Good morning, welcome to the Ashtead Q3 results presentation. Throughout the call, all participants will be in a listen-only mode, afterwards there will be a Q&A session. To remind you, this conference call is being recorded. Today, I am pleased to present Geoff Drabble. Please begin your meeting.
Good morning, welcome to the Ashtead Q3 results call. The call will follow the usual format, after a short update on the financials and current trading from myself and Suzanne, we will move swiftly on to Q&A. Starting on page two, it has been another very strong quarter as we capitalized on good end markets and our well-established strategy of geographic and sector diversification. I think once again, we have demonstrated the relative strength of both our model and execution. This was always going to be our toughest quarter in terms of comps, due in no small part to our oil and gas business, which was at its strongest this time last year. Obviously, we are in a very different place today. Therefore, against this backdrop, I am delighted to report that the group Q3 rental revenue grew 14%.
We are also growing profitably, with the group delivering record EBITDA margins of 45% and pre-tax profits for the quarter of 17% at GBP 139 million. We continue to invest responsibly, recognizing the flexibility that a young fleet age and low leverage provides. Therefore, I am encouraged that despite significant investment in our fleet and network, leverage has come down to 1.9 times EBITDA. I will come to our first thoughts on growth for next year a little later, for the balance of this year, we anticipate a full-year result in line with expectations. With that, I will hand over to Suzanne.
Thanks, Geoff, good morning to everyone on the call. The third quarter results for the group are shown on slide four, we were pleased to report this morning an underlying pre-tax profit of GBP 139 million as compared to GBP 114 million for the same period last year. This represented an increase of 17% at constant rates of exchange. Consistent with previous quarters, top-line growth was the main driver of our profitability, with rental revenue increasing by 14%. Geoff will review the quarterly revenue performance for both Sunbelt and A-Plant in detail in a few minutes, suffice it to say that both divisions performed well. The group's growth continued to be very profitable, with EBITDA margin improving to 45%. On the next slide, we have shown our group results for the nine months.
On a year-to-date constant currency basis, rental revenue grew by 17%, and our EBITDA margin increased to 46%, reflecting the higher revenues, operational efficiencies, and continued focus on drop-through across the group. As a result, our underlying pre-tax profit increased by 20% to GBP 482 million. Turning now to slide six, we'll look at the year-to-date numbers on a divisional basis, beginning with the U.S. Sunbelt's results were driven mainly by an 18% growth in rental revenue as we continued to benefit from strong construction activity levels, structural trends in our end market, and the diversification of our business. It was also a period of major investment, with 60 new locations added in the nine months. With the continued operational efficiency of our mature locations, we delivered a 48% EBITDA margin. On slide seven, we've shown A-Plant's nine-month results, as you can see, it performed well also.
Rental revenue grew by 8%, with a focus on cost discipline, drop-through of 74% in that business helped to produce an EBITDA margin of 37% for the period. Slide eight is one that you've seen many times, but it's key because our focus on leverage and balance sheet management remains an important financial discipline which underpins our business strategy. As expected this year, our debt increased as we invested in the fleet and made small bolt-on acquisitions. However, our leverage ratio declined to 1.9 times at January 31, reflecting our strong EBITDA margins. Going forward, we intend to operate within a leverage range of 1.5-2 times EBITDA. This is a conservative range given our strong EBITDA margins and the significant underpin that our well-invested fleet provides. Moreover, we believe that this range provides us with a high degree of flexibility and security through the cycle.
Based on our current plans, we are likely to trend towards the lower end of the range in the coming year. I'll now hand over to Geoff.
Thanks, Suzanne. Let's look at Sunbelt in a bit more detail, starting on page 10. Again, a very good performance driven largely by same-store growth, where we benefit from our well-established presence and broader product offering. Bolt-ons and greenfields continue to contribute to further growth and importantly, long-term opportunity. As you've seen, the activity this year is more greenfield focused, so we don't have the same levels of growth from acquisitions. However, we continue to identify opportunities with three small deals completed in the quarter and others in the pipeline. Page 11 is the usual analysis of our revenue drivers, as you can see, we had good volume growth at 16%. Yield, as anticipated, fell 1%, and physical utilization was flat. However, as we have highlighted in recent quarters, with so many moving parts, the key is in the detail. Let's get on to page 12.
The detail on this slide is important, differentiating what's happening in the underlying business and broader markets, and what's just short-term headwinds around the energy sector. Let's start with the 89% same store, which takes out all of the noise. As you can see, we had another great performance, 11% volume growth, 2% yield improvement, and 64% drop-through, which demonstrates our ongoing margin improvement in good markets. Greenfields and bolt-ons continue to be a drag on our metrics, as you can see from the dollar utilization and drop-through, but you can also see from the volume and yield improvement, they continue to develop in line with our expectations and are an important component of medium-term growth. Then to oil and gas, and yep, it's awful. In Q3 last year, it was 6% of our business, and now it's 1%.
To emphasize just how different it is, dollar utilization Q3 last year was 104%, and this year it's 51%. These swings have been a terrible drag, particularly this quarter. Encouragingly, however, our diversified business has allowed us to still deliver a very strong performance. We're confident that this will continue to be the case, and whilst the energy sector will still be a drag for another quarter or two, it will become irrelevant. Frankly, at 1% of our business, and at best break even for the year, how much worse can it get? Let's start to look forward a little and what's happening in end markets. We don't have much more to say than we did at the half year. Recent updates from forecasters we follow really haven't changed very much. Of course, we remain watchful and aware of the potential risks to growth of macro events.
As I sit here today, we expect the 2016 bill season from May to November to provide substantially more work than last year. All of our key indicators point to this, as does the feedback from our customers. We accept that we are cyclical and therefore manage our balance sheet conservatively, but we do not see anything on the immediate horizon. I believe we remain mid-cycle, and whilst the pace of growth may moderate, we should have multiple years of structural and cyclical opportunity ahead. Turning to page 14 and A-Plant, where revenue growth was again good, with solid volume growth and flat yields giving 11% growth for the quarter. Having tweaked our spend at the half year, physical utilization is starting to normalize, which is encouraging and reflects how easily we can pull the levers to correct our fleet to size.
Most importantly, as you can see on page 15, we continue to grow very profitably. Margins continue to set record highs, and we anticipate further progress. The year-to-date drop-through of 74% is a testament to the benefits of being selective in the business we take and a stable and efficient business model. Recognizing that there is still a quarter to go this year, we still felt it was appropriate to share our first thoughts on the group's fleet spend for 2016/17. On page 16, we show how our capital spend has evolved over time. As you can see, not surprisingly, our spend is cyclical, and therefore, levels of replacement CapEx are influenced by this. We're about to lap a very different spend cycle. We have recently been replacing our peak spend years of 2006, 2007, and 2008. As a consequence, replacement spend and disposals have been historically high.
We are, however, now entering a period where we will be replacing 2009, 2010, and 2011 spends, which were obviously our lowest spend years. Therefore, even with no change in growth CapEx, total spend is due to fall over the next two or three years as we enter a very cash generative period. Let's turn to page 17 to see what all of this means. Here's a divisional split between replacement and growth, and as you can see, replacement is much reduced, with Sunbelt needing to spend between $175 million and $250 million, or around $300 million less than this year. For growth CapEx, let me explain the broad range for Sunbelt, i.e., $600 million to $900 million. We've seen a strong seasonal pickup in fleet on rent during January and February, and all of the indicators for the spring, summer season are positive.
We will spend at the upper end of our range guidance for Q4, and we have strong landings planned for Q1. Very much the same as last year. However, our Q3 and Q4 landings are very much determined by what we see 2017 and 2018 looking like. Currently, all of our indicators still point to a continuation of steady growth. We are, however, watchful of broader economic trends. Our range therefore simply reflects our modeling of two very different outlooks for 2017 and 2018. Our fleet spend is comprised of relatively small, short-term commitments, and this allows us to defer any decisions on second half spending until much later in the year. Simply put, we don't have to take a firm view on 2017-2018 yet, so we aren't. Whilst we will flex short-term spend to current market conditions, we are still committed to our long-term structural growth.
Once again, we'll be opening around 60 new locations by way of greenfield and bolt-ons, and potential greenfields are included in the capital guidance. Once again, we anticipate market leading growth in both divisions, both with the added benefit of significant cash generation as replacement CapEx reduces over the coming years. To summarize on page 18, it's been another good quarter where the relative strength of both our model and execution have been clearly demonstrated. Unsurprisingly, therefore, our strategy remains unchanged with the focus on same-store growth, greenfields, and bolt-ons. We continue to see opportunities in our markets and are planning double-digit growth in the Sunbelt, around twice the pace anticipated for the market as a whole.
However, we are also planning to be highly cash generative, providing the security of trending towards the lower end of our leverage range of one and a half to two times EBITDA. This is clearly a balanced approach, recognizing the need to remain watchful in current markets. It also demonstrates the flexibility inherent in our model. We have, over recent years, been consistent in our commitment to both low leverage and a young fleet age, and we are now benefiting from the options that this strategy has provided. Once again, we are demonstrating our ability to deliver sustainable, responsible growth. With that, I'll hand over to the operator for Q&A.
Thank you. Ladies and gentlemen, if you do wish to ask an audio question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Once again, please press zero one to register for a question. Our first question comes from the line of Chris Gallagher from JPMorgan. Please go ahead. Your line is open.
Good morning. A couple of questions. The first around your expectations for yield as you look at the fourth quarter and maybe into the next year. Also then just I guess the replacement CapEx will be lower, but we also be aging the fleet a little bit within that. Thank you very much.
Yeah. Thanks, Chris. Let me cover both those questions. I think again, the key is page 12. If we go back to page 12. For the fourth quarter, it is not going to look an awful lot different to what it has looked in the third quarter. We would expect, again, to have some progress within same stores, but we will continue to have the big drag on oil and gas. Mainly because, as I said in the script, we were at 104% dollar utilization a year ago, and we will still have those big headwinds going into the fourth quarter. Our expectation for next year is that yields will be broadly flat. Oil and gas will, as we go through the year, become less of a headwind, we will start to lap better comps.
I think in large swathes of our business and our geographies, we would expect a positive rate environment. Our yields are a tougher measure because it includes mix. I think the drag for us will be in mix because we are at the stage now where we are very much mid-cycle from a non-residential construction perspective. A bigger proportion of our work going into summer of this year and into next year is going to be very large projects and a lot of work with big national accounts. If I look at it from a product perspective, our small and mid-size products, I would still expect to see yield improvements. I would expect to see it being tougher with things like big aerial on great big projects where you are going to get big, long rental commitments. On balance, our expectation for next year would be around about flat.
Sorry, I can't remember the second question now. I've rambled on at the first.
Yeah.
The average fleet age, no. Given that we are actually lapping replacement CapEx is coming down because we're lapping previous low spend years, it shouldn't age the fleet. If we just stopped spending replacement CapEx and we're not lapping low spend years, we would be aging the fleet. No, the reduction in replacement CapEx should not make any material impact on the age of our fleet.
Okay. Thank you. Just to follow up on the first question.
Sure.
I think before you'd mentioned the oil and gas, the headwind was likely to be at some extent in the fourth quarter. Has that got sequentially worse then?
No, we were at our all-time peak in terms of volume and rate during Q3. As some of you were with us in February last year people were asking us about oil and gas, and we had just peaked from a volume of fleet on rent and peaked from a rate perspective, and we were thinking, how foolish are we? We were thinking, what's all the fuss about? Really, it started to come down from March. It was fairly gentle. Again, if you look at page 12, well, if you go back to previous analyses in earlier quarters, it was a very small reduction in yield in the first quarter. It's by the time you get the second, third, and fourth quarter that the yield started to come down quite significantly, and that's when we'll lap better quarters.
Thank you very much.
Our next question comes from the line of Rory McKenzie from UBS. Please go ahead with your question. Your line is open.
Yeah, morning. A couple for me, please. On page 13, the industry growth forecast has come down slightly, but your guidance does imply you're more cautious on making the same rate of share gains next year. Is that more caution on same store gains, or do you plan to hold back on new openings a bit more? Some color on whether share gains might reduce, please.
Yeah. Look, I think we're talking around the nuances there, Rory, about whether it's 5% or 6%. Share gains in same stores, I wouldn't expect to be materially different, in all honesty. I do think we have, as I said earlier, it gets tougher as you get mid-cycle because the question is: How much of that big aerial contract work do we want to take for those larger projects? We will be lapping ever tougher comps. In terms of greenfields and bolt-ons, we will open exactly the same number. We will be opening a similar number of stores to what we have opened this year. We are very committed to that long-term structural opportunity to get up towards 900 stores.
A fact of life is that the percentage gain that is every year reduces if it's the same quantum of new fleet in greenfields and bolt-ons. It's largely down to the fact that the quantum of greenfields and bolt-ons is the same, and we're lapping tougher comps.
Okay. That's good. Thanks. Just on that point then, what were the trends you saw within the course of growth in small to mid-size key accounts and cash? I know you gave the split at the H1 results, but anything you can point out there?
Again, I've got to be honest with you. Remember the quarter finished at about 10:30 U.K. time last night, and what we haven't done yet is break it down by customer. I wouldn't have expected it to be significantly different. I do think we are quite clearly in very mid-cycle from a non-residential construction perspective, so there are significantly more larger multiple-year projects have either just started or are about to start this spring, and that does have a mixed effect. I think you'll see it more as we run through next year rather than you'll have seen it in the last quarter because even though the weather has been mild over the winter, people often don't schedule to start these larger projects until the spring because when they first schedule them, they can't guarantee that it's going to have been mild this winter.
Okay, great. Just lastly, on the yields, with that same-store yield growth of 1%, I know the mix is changing a lot, but can you talk to any regional differences within areas of your map which are darker green? Are you finding it easier to get wage increases through in rates and that kind of stuff than.
Yeah
in other areas, or?
It's not necessarily so much around where we are dark green or light green, but it depends on what is happening in that state's economy or has indeed happening. Where are we getting the best rate increases? California, Florida, areas up the Atlantic coast. Where is it going to be tough? Texas. We haven't got much in the Dakotas, but I'm pretty sure if we did have much in the Dakotas, again, it's less than 1% of our business, but I guess it's going to be tough in Canada, too. I think you are going to see product variations and regional variations. I think when you compare our results with some of our peers, that relative focus, both from a geographic and a sector perspective, does come through in our relative performance.
Yeah, definitely. Thanks very much, Geoff.
Our next question comes from the line of Steve Woolf from Numis Securities. Please go ahead. Sir, your line is open.
Morning, all. Just two from my side. Firstly, just your thoughts on acquisitions next year with a slightly lower CapEx guidance and prudence. Secondly, just to go back to Canada there, just your thoughts on where you are, number of stores, and the potential for greenfield openings via acquisitions next year.
Yeah. Sure. In terms of acquisitions, look, we remain committed to use the corny phrase, turning the map green and getting to our optimum number of locations around 900. We see the benefit in greenfields and bolt-ons. I think as I said at the half year, we have a bit of a dilemma at the moment around bolt-ons. Whilst we've got a reasonable pipeline, and as you can see, we did a few tiny ones in the quarter. If you're a small or mid-size rental company right now, life's never been much better than this, and your outlook for the next two to three years looks fantastic. I know there was a bunch of hedge funds trying to find out alternative news in both ARA and the Ritchie Bros.
sales in February, the message they all came around with is the small to mid-size guys feel absolutely great about life, and that was very much the feedback for the show. As a consequence, their expectations have risen as our rating has fallen because they don't understand what all the fuss is about, quite frankly. We are struggling in some respects at the moment in terms of relative expectations in terms of price versus what we trade at ourselves. Now, that won't stop us doing some, at the end of the day, I'm not convinced there's an awful lot of buyers out there, and that realization will come through. We've just hit a bit of a problem at the moment in terms of relative ratings, we remain committed to doing it.
One of the areas, to your second question, where we would like to continue growing is Canada. Look, we recognize the challenges that Canada is likely to have as an economy, given its dependence on oil and gas and commodities generally. We have a tiny market share there. If you look at the quarter, we have double the amount of fleet on rent we had one year ago. It's two times nothing, is nothing. I accept that point. We still have opportunities. We opened greenfields, and we did a couple of bolt-on acquisitions over the last six months in Canada, and we'll continue to do so because we have such a small market share. Frankly, it's one of the areas where things are attractive from a price perspective, given the relative exchange rate between the U.S. and Canada.
You will see us gently growing in Canada. Had there not been a degree of concern around exactly where does the Canadian economy plateau, you would have probably seen us do a little bit more. Like we are doing with all of our planning at the moment, we're being cautious and trying to ensure we grow responsibly. Our commitment to it being a significant proportion of our business over time is undimmed.
Perfect. That's great. Thank you.
Thank you. Our next question comes from the line of Josh Puddle from Berenberg. Please go ahead. Your line is open.
Yeah. Hi, good morning.
Hi, Josh.
My first question, are you seeing anything on the ground over the last few months that makes you more conservative on the medium-term outlook, say, than when we were at the beginning of December?
No, absolutely nothing. This is the dilemma we have had in putting together the range for next year. If I look at our seasonal uptick, and as you can see, our relative yield performance in same store, then it's been a really good quarter. If we look on the ground in terms of project starting, life looks good. When we're taking a slightly more cautious view, our profit center managers and sales force think we're nuts. Brendan keeps telling me if I just switched off the TV and switched off the radio, I would be more optimistic. However, you can't ignore general economic sentiment. If you look at our growth CapEx there on page 17, we have a range which says we'd spend slightly more in growth CapEx than we've done this year.
If the market continues to be as strong as we currently see it, down to a more cautious view that says, frankly, some of this economic concern also ultimately potentially just becomes self-fulfilling. Goodness. Look, I'm sitting thinking about my CapEx right now, not because of anything I'm seeing on the ground, just because of broader economic concerns. I'm guessing I'm not the only CEO in the world that's doing that. As a consequence, sometimes you end up getting what you talked about. As a consequence, that's the lower end of our growth CapEx. If I look at our February, as I said, I haven't seen the final numbers. Year-over-year growth is going to be around about 19%-20% now. Suzanne was born on the leap day in February, so we know we've had an extra day this February.
If you strip that out, it's probably 17% growth. That's hardly terrible growth given the strong growth we've had in preceding years. If I look sequentially, our yields always fall a little bit during the winter, but they have not fallen as much as they have done in the last two years. You're on the ground of February performance says, hey, that's how you end up with a growth CapEx number, which is greater than the number we had last year. We don't have to make a decision on our second half expenditure right now, and it just seems sensible to us that if we, let's put it into perspective. If we still grow 10%, we can generate a significant amount of cash and grow at the lower end of our leverage.
Now, for those who want to say it's the end of the world as we know it, I am sure that range says, well, there we go. It is the end of the world as we know it. That's not what we are seeing on the ground.
Okay. That's great. Then one follow-up, if I can. Are you able to give a bit more clarity on how your fleet growth into next year will change depending on whether you spend the low end versus the top end of that range?
Yeah. If we're at the lower end, you're going to see significantly less big aerial and telehandlers. We will go to our small and midsize through the cycle products and our end of cycle products. The area where you would see the biggest cutback is really big aerial. That's the area where there is still a pile of demand, let's be absolutely clear, but it's the area where it's likely to be the most competitive on these big projects.
Okay. Thanks a lot.
Our next question comes from the line of Andy Murphy from Bank of America Merrill Lynch. Please go ahead. Sir, your line is open.
Morning, Geoff. Morning, Suzanne.
Hi, Andy.
Morning.
Two questions for me. Could you just talk a little bit about new equipment pricing? I completely buy into your arguments for perhaps sort of standing back and sort of taking a view on sort of second half CapEx because you don't necessarily have to make that decision now. I'm just wondering what you're seeing in terms of new equipment pricing now and whether you think that might ease further as the year unfolds. Secondly, just on yield growth on one of your slides, you've got greenfield and bolt-on growth that's slowed down to 1% and 8% in the Q3. I wonder whether there's anything to read into that or whether that's just some seasonal factors.
I know, two very good questions. Look, we will be paying less for our equipment in the coming year than we did last year. That is for sure. I would rather not go into details because I suspect we may have, given the scale of our spending, a competitive advantage, and I would hate to lose that and embarrass the supply base. We are seeing good reductions in the original cost of the equipment. If you remember, when we would go back all the way to the beginning of the last upturn. The last downturn, sorry, we said we deliberately didn't overdo the pricing thing in one year because we knew that pricing through the cycle and service level was more important.
Similarly, we have put together programs with most of our major suppliers, which should give us sensible cost plans for the next two, three years, not to just one. I expect us to be going into a period of fleet cost deflation. We would rather give up some of the sexier deals in year one to get a steady improvement in cost over a two to three year period. Now, again, some of that comes down to us. Again, during the good times, you get a bit carried away and you overspec some of the products. Some of it is to re-spec the product to a more sensible rate. If you think it in the context of our dollar utilization, we would expect the original cost proportion of that to improve over the next two or three years, with a good reduction in year one.
In terms of the greenfields, be careful. It's like such a small population, it depends how you lap them. The key is to look at the relative dollar utilization, which has remained flat. The one thing I would say going forward, which I think is a good observation, Andy, is that, of course, the greenfields have a mix of fleet initially, which looks like all of our competitors. If it becomes tougher in that product space, then that will have a small impact. No, we've still been seeing very good progression in our greenfields and our bolt-ons.
Thanks. Can I just go back just to follow up on the new equipment pricing. Is any of the declines in pricing at all to do with lower commodities, or is it more to do with your position with your suppliers that you can sort of negotiate better rates?
Well, I suspect it's a combination of a lot of things. I think it is undoubtedly their input prices have been reduced. I think some of them are based outside the U.S., and therefore there is an exchange rate component to the opportunity. Thirdly, there's a practical consideration, which is the rest of the world sucks, therefore, they are very keen to get a bigger share of our wallet. Fourthly, if you look at the announcements, even at the lower end of our range, we're probably going to spend more on fleet this year than anybody else in the world. There is a whole host of factors together made us right from the start, fairly optimistic that you would anticipate a good pricing environment.
Great. Thanks, Geoff.
Thank you. Our next question comes from the line of Justin Jordan from Jefferies. Please go ahead. Your line is open.
Thank you. Good morning, everyone. Just staying on the theme of CapEx, and I guess slide 17. To be blunt, you've got a blooming cash problem in the sense that you're potentially being sort of very cash generative.
2009, people said we had a cash problem. A cash opportunity, perhaps, Justin.
All right. Okay. Maybe I'm being glib. On my numbers, you're generating potentially GBP 300 million-GBP 400 million free cash flow in fiscal 2017. You've talked in the statement about 1.5x to 2x net debt EBITDA. On my numbers, you'd probably be through the low end of that and some, frankly, by April 2017. What is the board thinking on, I don't know, enhanced ordinary dividends, special dividends, buybacks, or do you want to just carry on de-levering? What's the thinking at the moment on that?
It is a good question. Suzanne, when she did page eight, said, "This is a slide you've seen many times before." What she didn't say was subtly, there was a tweak to what is always said, which is you put a one and a half times floor in there, whereas before we've always said below two times. Our view on capital allocation remains unchanged, which is, we still think we've got good growth opportunities ahead. Our priorities for cash will be same store growth, then greenfields and bolt-ons. We've always said we would pay a progressive dividend, which would be sustainable all the way through the cycle. Again, we will continue to do that, and we'll make an announcement on our final dividend, as we always do, at the fourth quarter.
I see no point in deleveraging significantly below one and a half times. If you look at the strength of our EBITDA margins and that very strong asset underpin we have, which again is there on page eight, we will not continue to delever indefinitely. Which will beg a question at a point in time, which is: what do we do with all the money? It's a discussion which we have had many times as a management team and indeed as a board. Our current stance is a bit like The Capital, which is, hey, let's get there first. Given the uncertainty, our view is, let's fund our CapEx. It may be a bit more than we've currently got planned. It may be a bit less, who knows? It'll be somewhere in that range.
Let's see exactly where we get to from a leverage perspective. When we get to the lower end, and we may not wait till we're all the way to the bottom, but as we get towards the lower end, let's take an assessment of what the world looks like then. But what you're right in identifying is we are going to be very, very cash generative over coming years, and that's going to provide us with a lot of options for capital allocation.
Thank you.
The next question comes from the line of David Phillips from Redburn Partners. Please go ahead. Your line is open.
Hi. Good morning, everyone. Can I just ask, when you enter the next financial year, so 1st of May, what do you envisage in terms of fleet on rent year-on-year growth that you'll be standing at that point and position?
God, it's disgraceful. You want me to give one number for.
Percentage. My numbers is high teens anyway.
It will certainly be mid-to-high teens. Precisely, I don't know. Q3 was a really tough comp. Remember, the prior year, we grew 29%. I kind of tried to guide you with the February number. Q4 growth will be better than Q3. You have the dynamics of we are always lapping ever tougher comps, B, we think the market's strong. Certainly, as I said in my script, our Q4 landings and our Q1 landings will look almost exactly the same as they did last year. Please be clear. Our conservatism in giving the range on our CapEx reflects the optionality we have for what we think 2017 and 2018 might look like. It is no reflection of how we see calendar 2016 panning out. You're going to be there or thereabout, David.
Give or take 1% or 2%.
Yeah.
This year, I probably expected our numbers to be 1% or so better in Q3. Why were they not? Because it was warm and I got no heating revenue whatsoever.
Yeah.
Last year it was cold. There are nuances which make a difference of 1% or 2%.
Yeah
Do not change the overall direction of travel, which will be around where you said.
Yeah. Just taking that a stage further, the sort of soft guidance for 10%-11% volume growth next year, given the Q1 landings you just referred to, actually feels like quite a conservative place.
Well, again, we've given a range because we've basically modeled the doomsday scenario that we have to slam on the brakes in Q3, Q4, versus we do what we normally do. The honest answer is it's probably somewhere between the two. We just don't know right now. As Brendan says, I switched off the TV and switched off the radio and just looked at our stats. You may well be right. Because we are ordering equipment on short lead times in small increments, let's take that decision somewhere in Q2 when we need to take it.
You have the flexibility to do that and take the decision later, why wouldn't? That's the more conservative approach to take.
Yeah. Understood. Just a final one from me. On Texas as your biggest state and the sort of bellwether of what's going on oil-wise. Can you-
Not the biggest state any longer. I think Florida is again.
Is it?
Yeah.
What trends have you seen in Texas over the last three or four months, please?
Say.
Yeah. I don't think that much would change our greenfield strategy. I think our view would be that all the way through the cycle, given we believe in the structural opportunities of turning them up green, why would we not keep opening greenfields? What we might do during the downturn, which I think will provide us with a big opportunity, is rather than buy new fleet for those greenfields, we might transfer newer fleet from other locations and stock the greenfields with that fleet. I would say, we might drop to 50 or something, but I would've said you should anticipate the store openings to continue through the cycle.
In terms of our same-store growth, we would look at our physical utilization, we would look at our yield evolution, and externally, you know our view on starts, which served us very well in all through the cycle planning last time around. Look, we will look at physical utilization more than anything else. From a macro perspective, we would continue to look at starts and general GDP growth. Remember, half of our business now is not construction. If I look at things like the entertainment sector, accommodation, festivals, sporting events, there are more people have jobs in the U.S. than even one month ago. With oil prices, they've got more money in their pocket. That part of our business is very, very strong.
If you look at, say, physical utilization on earthmoving equipment today versus where that was a year ago, because presumably if we're digging holes today, we're going to be finishing off buildings a couple of years from now. Do you track it in that much detail to make your CapEx planning?
No. Look, when we do our fleet planning, we do it by individual asset, not even individual categories. There will be times where we will see a particular asset category with very high physical utilization, or we'll see it with very low physical utilization. We also see trends in the product people like. We are constantly rebalancing our fleet, and we do that almost on a week-to-week basis. For example, our physical utilization in the quarter was flat. If you look at the detail we've given you on page 12, bearing in mind how low oil and gas was, bearing in mind that our heating utilization, our general tool physical utilization was up. We look at individual categories within that, it was very strong too, and hence our strong Q4 landings. Are we going to be buying any heaters anytime soon?
No, but we'll open some more locations in Canada, and it's colder in Canada than America, and we'll ship them up to Canada for next year. Yes, our fleet planning takes place almost every week, and it is down to individual asset numbers. The mix will change depending on the demand we see.
Thank you.
Thank you. Our next question comes from the line of Andrew Wilson from Morgan Stanley. Please go ahead. Your line is open.
Hi, good morning, guys. Can you just talk about the fact that you've said it's mid-cycle in non-residential and the fact that you're going to be doing more national accounts. Does this mean that you'll be competing more directly with United Rentals? Also, what would you, in terms of the percentage of sales that you would take national accounts to, does it imply that you'd increase that?
Yes. Look, there's no getting away from the fact that the wheelhouse of both United and Herc is big aerial, big projects. There's no getting away. That was true in the last cycle, it will be true in this cycle, and it will be true the cycle thereafter. We don't have the chart in this presentation, but you've seen it in others, where our national account business has been growing. Look, I think it will tweak up a little bit. I think that's just a function of where we are in the cycle. If you look through the cycle, I think we talked about this quite a lot at the half year. Our commitment remains to those small and mid-sized contractors. It's just the fact that the benefit of our small and mid-sized contractors in our non-construction work is it is slower, steadier growth.
There is an inevitability that the proportions of the work will vary at different stages in the cycle. Yeah, it is likely to tweak up a little bit mid-cycle. Then it will tweak back down again. It's not a permanent shift in terms of our strategy as a business. It's just the natural consequence of where we are in the cycle.
Okay. Just one other one, too. If I look at your multiple of industry growth, if you look in this quarter, it's about 1.7 times, if you look on slide 10. If you look at the same quarter in 2015, it's about 2.5 times. Is this a reflection of increased competition in the industry?
I think we're forever lapping tougher comps. I don't think we've ever said we were going to continue to grow at two or three times the pace of the market, particularly, as I said, at the stage in the cycle where the type of work is better suited to some of our peers. Look, we think the rental industry will grow 5% or 6%, give or take, next year. We think we will grow at around about just less than double than that, which we think is a sensible growth ambition, particularly when you marry it with our deleveraging and cash generation.
Okay, that's great. Thanks.
Our next question comes from the line of George Gregory from Exane BNP Paribas. Please go ahead. Your line is open.
Morning, Geoff, Suzanne.
Hi, George.
Just one from me. Geoff, you mentioned that conditions for small and mid-size rental companies are still pretty good. I guess the concern is that the small and mid-size rental companies are still able and willing to add capacity to the market, thereby having a sort of a detrimental impact on returns, notwithstanding good volume conditions. What are your thoughts on that dynamic? Clearly that is the counter to the argument of conditions still being good for your smaller peers.
Yeah, no, I think that's probably a fair point. I think, as I said, undoubtedly, there was good purchasing activity at ARA. It was largely from the small and mid-size guys and ourself. As you know, one or two of our larger peers have significantly cut their CapEx. I think you've got to get it into perspective in terms of how much do we really think the industry fleet is going to grow. I'm not sure it's as much as the market is growing still. Remember, our small and mid-size peers have not kept as up-to-date in their replacement expenditure as we have, and therefore they have a significant degree of replacement expenditure. I think that's the first thing.
Having said that, it would be naïve to say that there isn't going to be a bit more fleet around and there isn't going to be a bit more competition. Remember again, the chart we showed at the half year. The share of the pie that those small guys now have has reduced significantly relative to previous cycles. I think given their scale and their offering and the level of sophistication of people like ourselves, United, and Herc, there is an awful lot of the business which I really don't think they can go after any longer. Around the very, very small contractors, then I would expect there to be a bit more competition, but not as much as the overall improvement in the market. We certainly expect our returns to improve again next year.
We have had specific headwinds of the quantity of greenfields in oil and gas, which has kept our EBITDA margins down to around 47%. We fully expect them to start heading back to 50 again. Look, of course it will be a factor, but I don't think it's such a big factor that it really is going to cause significant problems. Yes, look, this stage in the cycle, there's no question about it, everybody starts spending more, probably with the exception of our customers. I think the counter to all of that would be, this is probably the stage in the cycle where typically our customers would start to spend more again, normally on replacement initially as they caught up with their very old fleet dates.
Look, in the same way as I'm contemplating capital spend right now, what's the likelihood of any of our customers now deciding to spend a lot on fleet given the general uncertainty in the market? Certainly, that's what we're seeing now is there is no appetite from our customer base to spend on fleet. That's been translated through into the demand to our supply base. Yeah, I think it'll be a bit of a factor, George. I accept that point fully, but I'm not sure it's a huge one.
Thanks very much.
Our next question comes from the line of Carl Green from Credit Suisse. Please go ahead. Your line is open.
Thank you very much. Just one question from me. Just going back to the enactment of the extension and clarification around bonus depreciation. Can you give a clearer picture of how you expect that to drive your cash tax rate over the next couple of years, please?
Sure. Prior to the enactment of bonus depreciation, we were guiding toward a cash tax rate
For 2016 of sort of low to mid-teens, we now expect that to be around 4%, that will enhance our free cash flow for this year. For fiscal 2017, again, we would expect the cash tax rate to be low teens again, maybe 11%, 12%. We still get the benefit of bonus because that's been enacted for a number of years now. We also, because of our level of profitability in the states, are steadily using up some of our net operating loss carryforward. Still overall positive to the cash picture relative to the last time we spoke to you.
That's really helpful. Can I just clarify on that? What's the outstanding balance of NOLs at the moment? Can you indicate that?
Yeah. As I recollect, it's about $400 million, $450 million in the U.S. as a shield, I will check that and come back to you, Carl.
That's great. Thank you very much.
Yep.
Once again, if you do have a question, please press zero one on your telephone keypad now. We have a question from Rajesh Kumar from HSBC. Please go ahead. Your line is open.
Good morning. Earlier you referred to the point that you think you are in the mid-cycle part of the cycle. What are you seeing in your business that suggests that you are in mid-cycle and not late or the early phase of growth is tapering down? That would be quite helpful to understand.
Yeah. I think why do we think we're mid-cycle is really partly our ability to put significantly more fleet on rent at reasonable yields. We look at the activity levels on the ground. We look at all of the key indicators around residential starts, non-residential starts, all of which are forecasting two to three years of continued but moderating growth. I think there is a very broad range of both internal and external factors which would support the view that we have two or three years of growth in terms of the activity ahead of us. Look, I personally think all of our internal indicators and all the external indicators point to that.
Thank you.
Our next question comes from the line of Hector Forsythe from Stifel. Please go ahead. Your line is open.
Hi. Good morning, everyone. On National Accounts. Flicking through what you've been saying is that you clearly have an opportunity to grow market share. You give the impression that you will pick and choose how you go forward. The inference that you offer is a slight contrast to your competitors, who give the impression of a bit more of a cautious market. Can you just annotate how you think you've got a competitive advantage, how you can pick your way through that? Is it price or how is it that you're gaining or having the opportunity to win some of these accounts?
Yeah. First and foremost, look, I think we all know that we have one competitor whose performance I said earlier, we see no immediate concerns on the horizon around the market. That would be with the exception of one of our competitors' results announcements, which is usually one of our darker days. The reality is some of our larger competitors have very different exposures to ours. We do not have significant exposure to Canada. We do not have significant exposure to oil and gas. I have no doubt that in the markets in which we jointly operate, and I think they've said that they're seeing good growth. If I look at the market overall, the market still last year would have grown around about 7%. That's a very good market.
I think as we said many times in the past, we think we have a broader product and customer range than many of our larger peers, and we have scale advantage over those who have similar product and customer range. I think we found ourselves through recent years in a very unique space in terms of scale and product offering. We would expect that to continue. Look, the two structural trends that we've talked about many times, I think are only enhanced by the uncertainty we see right now. Rental penetration will undoubtedly continue to increase, and the scale advantages we have through both spend capacity but also sophistication around IT, et cetera, are only getting greater.
Because the consequence of increased rental penetration is that our customers are becoming more demanding of us and therefore, look, one day, I've said many times, I wish we'd had a bigger oil and gas exposure. It's dumb luck that we don't have the exposure that some of our peers have got. We want to get big in Canada one day, there will come a point in time when Canada is a great market at the moment. The specific issues one or two of our peers have happened to be just an unfortunate consequence of their current focus. We believe in our model, Hector. We believe in small to mid-size contractors and a very broad product offering. We have the added advantage that
We are not fully developed in terms of our footprint. Some of our growth is coming because we're expanding our footprint. If I had a fully mature depot footprint, I wouldn't have that opportunity available to us. I've got multiple years ahead of being able to roll out that strategy. Look, I don't think that necessarily our view of different parts of the market is very different. Just we do have slightly different exposures currently.
Just as a final on that. Are you finding that you're winning a proportionate share when you're going toe-to-toe with United Rentals or Herc?
I have no idea. How could I know? My general view would be not. If you look at our growth in our national account business, who did national account business, so I think that's probably true. Generally speaking, say when we open up a greenfield, I think we take it from a broad range of customers. The problem is, if you're sitting there right now and you do not have Sunbelt in your locality as a competitor, then that's the best environment you're ever going to have. We are going to keep opening greenfields, and we will be there one day, and we will probably take a little bit of share from just about everybody. That is a headwind some of our competitors face that we do not face. We aren't specifically targeted.
United and Hertz are very good, sophisticated businesses with great IT, great product offering, and very good people. If you're going to rent from me, rent from United or Hertz, because the level of quality and service you will get from all of the big players is so materially different than you get from the small local guys. I think people have to recognize and have failed to recognize just how different their geographical and sector exposure is, and that more than anything else. I'm sure in the same markets with the same products, we're performing not that dissimilarly.
Geoff, thanks ever so much.
Our next question comes from the line of Martin Miller from OBP. Please go ahead. Your line is open.
Yeah. Hi. I have a question on page 12 of the presentation, the yield overview. I don't really understand how in the third quarter, 99% of your business you had positive net yield development, but in the total that you're giving here, it's a slight negative of -1%. Maybe an explanation to that and a bit of a yield outlook would be useful. Thanks.
I am glad you asked that question because I asked the very same question, I just thought I was being stupid. I got Suzanne opposite with me, back in the office I have Michael Pratt, who have shown me various mathematical calculations how this works. The point is, when you're looking at year-on-year movement, you have to remember that oil and gas was not 1% of our business one year ago, it was 6%. What you've got is 6% of our business has halved its dollar utilization as a year-on-year effect. The mathematicians in our business have convinced me that maths makes sense, I asked exactly the same question when I first saw the slide. I'm sure if you contact Suzanne and Mike, they will take you through the same mathematical calculation that they showed me, which proves that it works.
Okay.
If you'd like to go through that later on or tomorrow, you can feel free to call us.
You've made me feel a whole lot better because they looked at me as if I was stupid when I asked the question.
No. That's all right. In terms of yield outlook, you said earlier you would expect fairly flat for the overall business.
Yes, that's correct.
Mm-hmm. Thanks.
Our next question comes from the line of Joe O'Dea from Vertical Research Partners. Please go ahead. Your line is open.
Hi. Good morning.
Hi.
Related to that last question and on the flattish outlook for yield. I think Geoff, in the past you've commented that there's the Tier 4 inflation cost as you find small and mid-sized competitors buying a little bit more. They should feel that more as they go through the replacement cycle. Just with the flattish outlook on yield, any degree to which you can talk to the components of that a little bit more. Obviously, there's some mix effect. Just why we may not see a little bit stronger rate as you anniversary the tough oil comps and as you get some more of the Tier 4 inflation lift.
Yeah. No, I think it's a fair question. If you were to look at some of the dynamics that are going on in pricing, what we'll see is I think we will have regions where we get very good rate improvement, and we will have product groups where we get very good rate improvement. I think as you rightly say, from a product mix and a geographical mix, there's going to be a lot of moving parts where it's going to be hard to differentiate how much is the economic impact in that geography and how much is down to Tier 4. There is no doubt that we have the highest proportion of Tier 4 assets in our fleet. As people add Tier 4, they will have to push a rate. It's also why, as I said, rental penetration will continue to improve.
Here people are debating whether we're at the mid-cycle or whether we're indicating the end of the cycle, and we're at 58% dollar utilization, where last time we were at 65%. If you look at the gap between the cost of rental and the cost of ownership now, it's really wide. It's far wider than it ought to be at this stage in the cycle. I expect that gap to close, and I think that will be a component. There's no getting away from the fact that there are going to be certain job types, certain sectors, as we talked about, like big aerial and certain geographies like Texas, which will be a little bit tougher. I don't know that we're absolutely precise in coming together with flat yield.
It may be a little bit better than that, it seems a reasonable proposition as we sit here right now.
Okay. Thank you.
I think we've got time for one more question. If that's okay, operator. I'm sorry to have to cut you short, there's been quite a few.
Okay. There are no further questions in the queue. As a last reminder, if you do have a question, please press zero one on your telephone keypad now.
In that case, operator, if there's no more questions, I'd like to thank everybody for their attention, and we will look forward to catching up with you individually or at our Q4 results presentation. Thanks a lot.
This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.