Earnings Call: Q2 2016

Dec 9, 2015

Morning, welcome once again to the Ashtead 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. The presentations will be the usual format with a financial view from Suzanne and an operational update from me, then followed by Q&A. Let's start with a brief overview. Suzanne's 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. For our part, we've executed our plans well and have once again significantly outperformed the market. Our strong operational and financial metrics, together with positive economic indicators, particularly around non-residential 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 investment. We've also once again delivered on our twin financial commitments around leverage and drop-through. It's been encouraging to see our margin growth with the potential for further progression ahead. It's also really reassuring to see that our leverage has remained within our guidelines given the significant levels of 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. We are now expecting to spend around GBP 1.1 billion on fleet this year. I'm also pleased to be able to announce this morning that the interim dividend has been increased to GBP 0.04 per share in line with our practice and recent policy. With that, I'll hand over to Suzanne to go through the financials in a little more detail. Thanks, Jeff, good morning to everyone. The second quarter results for the group are shown on slide four, and as Jeff mentioned, the positive year-over-year trends have continued with underlying pretax profit for the quarter of GBP 182 million, compared to GBP 145 million last year. This represented an increase of 18% at constant rates of exchange. Consistent with recent quarters, our profitability was driven principally by top-line 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 second quarter results also benefited from operational efficiencies, which helped to deliver an improvement in EBITDA margins from 46%-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 pretax profit grew by GBP 77 million to GBP 343 million, 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 six, 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. 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. Geoff'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 seven, we've outlined A-Plant's half-year results, and we continue to be encouraged with its progress. Rental revenue in the half grew by 7%, 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. markets, we have raised our capital expenditure guidance to GBP 1.1 billion for the full year. 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 $1.3 billion and $1.4 billion on rental fleet this year. The expenditure will be largely directed towards 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. As always, we'll continue to review this as we go through the remainder of the year, and we will make any adjustments that we feel are necessary. On slide nine, we've outlined our cash flow profile in the first half, and as you can see, the group's free cash outflow for the year was GBP 200 million, reflecting strong cash generation, but also the investment in the rental fleet. Payments for CapEx net of disposal proceeds were GBP 652 million. In addition, we invested, on a cash basis, GBP 29 million in small bolt-on acquisitions, and we returned GBP 61 million 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 31st, our leverage had been reduced to 1.9 times, in line with our stated guidance of below two 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 is 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 Rouse 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 gap is now GBP 1 billion, 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 Geoff. Thanks, Suzanne. Let's look at what's driving these excellent results, starting with Sunbelt. 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 new locations. M&A activity was, as anticipated, much lighter than a year ago. However, we remain committed to bolt-ons 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 million of fleet-on-rent in the half. To put that into context, year-on-year, that is the equivalent of creating a new top 10 player in the industry in just one year. We clearly have momentum as we continue to leverage our scale. However, to fully understand what is happening across all of our businesses, we will move on to page 14 here, where we break out same store, greenfields, bolt-ons, oil and gas to see how each is performing. We also show here both Q1 and Q2 to highlight the underlying trends as the year has progressed. For the first time, we have included dollar utilization because I think that just helps with a broader understanding of what is happening, particularly around yield. Let us start with 89% of our business and our same stores. What is not to like? Look, in the second quarter, fleet-on-rent growth was 13%. Yield improved to +2%. Physical utilization was a record 76%, and drop-through was a very healthy 64%. Look, that is a lot of numbers, but in a nutshell, we have delivered very strong, profitable growth in good markets. Now let us 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. These are just the normal trends as these newer locations mature in good environments. Finally, to everyone's favorite, oil and gas. Now only 2% of our business. As expected, with ever tougher comps, it has not been a pretty quarter, as you can see from this slide here. However, it is 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 is not much else to say here other than thank goodness it is only 2%. Look, we took corrective action in the first quarter, and activity has been fairly consistent since then. We have got one more quarter where the comps get even tougher, but thereafter it is going to become an irrelevance, both in terms of its absolute size and its year-on-year trends. To summarize, 98% of our business continues to be very strong, as evidenced by a range of improving metrics. As we hope we are about to demonstrate, we expect it to remain strong for the foreseeable future. With the uncertainty around oil and gas now behind us, it is time to get back to basics and focus on what is 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 2010 and 2015, increased rental penetration effectively grew our end markets by 20%-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. Look, if you have got a fleet of large booms and telehandlers, you are not benefiting from increased rental penetration. It is as high as it is 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 matter. Scale brings cost benefits and sophistication in areas like IT. This ultimately leads to further consolidation. If you look at how the industry has evolved over the last five years, the proportion of the market enjoyed by the larger players has increased by 33%. We've clearly been a major beneficiary of this. 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%-25% in the medium term. 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 mid-size local contractors rather than the larger national accounts. Our model has allowed us to be a disproportionate beneficiary. 70% of our business is to small and mid-size contractors. We remain very transactional in nature. 72% of our business is delivered within 24 hours of order. In many respects, we are just a large local player. In recent years, we have seen significant growth in our key accounts business. 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 mid-sized contractor, where we believe there is so much further opportunity. We're confident that the market's 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 five 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. Therefore, at these spend levels, it's just maths that our share increases over time. While most of today is about the future, I would also just point to what happened in 2008 and 2009, 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. 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 success. We've added 187 locations by way of greenfields and bolt-ons since this program began. As we said earlier, in the first half of this year, we opened 38 greenfields. 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 to 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 250 locations to complete our cluster model. As with rental penetration, there's an awful lot more to go. Of course, it's one thing growing. The key is, are you doing it profitably and responsibly? 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. 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 22, there is a proven track record of quickly improving returns in both bolt-ons and greenfields, 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. Yes, we do have an aggressive long-term investment plan. 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 where we are in the cycle and whether it's appropriate to be spending this type of money. 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. We're a late-cycle business with a 12 to 18-month lag between starts and any meaningful impact on our space. 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 see is the availability of key skills, which will probably moderate and lengthen the cycle. Let's wrap all this up by trying to get a sense of perspective to these cyclical and structural drivers and how they play out. What we 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. Clearly, there's a correlation, although not as much as there used to be. What the chart confirms is, 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. It's widely forecast that we have multiple years of steady growth left in construction. 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, we are confident that the market remains supportive of our fleet investment plans. As always, however, we will continue to invest responsibly, we are able now to utilize relatively short manufacturing lead times, which will help us to manage that growth. Turning to aerials, again, with a 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. 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 second quarter, but not quite as quickly as we would have liked. We still think it's mainly about timing, and the outlook for spring 2016 seems better. This is not a major correction, but a small tweak. As a consequence, as Suzanne highlighted, we've reduced our anticipated fleet expenditure to the bottom of the range that we previously indicated. Importantly, however, our growth's 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 U.K. and in the U.S., it's good to see such progress even in slightly more difficult markets. There remains and 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 U.K. market to continue to improve at a gentle pace for the foreseeable future. There has been a degree of oversupply 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. Our model remains a really simple one. We supply a high-quality fleet that we own, we maintain, and we understand it. It's from this well-proven basic model that we can guarantee service, which will allow us to continue to gain share profitably. To summarize. It's been another very good quarter and half where we have benefited from our diversified markets and taken significant market share. 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. 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. 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 investment in our long-term strategic opportunities whilst keeping our financial discipline and delivering high returns. Look, group ROI of 19% and EBITDA leverage of 1.9 times, given the investment we have made, is testament to that. Having enjoyed that moment of self-congratulations, we'll go back to the real world and head on to Q&A. Look, if we can follow the usual protocols for those listening on the web with me of giving your name before the question. Morning. Steve Woolf from Numis. Two from me. 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 greenfields that you've added since last guidance? Perhaps some regional trends, across the U.S. as well, where you're seeing, the guys ask desperately for more fleet. Yeah, no, that's a good question. Clearly, if there's an extra 10 greenfields, that's probably an extra $40 or $50 million worth of fleet. 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 of exercise. We were all together in Kansas City about two, three weeks ago and people are short of fleet. We are at 76% physical utilization. Key product categories, we're in the mid-80s right now. There is a big demand for fleet. Look, we're not immune to broader concerns about the markets, we try and taper things back. We don't have any region that isn't better than mid-teens growth year-on-year. 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. That has happened over the last 10 years. Different states face slightly different dynamics, and some will get stronger and some will get weaker. 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 states from low energy prices. As yet, we haven't seen it. If you look at construction starts in Texas this year, residential's up 20%, non-res is up 9%. Okay? In non-buildings, there's a big decline. There's always going to be swings around about, and this is the point we're trying to get across. Look, we're gaining market share with all of these store openings, we're also broadening our exposure because, as I hope you saw from that chart, which mapped our revenue growth relative to construction starts, there's a lot more going on than just construction right now. It's pretty broad based, Steve. Yes, of course, more greenfields does require more fleet. Justin Jordan at Jefferies. Three quick questions. Genuinely 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? Yeah. One at a time, because I can't remember three. I'm getting old. Remember, I think I worked out this is my 36th one of these. You'd think we were better at it by now, wouldn't you? Look, if you look at same stores, which is 89%, I wouldn't just pick out yields. 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. Look at the drop-through. That same-store growth is significantly improving our margins too. You then put that against a backdrop of 13% construction starts in Dodge this year, forecast to be 12% next year. We are delivering great metrics in great markets. Why would you not? Now, if our 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 U.K. is a little bit lower, and therefore we've tweaked down CapEx a little bit accordingly. 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 two. Highways. Last week we saw a $305 billion highways bill- Yeah over five years. What does that mean for Sunbelt or the U.S. rental industry overall? Look, as you said, a bill was passed last year. Last week, sorry. Not last year, last week. A $305 billion, five-year program. We've been rolling ahead. We've been ticking along with almost status quo expenditure on two-year programs over recent years. A five-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 the bridges, et cetera, which are more for us, but it's good for the sector generally. A lot's been made of a perceived oversupply in the industry, which is just kind of wrong because people have been looking at math 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. That equipment will be taken up by that highways build. We don't have an awful lot of that. The construction around the edges. Net, net For the rental space, it's very good, and it will take pressure off other areas, too. 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 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 initiatives now in the States, which I think is very positive. Also with the highway bill, what's changed is that a greater proportion of the heavy lifting is going to be done by states rather than the Fed. You've seen three or four states have actually increased their gas tax in order to provide revenue for further investment in roadwork. I think the overall long-term investment in infrastructure in North America is going to become a very positive play over the next two to three years. Remember, the headwind from sequestration over the last three years has been a much more significant headwind to us than oil and gas ever was. As that turns positive, it will become a bigger positive. Okay. Thank you. Sorry. Apologies. Third question. I am not a U.S. tax accountant, but even I can read there is something called bonus depreciation that is going on, Section 179 stuff. I think it is one for Suzanne. If I am correct in what seems to be happening or potentially happening later this week, your cash taxes could be coming down. I am currently modeling, I think it is $130 million of cash tax for fiscal 2016. If you get bonus depreciation extended, what could that mean for Sunbelt? I am sorry, Ashtead Group, I suppose. You are exactly right. It is something that we are watching with a great deal of interest, as is everyone else in the rental industry and anyone who is in a capital-intensive business. We have seen these Section 179 bonus depreciation rules passed usually at the last minute, and there was quite a bit of discussion about maybe potentially touching wood at 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 is the guidance that we have given all year. If this bonus depreciation is enacted, that would significantly reduce that number. Let us see what gets enacted before we start quoting any numbers, but it would significantly reduce that amount. Hi, Josh Pottle from Berenberg. Two questions, please. Sure. Can you give us an update on your end market exposure now in the U.S.? Secondly, you commented in the U.K. a better outlook for spring 2016. Yeah. Can you give a bit more detail around that? Sure. Let me sort of turn to a slide here, because 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. If you look at it, we've been tracking this since 2007. You can see how our business in 2007, this is page 32 for anybody listening in, 85% of our business was general tool, 15 was specialty. Now it's 75/25. Even within general tool, there's been a shift. We're down to around about 45% is construction, 55's not. Well, what's the non-construction work? Well, it's entertainment space, it's power, it's pump, it's restoration and remediation, it's facilities management. If you remember that slide I showed, which shows construction starts in volume terms today are below what they were in 2003 in square footage terms. Our revenue was six times bigger than it was in 2003. The reason is shift to rental and the broader diversity of our business. 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." Our trend, as you saw from the relative openings, and most of our M&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. We like the construction market, but there are so many other opportunities available. Look, a bunch of you were there in Miami. You saw it. You saw it in the climate control business that we showed you. You saw 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. That whole entertainment and exhibition space is very important for us. We believe that as we get this footprint, what's an increasing part of our opportunity is to put a broader range of products through that cost base and through that bit. Now, these are products like we're doing, for example, floor cleaning and facilities management. Look, rental penetration in that product group is like 1% or 2%. We have no aspirations for it to get much more than 10%-15%, but if we can put that sort of product through our offering, we provide a real great access to market to some top-line manufacturers. That broadening of our product offering is very important. Now we often go on about this slide here where we. Oh, sorry. I don't know what I've done there. Can anybody help me get this back up? We very often go on about how as our locations mature, the returns on investment improve. That's as much about the product. Thank you. As much about the product offering broadening as it is quantum and offering scale. A core part of our business remains both geographical and sector diversification. It all linked together. If you go back to that rental penetration slide. How many more telehandlers and big booms do you really want when they're over 80% physically utilized? The problem is, when you open green fields, they're the easiest products to put in. What you'll have seen over the last two years is our percentage of those products has crept up a percentage or two. If you look at our fleet spend over the next 12-18 months, it will have crept down 2%-3%. Fundamentally, what we want is more of those air conditioning units, mini excavators, skid steer loaders, generators. They are the products that we're pushing increasingly through our footprint. How are you in the U.K.? Sorry, in terms of U.K.? Yeah, look. A-Plant's utilization problem is of our making. We had about as good a January, February, March as it was possible to have. 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 said, "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, et cetera. It slowed down. The issue really wasn't the end market. That was just a delaying tactic was, there was a number of businesses like us who over-invested in the spring. 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 it, our physical utilization ticked up gently through the quarter. Remember, look, what have we done? We've taken our guidance down by about GBP 15 million. It's really a matter of timing You need. It's really a matter of timing. It's, yeah. It's about timing. In terms of when you bring it in. It's creeping up physical utilization. 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 to standard, and they need to get put together again. The work is there. If you look at AMP6, in terms of the utility program, it always happens. At the end of one AMP, before the next program, all the work gets done in the It's a five-year program, and all the work gets done in the last three years, not the first two years. Because it just takes a while for it all to ramp up, and we're in that lull at the moment. 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, that will work its way through, too. We're going to pass a microphone around, or we're going to just stand up, bunching people with their hands up in the air. Good morning. It's Joe O'Dea, 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. 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. 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. We've got Tier 4 cost in our cost base, and we haven't yet got Tier 4 full rates in our rates, which I expect to come back. We have significant inflation, not so much this year, but in the preceding two or three years. That's going to moderate significantly over the next two or three years, and as rate improves, that will drive up dollar utilization. There's going to be a bit of catch-up, but I think we paid a bit too much for two or three years, where we're going to get it back over the next two or three years. That's helpful. Thank you. Then just structurally, when you talk about penetration gains and further gains, and you think about the segments of your small, mid-size contractors versus large national accounts, could you talk about just your kind of medium-term outlook for where the greatest penetration opportunities are? Do you see that continuing even as we get to this point in the cycle? Yeah, I do. 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." 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. Rental is a very valuable 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 valuable alternative to ownership. 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. They've got to get used to the confidence and timing. There were, in the past, too many big boom and big aerial facilities. If you wanted big booms and big aerial, rental penetration increased because everybody knew you could get that stuff when you wanted it, where you wanted it. It has taken 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. You can see it when you look at greenfield openings. We used to talk about two to three years to get to breakeven point in a greenfield. It's now six months. Why? Because after six months, 80% of the customers are people who trade with us somewhere else. It's not like this unknown quantity with an unknown product offering is landing in town. It's very well understood what Sunbelt stands for from a service perspective and from a product perspective. There is a natural momentum to all of this. 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. We need to broaden our product offering, too. Yes. Mark Hodgson from HSBC. A couple of questions, if I may. First, just on looking at slide 22. Sure. You look at the returns on investment acquisitions versus greenfields. Actually, year one, two, and three, the acquisitions outperform greenfields. Just trying to sort of go through, in your mind, why you've cut down the acquisitions so much in this half. Yeah. What's the rationale looking at that? In year four, five, and six, the greenfields are better? By years three, four, and five, there's not much in it, is the truth of the matter. Look, 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. 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. It's as much a case of, well, what's available and what is the best route? As you know, we have a plan based on ZIP code. We did say, I think in the Q3 results last year and the full-year results, look, you can see we did an awful lot of bolt-ons last year. We needed to settle those down. What we ended up with all the bolt-ons was good coverage, but there was obvious gaps. Those gaps were best filled by rifle shots with greenfields to fill it all out. This has been a very deliberate strategy. There is some truth in the fact that, look, people think the rental market's not doing great because one or two 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 had and think it's going to be great forever. What was an easier conversation two 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 +9% greenfield and bolt-on line bigger than it was the quarter before. We will do bolt-ons or greenfields as they make sense. The place where most likely you will see bolt-ons remains specialty businesses. 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. We aren't inheriting the service and pricing history of a bolt-on. You've got to be careful in that, are you trying to drive short-term metrics, or are you trying to build a long-term business? 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 two. Okay. If it was sort of seems that one-third bolt-ons, two-thirds greenfields. That would be great math but would have no basis in fact. Yeah. It will be what it will be. It will just add it up. Okay. Just finally from me, just at the minute, every year there's a hare running, and this time last year, it was all about oil and gas. Obviously, from here on in, over the last quarter, we've seen companies in the U.S. sort of warn with regards to your manufacturers exporting to China, et cetera. That's obviously part of your non-construction sort of exposure. Can you just tell us what your exposure is in that area? Yeah. Well, it's a bit of both. 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. Okay. You're right. There's always been a hare running about something. About a year ago, everybody discovered Rouse. Everyone started doing correlations with Rouse, even though most of them didn't have a clue what the Rouse information was telling them. 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-odd presentations. I've included Dodge data in every single one of them. Everyone's discovered Dodge in the last six months, and they've started quoting Dodge. Most stupidly, the quarterly one starts, which is the most erratic data in the world. What we've got here is the Dodge data, all of it through the cycle. Okay? The bit everybody's got agitated about is this manufacturing buildings number, minus 28% this year. They're right. It has gone back 28%. There are pressures for those who are exporting because of exchanges. You need to put it into perspective. Look, a year ago, it was +88%, and it's only three years ago, it was -25% again. The problem with starts data, especially Dodge, particularly when you're talking things like because the next one is going to be energy and utilities and LNG plants. I'm predicting this time next year, we're going to be talking about LNG plants, which are forecast to be -43. Okay? You need to put it into context. It's going to be -43 after +159. Dodge starts data take all of the value of the project the day they break ground. Now, that work might go on for the next three, four or five years at a steady pace. 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. Yes, it's a headwind. Have we felt some of it? Yes, we have felt some of it, in the same way as we felt some of it with oil and gas. It's all very well, everybody doing all these correlations on manufacturing indices. Go to the very top with -25% in manufacturing, the overall construction starts are +13%. Be careful if you're going to start using Dodge, especially if you use the short course. Starts 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. Look at the total. You have to put it into context. Okay? Remember, starts is very lumpy, and we've probably got a good two years after start. Despite all of the concerns about that report there, which is the September report, is forecasting 6% growth in construction starts next year. There was a report came out last week, which was an executive forward summary from Dodge, which was very good, which actually forecast 12% next year and 8% the year after. Okay? There will be sectors which will be lumpy, and that's all we're saying, Buck. 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? Yeah. Are more people going on holiday? Is hotels great? Yeah. 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 sectors. Hi, it's George Gregory from Exane. Geoff, just maybe playing devil's advocate on that. George, not you surely. I think the historic data tells us a lot. I'm just wondering, if we look back to 2006, 2007, to what extent could we have relied on what McGraw Hill were telling us for 2007, 2008, 2009, 2010? I think there's clearly a risk of us relying on forecasts. As we analysts know, we probably wouldn't want to do that too much. Look, construction starts started going backwards in 2006. They really started to fall in 2007. In fairness, Dodge did predict it. The reason why I know this, I joined in October 2006, and we'd just bought NationsRent. The very next week, a Dodge report came out saying construction starts were going backwards. I was thrilled. We just spent GBP 1 billion on an acquisition, and everything was going backwards. 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 2007. I think a combination of external factors and internal factors do help you pick that. That's why this chart was really meant to say where we're going in terms of market share. If you look here, look, we were gaining market share. Sorry, for those listening, it is page 19. We were gaining market share all the way from 2003 to 2007. We just bought NationsRent in 2006. Like I said, I joined October 2006. By 2007, we said the party's over. We could harder and faster than everybody else. I believe you do get sufficient notice, I think given the lead times on which we're buying equipment. Will we get it perfectly right? Of course not. We're releasing expenditure on such slow lead times. The actual absolute scale of the potential downturn is that our fleet's two or three months younger than we actually would choose for it to be. Yes. Look, it's why we made the comment. We need to know when to spend and when not to spend. 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. 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. We've got a host of internal and external trends that we look at. My personal view is that if you look at that starts data, you had plus 10s, plus 11s, plus 12s, plus 13. If you look at work completed, it's been about plus six, plus seven. 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. There is a pent-up demand, in my opinion, for two to three years on the work that's being released. Now, if there's no more starts, that will start to play out. Drive around America. Go and have a look. There is lots of construction around. Are there potential tailwinds in the economy? Of course. I keep going back to this. Look, there has been massive unemployment in oil and gas, net, this economy is adding 200,000 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 two. We've always said about 60. What we had was, look, in individual quarters, you will have small step changes and then it will even itself out. 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 at 64. 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 as likely to go to 62 the quarter after. It'll average out around 60. Thanks. I've got the mic, I'll go. It's Aubrey from UBS. Just one question, actually. On the structural share gain within that same-store growth, the 6% Yeah Can you talk about the current difference between areas of the map which are green and areas which are white or yellow, and how that actually spreads across the market? Yeah, no, that is a good question. I guess the question is the green growing at the market pace and is the light and yellow being so good that it's dragging up the average? As you would expect, it's not so much whether it's light green or yellow. There is a small difference between the pace of growth in greenfields and bolt-ons and more mature stores, irrespective of where those stores are in market density. It's not so stark as to be making a significant. Well, you can see it. The same-store volume growth is 13%. Most of those are in our mature areas. That 13% in mature stores is pretty steady across the country. We have clearly got more growth in greenfields and bolt-ons. That's one of the keys. Greenfields start terrible as a drag on our metrics. Look, they help us enormously in our year-on-year growth in year two, because if we stick $5 million into a greenfield, for round numbers, in year one as a greenfield, in year two, we're typically adding about the same again. If you think about it, for next year's capital expenditure, about $300 million of it will be follow-on investment to the greenfields we opened last year. In terms of growth and margin improvement, it is a gift that keeps giving for the next two or three years. You have to soak up the initial impact on your metrics. If you look at that dollar utilization, 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, that won't be the case in a quarter probably, in fairness. We were getting over 100% dollar utilization in oil and gas. It's why you got this silly blip in some of the rents values. Look, you would pay anything for a bit of secondhand equipment of the right piece just to get it out of the 100% dollar utilization. That sizzle's come off, we're now back on a normal trend. Well, certainly by the end of next quarter, we'll be back on a normal trend line. Chris Gallagher, J.P. Morgan. Just a quick question on rate in the U.S. and how you've seen that trend and what your outlook is and how you expect. Yeah. Look, we're going into winter. I hate predicting in the winter. Remember last year, we did 29% growth in the third quarter. 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 start of November, December, it's been really warm and really wet, which is not absolutely ideal, but it'll be fine. It'll sort itself. We had a horrible Q4 where it was wet and warm. It'll even itself out over the course of the half, but you can get anomalies in individual months during the course of the winter. We missed a spring pop this year. Look, activity levels really pick up in May and June. Everybody goes on the 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. 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 cutting their CapEx. Those with higher utilization are increasing their CapEx. I would fully anticipate there 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, and it's not always going to be linear. Yeah, we're very confident at these levels of utilization and this strong demand, there's no reason why we won't get rate improvements in the spring. U.K., I think you mentioned before, but 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. They're doing some daft things. We'll ride it out, and we'll be selective on what we do. Again, it'll sort itself out with a spring pop. 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. Yeah. Going back a few years ago, you'd have probably said that was over-trading. I would still say that. You weren't happy with it. You still think that's over-trading. Yeah. No, look, it is. Look, what you got to remember, 76% is an average. We showed you the chart. In fact, we got a little bit more granular than we have done in the past. 49% 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. If we go back to a chart we had, I 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 six 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. 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 and telehandlers if we can possibly help it because we're trying to reduce it as a proportion of our fleet. That's why the fleet investment has gone up, because that's a very high level of physical utilization. We will have products at 20% or 30% physical utilization within that 76%. That's the key. You've got to remember, it's a much bigger range than people realize. Now, 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 %? We have, and that's one of the reasons you'll see that. There's what we call net utilization. I really don't want to get into gross net utilization because we'll be here all day. If we look at the speed of pickup, then it has effectively given us 1% more fleet to rent, which obviously helps us. Nonetheless, even having allowed for all of that, 76, when you look at the range, there are product sectors where we need more fleet. You're correct. We're going to have to go into a whole presentation on gross and net physical utilization to understand the various dynamics of that. Presumably all the pricing algorithms are suggesting put prices up to rectify all that. By the end of October, we got to look like what we should have looked like in April. If we had had our October metrics at the end of April, we would not have 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 everything will be fine. Thank you. Thanks very much. 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. What's your sense as to the net supply situation across the industry more broadly, forgetting the other big competitors who are- Look, 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. I do not dispute. The Rouse Analytics is what everybody used. Look, it's 27 Cat dealers and United and Hertz. That's it. United are a third of the data in there, and a big chunk of the rest, Cat dealer. 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 frack 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 all metrics, when we're looking at some of our other peers, I mean, gosh, look at H&E. H&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 who are growing less than that. I don't buy into, and I don't speak to many of our peers, with the notable exception of one, who buy into that oversupply situation. We think it's about right. 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 overcommit in terms of our capital expenditure. 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 pointing out? Mix on business is probably less important than mix on products. We did have a slightly better mix on products. Remember, Q3 is going to be tough because of oil and gas. If you go back to whatever it was, whatever slide it was, it was 14? 14. Look what happens. In Q1, our fleet on rent was +25% year-on-year. By Q2, it was -12%. By Q3, it will be -50%. 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. Yield that's -12% is probably going to be -52%. I don't know that precisely. That might not be what it is on an average, but from a peak to a trough, that's what it's going to be. 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. From both an absolute scale and a year-on-year comparator, it's going to be washed through. It's going to get worse for one more quarter before it gets better. No more questions? Excellent. In that case, once again, many, many thanks for all of your time, and we look forward to seeing you at the full year.