%. It's gone down to 43.2%. Okay? So this is all the ROUSS data for all the major rental companies that they cover. But the key is you can't look at that index without looking at the blue line too, which is the OEC. So if you look at if you go back to the very beginning of the chart, previously, you were getting 41% OLV of something that cost you 100. So if you were selling an old asset, you were getting 41 for it. Now you're getting 41 of 121. And that's the whole point. You're getting the second hand equipment still costs you more. The index has gone down because of the scale of the inflation in new equipment. And I think that's been massively misunderstood. It's not a value of OLV. It's indexed against cost. And in a period where we've seen significant inflation because of Tier 4, it's that which has adjusted the index more than declines in values. Our values that we are recovering are still around about 39%, 40% of OEC because we do it slightly differently. We measure ours as against the cost of the asset when we bought it, not the cost of an asset to replace it. And so how we measure it is different. I think that's better than when you've seen significant inflation and how Rauch do it when they look at current replacement cost. The other thing you need to look at is this stuff here. So the chart on the right, again, it's all from Rouss. You can get this from Rouss, so please use Rouss as a data point because it's very good data, but get all the information. This is the average age of the assets being sold. And of course, if you're selling all the assets, which of course everybody is now, then of course the OLV comes down. You would expect the OLV percentage of an older asset to be lower than the OLV of a younger asset. So without understanding what's happened to the OEC and without understanding the age of the assets being sold, the ROUSS data point is a good data point, but it needs all of the ancillary information. I think all of this is super exciting. I think all around Stata is really encouraging in terms of our structural markets. Why? It's proving that rental is cheaper than it has historically ever been, again witnessed by our dollar utilization metrics. 2nd hand equipment is expensive as witnessed by our strong and United strong margins. And when you look at the age of assets being sold and there's another data point which Gary will tell you is it's not rental companies that are selling. It's our customers that are selling. Our customers are selling very old fleet which is what's driving down the index. So it's and again, Gary, he's got the data for this. I think 20% of the assets sold in the last auction were sold by rental companies. Back in 2,009, 'ten, it was 80%. Our customers are selling fleet in auctions, not rental companies. And they're selling their fleet and not buying other fleet because rental is cheap and rental is a better option. So if you actually get into the house data and if you discuss it with Gary properly, the house data is very supportive of the 2 structural trends we're seeing in our rental industry. Thank you. It's Josh Puddle from Berenberg. My first question is, do you think you can continue to grow in the U. S. With an EBITDA margin drop through of around 60% or above? Yes. Look, we have done consistently for a number of years now. Look, if we didn't open any greenfields, we could grow at a faster because look at the drop through of our more mature stores. The drop through of our more mature stores is very, very strong. No, we're at that. It's all about scale. Look, 1st and foremost, we're now fully absorbed all of the fixed costs. We're adding variable costs, but we're not adding variable costs at the pace at which we are growing the business. I don't mind I know this. I know the statistic because I'm giving you a schedule about it last week. If you look at over the course of the year just gone, okay, we added 900 hits. It was 909. I'll go to round numbers because I remember round numbers more than I remember precisely. We added 900 hits, okay? 550 of those were in our greenfields and bolt on acquisitions. So we only added 350 heads in our existing stores. That equates to 3.5% to 4% head growth in a population of stores that grew their volume 12%. You will get improved efficiencies. You will get improved margins if you're adding. Because if you look at our total salary bill relative to our operating costs, it's half. So if you're growing half your cost base at 4% and you're growing your volume at 12%, you're going to improve margins. It's just maths. Thank you. And then the second question, have you seen anything on the ground over the last few months that makes you either more or less optimistic on in term prospects? In particular, I think U. S. Non resi construction expenditure slowed in April. But again, it's a bit like the employment statistics. Be careful on one data point. Look, all I can tell you is we have a lot more fleet on rent than we did a year ago. We got a lot more fleet on rent than we did in January. And there's lots of construction going on. I think to the you know my view, which was the impact of any oversupply because of oil and gas was overplayed, but it did affect some players. I think there is good evidence that people's physical utilization is better than it was a year ago. That ought to be more encouraging for rates than it was. Our look, construction growth might be 5% or 6 percent this year versus 7% last year. But we're going to you're going to get swings in individual years. I personally believe that's good for the medium term. What we we've stood here and talked about this many, many times. What we have seen over the last 4 or 5 years is medium term moderate growth. And I like medium term moderate growth. There's not enough growth to excite everybody to over commit capital. There is sufficient growth for it to be a robust market and we can continue if we can get 5% or 6% the maths in terms of our capital forecast is really pretty straightforward. We think the market is going to grow 5. We think we can grow at around about twice the pace of the market in our same stores. That gets you to 10. Then there's how much comes from greenfields and bolt ons, which ought to be 2 or 3, whatever the precise number is. And that kind of gets you to the midpoint of our capital range. And that's sort of where we are. Could it be 4? Could it be 6? Yes, it could. We're not that precise, but it's going to be a good year again. And if I look at the projects in the Dodge Data scheduled to start for next year too, again, it's going to be 4%, 5%, 6% growth. None of these have been stellar years. So no one's expecting this wonderful runaway market. But remember, twothree of our growth is not the market. It's share gains in existing stores and it's greenfields in bolt on. So within that environment, I think we can deliver continue to deliver very positive results. Chris Gallagher, JPMorgan. Quick question on the decision to return capital. Can you talk a little bit, given the uncertainty, why have you decided to do that now rather than keep some of it and potentially use it if the market was better than expected? Do I sound uncertain? What uncertainty? Look, Suzanne, I think, did a really good job in laying out like our waterfall in terms of our priorities for capital, which is look, we still believe in the growth in the market. So the majority of our funds will continue to go to organic fleet growth, greenfields and bolt on acquisitions. The key is now we think we've reached a leverage point which is kind of okay. And therefore, somewhere in the mid range between 1.5x, 2x, given where we think we are in the cycle, makes all the sense in the world to us. Therefore, I think the dividend is an important part of our long term story, and I am very committed to growing the dividend to a level that's sustainable through the cycle because it's a cyclical business. I think it provides and underpinned the shareholders, which is very valid. The question then is we then have excess funds available. What do you do with that? Do you do bigger M and A? Or do you do something else? Look, right now, we trade at something like a 10x pay. Look, it's for you to decide what multiples we should trade on. I can't buy anything worth buying for a 10 times PE, okay? So therefore, I've become reasonably agnostic between share buybacks. And so to the extent where I think we are operating at a low multiple, we will use our excess funds to buy back shares. Does that mean I will buy back shares forever at every share price? No, because I think share buybacks make sense if they are enhancing shareholder returns better than other uses for the cash. You can buy a 10 year 14% compound annual growth business with 19% ROI and 47% EBITDA margins on a 10 times PE. Well, you can. I can buy my own shares. That's why I'm buying back my own shares. And just one more then. You mentioned about REIT potentially being stronger as people move to Tier 4 equipment. Can you mention why that might begin to happen? Have you seen that? Yes. No, I think it comes to this. Look, people have been putting it off like the plague. A, because you can see the on cost. It's like 40% it's like a serious on cost. And B, we hate them. They take more maintenance. You've got to have they are just more complicated bits of equipment. And their reliability and dependability is as yet to improve and given that we've only had a couple of years of them in the marketplace. So people have been deferring expenditure, and that's why you can see they've been hanging on to all the stuff. That's why this average age of fleet being sold is people have been hanging on to Tier 3 as long as they can. Now if you bought a bunch of people spent the most in 2,006, 2,007, okay? You're now reaching the point where they're 10, 11, 12 year old pieces of equipment. You can only defer the expenditure for so long, and the assets just start to become less efficient. So as that process evolves and they replace expenditure, they have one of 2 options. They buy a 7 year old Tier 3 from me, which will keep my secondhand values high, which is why I'm pretty confident about secondhand values, or they buy a new one. And as they buy a new one, they start to incur that in place. Look, the one statistic I do know is that 83% of our fleet that should be Tier 4 compliant is Tier 4 compliant. The best industry guess we can come across by talking to our suppliers and others is the industry is about 27% to 30% Tier 4 compliant. So we have incurred the cost in our original cost, not because of some grand strategy, just because we've been growing so much and putting new fleet in greenfields, we've been spending a lot on Tier 4 over the last 2 years. As that 27% grows, then their average cost base rises. And I think that ultimately has a positive impact on rates. Look, we'll see. If you look at when you do the maths, secondhand equipment values haven't changed much. Rousaid, new equipment's grown 121% and second hand values. When we look at our own data, our data points are 2018 2018. So our data points are almost exactly the same as a complete fleet, but that's because our mix is slightly different. So eventually, eventually people are going to be incurring that inflation and that has to drive rates. Rajesh Kumar from HSBC. Just a follow-up question on what you were just talking about, the replacement CapEx in the industry. So when you look at the average age of disposal assets, it's running at about 90 months, which is a lot of people like you are enjoying the maintenance CapEx holiday this year. No, that's not true. On the top Because if you've got a fleet age of that age, then you haven't got the holiday yet. We have the holiday because of our young fleet age. If you have an older fleet age, your holiday doesn't come for a year or 2. Yes, which is the point that if you're a small player, then you're perhaps replacing 2,007 or 2,008 or even 2,006 assets currently. I think totally fair. So relatively, there are more cash flow squeezed than you are? Probably. Should we see an increase in bolt ons because sooner or later they will get that holiday? Yes. I mean, I'm not sure that's the reason why we would pick a bolt on in all honesty. It's true that clearly, one of the consideration I know everybody thinks businesses only get bought on EBITDA multiples and on the spreadsheet that's true. A key consideration when we value a business is the age and value, the second hand value of the fleet. That's our starting point, not an EBITDA multiple. I think it just I think it balances itself out. I think it is true that we've always believed that having a young fleet age is very important for two reasons. We think it gives us a competitive advantage in the upturn and it allows us to throw off cash in the downturn. And if you are late in de aging your fleet, you will end up with too high leverage as you go into the downturn. We have had that pain of higher spend earlier in the cycle. I look, you can see we've had a good start in terms of bolt ons. We had this strange anomaly over the last 12 months where our multiple fell like a stone and everybody's expectations for multiples for us to buy your business rose. And it was just this huge gap and you couldn't bridge the gap. It made no sense. It made more sense to buy back your own shares. There's not many positives to the highly volatile share price we've had other than it's helped drive down some reality to the people whose businesses we're trying to buy. And it's not coincidental that we've subsequently ramped up the pace of doing deals as people's expectations have become more recent. But it's true that the key will be what is the secondhand value of their. Our long term strategy to open Greenfields and Baldowns, it's not driven by tax advantages. It's not driven by fleetages. The long term fundamentals of that business. That's how you want to buy, but the seller for the seller, if it's a family business, they come under cash flow pressure. Who are they going to sell to? We're the only people doing this consolidation. Who are they going to sell to? Hi, good morning. David Phillips from Redburn. A couple please. On the €60,000,000 you spent so far, what's the run rate of revenue you're getting from that? And what underlying growth are those businesses doing? What really attracted you to buy them at this point in the cycle? Yes. No, that's a good question. I don't know the answer. It's the honest truth. As a general rule of thumb, we don't buy businesses for more than 2 times revenue, is it? Right. Yes. So, Dave, I can't quite remember precisely. If somebody told me it was 1.8 or 2.2, I wouldn't fight them over it. But it's a general rule of thumb if you work at something like 2 times. They're all growing. We don't buy fixer up as we've said this many, many times. I mean the business in Hawaii in particular is looks a lot like our businesses in areas like Florida, which is I keep making this point and no one thinks it's important. There's 2,500,000 Americans have got jobs. They've got more money in their pockets because of low energy prices. And where in the world do they want to go on holiday right now other than America? And therefore, anywhere like Hawaii, Florida, the growth in the resort industry and the general vacation industry means it's a really strong market. If you look at the 4 acquisitions we've done, 3 of them are effectively specialty business. 1 is a climate control business and 2 are power businesses, where one is load banks with us part of our power business. So again, we've bought good growth businesses. We don't need fixer uppers. I can't remember what the precise numbers were for each one, but they are good margin specialty businesses. I mean Hawaii is a general tool business, but it's in a great place in terms of you've got lots of military work and you've got lots of entertainment work. And just a more general question on the initiatives on costs that you've been talking about and better maintenance programs and better planning because you've seen the duration of assets that are out for, does that have positive implications for the ideal age of your fleet and extending the life of fleet and the ideal age? Yes. That is a really good question. And so for example, things like trucks, when we now start looking at the average mileage of a truck, when we come to our normal disposal point, we're finding that It's done significantly less miles than we thought it would have done at that point, which begs the question why we're selling it. So absolutely, as we go through this program, there is every reason to believe. But at the end of the day, it's hours on the clock, which are miles on the truck, which dictates the secondhand value. So I think it's a bit early to say, yes, the auditors are sitting in the back. They give us a hard time periodically saying we make too much profit on our disposals and we have to we are under depreciating our assets. Our view is let's go get through the cycle and let's see what it looks like when we get through the cycle rather than dashing away. There's enough confusion in the market right now without starting to change depreciation policies to be perfect. But no, it's that we are yes, there is an argument that we are over depreciating right now, but let's get there and see. But yes, where we've seen it first is in trucks and the number of we've done a lot less miles per truck when it comes to the normal disposal data that we had historically done. And that's where the let me give you a couple of statistics, big macro statistics because they are surprising when you look back at them. Back in 2,008, this DCR, so what we do with DCR is we take drivers, mechanics, trucks, all the costs of delivery and it's a bit like the Roussy mix, we then say how much do we recover in charging delivery to our customers. Back in 2,008 that was 57%. So we got back 57%. Now with a combination of charging a bit more, but more significantly reducing our cost as a company that's now 85%. If we were back at 57%, that would be $80,000,000 more cost in our business. If you look at our rental revenue per head, remember salaries is 50% of our operating costs, okay? We have improved as a total business, including the drag of greenfields, revenue per head is up 37% over 2,008. If you work out how many heads that is and take an average cost per head, which I know is lots of averages there, so I'm not saying it's the most precise number in the world, you get to about $180,000,000 saving, which is what there's a reason why our profits have gone up so much. If you look at our total yields from 2,008 to 2016, they're flat. It's not come from yields. It's come from operational efficiency and just leveraging scale. But yes, no, there are some significant considerations as this evolves. But I think we have to go through the cycle to prove it. Hi, it's Emily Roberts from Deutsche Bank. A few from me, please. First on the Sunbelt ROI, which looks like it is the lowest since 2012 because of the investments that you've made. Given the ongoing greenfield expectations and CapEx, when do you think that might return to I think you start seeing an improvement this year. And the reason being the reduction in replacement the reduction in the replacement CapEx. Remember if you're replacement big replacement CapEx in de aging the fleet is an absolute killer in terms of ROI. If we go back to one of these charts, one second, as I said, I'll be a lot better in a week's time with what page everything is. 17. Is that this one here? Yes, 22. Let's go back to Page 22. Let's imagine we are getting this rental rate for an old asset, okay? So I am now getting a rental rate of 112 on a 7 year asset. My ROI is 112 divided by 100, okay? I sell that asset. I might get like 114 or something because it's a newer asset, but we denominated as now 141. Look how much my ROI changes by. So when you've in a period where we've had such high replacement CapEx, it is that replacement CapEx that's killed ROI. And it's literally that's the calculation. The day before we sell the asset, that asset we haven't got any more assets and the ROI literally falls by that amount. It's a staggering drag on our ROI. Now that we are that is a bigger drag than Greenfields. It's the moderating of replacement CapEx. Now the problem is it's going to take a year for that to work its way through. But over the by this time next year, we should start to see it ticking back up again. Like I said, if we ended up with an average fleet age of what we would consider a normal fleet age, then you add about 2% ROI. But that's the biggest killer. And my second question is around the operational improvements that you've made. How much left is there to go for? And what's your that that you could take out to keep the operating profit more stable than your top line? Yes. No, I mean, again, I think it's a good question. I think there's a lot to go out. I think we are starting our journey in terms of some of our efficiency. So we now have trackers in trucks. We have trackers on equipment. We have used those of you in Florida saw, we now have that delivery program. We have automatic maintenance records which prioritizes work in the workshop. All of that's beneficial. But it can all get better. Look, do we have state of the art delivery routing plans? No, we don't. I was interviewing somebody recently who said, do you have the plan that only allows you to do right hand turns? I go, well, do you not just end up back where you started if you did? But anyways, this guy was heavily into his routing plans where it optimized the number of right turns and measured the amount of idling time. So I think there's more to go. But remember, our biggest self help is to take that half of our locations that weren't locations 5 or 6 years ago, We don't have to do better in locations we've got. We've just got to mature the locations we've got. So I think there's significant margin enhancement as we evolve those. In terms of like how what's the negative drop through if it goes the other way? It ought to be materially better than it was last time because last time, we weren't fully absorbing the fixed and semi fixed cost base. So you would immediately had high drop through when revenue turned down. We are doing that now. So all of our cost is marginal cost. Like I said, we're at the stage now where 50% of our operating cost is labor. And without wanting to be harsh about it, that's an incredible variable cost. If we need less drivers and we need less mechanics, before in the last downturn, because we weren't covering our fixed costs enough, you don't get rid of the profit center manager because you need a profit center manager. You don't get rid of 4 or 5 mechanics because that's the base load you need. As we've leveraged scale, more of our business is built on variable costs. So I am confident that our negative drop through and there will be negative drop through as we go into downturn ought to be significantly less than it was last time because of that reason. And then one more from me, please. Appreciate it's a much smaller part of the business, but could you talk us through the A Plant margin improvement a bit more? How sustainable that is going forward? Well, I think it's very sustainable in all honesty. I mean I have to say, probing questions which made us look at how we explain our probing questions which made us look at how we explain our business to us and this helped. If you go into the press release, I can't remember what page it's on, but it tells you that the dollar utilization in Sunbelt was 56% and the dollar utilization in A Plant is 52%. But A Plant had 2% lower physical utilization. So if it had the same level of physical utilization, you're comparing 56% to 54%. So rates aren't that different because that 2% is down to mix. So if you were to look at a skid steer or a tobacco on a monthly rental here in the U. K, it doesn't look any different to a key account job in them. The key is leveraging scale. So as we grow and as we broaden the mix of the business, then again, I think we can see improvements. Okay, it's not as impressive as the 37% revenue per head improvement that we've had in the U. S. Yet, But between 2008 and 2016, AirPlants improved its revenue per head by 21%. It's a really good improvement. And what we're doing is we're putting more volume and a better mix of business through a fixed cost base. That's what we're doing. And so I think I am very confident that we will get to that we can get to 20% ROI in the U. K. I think it will take us 3 or 4 years. I think we're going to have to continue to focus our acquisitions in greenfields around Specialty Products, but there's some real scale advantages. Again, if you look at the average fleet per store, okay, the average store in America has about £10,000,000 to them. This is, again, my round maths. So you look at the real numbers from the press release. But we've got about $5,500,000,000 worth of fleet and we've got 5.50 stores. So we've got $10,000,000 of fleet per store. In the U. K, we've got about 150 locations and about £600,000,000 of fleet. So we've got about £4,000,000 per store. So the problem with the UK margins is nothing to do with rate, partly to do with mix. It's scale. We need and that's what we're doing. We're using our balance sheet to diversify and grow scale because fundamentally, because of the scale, because their average fleet size is $10,000,000 Sunbelt is just operating higher up this curve than air plant is. So it's very fixable. If I look at a lot of the operating metrics now the question would be you're probably unlikely to get the same level of scale in a smaller market like this, but you could bridge the gap. So I think the improvements are tangible, and I think they're sustainable. But it's all just about where they both are. On average, Sunbelt operates around here. And on average, Air Plant operates somewhere around there. And that's it would have the same margins in the U. S. If it was the same size and same configured business. Sorry, Carl, you got beat to the punch. Next one. Andrew Flyer from Morgan Stanley. First question, just on Slide 19, the one about efficiency. Is that definitely comparing like with like? So there's been no change in size of fleet or there's been no mix? There's been a massive change in size of fleet. The fleet is 46% bigger. It's exactly the same physical location in exactly the same place. So of course, look, we've had 44% revenue growth and we've had 44%, 6% more volume. But it is exactly the same location doing pretty much exactly doing exactly the same thing. So yes, of course, a lot of it is scale. That doesn't explain, however, how you can do 46% more volume with 10% fewer heads and 10% fewer trucks. So yes, some of its efficiency improvements and some of it is just leveraging scale. I fully accept that point. But you can see that's why we put it out like this. You can see there have been significant it's not just scale. There have been meaningful efficiency improvements too. And within that, is there any mix changes? There'll be mix changes in the sense that there will be more key accounts than there were before. There'll be minor mix changes in terms of fleet composition. And that's why the yield is lower because there'll be more key count. But there's no mix changes in terms of the type of work, like new ones. There might be like 1% more aerial, 1% less aerial, but minus things. And secondly, can you just talk about demand and supply conditions in the market? Because I know the ROUSS data, I don't know whether you agree with it or not, has shown that demand has picked up and is exceeding the estimates of supply. Yes. Look, I've got to be careful because I can't shoot down Rouss data when I don't like it and agree with it when I do like it. So I suspect I ought to stay relatively consistent, consistent, which is the ROUSE data is good if you know what you're looking at. So for the popular so the ROUSE data is for the whatever it is now, 60 odd companies that are in Rous data analytics. It is not the industry. It is the people we are not in there because for a whole host of reasons, we will we are not in the ROUSE Data Analytics. You need to look at the population that's in there. When such a high proportion of them are Caterpillar dealers, when Caterpillar dealers have very little control over how much they buy and how much Caterpillar stuff into them, I'm always somewhat skeptical about some of the data. If, however, you were to ask me, do I think the industry wide physical utilization is better than it was a year ago, then I think the answer to that is yes. But I would say be careful that you have a range of sensible data points, not just the ROUSS data. It's a small, narrow range of companies and in my opinion is over influenced by Caterpillar dealers in United and Hertz. But we've had strong look at our physical utilization. It's kind of been strong all year long. It's not materially stronger. It's on a fleet that's 20% bigger. We've got broadly the same slightly better physical utilization. Thank you. It's Carl Green from Credit Suisse. I've got a couple of questions on Tier 4 and then a general market question. Just on Tier 4, I think you made the point that you guys hate Tier 4 for all the reasons you mentioned. And I think a lot of your competitors and a lot of your customers feel the same. Could you just explain again or run through the logic as to why you're depreciating Tier 4 at the same rates there for as Tier 3, just given the residual down the line could be weaker? I mean, that's a fair question. Think we take it all in the round on based of like they could be in the same way as you could justify that we are over depreciating the assets that we've currently got in the fleet based on the margins. I think on balance, we have been seen to have a prudent depreciation policy. Like we've got Carl, we've had 2 years of experience right now. The honest answer is we need some more evidence points before we would make a big change like that. But I accept the point. Ultimately, we'll see how they all pan out. But I think it's a very valid point in terms of what will the residuals be for Tier 4. Ultimately, they'll just be assets. And if you look at there's relatively little spend right now, so there's going to be ultimately depend on what the cycle looks like when those assets come to the market more than it will depend on what is the perception of Tier 4 products. But yes, I think it's a valid point that we need to look at and we'll keep looking at it. Okay. Thank you. And then following just on Chris's question he asked earlier just in terms of the timing of the industry generally putting up rates on Tier 4. I mean, there have been some surveys, admittedly, they're relatively small populations. There's some survey suggesting that rental companies aren't looking to charge more for Tier 4 generally and customers not generally willing to pay more for Tier 4. What do you think those service are missing and would you say that bigger companies such as yourself are more likely to push that forward? So in other words, are you kind of more in control of that process? Yes, I think we are. No, I think I don't disagree with the service. I mean, if you're saying to me right now, can I get a better price for a Tier 4 product than I get for a Tier 3 product, the answer is probably not? In some instances, yes, depending on the customer. But in most instances, no. So what drives so I think the surveys are wrong and are asking the wrong questions. I think the data is right, which is so why is our dollar utilization down? Our dollar utilization is down because we've had the 20% inflation 18% overall inflation in original costs and we haven't had the corresponding increase in rates. And that's because we've not been able to pass on Tier four. So I accept wholeheartedly that that's been a problem. The point will be, however, that there's only about 30% penetration of Tier four products. As that becomes a larger proportion of people's so people can take a view on the average when it's 30% of their fleet. They have no option now but to be adding newer Tier 4 products. There will come a point in time in 3 or 4 years' time when they're only going to be able to buy Tier 4 secondhand equipment. And as they realize that inflation, I think there is a natural industry wide benefit in pushing up the rates. Otherwise, ROI you can't justify their investment in the piece of equipment. And that's why it's pushing rental penetration because the customers are looking at current rates, which are based largely on historical prices, if they are in any shape or form considering buying a new one or an old one, they look at the inflation in the new and the second hand one and they're saying that makes no sense. And so I think that's why I think there's a bit of a trade off. I think it's a case of is the industry average is in more Tier 4, that will push a raise. But you're absolutely spot on. Like, are we getting more for a Tier 4 product than a Tier 3 product right now? No. And we're probably hurting from that more than most because of the percentage of Tier 4 we've got. But we've kind of taken on the Tier 4 now and I think we'll start to see the rest of the industry catch up with percentages of Tier 4. Okay. Thank you. And my final question is just around the outlook for calendar 2017 rather than your fiscal 2017. For calendar 2017, We've had 4 months of deteriorating non farm payrolls. The Dodge Momentum Index has been in negative territory year on year for 5 out of the last 7 months. If those aren't the kind of indicators that are getting you to change your view about the demand outlook, what would you be looking at to change your view? Well, again, I would dispute the payrolls data. We've had one bad month in whatever month it was. Again, we are at a point where we're afforded 4.7% employment. And if you look at the number of jobs added in construction in April May, I think it was 50,000 in each month in the construction market, which I would say points to very strong construction markets that we see. Again, the Dodge Data Index is a bit like the Rouse Data Index. It's the new sexy thing which everybody quotes. Have a look at it and see which sectors are up, see which sectors are down and remember, it starts. And so that starts data is skewed against a period where there were some very large LNG facilities and there's now not those large. So you need to look at it by sector and you need to look at it on a projection of put in place construction. If you look at all of the forecasts from all of the key indicators that we look at, they're forecasting 5%, 6%, 7% growth in construction for something like the next 3 years. So I would say that in the U. S. Right now, can you find a whole range of data points? Yes, you can. Look, you can find people who are you know, will say it's the end of construction or construction is the strongest. All I can say is on the ground, there is lots and lots of construction. On the ground, all of our customers are telling us their biggest issue is a shortage of labor and they can't get labor. We really struggle to get staff right now. We have hundreds of open vacancies at the moment because we can't get drivers and we can't get mechanics. So our evaluation on the ground of the markets we serve is that they're very, very strong. And when you look at those very big macro data points, I think you've got to get a little bit more granular in terms of the markets we serve. Good morning. It's Andy Murphy from Bank of America Merrill Lynch. A couple of quick ones. With the Hertz demerger coming up, do you foresee any change in activity or competitive nature from them perhaps with their high more firmly on the board potentially or anyone else for that matter? Yeah. You would have thought so. I mean it's going to be it's a relatively new management team. As you know we know lots of them quite well because it's basically the 2003 Sunbelt management team. And they understand the rental market. I think there's a place for a range of competitors. They're going to be starting off life with inheriting a certain fleet age, a certain service reputation and a lot of leverage. So will they are they a good management team that will make the business better than it was previously run? I have no doubt they will do that. Is it going to materially change the landscape in the foreseeable future? I can't say it. It. We will have to maintain a stronger service level and a stronger performance as we have done. But yes, they'll be there and they were there before. And just a point of clarity. When you're talking about the new branches you're talking about, can you just clarify what difference between a non cluster and a new market is? A new market means we just don't have anything there. So within that, we operate in what are called designated MSAs. In America, people group markets into designated MSAs. If we have no other location in that designated MSA, then that's a new market. If we already have a minimum of I think 5 locations, we I'm going to nod the head, I think it's if we say we already have 5 locations in that market, then we would class it as a market where we have a cluster. And so you're adding number 6 and you're adding number 7. So for example, in the slide we gave here, If we add anything to Denver or the last time we showed this chart that will I think that number was 5. So we've added 2 locations where we already have 5. When we add the next 13 local next 10 locations in Denver, they will be classed as existing markets. If I was to put a new location in a market where I have nothing, that would be a new market. So it's just because what the benefit there is, look, we already have a customer base. We have a regional management team. They're able to be supported by the other locations in the area. So it's just easier to start where we already are than when you're the brand new guy turning up in town. Thank you. That seems to be all of the questions. But once again, thank you very much for all of your interest in Astrid, and we will look forward to updating you again at the end of Q1. Thank you.