Earnings Call: Q2 2016

Dec 9, 2015

Good morning, and welcome once again to the Astrid Group Half Year Results. We're looking forward to going through our current performance and sharing with you the trends we are seeing both in the broader market and, of course, within the business itself. And the presentation is going to be the usual format with a financial review from Sussan and an operational update from me, then followed by Q and A. So let's start with a brief overview. Luc Sison is going to cover the financial details in a moment. However, by any financial measure, it's clearly been another strong quarter, which has played out as we anticipated. With the obvious exception of energy, the markets we serve are strong as both structural and cyclical trends remain favorable. And for our part, we've executed our plans well and have once again outperformed the market. Our strong operational and financial metrics, together with positive economic indicators, particularly around nonresidential construction, support our view that there's significant upside available over the medium term. Our focus remains responsible growth with the emphasis on organic fleet investments. We've also once again delivered on our twin financial commitments around leverage and drop through. And it's been encouraging to see our margin growth with the potential for further progression ahead, but it's also really reassuring to see that our leverage has remained within our guidelines given the significant levels investment that we've made. Oops, sorry about that. As a result of this strong performance, we have tweaked up both our profit expectations for the year and our fleet spend. So we are now expecting to spend around GBP 1,100,000,000 on fleet this year. I'm also pleased to be able to announce this morning that the interim dividend has been increased to GBP 4 per share, in line with our practice and recent policy. So with that, I'll hand over to Suzanne to go through the financials in a little more detail. Thanks, Jeff, and good morning to everyone. The 2nd quarter results for the group are shown on Slide 4. And as Jeff mentioned, the positive year over year trends have continued with underlying pre tax profit for the quarter of 182,000,000 pounds compared to £145,000,000 last year. This represented an increase of 18 percent growth with rental revenue increasing by 17%. Jeff will comment later on about the key drivers of our revenue performance and our view of the end markets in the U. S. And the U. K. The 2nd quarter results also benefited from operational efficiencies, which helped to deliver an improvement in EBITDA margins from 46% to 48%. On the next slide, we've shown the group's results for the half year. At constant rates of exchange, rental revenue was 18% higher than the same period last year. Our underlying pre tax profit grew by £77,000,000 to £343,000,000 an increase of 21%. EBITDA margin in the half improved to 47% and that reflected higher revenues, operational efficiencies and a continued focus on drop through across the group. Turning to Slide 6, we'll look at the numbers on a divisional basis. The key driver of another strong half at Sunbelt was the 21% growth in total rental revenue as we benefited from strong cyclical and structural trends in the end market. It was also a period of major investment for us opening 38 new greenfield locations in the half. This together with weaker energy markets did create a bit of a drag on margins. And therefore, it was good to see the strong operational efficiency in our mature locations, which once again allowed us to deliver a 49% EBITDA margin. Jeff's going to cover the drop through in more detail in a few minutes, but our performance clearly puts us in a strong position for further progress as we go forward. On Slide 7, we've outlined A Plant's half year results and we continue to be encouraged with this progress. Rental revenue in the half grew by 7 percent and with a focus on cost discipline drop through of 70%, both of these helped to contribute to an improved EBITDA margin of 39%. Now on the next slide, we've provided some color on our CapEx guidance. Based on our first half performance and the strength of the U. S. On the slide, you can see the usual On the slide, you can see the usual split between Sunbelt and A Plant with Sunbelt being shown in U. S. Dollars. Removing the currency effect just makes the most sense and gives really the best picture of what's happening on the ground. At Sunbelt, we now expect to invest between $1,300,000,000 $1,400,000,000 on rental fleet this year. The expenditure will be largely directed toward fleet growth rather than replacement given the very young age of our fleet in the States. At A Plant, we'll spend at the lower end of the previously indicated range in order to address the reduced physical utilization that you will have seen mentioned in the earnings release. The changes in these numbers reflect our disciplined approach to investment in fleet. The increased spend in the U. S. Is supported by strong physical utilization, EBITDA margin and return on investment, whereas weaker utilization in the U. K. Has led us to moderate our plans there. This also demonstrates, I hope, the flexibility of our CapEx plans and the ease with which we can adjust it. And as always, we'll continue to review this as we go through the remainder of the year and we'll make any adjustments that we feel are necessary. On Slide group's free cash outflow for the year was £200,000,000 reflecting strong cash generation, but also the investment in the rental fleet. Payments for CapEx net of disposal proceeds were £652,000,000 and in addition we invested on a cash basis £29,000,000 in small bolt on acquisitions and we returned £61,000,000 to shareholders in the form of dividends. By the end of the financial year, we do expect the cash usage to moderate just reflecting the seasonal nature of the business. On Slide 10, we've outlined our debt and our leverage position. While on an absolute basis debt levels have increased as we invested in the fleet, our leverage continued to decline because of the high margins that we generated. At October 31, our leverage has been reduced to 1.9 times in line with our stated guidance of below 2 times. In addition to considering leverage, which is a more traditional way of thinking about debt, it's also important to remember that this debt is supported by a tangible highly liquid asset on the other side of the balance sheet. Over the years, our investment has principally been in rental fleet rather than goodwill or intangibles. And our fleet today the youngest and highest quality it's ever been. You can see this most clearly in the chart on the bottom right. The green bar represents the value of our fleet at its original cost. The orange bar represents the secondhand value of the fleet. We refer to that as OLV, orderly liquidation value and that is measured by Rouss appraisal. The black bar represents our net debt. The key takeaway from this chart is that gap that exists between the secondhand value of our fleet and our debt. The GAAP is now £1,000,000,000 and 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. Together with our flexible debt structure and low leverage, it provides an important and a flexible underpin to our longer term strategy. That concludes my comments and I'll hand over to Jeff. Thanks, Susan. So let's look at what's driving these excellent results, starting with Sunbelt. Well, the same store growth remains very consistent, up 13% year on year despite the ever tougher comps. I think this demonstrates both the strength of our markets and our ability to grow market share. Bolt ons and greenfield growth is 8%, a reflection of the timing and scale of activity levels in the first half. We said we'd focus on greenfields this half, and we've done that with 38 strategy, and we anticipate further activity in the as a strategy, and we anticipate further activity in the second half. You can see here from the chart on Page 13 that we've had strong fleet on rent growth, high levels of physical utilization and yield was once again flat. We've put a further $675,000,000 of fleet on rent in the half. But to put that into context, year on year, that's the equivalent of creating a new top 10 player in the industry in just 1 year. So we clearly have momentum as we continue to leverage our scale. However, to fully understand what's happening across all of our businesses, we'll move on to Page 14 here, where we break out same store greenfields bolt ons oil and gas to see how each is performing. And then we also show here both Q1 and Q2 to highlight the underlying trends as the years progressed. For the first time, we've included dollar utilization because I think that just helps with a broader understanding of what's happening, particularly around yields. So let's start with 9% of our business and our same stores. I think what's not to like. Look, in the 2nd quarter, fleet on rent growth was 13 percent. Yield improved to +2 percent. Physical utilization was a record 76% and drop through was a very healthy 64%. That's a lot of numbers. But in a nutshell, we've delivered very strong profitable growth in good markets. Now let's look at greenfields and bolt ons. Combined some 9% of our business, again, great progression in all of our metrics with strong fleet on rent and improvements in yields and utilization. But these are just normal trends as these newer locations mature in good environments. And finally, to everyone's favorite, oil and gas, now only 2% of our business. As expected, with ever tougher comps, it's not been a pretty quarter, you can see from this slide here. However, it's worth noting that it is still our highest dollar utilization business, which gives you some idea of just how bonkers it was a year ago. There's not much else to say here other than thank goodness it's only 2%. But we took corrective action in the Q1, and activity has been fairly consistent since then. We've got one more quarter where the comps get even tougher. But thereafter, it's going to become an irrelevant, both in terms of its absolute size and its year on year trends. So to summarize, 98% of our business continues to be very strong, as evidenced by a range of improving metrics. And as we hope we're about to demonstrate, we expect it to remain strong for the foreseeable future. But with the uncertainty around oil and gas behind us, it's time to get back to basics and focus on what's driving our performance. Look, rental penetration continues to be a very positive trend for the industry as our customers have become accustomed to the flexibility of an outsourced model. Between 20 1015, increased rental penetration effectively grew our end markets by 20% to 25%. Look, I see this trend continuing, which will provide similar levels of market growth over the coming years. We believe that our model is a differentiator and explains in part our performance relative to some of our peers. We remain committed to a very broad product offering in segments with low rental penetration and high returns. Look, averages are really misleading in this space. If you've got a fleet of large booms in increased rental penetration. It's as high as it's likely to ever get. However, if you have a broader mix of fleet, then there is significant further upside to come from rental penetration. This is a capital intensive industry where size does consolidation. Again, if you look at how the industry has evolved over the last 5 years, the proportion of the market enjoyed by the larger players has increased by 33%. Again, we've clearly been a major beneficiary of this. And whilst there's always going to be strong local players, I can see the market enjoyed by the larger players growing by a further 20% to 25% in the medium And a bit like rental penetration, I think our model once again just sets us apart. These small players tend to deal with the small to midsized local contractors rather than the larger national accounts. So again, our model has allowed us to be a disproportionate beneficiary. 70% of our business is to small and midsized contractors, and we remain very transactional in nature. 72% of our business is delivered within 24 hours of order. So in many respects, we are just a large local player. In recent years, we have seen significant growth in our Care Cairns business. Look, as we grow our footprint and our service offering, that is a trend that's likely to continue. However, at our core, we remain very focused at that transactional midsized contractor where we that the market is going to grow, but we remain confident that our share of this growing market will also increase. We've got a good track record of success. We've doubled our market share in the last 5 years. As you'd expect, there's a close correlation between share and fleet size. Our current fleet spend relative to the market is much greater than our share. And therefore, these spend levels, just maths that our share increases over time. And while most of today is about the future, I would also just point to what happened in 2 1,000 and 82,009, where we clearly corrected fleet spend faster and harder than the rest of the market. I find it reassuring that we have a model that's very flexible and has proven itself to be able to correct very quickly when the market requires us to do so. But we're very conscious that part of our model is both knowing when to spend and when not to spend. As you can see from the maps on Page 20, we've been successful in our very simple plan, make the map green, both in terms of increasing share in areas where we have a presence and opening up new geographies, we've had really good We've added 187 locations by way of great greenfields and bolt ons since this program began. And as we said earlier, in the first half of this year, we opened 38 greenfields and we expect to add around 60 for the full year. What is pleasing is that we've continued to balance general tool and specialties locations as we look further diversify our business. However, there's just a lot more potential available, as you can see from the commentary on the right. Only looking at the top 100 markets in the U. S, we require a further 2 50 locations to complete our cluster model. So as with rental penetration, there's an awful lot more to go. Of course, it's one thing the key is, are you doing it profitably and responsibly? Well, here is a slide we showed for the first time with the Q1 results. Our new locations unsurprisingly don't give us the returns that our more mature locations do. And if you're going to add 60 greenfields in a year, initially that is going to be a drag on some metrics. However, as you can see from the charts on Page therefore, there is the potential for further margin progression. All of this investment is being made whilst we continue to deliver good margins and deliver. So yes, we do have an aggressive long term investment plan. But no, it's not at the expense of current returns. Of course, even with all these great structural growth opportunities, you've got to continue to validate whether where we are in the cycle and whether it's appropriate to be spending this type of money. But across a wide range of construction sectors, we are seeing steady growth, which is forecast to continue for multiple years. What's particularly encouraging is the strong starts data. But we have a late cycle business with a 12 to 18 month lag between starts and any meaningful impact on our space. And all of this certainly correlates with our experiences on the ground, where conditions are very robust across all of our regions and the constraint that I IC is the availability of key skills, which will probably moderate and lengthen the cycle. So let's wrap all this by trying to get a sense of perspective to these cyclical and structural drivers and how they play out. So what we've got here on this slide is construction starts in value and volume mapped against Sunbelt's revenue, and we're looking at it all through the cycle. Remember, construction is now just 45% of our business. But clearly, there's a correlation, although not as much as they used to be. What the chart confirms is that, as we said, we are a late cycle business, but also that the structural changes and our diversification have been the biggest driver of our growth in recent years and are likely to continue to be so. We are now a very different business in terms of market sector, geography and financial strength. But it's widely forecast that we have multiple years of steady growth left in construction. But let's not forget, this is an economy that's still adding over 200,000 jobs per month. Our structural opportunities also continue to play out, so we are confident that the market remains supportive of our fleet investment plans. As always, however, we will continue to invest responsibly, and we are able now to utilize relatively short manufacturing lead times, which will help us to manage that growth. So turning to Air Plant and again look at good performance with good revenue growth and importantly good profit growth. Rental revenue growth was a very respectable 8% for the quarter, split 7% volume and a 1% improvement in yields. Look, in fairness, we did bring in fleet this spring, anticipating a better market environment, as you can see from the physical utilization chart on the top right. At the end of Q1, we felt it was just a timing issue. Utilization has improved over the Q2, but not quite as quickly as we would have liked. But we still think it's mainly about timing and the outlook for spring 2016 seems better. So this is not a major to the bottom of the range that we previously indicated. Importantly, however, our growth has been very profitable with the drop through in the first half being 70%. As you know, we've consistently focused on this metric, both in the UK and in the U. S, so it's good to see such progress even in slightly more difficult markets. The reason will continue to be lots of growth available in this market, but we will remain selective to ensure continued margin discipline. Overall, I expect the UK market to continue to improve at a gentle pace for the foreseeable future. Look, there has been a degree of over supply this year and a little overreaction by some. However, I believe that this will correct itself over the winter, and I expect further progress in the second half of the year. But our model remains a really simple one. We supply a high quality fleet that we own, we maintain and we understand it. And it's from this well proven basic model that we can guarantee service, which will allow us to continue to gain share profitably. So to summarize, it's been another very good quarter and half where we have benefited from our diversified markets and taken significant market share. But we believe that both the structural and cyclical trends in our market are very supportive of a prolonged period of further growth. We now have much greater sector and geographical diversification. And as we have seen, the major growth drivers remain structural, not cyclical. Therefore, whilst there will be times when we face headwinds, such as we've just seen in energy markets or a weather event like the spring, these are relatively minor bumps in the road and do not change the overall direction of travel. Look, no business as broad as ours will have universally positive metrics across all of the sectors. But what's required when one individual sector turns negative is perspective in terms of its scale. The operational and financial structure of this group has been transformed in recent years, which has given us a wonderful platform for further growth. We feel that we've got the balance about right in terms of investments in our long term strategic opportunities whilst keeping our financial discipline and delivering high returns. Group ROI of 19% and EBITDA leverage of 1.9 times given the investment we have made is testament to that. So having enjoyed that moment of self congratulations, we'll go back to the real world and head on to Q and A. Look, if we can follow the usual protocols for those listening on the web with me, giving your name before the question. Good morning. Steve Ward from Numis. Just two for me. Just in terms of the increase in the U. S. CapEx, could you sort of outline where that reflects in terms of the extra sort of 10 greenfield that you've added since last guidance? And then also perhaps some regional trends across the U. S. As well where you're seeing the guys ask for desperately for more fleet? Yes. No, that's a good question, clearly. If there's an extra 10 greenfields, that's probably an extra $40,000,000 or $50,000,000 worth of fleet. So part of the upgrade is undoubtedly because of the faster greenfield openings. The rest of the fleet growth is pretty broadly based. I mean this is a very bottoms up exercise. We were all together in Kansas about 2, 3 weeks ago. And people are short of fleet. We are at 76 percent physical utilization. Key product categories were in the mid-80s right now. And so there is a big demand for fleet. But we're not immune to broader concerns about the markets, and so we try and taper things back. We don't have any region that isn't better than mid teens growth year on year. Now some of the regions that were top of the list in terms of year on year growth may have dropped to the middle of the pile. Some that were at the bottom of the pile have moved to the top of the pile. And that has happened over the last 10 years. Different states face slightly different dynamics, and some will get stronger and some will get weaker. But universally, everyone's fleet growth has been pretty significant. I know there's a lot of noise in the space about the secondary impact on oil percent, non res is up 9%, okay? There's a non percent, non res is up 9%, okay? In non buildings, there's a big decline. So there's always going to be swings around about it. And this is the point we're trying to get across. But there is we're gaining market share with these all of these store openings, but we're also broadening our exposure because as I hope you saw from that chart, which showed which mapped our revenue growth relative to construction starts, there's a lot more going on than just construction right now. So it's pretty broad based, Steve. But yes, of course, more greenfields does require more fleet. Justin Jordan, Jefferies. Three quick questions. Genuinely, it will be quick. If you go back to Slide 14, the yields in the same store is improving sequentially from 1% to 2%. I'm trying to understand what's kind of going on here. And is that one of the sort of real justifications for the increased CapEx? Yes. So one of the things, I can't remember 3. I'm getting old. Remember, this is I think I worked out this by 36 one of these. You'd think we'd be better at it by now, wouldn't you? Look, if you look at same stores, which is 89%, I wouldn't just pick out yield. I know people are saying, well, some of your peers are cutting CapEx. Oh, my goodness, why are you increasing it? Well, look at the metrics. There isn't a line on there which wouldn't tell you to increase your CapEx. Physical utilization is at record levels. Yield is improving. Then look at the drop through. So that same store growth is significantly improving our margins too. You then put that against the backdrop of 13% metrics were different, if our physical utilization was lower, if it was harder to get good price for that and we weren't converting it into improved margin and ROI, we would take a very different view. Physical utilization in the UK is a little bit lower. And therefore, we've tweaked down CapEx a little bit of. So it's a combination of a range of internal metrics and our reading of the external space, which drives our fleet investment decisions. Thank you. Okay. Number 2, highways. Last week, we saw $305,000,000,000 highways build up for 5 years. What does that mean for Sunbelt or the U. S. Rental industry? Yes. Look, as you said, a bill was passed last year last week, sorry, if not last year, last week, €305,000,000,000 5 year program. We've been rolling ahead. We've been ticking along with almost status quo expenditure on 2 year programs over recent years. So a 5 year commitment is positive. Anyone who's driven over a bridge or on a road in America knows that infrastructure expenditure is required. The core highway work is probably not our core space. There's lots of work around the edges on service stations, all of the bridges, etcetera, which are more for us. But it's good for the sector generally. A lot's being made of a perceived oversupply in the industry, which is just kind of wrong because people have been looking at maths thinking all fleet is the same and can be applied to all jobs. There's been a massive oversupply of big caterpillar excavation and compaction equipment, which is no, that equipment will be taken up by that highways bill. We don't have an awful lot of that. But the construction around the edges so net net net for the rental space is very, very good, and it will take pressure off other areas too. So I see it as being very positive. I think one of the important trends has been over the last 12 months is generally state and federal aid and fed finances, as the economy is gently improving, have become better. And there's clearly a long term investment opportunity in U. S. Infrastructure. We're seeing a number of public private right? That a greater proportion of the heavy lifting is going to be done by states rather than the Fed. And you've seen 3 or 4 states have actually increased their gas tax in order to provide revenue for further investments in road work. So I think the overall long term investment in infrastructure in North America is going to become a very positive play over the next 2 to 3 years. Remember, the headwind from sequestration over the last 3 years has been a much more significant headwind to us than oil and gas ever was. And so as that turns positive, it will become a bigger positive. Okay. Thank you. Sorry, apologies for the question. I'm not a U. S. Tax accountant, but even I can read there's something called bonus depreciation that's going on, Section 179 stuff. I think it's 1 for Santo. Yes. Well, okay. So if I'm correct in what seems to be happening or potentially happening later this week, your cash tax could be coming down. I'm currently modeling I think it's €130,000,000 in cash tax in fiscal 2016. If you get bonus depreciation extended, what could that mean for Sunbelt? I'm sorry, Ashlag Group, I suppose. No, you're exactly right. I mean, it's something that we're watching with a great deal of interest as is everyone else in the rental industry and anyone who's in a capital intensive business. We've seen these Section 179 bonus depreciation rules passed usually at the last minute and there's quite a bit of discussion about maybe potentially touching wood as something maybe getting passed over the course of the next week. Right now, we are planning and modeling and as you indicate, Justin, about a 20% cash tax rate. That's the guidance that we've given all year. If this bonus depreciation is enacted, that would significantly reduce that that amount. Hi, Josh Puddle from Berenberg. Two questions, please. Can you give us an update on your end market exposure now in the U. S? And then secondly, you commented in the UK a better outlook for spring 2016. Can you give a bit more detail around that? Sure. Let me sort of turn to a slide here. It's a slide we shared with you a couple of times. I'd like to point out, I wouldn't get bogged down in degrees of precision with this. We've got over 400,000 customers who do a wide range of work and knowing precisely what they're working on at any point in time is not easy. So but if you look at it, we've been tracking this since 2,007. So you can see how our business in 2,007 so this is Page 32 for anybody listening in 85% of our business was general tool 15 with specialty. Now it's 75%, 25%. But then even within general tool, there's been a shift. So we're down to around about 45% is construction, 55% is not. But what's the non construction work? Well, pump, it's restoration and remediation, it's facilities management. And if you remember that slide I showed, which shows like your construction starts in volume terms today are below what they were in 2,003 in square footage terms. Our revenue was 6x bigger than it was in 2,003. And the reason is shift to rental and the broader diversity of our business. So it's hard to be precise, Josh, to be perfectly honest. Our small contractors won't fill a form in every time they rent a piece of equipment saying, hey, this is what I'm working on today. But our trend, as you saw from the relative openings and most of our M and A, is to continue to focus on Look, we will always be cyclical with construction. It would be ridiculous to say that we're not. And we like the construction market, but there are so many other opportunities built. There's a bunch of you there in Miami. You saw it. You saw it in the climate control business that we showed you. You showed it in the Facilities Management. Remember, we went to that first location where almost every contract on the board was to a conference event or a food fair. So that whole entertainment and exhibition space is very, very important for us. So we believe that as we get this footprint, base. Now these are products like we're doing, for example, floor cleaning and facilities management. Look, rental penetration in our product group is like 1% or 2%. We have no aspirations for it to get much more than 10% or 15%. If we can put that sort of product through our offering, we provide a real great access to market to some top line manufacturers. And that broadening of our product offering is very, very important. And we often go on about this slide here where we I don't know what I've done there. Can anybody help me get this back up? We very often go on about how our as our locations mature, the returns on investments improve. That's as much about the product thank you as much about the product offering broadening as it is quantum and offering scale. So a core part of our business remains both geographical and sector diversification. It goes back to it's all linked together. If you go back to that rental penetration site, like how many more telehandlers and big booms do you really want when they're over 80% physically utilized? Now the problem is when you open greenfields, they're the easiest products to put in. So what you'll have seen over the last 2 years is our percentage of those products has crept up a percentage or 2. If you look at our fleet spend over the next 12 to 18 months, it will have crept down 2% or 3%. And so but fundamentally, what we want is more of those air conditioning units, mini excavators, skid steer loaders, generators. They're all the products that we're pushing increasingly through off footprint. Sorry. In terms of U. K, yes, look, A Plant's utilization problem is an awe making. We had about as good a January, February, March as it was possible to have, and we got all super excited. In fact, I hold my hand up. I was probably the person in the business who got the most excited and felt this looks like America have more fleet. It all kind of died a bit of a death around the election, particularly around certain sectors like transmission, solar, wind, etcetera, and it slowed down. The issue really wasn't the end market. That was just a delaying tactic. There was a number of businesses like us who overinvested in the spring. So there's been an oversupply through the course of this summer, which has caused some tensions on pricing, and I think some people have done some seriously dumb things. We're seeing all of that coming back slowly. You could see that our physical utilization ticked up gently through the quarter. Remember, look, what have we done? We've taken our guidance down by about £15,000,000 to you It's really a matter of timing. It's a matter of timing. It's a matter of timing. It's a matter of timing. It's a matter of timing. It's a matter of when you bring it in. It's a matter of timing. And so I believe if we look at particularly around transmissions, a lot of the transmissions works are done by a series of joint ventures. They all sort of got the standard, and they need to get put together again. The work is there. If you look at AMP 6 in terms of the utility program, it always happens. At the end of 1 AMP before the next program, all the work gets done in the it's a 5 year program, and all the work gets done in the last 3 years, not the first 2 years, because it just takes a while for it all to ramp up. And we're in that low at the moment. So when we look at what's due to come, it doesn't look a bad place spring 2016. I'm worried about pricing and some of the behavior in the space, but that will work its way through, too. So we're going to pass the microphone around or are we going to stand the people putting people their hands up in the air? Good morning. It's Joe O'Dea of Vertical Research. First, could you talk about new equipment pricing in the U. S. As you see some expected demand declines, particularly in aerials and what you're seeing there and sort of the balance between pricing? You certainly wouldn't expect to pay more in the coming year. Okay. I'd rather not go an awful lot more into that. But again, I think it's an important point to consider because people do track our dollar utilization. Our dollar utilization is probably at a cyclical low point right now, in my opinion, or certainly for the foreseeable future. 80% because we've been buying so much new, 80% of the fleet that needs to be Tier 4 is now Tier 4, which is significantly higher than the industry generally. So we've got Tier 4 cost in our cost base, and we haven't yet got Tier 4 full rate in our rates, which I expect to come back. I do we have significant inflation, not so much this year, but in the preceding 2 or 3 years. That's going to moderate significantly over the next 2 or 3 years. And as rates improves, that will drive up dollar utilization. So there's going to be a bit of catch up, but I think we paid a bit too much for 2 or 3 years where we're going to get it back over the next 2 or 3 years. That's helpful. And then just structurally, when you talk about penetration gains and further gains and you think about the segments of your small, midsized contractors versus large national accounts, could you talk about just your kind of medium term outlook for where the greatest penetration opportunities are? And do you see that continuing even as we get to this point in the cycle? Yes, I do. I mean, as I think we've said, we believe that in specialty products and at the lighter end of equipment, as our service offering improves and as our presence improves, we drive increased rental penetration. There is a saying in Sunbelt around that small tool, which I agree with, which is build it and they will come. And there's an element of truth in that. For these specialty products and these small tools, people have to get used to the fact that it's available as a rental option. In these rental is a very viable alternative to ownership on a broad range of products. The whole reason rental penetration was initially behind the rest of the world in North America is there wasn't the service and the presence for people to rely on rental overall. You had to get to a critical mass where it was a viable alternative to ownership. And with a lot of these smaller products, people have just started to realize that actually, I can rent it from Sunbelt, and it makes all the sense in the world. And they've got to get used to the confidence in time. There were in the past too many big boom in big aerial facilities. So if you wanted big booms in big aerial, rental penetration increased because everybody knew you could get that stuff when you wanted it, where you wanted it. It's taking us it is taking us time to show the market that there is an alternative with a much broader offering. And that's where we're very excited. We think as our presence has grown, we have established that understanding. And you can see it when you look at greenfield openings. We used to talk about 2 to 3 years to get the breakeven point in the greenfield. It's now six months. Why? Because after 6 months, 80% of the customers are people who trade with us somewhere else. So it's not like this unknown quantity is with an unknown product offering is landing in town. It's very well understood what Sundal stands for from a service perspective and from a product perspective. And so there is a natural momentum to all of this. So as always, we've got as high as we ever want to get with telehandlers and big booms being the proportion of the fleet that we are. It's been a necessity as we've gone into new geographies because it's the easy product to get started with. But then we need to broaden our product offering too. Mark Alstom from HSBC. A couple of questions, if I may. First, just on look at that Slide 22. You look at the returns on investment, acquisitions versus greenfields. I mean, actually, year 1, 2 and 3, the acquisitions outperform Greenfields. I'm just trying to sort of go through in your mind why you've cut down the acquisitions so much in this this half? What's the rationale looking at that? Is it in year 4, 5 or 6, the greenfields are better? By years 3, 4 or 5, there's not much in it is the truth of the matter. Look, if you look at that if you look at those if you look at Page 22, if all you wanted to do was get big slaps on the back for improving your metrics, you would just do same store growth, but you wouldn't get that much bigger, and you wouldn't be diversifying your business. If again, you were just doing it on the back of metrics, you would say, don't do any greenfields, just do bolt ons. Of course, that presumes there's a good quality bolt on opportunity in the zip code where you want to open. And so it's a case it's as much a case of, well, what's available and what is the best route. And so as you know, we have a plan based on zip code. We did say in Q3 results last year and the full year results, we did but you can see we did an awful lot of bolt ons last year. We needed to settle those down. And what we ended up with all the bolt ons was good coverage, but there was obvious gaps. And those gaps were best filled by rifle shots with greenfields to fill it all out. So this has been a very think the rental market is not doing great because 1 or 2 of our peers have got some very specific problems. All the people we're tapping on the shoulders are having the best performance they've ever, ever had and think it's going to be great forever. So what was an easier conversation 2 years ago is a slightly tougher conversation today. Now we have people who we're in discussion with. We're not going to just do bolt ons to keep the +8% or greenfield and bolt on line bigger than it was the quarter before. We will do bolt ons or greenfields as they make sense. Now the place where most likely you will see bolt ons remains specialty businesses. So yes, greenfields are a short term drag, but we end up exactly where we want to be with people who know our IT systems and a brand new fleet. And we aren't inheriting the service and pricing history of a bolt on. So you've got to be careful. And that is are you trying to drive short term metrics or are you trying to build a long term business? So going forward, there will always be a combination. I don't know when bolt ons are going to I can predict greenfields because I know I've got leases signed. I can't predict bolt ons. You will continue to see a sensible mix of the 2. So if we sort of see sort of onethree bolt ons, twothree greenfields That would be great math, but would have no basis in fact. It will be what it will be. Just add on. Okay. Just finally for me, just a minute that every year is a head running. I mean, this time last year, it was all about oil and gas, obviously, from here on in. So over the last quarter, we've seen companies in the U. S. Sort of warm with regards to your manufacturers exporting to China, etcetera. That's obviously part of your non construction sort of exposure. Can you just tell us what your exposure is? Well, it's mainly construction. Let me try and find the right slide here. I'm glad you asked that question because I put in a brand new slide especially for this question. So you're right. There's always been a hair running about something. And about a year ago, everybody discovered ROUSS. And everyone started doing correlations with ROUSS, even though most of them didn't have a clue what the ROUSS information was telling them. But nonetheless, there was a correlation in there somewhere. The new thing everybody seems to have found, even though, as I said, it's been 30 audit presentations, I've included the DODGE data in every single one of them. Everyone's discovered DODGE in the last 6 months. And I've started quoting DODGE. Most stupidly, the quarterly one starts, which is the most erratic data in the world. So what we've got here is the Dodge data, all of it through the cycle, okay? And a bit everybody's got agitated about is this manufacturing buildings number minus 28% this year. And they're right. It has gone back 28%. There are pressures for those who are exporting because of exchanges. But you need to put it into perspective. Look, a year ago, it was plus 88%, and it's only 3 years ago, it was minus 25% again. The problem with Star Stata, especially Dodge, particularly when you're talking things like because the next thing I want to the next one is going to be energy and utilities and LNG plants. So I'm predicting this time next year, we're going to be talking about LNG plants, which are forecast to be minus 43,000,000, okay? But you need to put it into context. It's going to be minus 43 after plus 159. Dodge Star's data take all of the value of the project the day they break ground. Now that work might go on for the next 3, 4 or 5 years at a steady pace. But if you get like in last year's data, there was a Tesla plant, I think it was a BMW, there was a handful of really huge projects. You were always going to get a decline. If you look at next year, I think in square footage, they're forecasting 5% growth in manufacturing. So yes, it's a headwind. Have we seen have we felt some of it? Yes, we have felt some of it. And the same reason we felt some of it with oil and gas. So it's all very well, everybody doing all these correlations on manufacturing indices. We go to the very top with minus 25% in manufacturing, the overall construction starts are plus 13%. So be careful if you're going to start using Dodge, especially if you use the short course. The start is very lumpy. It's the point I was trying to make in the presentation. Look, you can't find a single year where there isn't something to get agitated about in one of those lines. But look at the total. You have to put it into context, okay? And remember, starts is very lumpy, and we've probably got a good 2 years after starts. So despite all of the concerns about that report there, which is the September report, is forecasting 6% growth in construction starts next year. This report came out last week, which was an executive forward somebody from Deutsche, which is very good, which forecast 12% next year and 8% the year after, okay? So but there will be sectors which will be lumpy, And that's all we're seeing, Bob. So yes, of course. Look, do I think there will be some secondary impact in Texas? Yes. Do I expect that there will be some downturn in manufacturing? Yes. Do I expect Automotive is great because everybody's got more money in their pocket? Yes. Are more people going on holiday? Is hotels great? Yes. So there's going to be swings and roundabouts. You need a broad geography and a broad sector, and you need perspective when you pick out individual segments. It's George Gregory from Exane. Jeff, just maybe playing devil's advocate on that. George, not you, surely. I mean, I think the historic data tells us a lot. But I'm just wondering, if we look back to 2,006, 2,007, to what extent could we have relied on what McGraw Hill were telling us for 7, 8, 9, 10, because I think that's clearly a risk of us relying on forecast. And as we analysts know, we probably wouldn't want to do that too much. Yes. Look, I look, construction starts started going backwards in 2,006. They really started to fall in 2,007. But in fairness, Dodge did predict it. And the reason why I know this, I joined in October 2006, and we just bought Nations Rent. The very next week, a Dodge report came out saying construction starts were going backwards. I was thrilled. We just spent $1,000,000,000 on an acquisition, and everything was going backwards. Once, and they were spot on. We tried to convince everybody, including ourselves, that they weren't right, but they were absolutely spot on. If you look at our yields and our physical utilization, they started going back slightly in spring 2000 and So I think a combination of external factors and internal factors do help you pick that. And that's why, whilst this chart sorry, this chart was really made to say where we're going in terms of market share. If you look here, we were gaining market share sorry, for those listening, it is Page 19. We were gaining market share all the way from 2,003 to 2,000 and 7. We just bought Nations Rent in 2006. Like I said, I joined October 6. By 2007, we said the party is over. We could harder and faster than everybody else. I believe you do get sufficient notice. And I think given the lead times on which we're buying equipment, will we get it perfectly right? Of course not. But we're releasing expenditure on such slow lead times. The actual absolute scale of the potential downturn is that our fleet is 2 or 3 months younger than we actually would choose for it to be. So yes, look, it's why we made a comment. We need to know when to spend and when not to spend. And a combination of those external factors and our indices, we measure how long it takes from a new piece of equipment landing to when we get it out on rent. And if that starts limiting, that's a real worry. We look at the rate we get for new bits of equipment relative to all of the other equipment. If that gap isn't there, that's worrying too. So we've got a host of internal and external trends that we look at. So my personal view is that the if you look at that starts data, you had plus 10s, plus 11s, plus 12s, plus 13s. If you look at work completed, it's been about plus 6, plus 7. So there's enough people are behind on projects. There isn't enough skills around to do the projects that have been done. Completions haven't kept pace with starts. So there is a pent up demand, in my opinion, for 2 to 3 years on the work that's being released. Now if there's no more starts, then that will start to place a driver in America. Go and have a look. There is lots of construction around. Are there potential tailwinds in the economy? Of course. But I keep going back to this. Look, there has been massive unemployment in oil and gas. And net, this economy is adding 200 1,000 jobs a month. That's not so shabby. Just one more, if I may. There was a strong improvement in the EBITDA drop through, certainly on a same store basis at Sunbelt. If I recall back to Q1, there was an uptick in OpEx on the back of IT investment, which you said would carry through the duration of this year and would dilute that drop through. Did anything change that No, it's a bit of timing. You're right. What you should do is probably pick an average between the 2. We've always said about 60. And what we had was look, in individual quarters, you will have small step changes and then it will even itself out. So again, people need to be careful on months or quarters that you're going to get some distortion. We ought to average in the low-60s on an ongoing basis. It's not going to stay 64%. So if it goes to 60% next quarter, it's not the end of the world. It doesn't mean it's going to 50. It's just likely to go to 62 the quarter after. It will average out around 60. I've got the mic, so I'll go. It's Rory from UBS. Just one question actually. On the structural share gain within that same store growth of 6%, can you talk about the current difference between areas in the map which are green and areas which are white or yellow and how that actually spreads across the market? Yes. No, that's a really good that is a good question. So I guess the question is, is the green growing at the market pace and is the light in yellow being so good that it's dragging up the average? And the as you would expect, the growth in the well, it's not so much whether it's light green or yellow, is there is a small difference between the pace of growth in greenfields and bolt ons and more mature stores, a well, you can see it's the same store volume growth is 13%. So most of those are in our mature areas with high so that 13% in mature stores is pretty steady across the country. We've clearly got more growth in greenfields and bovine. And that's one of the keys with greenfields start terrible as a drag on our metrics. Look, they help us enormously in our year on year growth in year 2. Because if we stick $5,000,000 into a greenfield for round numbers in year 1 as a greenfield, in year 2, we're typically adding about the same again. So if you think about it, for next year's capital expenditure, about $300,000,000 of it will be follow on investments to the greenfields we opened last year. So in terms of growth and margin improvement, it is a gift that giving for the next 2 or 3 years. You have to soak up the initial impact on your metrics. So if you look at that dollar utilization, I mean, it's a lot lower than the 59% that we're getting in our same stores. Hell, it's still lower than we're getting in oil and gas, but that won't be the case in the quarter probably. It's unfair. And we were getting over 100 percent dollar utilization in oil and gas. It's why you got this silly blip in some of the Ralf's values. Look, you would pay anything for a bit of secondhand equipment of the rights piece just to get it out of the 100% dollar utilization. That has come off, but we're now back on a normal trend. We will certainly by the end of the next quarter, we'll be back on a normal trend line. So you know Chris Gallagher, JPMorgan. Just a quick question on REIT in the U. S. And how you've seen that trend and what your outlook is and how you expect? Yes. Look, we're going into winter, and I hate predicting into winter. You said look, we had a great Q remember last year, we did 29% growth in the Q3. We had oil and gas going crazy, and we had the perfect start to the winter, I. E. It was really cold and really dry. This started November, December, it's been really warm and really wet, which is not absolutely ideal, but it will be fine. It will sort itself. We then had a horrible Q4 where it was wet and warm. It will even itself out over the course of the half, but you can get anomalies of individual months during the course of the winter. I fully expect we missed a spring pop this year. Activity levels really pick up in May June. Everybody goes on big sites, and you almost create a summer price in the spring. It's hard once you've got bits of equipment on that site for the summer to keep banging the prices up. You can on the stuff that goes back and forward, but some stuff just sits there for the summer. That spring pop didn't happen because everybody was panicking about oil and gas and the weather was awful. So we just if you look at our rate progression, nothing happened in the spring and usually we get a pop in the spring. Since the spring, it's kind of got better as the half's gone on. Look, there's lots of demand. People are being responsible in their fleet growth. Those with lower physical utilization are quitting their CapEx. Those with higher utilization are increasing their CapEx. I would fully anticipate that to be a normal spring pop this April. There is no reason why that shouldn't be the case. All of the metrics point to that. We had an aberration last spring. Look, you're going to get those in times. It's not always going to be linear. But yes, we're very confident that these levels of utilization and this strong demand, there's no reason why we won't get rate improvements in the spring. I think it's going to be tough over the winter. Look, we have peers who are scrapping for their existence and doing some dumb things. You know who they are. I don't need to mention them. And they're doing some dark things. We'll ride it out and we'll be selective on what we do. Again, it'll sort itself out with a spring popeye. We're looking at the spring thinking it should all sort itself out. We're going to have to ride out some irrational behavior while people get behind the promises of an aggressive IPO. Sorry, Steve. Hi, good morning. David Phillips from Redburn. 76% utilization in your same stores. If you go back a few years ago, you'd have probably said that was over trading when you wouldn't have it. So you still think that's over trading. Yes. Look, it is. Look, because what you got to remember, 76% is an average. We showed you the chart. In fact, we've got a little bit more granular than we have done in the past. 49 percent of our business gets delivered the day they ask for it. You can't do that if you haven't got it. It's a very obvious balancing act between physical utilization and getting high rates and availability. We if we go back to the chart we had, we have stuck right at the back of the appendices because I didn't want to talk about oil and gas too much unless somebody forced me to do so. Look at these 6 products, which are the key products that were in oil and gas. I'm at 80% physical utilization on those products today. And they're the ones most affected by oil and gas. And quite frankly, if I stripped out light towers, I'd probably be at 85. We have high demand. Now we are not letting people buy too many big booms in heavy handlers if it can possibly help it because we're trying to reduce it as a proportion of our fleet. So that's why the fleet investment has gone up because that's a very high level of physical utilization. Because we will have products at 20% or 30% physical utilization within that within that 76%. That's the key. You've got to remember, it's a much bigger range than people realize. The question was more with all the innovations you've done regarding Internet and tracking and GPS, have you managed to eke out an extra percent, percent? We have. And that's one of the reasons you'll see that. Now there's a what we call net utilization. So I really don't want to get into gross net utilization because we'll be here all day. But if we look at the speed of pick then it has effectively given us 1% more fleet to rent, which obviously helps us. Nonetheless, even having allowed for all of that, EUR 76,000,000, when you look at the range, there are product sectors where we need more fleet. But you're correct. We're going to have to get into a whole presentation on drills and their physical utilization to understand the various dynamics of that. Presumably, all the pricing algos are suggesting the price is up to rectify all that? We look we got by the end of October, we got to look like what we should have looked like in April. If we had got if we had our October metrics at the end of April, we would have not had the spring POP problem that we've got. Our problem is we got the spring POP metrics with winter to come. As long as we are where we were at the end of October from a metrics perspective at the end of April, that's why we're fairly comfortable, perspective at the end of April, that's why we're fairly comfortable everything will be fine. Thank you. It's Karl Green from Credit Suisse. A couple of questions. Just going to the supply situation, I think your comment earlier about some of the bolt on targets feeling a bit better about life and there's also some evidence that they're finding access to capital a little bit easier. I mean what's your sense as to the net supply situation across the industry more broadly? I mean forgetting the big competitors who are Look, you know, we do we think that it's about the same as it's always been. I don't buy into this oversupply in the industry. I've never bought into it. I think the reference points, which were the ROUSE auction data, was just wrong. It kind of worked on the premise that all fleet was interchangeable and used for every job. So I do not dispute. The Rouss Analytics is what everybody used. It's 20 7 cat dealers in United and Hertz. That's it. United are onethree of the data in there and a big chunk of the rest cat dealer. So what did it tell you? It told you that Caterpillar and United had utilization problems. Well, tell us something we don't know. It did not tell you what the whole of the industry was doing. You can't say there's an oversupply in frac tanks, therefore, light towers. They're not interchangeable products. There was very definite product sectors where there is oversupply. In the broader market, when we're looking at bolt on acquisitions, when we're looking at our old metrics, when we're looking at some of our other peers. I mean, gosh, look at H and E. H and E are probably as focused on oil and gas from a geographical perspective as any other business. They delivered 9% rental revenue growth. Their physical utilization was really good. We're looking at bolt on businesses. The overall industry is growing about 7%. What you've got is a bunch of people who are growing much more than that and a bunch of people growing less than that. So I don't buy into and I don't speak to many of our peers, with the notable exception of 1, who buy into that oversupply situation. We think it's about right. Now from a supply perspective, international demand has tailed off and therefore we're operating with very short lead times. That helps us in terms of reacting to short term demand and ensuring we don't over commit in terms of our capital expenditure. Okay. Thank you. And just a second question, unrelated, just in terms of that improvement in the yield between Q2 and Q1 in terms of same stores. Was there any notable mix away from the key accounts there? Anything worth pulling up? Was it I mean, mix of business is probably less important than mix on products. We did have a slightly better mix on products. Now remember, Q3 is going to be tough because of oil and gas. If you go back to whatever it was, where the slide it was, it's 14? 14. Look what happens. In Q1, our fleet on rent was plus 25% year on year. By Q2, it was minus 12%. By Q3, it will be minus 50%. Well, people forget what and in that time, we're going to be flat this year. Last year, it was growing like a train all the way through to December, January. So yield that's minus 12 percent is probably going to be minus 52%. I don't know that precisely. That might not be what it is for on an average. But from a peak to a trough, that's what it's going to be. So there is going to be more pressure because of that. Thereafter, it's going to be down to 1%, 1.5% of our business, and then we're going to be in steady state. So from both an absolute scale and a year on year comparator, it's going to be washed through. But it's going to get worse for 1 more quarter before it gets better. Again, many, many thanks for all of your time. And we look forward to seeing you at the full year.