Hello, everybody. In that case, good morning, and welcome to the Ashtead full year results presentation. As usual, we have a short presentation where we will look at the financial and operational drivers for 2014/15, also look forward to the opportunities for the current year as we carry forward that momentum that we've established during the current year. We'll take questions at the end, which will give us a chance to add more color to current trading and our longer-term strategy. In overview, it's clearly been another very strong year for the Ashtead Group. What is pleasing is to see the results of a well-executed strategy, which has remained consistent for a number of years. Strong organic growth, together with bolt-on acquisitions, are allowing us to differentiate our service offering, gain market share, and improve profitability.
The financial highlights are obvious with the group revenue up 24% and profits up 35% to a record GBP 490 million, all with a return on investment of 19%. The group's ability to continue to both grow and deliver on the bottom line has allowed us to invest GBP 1 billion in the fleet and a further GBP 236 million on bolt-on acquisitions. Importantly, this investment has been achieved whilst maintaining our financial discipline, with leverage maintained below two times EBITDA. A credit to both the team and the inherent returns on our investment. A great year, most importantly, another year where we have diversified the business and enhanced our operational and financial capacity. In a quarter where there's been a lot of noise around oil prices and weather, our long-term strategy of expanding the geographies and sectors that we serve has clearly paid off.
Our markets continue to provide both structural and cyclical opportunities. Our well-established business model has a track record of success. The board, therefore, looks to the future with confidence and is pleased to propose a final dividend of GBP 0.1225, giving a total of GBP 0.1525, up 33% on the prior year. With that, I'll hand over to Suzanne to cover the financial performance for 2014/15 in more detail. I'm terribly sorry. I forgot to flick through the slides there. There we go.
Thanks, Geoff. Good morning. I'll begin by reviewing our results for the fourth quarter, which are shown on slide four. Our underlying pre-tax profit for the quarter was GBP 110 million, up 42% year-over-year at constant rates of exchange. As in past quarters, the main driver of our profitability was top-line growth. Rental revenue increased by 24%, reflecting strong performance at both Sunbelt and A-Plant. Geoff will review the drivers of the operational performance in a moment. The quarterly results also benefited from our continued focus on operational efficiencies. As a result, our EBITDA margin improved to 42% and our operating profit margin improved to 24%. Our financial results for the full year are shown on the next slide. As mentioned earlier, the group's underlying pre-tax profit increased by 35% to GBP 490 million. Not surprisingly, rental revenue growth of 24% was again the main driver.
Further down the income statement, you'll see that depreciation expense exceeded the prior year amount, reflecting our additional investment in the rental fleet. The rise in interest expense from last year reflected both an increase in average borrowings and a greater proportion of longer-term fixed-rate debt. For the full year, our EBITDA margin expanded from 42%-45%, and our operating profit margin was 27%. Turning over to slide number 6, we'll take a look at the headline numbers on a divisional basis. Beginning with the U.S., Sunbelt's ability to capitalize on market opportunities and take share was evident in this year's 25% growth in rental revenue. In addition to strong same-store sales growth, we also added 82 new locations in the year through our Greenfield store opening program and small bolt-on acquisitions.
Maintaining a good drop-through rate of incremental rental revenue to EBITDA during this high-growth period was therefore key to our performance. Despite the drag effect of these new stores, Sunbelt maintained an overall drop-through rate of 58%, and excluding new stores, it was a robust 67%. As a result, Sunbelt achieved a record annual EBITDA margin of 47% and an operating profit margin of 30%. Moving on to A-Plant on slide seven. We continue to be encouraged by the U.K.'s progress. During 2015, our rental revenue increased by 19%, reflecting both a recovering market and market share gains. The combination of this rental revenue growth with a 56% drop-through rate resulted in an EBITDA margin of 34% in the U.K. and an operating profit margin of 14%.
On the next slide, we've summarized our cash flow profile, highlighting the net cash outflow for CapEx of GBP 834 million in 2015. While this investment resulted in a free cash outflow of GBP 88 million for the fiscal year, we believe it to be appropriate at this stage in the cycle as we continue to take market share both responsibly and profitably. Additionally, as you move down the cash flow statement, you'll note that we invested cash of GBP 242 million on a number of small bolt-on acquisitions. After considering those acquisitions and our dividend payments, our net debt at April 30th increased by GBP 412 million. The next slide is one that you've seen before, it outlines our debt and our leverage profile. Including currency translation impacts, our year-end debt was GBP 1.687 billion.
Our net debt to EBITDA ratio remained constant at 1.8 times on the strength of our improving EBITDA margins. As we look forward to next April, we expect leverage to remain comfortably below two times to ensure that we strike the right balance between our financial stability and investment in growth. You'll also note, in the middle of the page, a slightly higher ratio of fixed to floating rate debt. The mix and structure of our debt as it exists at April 30th, carries a weighted average maturity of six years, it helps to maintain our balance sheet strength and our flexibility. As a final point, I'll briefly mention our return on investment shown on slide 10. Despite the significant investment that I've just discussed and the growth in our business in 2015, it was pleasing to see our ROI at 19%.
This, along with our balance sheet capability, puts us in a solid position from which to consider 2016. With that, I'll hand it back over to Geoff.
Thanks, Suzanne. Let's have a look at some of the operational detail behind the numbers, starting with a breakdown of Sunbelt's 27% rental revenue growth. It has clearly been a good year, and it's been a very consistent one. Our strategy of same-store organic fleet investment is paying off with 17% growth well ahead of underlying markets. It's a simple strategy, but we believe that superior service levels lead to share gains and therefore, before we look to broaden our business, we focus on same-store fleet investment to ensure that we are the provider of choice in each individual market. The sustained period of significant share gains that we have enjoyed suggests that this is a strategy that's paying off. In terms of greenfields and bolt-ons, it was a particularly busy year, with a net 82 new locations.
We identified some excellent opportunities, we had both the financial and operational capacity to make it happen. Also, we feel that delivering this level of growth this early in the cycle will prove to be well-timed investment. Breaking this down to each quarter, you can see that, as I said earlier, it's been a very consistent performance, particularly in terms of volume. Over the last six months, all the noise in the sector has been around oil prices and tough winter. Hopefully, these results bring a sense of perspective to it all. Was it a tough winter? Yes. Did our oil and gas revenues fall? Yes. Was it indeed wet in Texas this spring? Well, yes, it was that too. Look, we are a normal business, and we will always face some challenges.
Remember that with these headwinds, we still delivered 27% rental revenue growth in the quarter. What does that tell you? Well, as I said at the opening, our strategy of broadening our geographic base and the sectors we serve through greenfields and bolt-ons have clearly worked, and we are now a more resilient, more diversified business. I also think that these results support the view that our core construction markets are very strong, and I will cover both of these points in more detail in a moment. Sticking to the chart on page 13, the physical utilization, it did get a bit weak in February, March. We continued to bring in fleet as the bad weather hit. However, it was a short-term timing issue, as you can see by our recovering utilization despite this significant fleet growth. With markets so strong, we remain committed to our investment plans.
I'll repeat what I said before, that is, it's better to be able to say yes right now than to push physical utilization. That, of course, is particularly true in our newer locations. Yield has obviously fallen to 1% from the 2% we have been delivering. It's here more than volume that you see the effects of lower oil prices. While it's a small percentage of our business, there have been significant price concessions in the oil and gas division. There was a sudden fall in volume and price in late February and March as the reality of the lower oil prices set in. From both a volume and a price perspective, I'm pleased to report that it's been remarkably stable over the last two months. The biggest drag on yield is again mix and the impact of so many greenfields and bolt-ons in one year.
What I'd like to cover now is the much broader benefits of this growth and diversification strategy. Look, we've had a prolonged period of market-leading growth, but what I think is particularly encouraging is the profitability of this growth. I want to spend some time here differentiating between same-store profitability and the impact of bolt-ons and greenfields, as I think it gives a much better insight into the exciting medium-term potential for our returns. As Suzanne highlighted, EBITDA margins for Sunbelt have risen once again to a record 47%. I think the real highlight here is the same-store drop-through, which remains very, very strong at 67%. You can see the benefit of our strategy when you also look at return on investment.
Same-store return on investment is now 27%, up from 18% only three years ago, as we see that benefit of focusing on organic fleet investment. We've added 144 new locations in just three years, and as we develop these towards full maturity through fleet investment, the potential for further share gains and margin progression is both clear and exciting. Let's see how these locations evolve over time. Look, greenfields obviously start with very low physical utilization. They start with low return on investment and a fleet too dependent on low-yield assets, although in fairness, they do break even very quickly. Fundamental to our approach is that in the early weeks and months, it's all about service. You establish your reputation in the market, and the other metrics will come with time.
We're now entering the fourth year of our openings program, therefore we can see the real returns potential as we broaden the fleet mix and customer base. This is demonstrated by the fact that our earlier openings are already included in that same-store 27% return on investment. This program is delivering good initial returns, but we must also look at this investment in terms of its longer strategic benefit. Greenfields are a key element of our strategy to broaden both the geographies and sectors we serve, as we highlighted earlier, and clearly it's worked. In addition, however, greenfields and the extra coverage they provide have been a key element of our market share gains, both at a local and a key account level.
This combination of same-store growth and bolt-ons and greenfields is allowing us to develop our margins and returns on investment and provides us with the potential for further growth. I feel like we have balanced short-term returns and long-term strategic planning well. This chart on page 16 is one we've shown before, but I think it does demonstrate how both our well-established and new locations develop over time, both individually and collectively. Again, I just think it points to the medium-term opportunity as the 144 stores that we've opened over the last three years reach their full potential. It is this consistent organic investment in our business that's created a virtuous cycle of scale as we both improve returns and gain market share. In addition, we are diversifying our business and consequently, we're improving our long-term resilience.
As I said earlier, it's this strategy of investment that's contributed to our market share gains, as you can see here on page 17. Initially, as you would expect, our wins with our historical small to mid-size customer base who are more transactional in nature. They are the customers who will vote with their feet very quickly if they are dissatisfied with the service and the ones we were best positioned to pick up. However, as we have grown, filled out our geographies, and broadened our product offering, it is our key accounts that have begun to grow the fastest. Let's be clear, this does not signal a change in strategy from us as the small to mid-size contractual space is one where we still feel our model is well suited.
However, a combination of where we are in the cycle, some specific competitive dynamics, and our own capabilities have made us far more credible and a viable alternative to those who have historically dominated this space. Looking forward, I'd expect this trend to continue in the short term, but to probably balance out over time. Another chart you've seen before, and really not a lot new to say here other than the plan has been well executed. There's more dots on the map of both core general tool businesses and specialty locations. Again, it's about breadth of geography, breadth of sector. There is clearly more to go, and we will continue to execute in a responsible manner, taking account of both our financial and our operational capabilities.
A key objective of our investment was to broaden not only the geography as we showed there on the map, but also the market sectors that we serve. We've broadened this exposure in two ways. Firstly, we have through our general tool business, gained a greater share in non-construction markets such as industrial, events, and facilities management. There are a number of sectors which we believe are under-penetrated, where rental provides a feasible alternative. We're going to continue to focus and grow these markets, and one day they may well be standalone specialty divisions in their own right. The other way we've broadened our business is through investment in our specialty verticals such as Pump & Power, Climate Control, and oil and gas. This now represents 25% of our total business, which is great progress.
As we've seen with oil and gas, these sectors are not necessarily immune to cycles. However, by growing largely organically or through small bolt-ons, and by not becoming over-reliant on only one sector, we have significantly mitigated the overall business risk. To have reduced our overall exposure to construction markets from 55%-45%, even as construction markets recover, is clearly good progress. Importantly, there's much more to come. This diversification is very positive in terms of the long-term development of the group. However, we can't lose sight of the fact that currently, construction is a key market. Here, we continue to believe that we remain relatively early in the cycle, and key markets like non-residential construction are still well below previous peaks. Through the winter, there have been some contradictory data points on the U.S. economy. However, the construction data remains universally positive.
Certainly, that correlates with what we are seeing on the ground, where there is a lot of activity, as many of you saw when you visited us in Florida earlier in the year. Of course, short-term, a lower oil price has had a negative impact on some areas of activity. However, we remain of the view that longer-term, lower energy costs are a net positive to the economy. Both residential and commercial construction looks solid, and there are early signs of recovery in state finances through increased taxation revenues, resulting in gently improving institutional expenditure. How does all of this translate into our planning for the new financial year? The short answer is, again, nothing thus changes. Why change a successful formula? We remain committed to our organic growth plans that we first laid out in March.
Relative to these plans, we actually pulled forward GBP 40 million of fleet spend to the very end of the financial year as we prepared the business for the coming season. Nothing has changed in terms of our view of the potential for further fleet growth and share gains. We are continuing to look at around mid-to-high teens organic volume growth. We will further broaden our geography with around 50 greenfields opened in the year, and we will also continue to diversify our business through bolt-on M&A, again, mainly in specialty markets. We've added a net 82 locations last year, so our Q1 focus will be growth CapEx for these locations to maximize this new market opportunity. Having said that, we will actively appropriate bolt-on opportunities on our target list become available. Looking to the medium term, we see a very good pipeline.
That's about it for another great year for Sunbelt. Let's turn to A-Plant. It's been a very good year for A-Plant who, as Suzanne highlighted earlier, have been a good contributor to the group's overall profit growth. Fleet on rent and yield were positive and fairly consistent throughout the year. As you can see, we have increased the fleet size considerably, and we anticipate further good growth in the coming year. In fairness, if you look at the physical utilization chart, we may have got a bit carried away with the fleet growth in April and May. Some general economic uncertainty this spring and delays in a number of transmission and utility contracts meant we were left waiting for these projects to start.
I'm confident, however, that it's a blip and something we can remedy during Q1 through a combination of these larger projects starting and the usual seasonal upturn. We are already seeing more positive trends in June, and the transmission projects seem to be sorting themselves out finally. Given the track record of the U.K. rental industry, are you doing it profitably? The simplest measure of this remains drop-through of revenue growth to EBITDA. Rental is an operationally leveraged business, and drop-through is a key profitability metric. Therefore, we are pleased that as well as gaining share, our drop-through is improving, and we anticipate further improvements in the coming year. This focus on drop-through is what drove our returns in the U.S., and it will do so in the U.K. as well.
For return on investment to be beyond historical peaks so early in the cycle is, of course, in itself pleasing, but most importantly, it points to the real potential ahead. We have said before that we need to rebase our through the cycle ROI at A-Plant, and this has been a really good start. The market outlook is becoming more encouraging in the U.K. As I've already covered, some sectors have seen some delays, but there is a lot of work about, and confidence has picked up in recent weeks, and we expect a good year where once again, we will beat the market. Again, what's new for A-Plant? Well, continued investment in the fleet. Look, we're a rental company, and we believe in the benefits of a broad, young fleet to service our customers.
That's our model, and based on our revenue growth and our drop-through and our U.S. experiences, it works. We did pull forward some of the planned 2016 fiscal year fleet into Q4 of 2015, but again, broadly our plans remain unchanged from those outlined in March. That is low to mid-teen organic growth. In terms of M&A, we will continue our strategy of keeping options open, but looking predominantly at specialty sectors to broaden the markets we serve, just as we've done over the last few months. To summarize, the strong execution of a consistent and successful strategy has resulted in another strong set of financials in both divisions. We've invested significantly in the business whilst maintaining a commitment to responsible growth, as evidenced by our leverage.
We continue to strike the right balance between excellent short-term financial returns and investing in our strategic objectives of long-term growth and diversification. During the year, we have once again increased our operational capacity, both in terms of our location footprint and our fleet size and fleet mix. This, coupled with our financial capacity, has positioned us well to further capitalize on the structural opportunities that continue to exist in our industry, as well as ongoing cyclical recovery. As a result, the board is able to look forward with confidence, as reflected by the 33% increase in the full-year dividend to GBP 0.1525. That concludes the presentation. We'll move on to Q&A, where we look forward to being able to add a lot more color to current trading and the exciting opportunities ahead.
If we can follow the usual protocols, you all know what to do in terms of waiting for the microphone and stating your name and organization for the benefit of those listening in.
Justin Jordan at Jefferies. I'm going to start with the obvious current trading question, I'm afraid. Can you give us some more color since the end of April? Obviously, one of your peers has talked about some softness in May, so I'm just curious to see what you've experienced. Secondly, can you talk through M&A within the industry? Obviously, one of, I think, a major institutional journal of both United and Herc last week talked about the potential merger of those businesses.
Sure
Being supportive of that. Just wondering what the implications for Sunbelt might be and just obviously prior M&A has been, broadly speaking, net positive for you. I'm just wondering what your thoughts would be on that.
Sure. Yeah, look, May was strong. I know there was the famous fireside chat, which got everybody a little bit agitated a few weeks ago. Our May trading was Sunbelt rental revenues were up 24% year-on-year. Look, we had some headwinds during Q1, which trickled into May a little bit too. As I said, those headwinds delivered 27% rental revenue growth in quarter one and 24% rental revenue growth in May. The key at this time of year is what does the cycle look, what does the season look like? We are a seasonal business, and there's been lots of commentary around May trading, and I apologize, you better get your pens ready because I'm going to absolutely douse you with facts, because as you know, we play lots of cards in Sunbelt, and our experience is facts usually win.
Look, we had 24% rental revenue growth in Sunbelt in May. In any normal season, between May and whatever our high point is, somewhere in the middle of October, early part of November, our fleet on rent grows 20%. If we're off 1% or 2% like this time of year on physical utilization, why do we seem more relaxed than every analyst out there? It's because, well, our requirement is going to grow 20%, you can adjust your physical utilization by just reducing your intake a little bit very, very easily. We measure what's happening in terms of that climb. That climb normally is about 3% a month. May was a good month, the 24%. It wasn't the greatest May we've ever had.
What's really important, if I look at yesterday, which was the middle of June versus the middle of May, our fleet on rent is over 6% up in the middle of June versus what it was in the middle of May. That means it stopped raining and the cyclical uptick is very good. Okay. I look at markets where you think, well, actually, where did that hurt the most, those wet conditions? I look at Texas. Okay? If I look at Texas, yesterday, I have 25% more fleet on rent in Texas than I had 1 year ago. I have 10% more fleet on rent in the middle of June than I had in the middle of May. It is not surprising that people have confused weather with some great overcapacity in the market as a consequence of oil and gas.
None of that bears out any support from any of the statistics we have. To knock it on the head, hopefully, there's another chart in a moment on oil and gas, as I assure it won't go away. Keep your pens ready because here's some more statistics. Okay? The biggest product category which is impacted by oil and gas is telehandlers, job site forklifts. People call them different things. Okay? That is the mass of all of this product is. 1 year ago, I had 8,000 telehandlers in my general tool fleet. Today, I've got 10,000 telehandlers, and I had 74% physical utilization 1 year ago, and I've got 75% physical utilization on the fleet that's 2,000 larger today. There is not this great overhang.
Of course, people say, "Yeah, what about all the oil and gas stuff?" Well, 1 year ago, I had 300 telehandlers in my oil and gas fleet. Today, I've got 500 telehandlers in my oil and gas fleet. Yes, physical utilization has dropped from 71% to 54%. I've probably got 100 too many telehandlers in my oil and gas fleet right now. In the context of a general tool fleet, that's 10,000 and likely to grow 20% between now and October. Yes, would our numbers have been better if there hadn't been a reduction in oil prices? Undoubtedly. Would our numbers have been better if the sun had shone in January, February, March, April, and May? Undoubtedly. We just need to put it all into perspective.
Let me just show you a chart here on page 28, where we just look, what's the hit? How big of a headwind is it going to be? We've done this not if we reallocate this fleet and if we move this here, and if Mars becomes in line with Jupiter, then this is if we just take how much revenue will we lose and how much profit will we lose because oil prices have come down. Ignore reallocation of fleet. It's 5% of our business. Okay? We will lose about $35 million-$45 million of revenue, and we lose GBP 15 million-GBP 20 million of profit. All of that impact has been incorporated in Suzanne's guidance in terms of our numbers, and my guidance in terms of our fleet. You need to put it into perspective. These things have been headwinds.
Real businesses face challenges. They are not great big linear plans. Usually, plans that are on a perfect straight line are usually too good to be true. Our current trading, we believe, is strong. Our activity levels on the ground are very strong. We're encouraged about it. In terms of M&A, I don't know. It's not a secret that Herc is for sale. If they could ever work out how to do a set of annual reports, it would've been sold by now, I guess. There is speculation that United will buy them. I saw the same speculation as you. You've got to ask them, not me. Would I see it as a good thing or a bad thing? Well, apparently since the RSC deal, it didn't work out so bad.
Good morning. David Phillips from Redburn. Can I just ask the increase in greenfields to 50 for 2016?
Much more exciting than that, we're going to do 20 in Q1.
The next bit was how many of those have you identified already?
Like I said, all of them. The one thing which might change, perhaps in the third and fourth quarters if we haven't quite signed a lease and a good bolt-on turns up, some of the bolt-ons can be just in lieu of greenfields. We've got a schedule of 20 to be done in Q1. We've done six in May. Again, this is where I think people have got to get their minds around the short-term impact of some of this bolt-on and greenfields on short-term metrics relative to the long-term strategic potential. When you're sitting looking at the statistics yesterday, you think, "I might get asked a question, so I'd probably better look at this a bit more carefully than I might normally do." Those six locations, as of yesterday, have 40% physical utilization. They're a drag.
If I look at all of my greenfields and bolt-ons over the last two years and take them as a collective group, they've currently got 60% physical utilization. They're a drag. Think of them from the terms of potential. They're going to get to 70% physical utilization like everybody else. They're going to get to the margins, dollar utilizations that all of my other locations have got. That medium-term potential of those 144 locations reaching maturity, both from a financial perspective, but more importantly, strategic perspective, it broadens the diversity and resilience of our business. That's what's so exciting about the quantity of work we've done in the last three years so early in the cycle. If you add onto that our potential to just do it again because it's so low risk, we can accelerate or decelerate it depending on how we see the markets.
That's where I think people have to get over the short-term stuff about whether in oil and gas and look at that medium-term potential.
Thanks. Just as a follow-up to that then, of the CapEx you've allocated in Sunbelt, how much of that is to these greenfields?
Well, you could probably work on the basis that when we do it, you say GBP 5 million per greenfield. You're not going to be a million miles out.
Thank you.
Yeah. Morning. Andrew Nussey from Peel Hunt. Just a couple of little questions, just picking up some points you made in the presentation. You highlighted there were some specific competitive dynamics which drove the key accounts business. Is that just a delay from the merge of United and RSC? Is that what you're referring to there?
If you go to one of the appendices charts here, perhaps, page 31. I think it's an important chart in terms of the structural opportunities within this industry. I remember some years ago saying, around the time United bought RSC, the great thing about this industry is the big will get bigger. We might do it through slightly different strategies, one through big M&A, one through organic growth. The big will get bigger. If you look at that market share chart between 2010 and 2015, there's two points which I think are really important. At the end of the day, there are three players who really have the scale to be a national provider to key accounts. That's us, United, and Hertz.
Other people can pick up bits and bobs around the edges in certain geographies. The only people who can really look at a customer and say, "I can provide you all of your equipment everywhere you want it," is us three. Okay? There used to be four. When four went to three, we were the bottom of the pile in key accounts way back then, we had to do well. As you saw by that chart in our key growth. If one of those, as you know, has got some difficulties at the moment, Hertz, I don't think I'm saying anything out of turn. People can read there, I don't know, 3% last quarter, when we grew 27%. They can't do a set of financials. They have some problems. They've just got yet another new CEO. We have to benefit from that.
Did we benefit from the top two becoming one? Yes. Therefore, would we undoubtedly benefit if the population of suppliers to that key account group was two, not three? Yes, we would. We would be the only one left to really benefit. We wouldn't be concerned about that. I think that might happen, that might not happen. The key, to my mind, is what we said right at the start some years ago, which was that diversification or that fragmentation where 61% of the market with tiny players is unsustainable. It's gone from 61%-48%, in fact. That's going to get smaller. My premise all along is whatever the top three currently have got about 23%-24% market share. I think that population will ultimately have about 40% market share, and that includes very good growth from United.
It includes very good growth for anybody else in that national group. It is that structural shift and consolidation in the industry, which is one of the key structural changes which we will benefit from. Of course, the other one is increased rental penetration. The whole cyclical element, which I think has legs to go, is arguably significantly less important than the structural element. Remember, as good a set of performances as we've had for a number of years, the vast majority is from these structural changes. We've grown our market share from 4%-7%. It's that share gain, not the growth in the market, that's grown our top line and our bottom line, and will continue to do so in the future.
Okay, great. Thank you.
Hi, it's George Gregory from Exane. Two questions, please. First, Geoff, EBITDA drop-through on the same-store base is still running at 67%.
Yep.
You look forward, any thoughts as to how that might evolve?
I can't say any real reason why it would be that materially different. Look, don't shoot me with 68 and don't shoot me with 66. We've got over the initial hurdle. It was originally over 70. It was originally over 70 because we had spare capacity in the business, therefore we were adding top-line growth, we weren't having to do the increase in capacity. That's not been true for a couple of years now. For a couple of years now, if we put more growth on the same store, we do need more mechanics, we do need a bit more land, we do need a few more trucks. Remember, those increments of variable capacity that we are putting in are relatively small. I don't see any reason why not. Remember, those same store ROIs has gone up to 27%.
Look, if all I wanted to do was keep everybody happy with metrics, dollar utilization metrics, physical utilization metrics, yield metrics, all I would do is same store growth. I would never open a greenfield, and I would never do a bolt-on acquisition. That's what we're trying to balance here. We're trying to balance still delivering good financial returns, i.e., the improvements in EBITDA margin, strong ROI, still de-leveraging. We're also recognizing that by broadening our geography and broadening the sectors in which we serve, we are creating a resilience to this business that will see us through many cycles. That's our trade-off. Like I said, to improve our metrics is 100% currently within our control. That won't always be the case. The market will take over at some point in time.
Right now, any softening in any of our metrics is purely down to the pace of the greenfields and bolt-ons that we choose to do. Therefore, we can change that. Because we're doing it mainly through small bolt-ons and greenfields, we're not taking that one great big leap. Sorry, to get back to your question earlier. With probably the 50 locations, I'm picturing the chart in my head. Got 30 where we signed the leases, 20 where we haven't yet. I could certainly give you the zip codes and tell you exactly where they are. Where we are with lease negotiations varies. I think there's two of the 20 that we haven't actually formalized leases with yet.
Thanks. Secondly, in relation to that question, you put on the chart the same store ROI for 2012.
Yeah.
What does the 2014 number look like relative to the year you just-
ROI We should have probably stuck that on. I can't remember the precise number. What I'll tell you, which is the question I think you're asking, is the ROI in all categories improved between 2014 and 2015. Every category improved. What stopped ROI growing Collectively, was just the proportions that were not in the same store versus the proportions that were in same store, having added 82 locations. I think it went forward, Mike's in the back, a % or so? Both categories improved. Like I said earlier about physical utilization. physical utilization on greenfields and bolt-ons, it was only 55% a year ago. That 55% number had a lower drag on the overall number just because of the quantum that was in 55% versus the quantum that's in 60%. All of the metrics are heading, in each part, forward.
It's the weighting that's killing us.
Hi, Josh Pade from Berenberg. You talked in the past of a market share target of 12% by the bottom of the next downturn. Do you still think that's valid?
Yeah. Look, depending on how you cut it, we're growing at somewhere between two and three times the pace of the market. If you look at our capital plans versus some of our biggest competitors, it suggests that our organic growth is going to be at least double theirs. I don't know how that all changes with M&A. Given the pace at which we're gaining market share, the fact that we're doing it profitably and still managing our balance sheet well, I see no reason why we won't continue to trend. Precisely where we get to will depend on macroeconomic factors of how long we've got left in the cycle. My personal view is we've got quite a long way left in the cycle. It's very different having a U.S. audience to a U.K. audience.
U.S. audience laughs when you talk about, are you anywhere near the end of the cycle? They tend to think, "Well, has it started?" But it is very, very busy. I was in Ohio recently. Columbus, Ohio. I used to have a friend who worked for Asda, who bought flowers, and I always thought whether you bought flowers or not was a great general indicator of health. When I was in Columbus, Victoria's Secret were building a new corporate headquarters, and I've decided if Victoria's Secret are doing so well selling lingerie that they need a new corporate headquarters, that's as good a benchmark for the general economy as I need.
Hi, morning. It's Rory Mackenzie from UBS. As you showed that map in increasing shades of green, how are you finding the expansion to new areas? Is there more inclination to start with bolt-ons or greenfield as you move around that spectrum?
It's a good question. You come back to metrics to a certain degree. If you look at this chart here, so I'm looking at page 14 here, and you look at the ROI of greenfields versus acquisitions now, acquisitions is a bit tilted because it doesn't have goodwill in it. You would say you're going to get less hassle about metrics, and you're going to do it quicker if you do it with bolt-on acquisitions. That's just a fact. There's just no getting away from that. Why not do more bolt-on acquisitions? Why are we going to do 20 greenfields in the first quarter rather than 20 bolt-on acquisitions? The benefit of greenfields is, whilst they are a shorter-term drag on your metrics, you're starting with exactly what you want, where you want it.
There's always some compromise, either be it on location, fleet age, fleet mix, caliber of staff, relationship with ex-owner, which you have to take into account. From a pure metrics perspective, short term, you would do bolt-on acquisitions all day long. However, if you really want a rifle shot of geography and a fleet mix and a fleet age. Again, one of the biggest factors we have in terms of our ROI is, remember, the poor souls who get measured on ROI, you open a greenfield, all your fleet's new. It's a nightmare. Whereas your partner down the road's got an average age of, let's say, three years. He's doing an ROI on fleet that's been depreciated for the last three years, and you're doing an ROI on brand new fleet. For a whole host of metrics perspectives, bolt-ons are better.
We're not just here to drive short-term metrics. We have to be cognizant of them, which is why things like leverage, drop-through, progression in EBITDA. You can't just say, "Forget all the metrics because we're doing this grandiose long-term strategy." You have to strike the balance. So what you'll find, Rory, I would suspect, is a good balance between the We did a lot of bolt-ons, a lot of greenfields last year. We need to give them the opportunity to have the fleet mix and fleet age that we think that they need to get market share. That's why right now, some of our physical utilization metrics look a bit low. Because you can see what we've said to these people, like these six we've opened with 40% physical utilization. No one's getting beaten up about 40% physical utilization.
I hate it when Suzanne comes up with better one-liners than I do. That's my job to come up with one-liners. She came up with a great one in the most recent board meeting. She said, "What's more important? If a customer calls us up and says, 'Have you got it in a new location?' Is it more important to say yes, or is it more important to say, 'No, I haven't got it, but guess what? I've got 72% physical utilization.'" Okay? The answer is, as you establish your presence in a new market, you have to be able to say yes.
Just following up on that. On those acquisitions, does that 26% return include how much extra fleet you've got in?
Yes
All that's coming in?
Yes.
Can you say how much that is in proportion to how much
I'd have to get back to you on that, but it's something we can easily work out.
Okay. Then just one more, sorry. Do you worry that the same-store trends in terms of rates or yields, now that other small players are ramping up their fleets
Yeah, no, that's a really good question because the obvious answer would be. It's true, I think a sign of how strong the economy is, there is no doubt that our smaller competitors are now spending more on fleets than they did once before, that was always going to happen. The key in the long term is based on quantum, how quickly are they increasing their capacity versus how fast the market's growing. Like in all markets, that imbalance. Medium term, I see it as nothing but positive, and I think we're starting to see that already, which is, as they start to increase their fleets, they are facing up to the reality of current pricing for Tier 4 product.
Therefore, rates that they're happy to enjoy with very aged Tier 3 product in their fleets make no financial sense given the reality of the real cost of new Tier 4 product. Therefore, if they're going to sustain anything like a sensible return, then they have no option but to increase their fleet sizes. Our customers are facing the same thing, which is why, where normally now you would anticipate the trend to rental to be slowing a bit, I don't think we are, because I think people are waking up and thinking, "It costs how much to own one?" And thinking, "Do you know what? Rental doesn't seem such a bad option." I think ultimately, of course, as more people, more capacity into the market, your potential to get rate increases could potentially start abating. Of course, makes sense.
I do think there's a very specific reality right now that people are selling very old, cheap bits of equipment and having to buy very, very young, expensive bits of equipment, which has to drive rates to positive territory. Let's be clear. Oil and gas was on this steaming train, although what sort of thing is a steaming train? I guess there is. Anyway, you're on this great growth all the way through to December this year. Sorry, December last year. We are now flat. We had all of our damage in February and March. Our fleet on rent and our rates haven't moved in eight weeks. When I say it haven't moved, you look at it every day and think, "Have they changed the number?" The fleet on rent's just the same.
The comparables get tougher because all the way through to December when people have said, "I've now seen very, very little impact on oil and gas," that's because their quarter ones last year, their numbers looked a lot worse than they did by quarter four of this year. People's comparators are going to get tougher. Of that, there's no doubt. We're going to have to think of probably by Q1 better ways of differentiating and spreading all of this out. There is going to be a growing headwind on rates across the industry because of oil and gas, we need to differentiate that with what's happening elsewhere in the industry.
Chris Gallagher from JPMorgan. Just a quick question on Caterpillar Finance, the kind of peer-to-peer software called Yard Club where people lend equipment.
Yeah.
Can you talk a little bit about that?
Yeah, I know.
The technology in the industry?
Yeah, sure. I don't know if everybody knows what Yard Club is. Yard Club's this business that started where Tiny, tiny business started where basically if you own fleet, the theory is you put it into a club and you all share it. Therefore, you transfer the equipment around. I think it's the greatest vindication of the shift to rental that I've ever seen. Because why are people doing it? Because it's basically there's a tacit admission that you don't get sufficient good returns or sufficiently good utilization by just owning it yourself. Now, for very large pieces of equipment that need to be rented for very long periods of time, and you come to the end of a project, and you think, "What do I do with it?" It's an option. Frankly, I still think people will just sell it.
Why would they let somebody else borrow it for six months rather than realize the cash? In a very competitive industry where 70% of our business gets called in for delivery the same day or the following day, who's going to phone up a competitor and say, "Can I have yours instead?" It's an interesting concept. Caterpillar tried to make a big deal of it, everybody knows Caterpillar have been promising to do all kinds of weird and wonderful things in the rental industry forever. I've been here 10 years, none of it's worked. This one seems the most desperate one I've heard to date. Anyway. Of course, in a world of technology and core comparison websites, it seems the sexiest, coolest thing in the whole wide world. Think about it logically.
All it's saying to people is you don't get a good enough return by owning your own equipment. I agree. They don't. Anyway. Other technology in the industry, yeah, it's moving ahead. If you look at all the things a lot of you would see in front of that, our pricing, telematics, our logistics systems. This is a very young industry that's evolving. Technology is developing. I think the likes of us and United and all the key guys are leading that technological charge, it's one of the justifications I have for saying the large will get bigger. The big will get bigger because of their capacity to invest, both in hard assets on the ground, also in things like technology. Everyone gets hung up about the fleet investment, rightly so, because you can do some calculation and work out what it means for fleet growth.
Over the last two years, we've spent over $140 million improving our delivery trucks. In the last 18 months, we spent over $20 million, not on greenfields, just upgrading the quality of the facilities that our customers go and visit to improve the overriding brand image of this business. You wouldn't do any of those things unless you were absolutely confident in the long-term structural opportunity from this business. You would milk them and generate short-term metrics improvements. One of the great benefits of this industry is we've got a bunch of people who are doing just that. There is only a handful of businesses, including the two market leaders, us and United, who are investing in that long-term brand image and capacity through the cycle. That together with these 144 locations reaching maturity, is what really excites me.
Morning. Andy Murphy from Merrill Lynch. Two questions. First of all, you talking about your net debt to EBITDA level of staying below two from the current level of 1.8 times. I'm just wondering whether that's a general comment or whether you're trying to indicate that maybe you're leaving the door open to invest further CapEx or perhaps greater M&A than you've been seeing in the past. Secondly, perhaps a question for Suzanne. In terms of the growth figures, you've got different growth rates in terms of the overall growth and rental growth. I was wondering whether you could unpick the sort of non-rental growth elements of the growth at the group level.
Well, let me take the first bit, and Suzanne, if you take the second bit. In terms of the general sort of Look, what are we saying? Well, we're not saying a lot really with our, "We'll keep leverage below 2x EBITDA." What we're saying is that we recognize that keeping a strong balance sheet in what is still a cyclical business makes all the sense in the world. We are reaffirming the fact that we will grow responsibly. If the right deal came up and we went to 2.1 for three months, would we do the right deal? Yeah, probably. We'd have to show a very clear way how we got to Equally, the right deal might not come up, and we might go down to 1.5 or 1.6 or 1.7, whatever.
We're basically keeping all options open based on the right thing to do for the business at the right time. The key, Andy, is we have options, and we are keeping those options open. We are not a financially driven business in the sense that we think low leverage is bad. Through the long haul, I think most cyclical businesses have a fairly toxic mix of operational leverage and financial leverage, and over the appropriate time, I would like our financial leverage to be a bit lower. Equally, we are not going to miss out on the right opportunities to grow at a period point in time. Keeping a broad base of saying, "Look, we'll keep below 2," I think gives people good comfort about the responsibility with how we target growth, and also enough flexibility to make the right investment decisions for the business.
With respect to that ancillary revenue, those aren't numbers that we disclose, but we do in the press release, essentially show how much that's grown year-over-year. It's a little less than the rental revenue growth. It's about 22% for the full year. Those are component pieces in there. One of which, for example, would be delivery charges to customers, which has a bit of the gas element. As gas prices have fallen, certainly you're not charging quite as much to customers as you would have been in the past.
Again, it's worth looking at that difference between rental revenue growth and total revenue growth. You need to look at the press release. Ancillary revenues have not risen as quickly as rental revenues, but the vast majority, be it directly in oil or diesel that we charge that are used in the bits of equipment or is incorporated in a delivery charge, has come down. But so has what we pay for gas too. That's why the margins have still gone up. As much as anything, it's that pass-through element through oil and gas is why ancillary rate charges are lower.
Can you hear me?
Yeah.
Yeah. Hi, it's Daniel Oppenheim, UBS O'Connor. Just to make sure that I understand this correctly in terms of opening the new stores. At unchanged capital expenditures, if a higher proportion is to opening new stores, does that lead to slower sales and EBIT growth than it would otherwise or?
No. It makes no difference. Look, the question was really about initial operating metrics. If we buy a business with GBP 5 million worth of revenue, we start with GBP 5 million worth of revenue. The pace of growth is from 5 to wherever it goes to. We open up a greenfield, we start with none, and then the pace of growth. We are fairly relaxed about the balance between the two. Ultimately, I think the balance over the course of the year will be as it's been, because it's been fairly consistent over the last two or three years. We have phases where we do more greenfields, and we have phases where we do more bolt-on acquisitions. In terms of through a one or two-year period, the metrics work themselves out, and the pace of growth and the returns are about the same.
Coming back to oil and gas. Obviously, so far, we've seen a big impact on exploration drilling and stuff like that, but we haven't seen anything on production. Oil production remains at peak levels in the U.S. Do you know where, in the example of the telehandlers, for example, are they going into the production phase or to the?
They're going into a bit of both. You're right. The production element, it depends where you look. Again, if you remember when we talked about this in January, there are very different dynamics in different basins. Canada, the Dakotas have been hit significantly more than, say, the Permian Basin. Even within Texas, Permian Basin has done relatively well relative to Eagle Ford, and it's all about marginal costs of production, et cetera. Our view would be, as we explained, look at the chart we showed both in January and in March, we have a good balance of fleet. I think that, as I said, it's now a lot steadier. I think where we've lost it, we've lost it as much in production as we have upstream, because that's where most of our equipment was.
I don't think there's another wave of downturn if oil prices stay where they are. All bets are off if it drops another $20 a gallon. Again, even if that happened, what's the worst that can happen? I've got to find a home for 500 telehandlers out of a population in general tools of 10,300. 15% of that are due for disposal at any point in time. Again, the view was, everybody's going to slog off all of this fleet, and it's going to hammer secondhand markets. It hasn't. There's been one or two specific auctions in Houston where people sold off junk, where it did have an impact. Generally speaking, secondhand equipment prices remain very good because in the context, of course, when all of that came off rent in the middle of a winter.
If this had all happened in October, it would have been a total non-event because the construction markets would have been so busy, it would have got gobbled up. It actually happened at about the worst time humanly possible in terms of our cyclical construction markets. Even allowing for that, it's really had relatively little impact. Now, there's still people with more fleet to move, more fleet to sell. I think you'll see probably higher disposals than you normally see at the half year. Look, we're at the hands of what happens to the oil price. Every indication we've got right now is that it has settled down a lot. That's certainly how our customers are acting. They're starting to talk about longer-term investment decisions.
The key here is, if oil prices go up, which is a huge debate, we could debate that all day long. There are 3,500 holes drilled in America ready to frack. Usually, there's a lag between oil prices going up and people drilling the wells. Now, there isn't that lag. When it tips up, it will tip up at a pace because the holes have been drilled, they just need to be fracked. There's this huge population ready just to bounce as and if oil prices rise. Don't underestimate the pace at which, in various basins, the U.S. oil producers are generating cost savings and efficiencies and lowering their marginal cost of production.
Thanks. Mark Castro from Canaccord. Three questions, if I may. Just two simple ones, stock questions. Can you give us a feel for like-for-like wage inflation is the first one, and the cost of purchasing machines. Are you seeing that starting to come up?
Yeah. Like-for-like wage inflation is 3% to 4%. Probably going to, I would guess, trend closer to 4% right now. We stayed at the forefront of paying all the way through our guys good salaries. I think our starting point is the U.S. economy is really strong right now. If you look at all the employment statistics, number of people moving jobs because they can, it's all pointing to a positive direction. Our view is you have to stay ahead of the curve, otherwise you lose your good people. Therefore, I believe we do stay at the forefront of that, and therefore, it'll be somewhere between 3% and 4%. If I was a betting person, it'll be closer to 4% than it will be 3%. In terms of pricing inflation, it's 2%, 3%, some product categories, very little.
It's normal levels of inflation, which it has been since the hike. That's for buying like for like. Remember, that's not buying a Tier 4 and replacing a Tier 3.
Finally, just maybe the cheeky question. If you have investors sitting out there, for instance, in United, you see lots of investment banks writing notes saying what a wonderful deal it would be to buy Hertz, presumably the same investment banks who are pitching to get them to do the deal. Call me a cynic. Why would you not be interested in buying Hertz yourself? I appreciate from my perspective, obviously, the returns, things like RSC and Pump & Power and stuff in their past, and I can see all these things, can you just spell out why you would be interested?
Look, you won't be surprised to know that you've all got colleagues who beat a regular path to our door and destroy Amazonian rainforests with these books which all look exactly the same. With this unique idea that we do something like that. There's nothing terribly new there, in all honesty. Why not? Look, it's times like this when our advisors say never say never. Look, we've got a model that works. All right. The one thing I've said consistently that I admire United for is the timing of their RSC deal. They did it at the perfect point in the cycle with lots of room to get it wrong because the market was going to be their friends. We have a desire to have a mix of business and to have a size of business.
I think we get more precisely what we want in a more responsible manner, doing it the way we've done it. Also, United bought when they bought RSC, was arguably a player in the industry, no question. We aspired to be way back when I joined, and we were doing a pretty good job of catching them up. I don't like fixer-uppers. If that's it from a Q&A perspective, once again, thank you very much indeed for coming today and the very interesting questions. We look forward to seeing you in the not too distant future. Thank you.