Good morning, everyone, and welcome to the Ashtead Group Q3 trading update. We will be following the usual format today, so let me kick off with some highlights on page two. The quarter saw a continuation of our strategy of same-store organic growth, supplemented by greenfields and bolt-ons. Once again, this has delivered a strong financial performance in revenue and profit growth, which Suzanne will detail in just a moment. It was particularly pleasing to see strong performances from both Sunbelt and A-Plant, and our confidence to invest in the business is clear. With GBP 783 million spent on capital and GBP 162 million on bolt-on acquisitions. Organic growth remains our focus, but the geographic and sector diversity which our M&A spend is delivering is a key element of our strategy and growth.
You will note from this morning's press release that we completed a further two deals in the U.S. just after the period end, one in general tools and one in climate control. Even with these significant levels of investment, we continue to grow responsibly, generating strong returns and maintaining leverage within our stated objectives. With the momentum established in the business and our confidence in end markets, we now anticipate a full year result ahead of previous expectations. On a positive note, I will hand over to Suzanne to cover the financials in more detail.
Thanks, Geoff, and good morning. Our third quarter results are shown in more detail on slide four, and as Geoff mentioned, we were pleased to report an underlying pre-tax profit of GBP 114 million as compared to GBP 80 million for the same period last year. Consistent with past quarters, the principal driver of our profitability was top-line growth. At constant rates of exchange, our rental revenue increased 25% as compared to the same period last year, reflecting strong performance at both Sunbelt and A-Plant. Geoff will review this in more detail in a moment. With the added benefit of our operational leverage and continued emphasis on flow through, the group's EBITDA margin improved to 44%, and our operating profit margin improved to 26%. On the next slide, we have shown our results for the nine months. On a year-to-date constant currency basis, our underlying pre-tax profit increased by 33% to GBP 379 million.
Our rental revenue grew by 24% at the group level, and we also benefited from the operational leverage I mentioned earlier. During this period, our EBITDA margin increased to 45%, and our operating profit margin rose to 28%. Our focus on leverage and balance sheet management remains an important financial discipline which underpins our business strategy. On slide six, we summarize our current position. As expected, the absolute amount of our net debt increased at the end of January, reflecting our investment in organic growth and small bolt-on acquisitions. However, given the strength of our EBITDA margins, our leverage ratio remained in line with our guidance of at or below two times, and our plan is to continue to operate within that guidance. That concludes my comments, I will hand it back over to Geoff.
Thanks, Suzanne. Let's look at what's happening in each of the divisions, starting with Sunbelt. Page eight details the year-to-date and the quarter, looking at both the structural and cyclical elements of our revenue growth. As you know, this is how we like to look at the business internally. I think this page clearly supports what I said during the introduction, that is, our strategy is working. We continue to see growth both on a same-store basis as we invest in fleet and leverage our scale advantages and from bolt-ons and greenfields as we broaden the geography and sectors we serve. The third quarter was strong, with same-store growth of 19%, reflecting robust end markets and share gains. The impact of greenfields and small bolt-on M&A is also evident, contributing 10% year-on-year revenue growth.
I think this mix of both structural and cyclical opportunity is very encouraging, and we continue to see a long runway of further growth ahead. Turning to page nine and looking at revenue another way, you can see that again, Q3 was very similar to recent quarters. Yield remained at +2% year-on-year. There was no change in physical utilization, and volume with fleet on rent was strong at +26%. Looking now at A-Plant on page 10, it's a very similar story. A consistent improvement in yields at +4%, together with a 17% year-on-year growth in volume delivering a strong revenue performance. We continue to benefit from gently recovering markets, but are also clearly taking market share. With the platform we've created over recent years, a well-invested fleet, and strong service metrics, we anticipate a sustained period of growth well ahead of the market.
Turning to page 11, what does this mean for capital, and in particular, fleet investment? For the current year, both Sunbelt and A-Plant will be at the upper end, if not slightly above the increased range we detailed at the half year. As you saw earlier, volume growth remains robust, and as we enter the busiest spring season, there is nothing on the horizon which affects our macro planning. As we start to focus on next year's fleet investments, again, we anticipate good growth in both divisions. A consequence, we see next year's spend being at least as much as this year and probably higher. In previous years, we will flex our actual spend to market conditions as we progress through the year.
We have the benefit of still buying fleet in relatively small increments and on relatively short lead times, we will continue to fully utilize this flexibility. The allocation of spend between replacement and growth and its phasing impacts how it all translates into fleet growth. Whilst this is an imprecise science so early in our planning, we have tried to help with some guidance on what growth we are anticipating as shown here by division. An allowance for greenfields at a similar level to this year is included in these capital projections. As usual, we have made no predictions for M&A, either in terms of initial acquisition price or follow-on fleet investment. To summarize, I make no apologies for the fact that page 12 is exactly the same slide as one quarter ago as so little has changed.
Just to make it different, I was tempted to add a bullet point saying it was a reassuringly dull quarter but could not bring myself to call 25% revenue growth dull. Our strategy and operational delivery has remained unchanged, I think we are seeing the benefit from the breadth of geographies and sectors that we now serve. We are confident in the returns available from further investment in the business. Once again, our focus will be same-store organic growth, but this will be supplemented by greenfields and bolt-on acquisitions. This investment will continue to be made in line with the financial parameters we have outlined previously. That is leverage at or below two times EBITDA and drop through at around 60%. Our responsible investment to date has allowed us to establish a strong financial and operational base for the business.
Given that we are still in early cycle and continue to see further structural opportunities, we look forward to the medium term with confidence. With that, Hugh, I'd like to hand over to you for the Q&A session, please.
Thank you very much. Ladies and gentlemen, if you wish to ask a question, can you please press zero and then one on your phone keypad now in order to enter the queue? Then after you're announced by me, just ask your question. If you find that question has been answered before it's your turn to speak, just press zero and then two to cancel. There'll be a brief pause while questions are being registered. Our first question is from the line of Chris Gallagher of J.P. Morgan. Please go ahead. Your line is open.
Good morning. Just a couple of questions. One around where would be the focus in terms of region of future greenfields and potentially maybe some M&A. Also in Canada, what is the penetration of rental in Canada and where do you think that could go? Thank you.
Yeah. In terms of our greenfields and our bolt-ons, our strategy remains unchanged. We are looking to fully cluster the major metropolitan areas, so those top 100 markets. We're looking to fill in gaps in the map where our market share is lower than it is in other areas where we're more established. I would have said on balance, both our greenfields and our bolt-on M&A will trend towards more specialty than general tools, but to a large extent, it depends what opportunity presents themselves at different points in time. Our strategy is unchanged. Rental penetration in Canada, I don't know, to be perfectly honest. What I would say is I know we've got a minute market share, and our initial aspiration is to get to around about a 5% market share. We've done that first small acquisition.
We are planning some greenfields in the coming months once the weather gets a little bit better. We've already started introducing some significant quantities of organic fleet growth. Our target is to get to around about a 5% market share initially in Canada, and we think that's a very realistic target.
Thank you very much.
We now go to the line of Steve Woolf at Numis Securities. Please go ahead. Your line is open.
Morning. One question in terms of the asset sale level you're seeing in the U.S. As you add more kit, the fleet age obviously comes down through the maths. Do you think you'll find yourself selling less kit out in the market now, given the strength of demand and the young fleet, and therefore the benefit of that flowing through to fleet on rent? Then secondly, in the U.K., just in terms of a bit more color on maybe the regional performance, what type of kit is highest in demand and maybe who you think you're taking market share from? Thanks.
Yeah. Steve, as you have seen for a few quarters now, when you look at our total revenue growth versus our rental revenue growth, total revenue growth is less than rental revenue growth. One of the main reasons for that is we're just not selling as many assets as we would, certainly proportionately relative to the size of the fleet. For some time now, unless we get it back off rent, it's hard to sell it is the truth of the matter. We have sold relatively less. In truth, there's probably a bit of catch up to be done going forward just to get to normal levels of net fleet planning. We aren't selling off a lot. I think when we were all in Miami, we thought, well, look, there's a couple of big auctions coming up both in Houston and Orlando.
If there was any great fears about oil and gas, perhaps we'd see an influx of fleet being sold in those auctions, we just didn't. I think it's true that most people are hanging on to fleet more now and using it because it gets you better returns from rental. At some point in time, you have to catch up with normal cyclical planning. Look, yeah, it's true. Lewis, our proceeds from sales are not what they might normally be just because it's out on rent. In terms of the U.K., it's a pretty broad-based recovery. I think we've talked in the past about how London-centric it was. Again, you will see that the returns in A-Plant have improved significantly, and part of that is we are deliberately focusing growth in higher ROI, either markets or product sectors.
Again, at early stages of a construction cycle, you are going to get more demand for dumpers, diggers, and big booms. We are trying to more than compensate for that by focusing our attentions on a broader range of equipment. I think the relatively new news is it's a lot less London-centric, and it's a much broader base of jobs than it was, let's say, 12 months ago.
From a market share perspective, is that coming largely at the expense of the locals, would you say?
It's not quite as I don't know. Look, it's hard to say. It's not a well-followed market. There are a number of peers who have announced their results recently, and based on our relative performance, someone's also taking share from them.
Yeah.
Whether that's specifically us or not, I don't know.
Thanks very much, Geoff.
Our next question is from the line of Rory Mackenzie at UBS. Please go ahead. Your line is open.
Morning, guys. Just two from me, please. Firstly, can you talk about the impact on the drop-throughs of the growth mix. I'm just trying to think about what the impact could be if that mix changes more in the next year, because your combination from greenfield and bolt-ons has picked up over the past three quarters, while the same-store growth has been high but steady. Secondly, we didn't feel much disruption in Miami. But can you give any color on how your trading was impacted by the Snowmageddon in the East Coast of the U.S.? Thank you.
Yeah, sure. Yeah, look, our same-store growth has been fairly steady. It was a bit better in Q3 than it had been in previous quarters. We said for a while, we're anticipating somewhere around that mid-teen mark in same-store growth. Of course, it's the same % against tougher comparators.
Yes.
Clearly, there's good same-store growth. We would anticipate similar levels of growth. Now, our overall drop-through is 59%. Our same-store drop-through has been 67%. Therefore, if all we wanted to do was improve metrics, then you would do less greenfields and less bolt-on acquisitions. We are not buying businesses with either the dollar utilization or the EBITDA margins or the ROI of ourselves. Their initial impact reduces some of those metrics. Clearly, all of those metrics improve the greater proportion of our growth, which is same-store growth. It's one of the reasons why we like same-store growth. We discussed in Miami, I also think the more we invest in same stores, it becomes this virtuous cycle of scale whereby we just further and further differentiate ourselves from the local competition.
Not only is it financially attractive, I think in terms of structurally gaining market share, it's the most attractive investment we get. If we go through a period where same-store growth is a greater proportion, then of course, a lot of those metrics will improve. If there'd been none in the last quarter, our drop-through would have been 67%, not 59%.
Yeah.
It's as straightforward as that. Of course, remember, given we've done so many deals and opened so many greenfields in the last 12 months, there's a very large population going into same stores over the course of the last 12 months. Therefore, just looking at year-on-year % growth is a little misleading given how the population moves during the course of the next 12 months.
Okay, thanks.
We now go to the line of-
Oh, sorry. I didn't answer the last question. The last couple of weeks has been really tough in terms of weather. I think in Miami, I accurately said that sequentially, pretty much every week, year-over-year had been better than the preceding weeks, and you can see that in how the Q3 revenue growth was higher than the Q2 and the Q2. That was absolutely true up until Miami, and it's been slightly less true over the last two weeks. Snowmageddon's been a bit of an issue on the East Coast. Ice storms across a broader geography, even down through Texas, the Carolinas, certainly last week certainly disrupted our business. I was trying to talk to Francis in Texas to listen in to a budget meeting with 13 people, and one person made it because of the weather.
Okay.
Yeah, it's been disruptive, but it's a blip. Look, it's winter. Sometimes in winter you get bad weather. That's just how it is. It doesn't change the quantum of work that needs to get done. It just delays it a little bit. Actually, net, net, it's beneficial. There will be flooding now because of when the snow melts, that will create flooding. There will be more burst pipes. There will be more holes in the road. On a net basis, I always think bad weather is better than good weather. It just affects the timing of certain things.
Yeah. Okay. That's level. Thanks.
Okay, now we go over to the line of Andy Murphy at Bank of America Merrill Lynch. Please go ahead. Your line is open.
Morning, Geoff. Morning, Suzanne.
Morning.
I just wonder, could you just talk about the obvious, any sort of feedback on the oil and gas markets, what your customers are saying to you, whether there's anything about pricing, anything on one of the issues that we get sort of bowled at us is about risks of fleet moving around and perhaps putting pressure on prices in various areas. Then could you just sort of flesh out on that last point about the weather impacts. Can you talk a little bit about recent trading since the period end over the broader part of the group, please?
Yeah. Sure. Look, oil and gas, I think as you can see from our same-store growth has been the great non-event to date. Have we seen some bits of equipment come back? Yeah, but only because we're looking for it. If we weren't looking for it, nobody would notice it. It's minuscule. We have not moved a single piece of equipment from any location to another location, and we have seen no evidence of anybody else doing it either. Now, it is one of the levers we can pull. I think what happened was a bunch of people asked us what levers we could pull if something terrible happened, and what we said was we would move fleet. I think there was then this presumption that there was this mass repopulation of fleet around America. It just hasn't happened.
One of the other things which I think is notable, there's been two very, very big auctions since we were all in Miami, one in Houston, one in Orlando, in terms of auction sales. If people were terribly worried about all of this, they would have dumped fleet in these auctions. Frankly, we looked to see if that was the case. There was relatively low volumes in both auctions, and there was no evidence whatsoever of it being people dumping telehandlers and booms trying to Thus far, from a volume perspective, it's been the great non-event. From a pricing perspective, given pressures, are customers asking about pricing at the moment? Of course, they are. Have we had to give anything up significant yet? No, we haven't. We're a quarter in, not a lot's happened. I'd reiterate it's 6% of our business.
I think I've seen some industry statistics that have said that of the total industry fleet, it's about 10%. Of that 10%, less than half of the people have the infrastructure to move the fleet somewhere else. Given the strength of the markets anywhere else, another 3%-4% of fleet moving somewhere else would get swallowed up in a heartbeat. I understand why people are nervous about it. If you look at our statistics, all of our peer statistics, the auction results, to date, it's a great theoretical argument, we've seen nothing in practice.
Right.
We've given some guidance for Texas for our fleet growth next year. We're budgeting growth in Texas next year from a fleet growth perspective. We have significantly more fleet on rent in oil and gas today than I did one year ago.
Current trading?
Current trading is strong. As I said, there's been a minor tick back over the last week or so with the weather. As I said, if you look on page nine, you can just about see that in the physical utilization numbers. Absent that, the market had seen continuing previous trends of just getting stronger. The market is very good. Remember, I can understand why there was this fear that it was going to be this short-term blip where all of this fleet came off very short-term as a result of the oil and gas price. That hasn't happened. Now what we should be thinking about is thinking more to the medium and long term and what is the positive impact of lower energy prices on the general economy, which flows through to the rest of the 94% of our business.
The short-term blip, which everybody panicked over, clearly hasn't happened.
Right. Thanks, Geoff.
We now go over to David Phillips at Redburn Partners. Please go ahead. Your line is open.
Good morning, everyone. Can I just ask a bit more about the guidance for fleet growth next year and the CapEx that you mentioned today? I think, Geoff, you said that there was no expectation of greenfield or bolt-on in your volume growth number that you put in the slides.
No, there's an allowance for greenfields. There's a presumption that we do somewhere between 25 and 30 greenfields.
Okay. 25 and 30 greenfields. Cool. Presumably within the GBP 1,225-GBP 1,325 CapEx range or the outlook, is there any expectation of bolt-on in that? Have you not accepted?
That's where there's a difference. Remember, there's always going to be a degree of interchangeability between whether it's greenfield CapEx or whether it's M&A spend.
Yeah.
Having said that, when we do M&A, there's obviously the initial acquisition price, but a normal characteristic is there's then a significant level of follow-on CapEx.
Investment
too. Yeah. Fleet investment. It was a pretty busy year in terms of both greenfields and bolt-ons. What I don't want to do is set a target for M&A spending just to hit a % of growth number.
Sure.
I think that's an immature way to run the business. The minute you set a target, you're just going to do the deals for the sake of hitting a growth number. We want to do each one on its merits. Now, realistically, is there going to be some? I will be very surprised if there is none. What we're trying to say is, because at this stage, we aren't budgeting any more M&A, but our strategy of it being a predominantly organic-focused strategy remains unchanged. We've had very good track record of getting good returns by broadening our geography and our sectors through bolt-on M&A, and that's likely to continue given we think. Remember, one of the big pluses I see of this lower oil price is it will elongate as well as improve the economic recovery in North America.
We believe we are sufficiently early in the cycle to still be active from a bolt-on and greenfield perspective.
Yeah, understood. Just to make sure I'm thinking about apples for apples, that mid to high teens anticipated volume growth is completely separate from the greenfield element of the 10% growth that you delivered in Q3 from bolt-ons and greenfield.
No, it includes the greenfield.
Yeah, that's what I'm saying. The bolt-on element is not included in the mid to high teens.
The bolt-on element is not included, that's correct.
Great. Understood. Thank you.
If you were to take that as a volume, I guess you pick the number somewhere between mid and high teens, you stick it on a bit for yield, and you probably not unrealistically put a little bit on for M&A. The only problem is we have no idea what that number is going to be.
Yeah. No. Exactly. Given what you were saying earlier on about the aging of the fleet and lower disposals, is 2016 a year you should be thinking about expanding the fleet by your non-investment means? You've got your project capacity in place, and you've got the ability to maybe put three or four months onto fleet. Fleet growth could actually go from that aspect as well as CapEx.
Yeah. No, that's absolutely spot on. Whilst we have historically said, let's assume similar levels of physical utilization, as you saw over in Miami about that whole thing about project capacity, it's about speeding up the availability of fleet, and therefore, where that ought to play itself out is in a slightly better physical utilization.
Yeah, great. Thank you very much. Very clear.
Our next question is from the line of Justin Jordan at Jefferies. Thank you very much. Your line is open.
Thank you. Good morning, everyone. Can we just go back to slide eight? I know you called it reassuringly dull, but can you just talk us through the acceleration in the like-for-like rental revenue growth from the 17% in the first six months to 19% in the last quarter? Obviously, people were probably expecting some modest slowdown in that from energy, and I think you've dealt with that frankly in the last few questions. Can we just talk about some sort of explanation as to why the like-for-like has accelerated? Are there any particular aspects of non-res construction or specialty that you're seeing strong growth in? Particular geographies that you want to call out that are just particularly working for you for some reason?
No, I think it was predominantly through general tool stores. It wasn't an acceleration particularly in specialty. I would attribute it all to a very strong non-residential market. As you can see, it's all volume. Again, I think we highlighted Miami, we highlighted it in December too. We saw an acceleration in the pace of activity through the year. The reason why we've called out good, strong CapEx numbers for next year is based on what we're seeing on the ground. Once the weather breaks, spring looks like a very busy season for us. Absent financial markets who are preoccupied with oil and gas, if you look at employment statistics, wage growth statistics, the fact that people effectively have had a tax cut because of lower energy and gas prices, life feels pretty good in North America at the moment.
It was just a continuation of existing themes, Justin.
Okay, just one quick follow-up on rental rates. In prior quarters, you've called out about a minus 2% mix effect of both on M&A and new store drag and that sort of thing impacting on the 2% rate you've declared in prior quarters. Is that still around that negative mix, similar number going forward, and what should we be thinking about in terms of rate versus going forward?
Yeah. If you break it down, it always worked itself out as minus two, and we dealt with this in the first quarter saying we thought it took at least a year for this to wash through. The one tweak I'd say is it doesn't change anything. When we break it down to rate and mix, if the last two quarters were plus four, minus two, it's probably now plus five in rate and minus three in mix. Some of that might be weather, the minus three. The one thing, when the weather gets bad, you lose daily contracts. What you have is the longer monthly contracts, and you lose your transactional business. If somebody's got something on rent and the weather's terrible, they probably keep it on rent. Nobody goes out and just does a daily activity when the weather's terrible.
The rate's a little bit better and the mix was a little bit worse, but net, net, it all just worked out at two.
Okay. Just one final thing. Obviously, dollar utilization is trending nice and steady at around 60%, 61%. I appreciate there's a negative impact here of new branch openings organically and both on M&A, because you're not buying anything with the same dollar utilization of your own business, sadly. Going forward, are you confident of being able to at least hold something like a 60% dollar utilization going forward, even with the impact of growth?
Yeah. Give or take. It's exactly the same question around drop-through.
Yeah.
The impact of M&A and greenfields affects dollar utilization, yields, drop-through, a number of metrics because we're buying businesses. I see that as a positive in terms of there will come a point in time when the level of those greenfields and M&A breaks down. Again, remember the charts which are on the website from Miami. We showed how over a period of a three-year period, those businesses evolved to our average. What we have now is those who are going through that maturity curve and some new ones that are coming on at the bottom. The precise number will depend on that mix. That's a hard thing to call. We're not going to get down to breaking down every single metric between same store greenfields and bolt-ons.
We do it on the drop-through, because drop-through became a key measure over a period of time. We obviously track same store dollar utilization, new acquisition dollar utilization greenfields, and therefore are confident in our ability to maintain strong levels of dollar utilization. Again, we could improve it by not doing any greenfields and not doing any acquisitions if we just wanted to drive the metric. As it is, we're growing the business significantly whilst delivering high returns and managing our leverage. We think that's a responsible thing to do at this stage in the cycle.
Thank you.
We now go to Alessio Magni at HSBC. Please go ahead. Your line is open.
Thanks. Morning, Geoff. Morning, Suzanne. A couple from me. Just two quick ones on CapEx and then one on the effect of diesel. On CapEx, could you give us a sense of how much of that might go into specialty versus general tool? I'm thinking of the FY 2016 guidance. Is there a change in the proportion there?
There's not. The honest answer to the question, Alex, is I don't know right now. We've gone through the initial first pass of top-line budgets. Suzanne and I are out in America next week, dotting I's and crossing T's. That is if the weather breaks and they can actually finish them. I don't know. I would not anticipate a significant difference. If the weighting was any way, it would trend towards more specialty. Look, can we come back to you the full year by which time we'll know that in more detail?
Yeah, sure. Second one on that. As you're looking at your budget and you're looking where you're going to fill in, how would that affect the proportion of extra large and large depots over the course of the next year?
That's, again, a good question. Remember, you can broadly work on the assumption that all greenfields start at the very small end and work their way up. It's same store growth, which is driving people up the curve.
Yeah.
It is the greenfield CapEx and the M&A CapEx, which is typically bringing in people in either the small or medium-sized locations. I can think of one occasion, maybe two locations that we bought that would actually go straight into the extra large category. Typically, they go up that curve over a period of time. It's the same store growth, which is driving them up that curve.
Okay.
If you look at our CapEx last year, 75% of the capital we spent went in same store growth. I would expect a not dissimilar number going forward.
Understood. Thank you. Last one. If I look at the sequential improvement in the EBITDA margin, it looks sort of on trend with what we've had for some time. Bringing that back to the effect that lower distribution costs might have had, particularly on diesel. I suppose a two-part question. What has been the experience on the diesel cost side, but equally, to what extent are you having to lower the surcharge proportionately? What's been the net effect through the P&L from that, please?
I don't know I know the answer to that right now, because there's too many moving parts. I'll be honest with you, I've not even tried to analyze it. I think there's an interesting bit. If you look at the press release in a bit of detail, we break out our revenue growth by the quarter and the nine months where we break out ancillary revenues. One thing you will see in the fourth quarter is that ancillary revenue growth is +19%, whereas it's +22% from memory for the nine months. Clearly, whilst it is hard to get increases in fuel for our equipment and indeed delivery. Now, as it happens, we have had increases, just we haven't had 22% increases. The slower pace of growth. It's going to take a quarter or two for that to balance itself out. You're absolutely right.
Some of the saving will stick, and some of it will have to be passed on. Right now, we aren't giving away great reductions in either transport, but we're not getting any increases. Just by having zero growth means it is a drag on our total revenue growth as opposed to our pure rental revenue growth.
Got it. Understood. Thanks.
We now go to the line of Joshua Puddle at Berenberg.
Yeah. Hi there. A question on your smaller competitors in the U.S., please. You've previously commented that they're being slow to invest in their fleet despite the positive outlook. I was just wondering if you're seeing any change there.
No, not really. We just had the ARA show. Every ARA show for the last seven years has come out with announcements saying it's the best show ever. People are going to spend more money than ever before, and it never happens to quite be the case. Do I expect people to spend a bit more? Yes. I think a lot of it will be in replacement. I think the key is not what they spend, but the extent to which they replace and which they grow. If you look at the Rouse data, the general industry fleet ages are still high, therefore, I would still anticipate a greater proportion of their spend to be replacement, not growth, and that's borne out with discussions I've had post-ARA with some of the big equipment suppliers.
I expect people to spend more, but I do not expect the fleet growth from our small competitors to match the growth in the market. Therefore, we think there's a vacuum into which we can invest.
Okay. Thank you very much.
We now go to the line of Mark Russon at Canaccord. Please go ahead. Your line is open.
Yes, good morning. Two questions, if I may. The first question is just on CapEx. Obviously you raised CapEx guidance, which shows confidence, et cetera, but just how much of that is also due to obviously the more items as you buy that are Tier 4, they're more expensive. I'm trying to figure, is there also a like for like increase in the cost of equipment that you're buying from the manufacturers? Can you just say something about that as the first question?
Look, clearly Tier 4 engines are more. Having said that, built into going forward, if you were to look back on an asset we bought today, relative to the cost of the asset we are selling and replacing because of Tier 4, there has been significant inflation. However, between the year just gone and the year ahead, we are anticipating very little inflation.
Okay, thank you. I'm interested in your comments on oil and gas. We haven't really seen much impact to date. It doesn't surprise me. If you look at the United Rentals conference call a couple of weeks ago, they didn't say they anticipate anything either right now, but it was more like Q4 calendar 2015 because again, given the cuts to CapEx and in some cases OpEx amongst the oil companies, it would be calendar Q4 2015 rather than Q1 2015 it would have an impact. I'm a bit surprised you say you haven't seen it now. I'm surprised that you were looking for it now because I wouldn't have expected it now.
I don't know. I think Michael's right. Clearly, if these prices continue, there is going to be continued pressure. We would not anticipate significant growth. We would probably expect it to be a small amount of decline. I think what is important, however, is there are these headline numbers about how number of well heads have halved. People are looking for the correlation in that to our equipment. I think what both ours and United Rentals' comments should reassure is that neither of us have significant exposure to that highly explorative side of the market.
Sure.
Trying to correlate what we are going to see from a volume perspective relative to explorative oil fields was slightly overdone. If there is significant cutbacks in production from existing wells, that will have some impact. Although, to an extent, whether you are producing at 70% or 100% does not make a whole heap of difference in terms of what equipment you need. It is just how hard it is working. If there is a significant downturn or in the longer term downstream capital projects, that will have a bigger impact. I think the former, i.e. the significant reduction in volume, is the sort of things we might see in Q3 and Q4. Again, remember how small a proportion of our business it is.
Yeah.
The bigger capital projects, they are the sort of things you are not going to see for 18 months to two years because we have not seen a single large capital project that has either been delayed, suspended, or stopped. The question is, and most of these are multi-year projects, the question is how many more new ones are going to come along to replace those over the next 12 to 18 months? There could still be some impact. Remember, our direct impact is 6%. If you include indirect, i.e. all of our exposure to oil and gas states, it is 10%. It would be ridiculous to say that there would not be some slowing over time if oil and gas prices stayed low for a long period of time in that 10%.
It is going to happen over the long term, and therefore, the positive impact that flows through the other 94% of our business will be flowing through by then. If I look at over the last three years, we posted great results and sequestration and the cuts in institutional expenditure were a bigger headwind to us than I suspect oil and gas is going to be. No one bothered about those things because it did not get the publicity that oil and gas has got. It is not unusual that at different times in the cycle, we see different elements of our market growing at different paces. I just think this is just another one of those swings, Mark.
Yeah. Thank you.
Our next question is from the line of George Gregory at Exane. Go ahead. Your line is open.
Morning, both. Just one question from me, please.
Up on a previous one on bolt-ons and greenfields. When you look at the deals and the store openings that you have already done, what growth would you expect that to contribute next year, please?
I don't know. If you think about it, the greenfields and the bolt-ons for the year to date have done about nine. I think the key is to look at the bolt-ons rather than the greenfields, because greenfields just get incorporated in with the CapEx number. The bolt-ons are four, and if you've done them on average through the year, it should contribute two next year. I've not sat down and worked it out. Like I said, we're about a week or two away from doing formal budgets. Yeah, there's got to be a % or two growth, probably a bit more as a consequence of the full year effect of some of those, but absolutely.
Okay. Thank you.
Once again, if anyone has any further questions at this stage, could you please press zero and then one on your phone keypad now? We go over to the line of Hector Forsyth at Stifel. Please go ahead. Your line is open.
Hi, Geoff. It's Stifel. In terms of on the CapEx guidance you're giving for next year at this stage, can you give an indication of where you might see leverage at the end of financial year 2016?
Yes, Hector. What we have said about leverage, and again, we'll be able to perhaps give some more guidance on this in June when our budget process for 2016 is complete, is that we will keep guidance within the range that we've given, which is at 2 or below. That is largely dependent on M&A. At the current CapEx spend levels that we have indicated for next year, should we do no M&A, then the leverage ratio will drift down a bit from that 2 level. It's dependent on M&A, but certainly, we will keep it within the guidance of 2 or below.
Okay, thanks very much.
At this stage, there are no further questions in the queue. May I please pass the call back to you to close?
Yes. Thank everyone for your interest this morning. We appreciate all the questions. As always, if you have any questions, please feel free to call Geoff or me later on today. Thank you.
Thanks, everybody.