Earnings Call: Q2 2015

Dec 10, 2014

Good morning. Welcome once again to the Ashtead Q2 results presentation. It's another half year. It's another good set of numbers and I've got a cold again. So not an awful lot changes. I think you all know the format. After a brief overview from me, Suzanne will go through the financials. I'll then try and cover what's happening operationally on the ground. And of course, then we'll go to the most interesting bit, which is the Q and A. As you can see from this highlights page and also this morning's results release, it's been another very strong quarter. Group rental revenues of 24%, delivering record pretax profits of 33% at GBP 266,000,000 I'm going to leave the detail of this impressive performance for Suzanne to cover in a moment. But for me, the key highlight is that across a broad range of metrics, you can see real progress. As we continue to benefit from recovering end markets, but also a consistently applied well executed strategy for significant market share gains. If these dynamics coupled with the investment decisions made over the last 3 years that have delivered not only this current performance, but have created such a good platform for further growth. But I want to cover this in a little more detail in a moment. But for now, let me hand over to Suzanne. Thanks, Jeff, and good morning. Our second quarter results for the group are shown on Slide 4 in your pack. And clearly, the positive year over year trends continued with pretax profit for the quarter of £145,000,000 compared to £113,000,000 by top line growth with rental revenue increasing by 26% measured at constant exchange rates. Our results were further enhanced in the quarter by our operational leverage, which helped to deliver an improvement in EBITDA margin from 44 percent to 40 exchange, rental revenues increased by 24% and profit before tax grew by 33% to £266,000,000 The EBITDA margin of 46% and the operating profit margin of 30% are consistent with those of the 2nd quarter and result from higher revenues, operational efficiencies and a continued focus on fall through across the group. It was pleasing to see that both the UK and the U. S. Businesses performed well in the 6 months. I'll cover the headline numbers for Sunbelt and A Plant and Jeff will cover the growth drivers and our strategy later. So beginning with Sunbelt on Page 6, our ability to capitalize on market opportunities was evident in the first half 25% growth in rental revenue. In addition to strong same store sales growth, we also saw strong growth from greenfields and bolt on acquisitions. Maintaining a good drop through rate of incremental rental revenue to EBITDA was therefore key to our performance in the half. Despite the drag effect of new stores, Sunbelt's overall drop through rate in the half was 59% and excluding new stores, it was a robust 67% on a same store basis. So as a result, Sunbelt achieved a record first half EBITDA margin of 49%, an operating profit margin of 33% and a pretax return on investment of 26%. We continue to be encouraged by A Plant's progress as shown on Slide 7. The rental revenue growth at A Plant was 18% and it reflects both the recovering market and market share gains. The combination of this rental revenue growth and a 62% drop through rate resulted in an EBITDA margin of 36% and an operating profit margin of 18%. So given the strong performance in both geographies and as a reflection of our continuing confidence, we are raising our CapEx guidance for the full year as shown on Slide 8. As we often will at the half year, we've added just a bit of color to hopefully aid in your understanding of these numbers. We've provided a forecast for both Sunbelt and A Plant, and we've also shown Sunbelt in dollars. Given the recent movements in currency, we think a discussion of the U. S. Number in dollars makes a lot more sense at this stage and will provide a better picture of what is actually happening on the ground. So at Sunbelt, we now expect to invest between $1,170,000,000 $1,220,000,000 in fleet this year, and that represents an approximate 25% increase as compared to fiscal 2014. The expenditure in the U. S. Will be largely directed toward fleet growth rather than de aging given the very young age of our fleet at Sunbelt. So clearly, we're moving ahead with the U. S. Investment and given the strength in the business that we reported this morning, I suspect that probably isn't a big surprise. But perhaps the more surprising point is that in the UK, we do plan to spend approximately 50% more on CapEx this year than last. And that expenditure will be allocated between fleet growth and de aging as there's a bit of catch up to do. So at the group level, our current forecast is for total expenditure for CapEx to be in the range of £925,000,000 to £975,000,000 and that assumes a 1.6 rate of exchange. And before we leave this slide, I'll just give my usual caveat that as always, we'll remain flexible and look at how conditions are developing in the market and adjust these figures as appropriate throughout the rest of the year. So as we move on to the next slide, we'll take a look at our cash flow profile. And for the first half, you'll see that free cash flow was £172,000,000 negative, reflecting strong cash generation, but also a significant investment in the rental fleet. Our capital expenditure net of disposal proceeds received was £492,000,000 and that's an increase of £84,000,000 ahead of the comparable period last year. In addition, you'll see that we invested £113,000,000 on small bolt on acquisitions and we returned £46,000,000 to shareholders in the form of dividends. The increased level of interest and tax payment reflect the increased cost of our bonds that were issued just a couple of months ago and the utilization of our tax loss carryforwards that we mentioned in earlier quarters. By the end of the financial year, we expect our cash usage to moderate, reflecting both the seasonal nature of our working capital and our fleet investment. Moving on to Slide 10, here we show information on our debt and leverage position. As expected, the absolute amount of our net debt increased this October as compared to last year due to the fleet investment and M and A activities I just described as well as the seasonal use of working capital. However, from a leverage perspective, the increase in debt was more than offset by higher earnings and as a result, our leverage ratio declined to 2 times. This reduction was in line with our often stated view that improving EBITDA margins will allow us to support growth while still continuing to delever. So as we look forward to year end, we expect to sustain our leverage at or below 2 times and that's in line with previous guidance. And as a final point before I turn over to Jeff, following the issuance of the 10 year bonds back in September, the weighted average maturity of our debt is now just a bit over 6 years. That concludes my comments on the financial results. So I will hand over to Jeff. Thank you, Suzanne. So let's get into the operational details starting with Sunbelt. As Suzanne just highlighted, it's been another great quarter with rental revenue up 25% against tough comparators. You can see that volume is again the big driver, up 24% year on year and yield is up again 2%. As we highlighted in Q1, our yield measure is a tough one. With all the impact of greenfields, acquisitions and mix, we will face a headwind for the year, which reduces the underlying rate impact of 3% to 4%. You only have to look at our EBITDA margins of 49%, up from 46% a year ago and our return on investments to know that we are growing profitably. Q1 physical utilization was a little lower than some expected, but as you can see, that's been corrected in Q2. So year to date, average 73%, which is exactly what it was 1 year ago. I just want to remind everybody, the physical utilization is an important KPI, but needs to be viewed in the context of fleet growth and not in isolation. Our current utilization levels on a fleet size of 28% is testament to our ability to absorb this additional volume and get it out on rent to customers who clearly need it. There are more moving parts than they used to be in our growth story. So here on Slide 13, I'll try and break down and look at the underlying trends. So same that stores we've had for a full 12 months grew 17% year on year. The commonly held view is that our end markets are growing around 7%. Personally, I think it's a bit better than that. But on that basis, 10% of our growth is coming from same store market share gains, which is clearly very encouraging and supports our strategy of organic fleet investment. These same store gains reflect a structural change in the market, where our scale advantages are resulting in the big continuing to get bigger and that's a trend I fully expect to continue. The other element of our growth that has really built some momentum in the last 2 years is bolt on acquisitions in Greenfields, which contributed 8% revenue growth, again a very good performance. What I like about this is that we now have multilayered growth. Markets are recovering, which is great, but still 2 thirds of our growth and the same store share gains and new stores is structural rather than cyclical. This blend over time will of course change, but I think it explains not only why we had a great quarter, but also why we can look forward with such confidence. What I'd like to do now is go through each of these elements in a little more detail. So let's start with the market. As you know, we have been advocates of a slow steady recovery for a couple of years now. In that time, there have been some contradictory data points, but now the consensus seems to be coming in line with our view. As you can see, there are still some who suggest a more dramatic short term improvement end markets, but they also predicted that for 2014. And once again, it's been another steady growth year. We continue to anticipate a number of years at similar levels of growth knowing that the constituent parts of the market will of course change. Certainly with the exception of institutional spend, markets are good. Our customers are reporting much better pipelines and the number of major projects breaking ground has clearly increased. If you also look at the results of other companies in the U. S. Construction space, they all now consistently point to very healthy markets. And it's a good question is why are we gaining so much share in existing stores? Ultimately, share gains in this industry come down to service. And there are a host of contributors to this such as IT, training and logistics. You've got to have the right platform to deliver service. However, probably the biggest contributor is fleet investment. We have crossed thresholds over the past couple of years where we can really leverage our scale advantages. We have doubled our fleet since 2011 and are investing proportionately more than the rest of the industry. Our fleet is also the youngest in our history and the youngest in the industry. The depth of fleet, but also the breadth of product does differentiate us and has proved to be a compelling solution to our customers and allowed us to appeal to many new ones. As markets recover and deadlines become tighter, high quality service becomes ever more critical. Therefore, I believe that we will continue to benefit from our investment. Of course, it can't all be about fleet investment. As I said, you also need a platform and hence our greenfield and bolt on strategy. Just let me recap. Firstly, our core general business geographically to increase and better balance our market share. We are doing this by way of both bolt ons and greenfields with a target to double our market share through this cycle. In addition, we are broadening the base of the business. There are a number of highly profitable niche sectors, which also have low rental penetration and therefore have the potential for significant growth. Typically these sectors are either less cyclical or on a different cycle to construction and will therefore help to better balance the business long term. Most of our targets are relatively small and regional. This is very much a buy and build model. So how have we done? Well, as you can see both in terms of our core general business and our specialty divisions, we have made great progress in a relatively short period of time. We have 38 locations and achieved a nice balance between our two objectives of a broader general footprint and specialty growth. The pace is good and we have now a well established process as well as an experienced and dedicated team. We see this continuing as a core element of our growth. We have around 20 greenfields planned for the second half and a good pipeline of bolt on targets. You will note that Canada is on the map for the first time. You can tell us the first time because where it is on the map. We haven't quite got used to where Canada is yet. We completed a small acquisition in November in Western Canada as detailed in the press release and we see this as a bridgehead for further investment. It may be a small stop, but we see Canada as a very exciting new opportunity. Our strategy remains unchanged, so we would expect to maintain our guidance of around 15 unit locations for the financial year 2015 2016. Although as we have seen in the first half of this year, M and A growth tends not to be linear. Whilst there are obvious long term benefits from broadening the geography and markets we serve, there are also good immediate financial returns from this activity. You can easily get bogged down by the fact that there is a small drag on some of our metrics from this activity. However, as you know, we are industry leading in most of these measures and therefore any acquisition or greenfield will be a short term drag to metrics such as yields, dollar utilization or drop through. However, the return on investment is still very good at 20% to 25% and we have built a sizable business in a relatively short period of time. We also believe that by focusing on smaller deals, we have given ourselves exposure to a wide range of geographies and sectors, which significantly mitigates the risk of any downturn in a specific space. It's also worth noting that acquisitions in Greenfields that we've had for only 12 months are classed as same store, where collectively we are delivering a 67% drop through. So you can see how quickly they are integrated and begin to contribute. It's clearly been a very busy period from both greenfields and acquisitions. I guess a fair question is whether the signals are changing strategy or an acceleration of the pace. And the simple answer is no. We remain committed to responsible growth and continue to focus on the same financial and operational disciplines that have underpinned our performance over recent years. Our drop through for same stores is strong at 67%, which suggests that we are coping with the pace of growth. Look, I believe this is a really important indicator of stress in the business and something we are watching very carefully given the levels of investments. Allowing for greenfields and acquisitions, drop through remains a healthy 59%. We continue to scrutinize all acquisitions to ensure that they meet our stringent financial hurdles and are in line with our strategy. A reflection of our high margins is that despite this investment, we have maintained leverage of 2 times EBITDA. I think it's worth noting that of our total investment, 85% is on organic capital. And of that, 75% of that investment is going into existing stores, where the risk is lowest, the drop through is highest and we are gaining the most market share. So clearly, our emphasis remains on organic growth. We also continue to invest in our operational capabilities. We've added over 1,000 new employees in the year. Whilst no one is suggesting that this level of growth is easy, it does play to our operational strength. We've also supported this with an enhanced IT and logistics infrastructure, so the platform is both larger and more sophisticated. 2 weeks ago, I was with our senior leadership group in Chicago and it was cold. I remember the first meeting of this group back in Dallas in 2,008 when it was around 70 of us and times were very, very different. In Chicago, we had over 170 people and I was particularly struck by how much our core strength has improved both in terms of quantity and quality. Our actions have demonstrated that we are more than prepared to invest in what is a proven strategy of profitable growth and market share gains. However, nothing has changed in terms of our commitment to this being responsible growth reflecting where we are in the cycle. Moving on to A Plant and again it's pleasing to report a very strong revenue performance as we benefit from a recovering market and continue to gain market share. As you can see, our confidence is in the business is reflected in our fleet growth. There are however a couple of anomalies to note. You will recall in Q1, we highlighted that 9% yield improvement was a one off mix event and yield would trend to 3% to 4%. This remains the sustainable level of yield improvement. And yes, physical utilization has ticked down a little, but again, look at the fleet growth. This is just a timing lag as we brought in a lot of fleet later in the quarter. As I spoke earlier of the benefits of Sunbelt having such a multilayered growth story and the same holds true of the group as a whole. Instead of us being a U. S. Only story as we have been in recent years, we now also have great opportunities in the UK, which is very encouraging. As Suzanne highlighted, A Plant delivered £30,000,000 of profit in the first half, which is close to its best ever full year. And being so it's clearly going to be a record year and it being so early in the cycle and with more to come from self help, we think there are significant opportunities ahead in the UK. As you know, I have not been the most bullish on the UK K. Construction space in the past. However, there is no getting away from the fact that there is a growing confidence in our customer base matched by our own experiences on the ground. A bit like the U. S, it's got the feel of a long steady recovery rather than the blowout, So we expect a good runway of growth. What is particularly nice to say is the impact of our strategy on ROI delivering what we anticipated. We've never shied away from the fact that our record in the U. K. Was not acceptable in this key metric and we have to do something different. However, our strategy of self help and focusing on high return customers and markets is clearly paying dividends. But the strategies will stay the same and is very consistent with Sunbelt's. We continue to invest in same store growth to meet the demands of a recovering market and we will continue our buy and build strategy in higher return specialty markets. So to say in both our strategy remains focused on organic growth supplemented by bolt on acquisitions. This is helping us to build a broader base for longer term growth both in terms of the geography and the markets that we serve. Our investment in both fleet and operating capacity over the last 3 years has created a platform for which we can capitalize on recovering markets and structural growth. The confidence we have in our model is supported by strong investment, but we remain committed to keeping leverage at or below 2 times EBITDA. To balance our investment with returns to shareholders and in line with our stated dividend policy, the interim dividend has been increased 33% to 3p per share and we reiterate our policy to maintain the dividend through the cycle. So with both divisions performing well and the benefit of weaker sterling, we now anticipate a full year result ahead of our previous expectations. So with that, let's move to Q and A. If you could just wait for the microphone, state your name and the organization, look, you all know what to do. Andrew Murphy from Bank of America Merrill Lynch. Just wanted to touch on the U. K. And Canada as they seem to be sort of not as much flavor in the month but interesting areas. Are you suggesting that the emphasis in the U. K, the growth that you're seeing is going to change your underlying thinking about whether it's a long term part of the group or not? We've again consistently said ROI wasn't good enough. We've consistently said we have a range of options for the U. K. I don't think anything's changed. If the question is, are we going to do a great big consolidation play because suddenly we think the U. K. Is wonderful. All that would be fairly done looking at the relative ROI in the U. K. Versus the U. S. It's better than it was. Is it great? No, not yet. So we would have to see significant improvements in the underlying returns on investment in the U. K. Before we took a greater investment decision. Will we continue to invest in same store growth? Yes. Will we continue to do the sort of deals you've seen us do over the last 12 months in terms of buying small specialty businesses and then rolling them out on a more national basis? Yes, we will. But we will continue to invest in the UK. Somebody came along and made a big offer, would we consider it? Yes, we would because of the relative returns on investment. You would expect us to look at it dispassionately like that. In the meantime, we're just making it more valuable. So look, I think it's a case of very much more of the same. We haven't suddenly got religion in terms of the U. K. Market. It's still a tough place with fairly thin margins and it's an overcrowded market. And just on Canada, does that present any more difficult problems than you would otherwise expect looking from the outside? I guess a different territory a bit further away. I was there a few weeks ago and it's colder. But other than that? But other than that. But other than that. And so look, let's before we get all carried away about this, we've moved to Vancouver. We've got a and we've got a location in Calgary in Edmonton. And I would not say this with any Canadians in the room, but it's not far from Seattle to Vancouver. It's an obvious extension of a geography we already serve very well. Having said that, we have been facing increasing pressure from customers to go there and support them. Some of our biggest competitors, around 20% of their businesses in Canada, is clearly a highly profitable market and it's a one we want to serve better. But what you'll see now is we're going to follow on that investment with some pretty heavy organic fleet growth. I think we'll see us opening a couple of greenfield locations fairly soon too. So we'll do it in exactly the same way as we've approached an expansion into Kansas and expansion into Minneapolis. We will follow on an initial bridgehead, which I think GWG really provides us. We spent a lot of time looking at Canada. I probably looked at that my first acquisition opportunity in Canada 3 years ago. And it's we can buy fleet. We can open greenfields. You want that platform. You want that management team, that IT infrastructure, somebody that will bolt in culturally well with us. And we think we have taken the appropriate amount of time to find that right bolt on. So it has the potential for being a significant part of the group, but it's not going to happen overnight. Thank you. Good morning, Geoff. It's Rob Plant from JPMorgan. When we last met, you talked about oil and gas being a small but quite interesting market. How's that business performing? It's a small and quite interesting market. We might as well deal with it head on. It's about 10% of our business. Well, it's almost exactly to a decimal place about 10% of our business. It has been a good market. I think it continues to be a good market. I think you have to look at it from a long term. Remember what we talked about, I thought about specialty businesses. What we said was they're going to be on different cycles to construction. So we're probably going to have a slowing in the growth of oil and gas for a period. I think the long term desire for North America to be self sufficient in oil and gas stays true. And therefore, I think it's a sector that for the long term we absolutely want to remain in. If you look at it, look, is it going to slow down some of the growth in oil and gas, the current oil price? Yes. Is it going to be a benefit to other parts of our markets with lower gas prices? Look, our total revenue in oil and gas is about $200,000,000 So there's going to be a negative there. I spend $100,000,000 on petrol for my delivery trucks and there's going to be an immediate benefit then. So when you look at the trade off of savings in fuel, the impact of that in our general markets and the potential downturn in oil and gas then yes. Could it be a bit of a knock on impact of some of the infrastructure work in some of the oil and gas rich states? Yes. But again, I think you've got to look at them. 90% of our businesses are neither the Permian or Eagle Ford Basins. They are the lowest half life producing basins in North America. Getting it out of the tar sands, getting it out of Bakken and getting it to the coast is significantly more expensive and we have no exposure in those markets. So I think we're pretty well placed in terms of our actual oil and gas exposure. I think the overall net impact will be marginal, if any. You could put forward a case it's going to be net positive, but you've got to get into all kinds of economic theory around that. Thank you. Good morning. It's David Phillips at Redburn. Can I just ask a question jointly on investment and between the organic and the bolt on situation? Firstly, organic CapEx, what's the level of inflation are you seeing now compared to maybe 6 months ago? And how do you see that going next year? And how quickly can you get access to the kit? I know previously you might I mean versus 6 months ago, we are not seeing significant inflation. We're seeing a bit like a couple of percent. The real inflation is against the replacement cost of what we were selling that we bought 7 or 8 years ago. And here what you're seeing now is a real impact of the whole Tier 4 issue, which is creating us a bigger inflation impact, it's actually really positive for us as bizarre as that sounds. Remember what we did a year ago, we grandfathered in a bunch of Tier 3, which was good. I think I used this term last time. There's this thing called sticker shock where the actual cost of a piece of equipment now is a Tier 4 final versus an old Tier 3 is so high that it is reducing in volume terms the investment of our competitors and it's another reason why our customers are choosing to rent not buy. So have we got the full rate back yet for that weighted inflation? And the answer to that is probably no, not just yet. And again, I think I said at the time, there'll be a bit of a lag because you can't charge one price for Tier 4 and another price for Tier 3. It doesn't work. You have to increase your average price. And what we're seeing is average prices going up, but they have to continue to go up to reflect the inflation in here for. So it is an inflation headwind, bizarrely. It's pretty positive for the bigger rental companies who've got a little bit ahead of the game and have that capacity. So in terms of the 2 structural changes in our market, the shift to rental and the big getting bigger, I see that inflation in Tier four as being very, very positive. Exactly. And the incremental CapEx you're putting into these, do you expect that to be in place by the end of Q1 next year, the kit? Yes. I mean the numbers that we've quoted now is stuff we would fully anticipate to have landed. I mean it's where we get a little bit we've got out of the kilter about a year ago when we started talking about capital. What you got to remember is, look, what we tried to spread our capital a lot better. There's no point trying to land the quantum we're now buying on the 1st May because it fits neatly into a new financial year. It's like every truck in the country is delivering fleet to us if we try and do that. And we can't just absorb it more quickly. So the vast majority of this increased CapEx, we aren't going to rent more equipment in December, January February than we are today. And so most of it is coming in and we want it landed. I know people got a bit agitated. 1 or 2 people got agitated about the lower physical utilization in Q1. That was great for us because what we actually did was we provided some flex capacity to meet the increasing demand. Our fleet is like having tins of beans on the shelf. You can only take market share if somebody can come and take a bean off the shelf, okay? So it was very, very important that we were just a little bit ahead of the curve in terms of our CapEx. All right. Thank you. And just on bolt ons, are you getting any more competition for buying these assets or your preferred buy or no because you've got the model for doing it? I can honestly say there is one acquisition that we've looked at over the last 3 years that we thought we would get and we didn't get because somebody else bought it. Now there are remember, we are not participating in the bigger deals with very aggressive multiples. And so you've seen 1 or 2 acquisitions, particularly in the oil and gas space over the last 6 months where I struggle to see how you ever get a return on investment. We have no we have a platform. We don't need to take that level of risk. And so no within these small we're certainly getting more people contacting us. I'm hoping we'll do a deal in the next week or 2 where it's like it's the obvious next step along where we did a deal about a year ago, we've stuck in the greenfield. And if you carry along the interstate, the next place we've got to go, it's obvious. And the guy who runs owns a bunch of depots along that interstate has called us and said, do you want to sell? Do you want to buy? And the answer is, well, either yes or we'll do greenfield. So yes, our strategy has become clear. We have gone out of our way to be very responsible buyers of businesses because you develop a reputation. We want to keep most of our key guys. We want to keep our customers. And so we see this as a long term growth opportunity for us. So are we the preferred? And the only that's probably stretching it a bit, but we're pretty close. Okay. Thanks. Actually one more quick one. Market share guess would run about what 7% you think? Yes, we're heading that way. Look one of our competitors increased our market share 20% in their last presentation. Look, when I went to school and did the math, that means we're gaining market share. Percent, look, when I went to school and did the math that means we're gaining market share. Sorry, I'm Justin Jordan from Jefferies. You closed Q2 or started Q3, I guess, with a fleet up in Sunbelt 28% year on year at €4,200,000,000 Obviously, the pace of fleet expansion has accelerated because that was up 25% at the end of Q1. Where do you think you could take dollar utilization just on that fleet? So it is running consistently at around 61%? Yes. Look, our objective is as we said when we talked about physical utilization, we're looking to maintain physical utilization about where it is now. There's going to be seasonal swings. There will come a time at the bottom of the cycle where I will want physical utilization to be a little bit higher than that and I'm going to want to sweat the effort. But for now where we have significant share opportunities, we need to have the flex. Then we look at we're bringing in a bunch of feet. I mean a very valid question is, is it too much? Are you able to cope with it? And there are a couple of key measures we look at. The drop through is a big one. If individual depots, individual districts are really struggling with depot, with drop through, the chances are we're giving them too much fleet. And therefore, we will start to rein it back. Similarly, we look at physical utilization. Now again, we won't panic over a month or 2 if we've just had a big delivery, we'll give them time to get it out. If you put them under too much pressure on physical utilization, they'll just drop the prices. So holding it broadly where it is right now and growing the fleet, which is kind of consistently what we've done for 2 or 3 years now is what we want to continue to do. So physical utilization is an important measure, but it has to be looked at in the context of fleet growth and where we are in the sector. Just a follow-up on Canada. Sorry, how big is that market in relation to, say, the size of the U. S. Market? And is it conceivable that Canada could be It's about 1 5th of the size of the U. S. Market. So is it conceivable that Canada could be as big as the UK, for example, for the Astrid Growth opinion? If you look at market opportunity and actually the structure of the market, it really ought to be bigger because it is there is enough of the concentration. It's one of those markets, a bit like the U. S. One of the problems with the U. K. Is you don't need the scale to be a relatively large player. You need a platform because of the geography, the distances traveled and the type of business scales a similar advantage in Canada to what it is in America. So it has I think it has the real potential. 1 or 2 of our peers have a significant market share in Canada. Our intention is to take some of that. Just one final one for Suzanne. You've never believed about FX when it's been a headwind, but obviously it's potentially a tailwind going forward. Can you just remind us just the sensitivity on, let's say, a 1% move on dollar sterling? Yes. Sure. A 1% movement in the exchange rate is about £4,000,000 of PBT. If you look at the first half, it's been about £17,000,000 headwind. Depending on your assumptions on our growth, on your assumptions of ForEx, we will mitigate a significant proportion of that. But net net net ForEx is going to end up this year being not a big deal one way or the other if we stay at similar levels, but it's going to be the game of 2 halves. That's for sure. It's Rory from UBS. Firstly, on the fleetage plans. You hinted that, that could come down further. Where can you think that could get to? No. Look, let's be careful with fleetage. Fleetage, if we keep buying as much fleet as we're doing, will mathematically come down. But it isn't coming down in terms of our driving it down by accelerating the replacement cycle. So there will be there is a mathematical because there's so much more of it is relatively new that will bring the fleet age down. We are now replacing fleet on a normal cycle. If anything, we're doing if you look at our disposables relative up here, we aren't really doing very many disposals. Why? Because we need to keep it out on rent. So no, we are not reducing the fleet age. It's just a replacement that's bringing in. It's purely the maths of the proportion of new fleet. Okay. Okay. Thanks. And then on the yield, so you said the underlying is still tracking kind of 3%, 4% reported at 2%. Can you talk through the moving parts of the M and A mix that kind of thing and where that was last year or It is unbelievably complicated because there are so many bits and every single contributing bit is very, very small. I don't want to sort of push everything off to them. It's a bit we want to I know a number of you are coming to visit with us in January. We'll put obviously publish the slide. It's something to cover then. But for example, when we're buying businesses, on average, they are renting equipment out at rates which are 15% lower than ours. On day 1, we don't change the rates. Therefore, we get the volume, but it's a drag in terms of rates. Some of the mix in terms of we are slowly growing our proportion of bigger national accounts, then that is a small drag. We would argue, as we will show you in January, that if you look at our drop through, it all works itself out in the operating cost, but it affects yield. This time in the cycle where it's getting early, we have a greater proportion of monthly rentals than weekly rentals. That affects us. I mean, there's about 6 different things, all of which add up to 1% or 2%. And so they're all relatively small, but it's we're just at a stage in the cycle. If you look at the rate measure that some of our peers quote, that's based on a frozen mix. But mix changes through the cycle. So ours is a tougher measure in terms of but it probably impacts what's happening to your bottom line. If you want an indicator of the strength of the market, then that fixed mix measure is probably a better indicator of margin. If you want to get some correlation between what's happening and what could happen to your profit and loss account, then we think our yield number is a better measure. Like no one measures created every single point of every cycle. But yes, I mean, I think the key is this. In both the U. K. And the U. S, we are getting good rate improvements. It is a reflection of a very good market. We have some mix issues which we need to manage. And one of the things we want to talk about at length in January is, well, where do we go with merchant accounts? Is it a change in strategy? How big will it get? How might it change over the long term? In the short term, these are tiny, tiny tweaks. Again, it might be too simple, but that delta is kind of roughly 2 ish. Can you say what that was last year? So Yes. It was a lot smaller last year. It was a lot smaller because we weren't at those larger projects with bigger national account. It's a reflection of where we are in the construction cycle. As we've got into bigger projects with bigger customers, it's become a marked effect. As we have done a greater number of greenfields and acquisitions than we did a year ago, it's become a bigger effect. So it was close to nothing a year ago. Okay. That's great. Thank you. Hi, it's George. Just one quick question please, George Gregory from Exane. I think looking at the stats, you added 68 branches to the U. S. How does that marry with the comments on new locations? Is that the difference between M and A and greenfields? Well, if you go to the page, let me get the right page here. Where is it here? So if you look here, we added 65 locations and 65? 68. 68 in the year. You have to be careful, however, because there's locations and there's locations and there's locations. So if you look at Atlas, then they are really small air conditioning sort of distribution units. They're the size of this room. They're incredibly high ROI businesses, but they haven't got the revenue potential. So don't try and do a calculation which says an average store does this therefore times 68, the future revenue growth is that. We bought other ones where we bought a business in Chicago, which was a $45,000,000 acquisition and it was one huge location. So there is a broad mix. So you just have to be careful. We would we would typically exclude Atlas from what we're talking about in terms of EUR 50,000,000. So we're a little bit ahead of the pace of where we want to be in significant locations, but not as much as those statistics would suggest. Perfect. Good morning. It's Alex Magnet at HSBC. A couple from me. Just on the CapEx and in view of the Tier 3 to Tier 4 inflation, So how much of the dollar growth in CapEx translates to usable equipment volume? Yes. I'm surprised no one's ever asked me this question. If you work on the basis that average fleet on rents and revenue is up 25%. Physical utilization is flat. Therefore, how is that 28%. I know it's partly it's point to point and the difference is inflation. And so 25% revenue growth with flat physical utilization, you can kind of work it out from here, Alex. So it's in terms of number of units, if you knock off 3%, 4% for inflation, you will get down to equivalent units. And so when we do our calculations, we always do it. Our average fleet on rent is based on a frozen price. So it's a more volume statistic whereas that's a value statistic. Got it. And if I looked at your motorized fleet, what proportion of that is now in Tier 4 compliant? How much is still grandfathered in? I don't know. I'll tell I can tell you offline, it's still a relatively small proportion, but a growing one because a big proportion of this year's spend is Tier 4. The answer is I don't know. Okay. I'll come back to you on that. Okay. And could I just then press you a little bit on the strategy for the specialty business? So coming back, you had the previous chart where you showed the red dot specialty and Blackman's general tool. Is that how it's operated? Do you run them in separate depots? Are the end markets for specialty? We're going to run that again. They're obviously delineated that you run them through a Yes. No, it's a good question. We run them as specialty divisions. However, they also report regionally to the region. So it's a bit of a matrix. So in terms of strategy, investment decisions, key account management, fleet planning, it's a specialty division. Having said that, because there's a huge opportunity for crossover sales opportunities, Then at a local branch level, they also report to the regional manager of the general tool business to make sure there's a sensible use of logistics and cross selling opportunities. But no, we have good structured heads of scaffold, oil and gas, pump and power, industrial cooling. Okay. And the drop through in the ROI metrics that you're talking about earlier at the group level, do you find there's a distinction between general fuel and specialty? They are typically better in our specialty businesses. Okay. And then last one on that. Again, something we need to spend a bit of time on where we have time together is One of the defining features of these specialty businesses are there is very low rental penetration. And even within general tools, remember, the distinction between our high ROI assets and our low ROI assets is in essence rental penetration. So high rental penetration assets like big booms are our low ROI commodity products. And so specialty looks like our more smaller tools specialty business within general tools. There's low ROI and they're typically better drop through and Okay. And then so as you're looking forward to whenever it is that you can get the mix to about 50% specialty, I guess the question is how much of that is moving into new areas of specialty that you're not and how much of it is just Yes. No, it's again it's a good question. We think there is growth in all of our current verticals. Now but we have to bear in mind that growth organically is likely to be slower than general construction growth during the peak of the construction cycle. The attribute of the specialty business is its longer term steady growth through the cycle. So we will see growth and we will supplement that. There are however some verticals that we want to go into that we're currently not in doubt. Again, we're going to get into a level of complication here. There are within general tool, there are businesses that we run general tool that we think are big product sectors, which are very high ROI that have the potential to come out of general tools and be focused upon as a special way. And Climate Control, we're following on from TOPS and ATLAS and our greenfields, we're probably the biggest in spot air conditioning now in North America. That started off as being this real coolie sexy part of general tools. And then we said actually the potential in that market is so big, let's invest in it and make it. There are 3 or 4 segments within general tool at the moment that we think really have the businesses. And so these will not signal big changes in what we do right now. It would just signal a change in emphasis on certain product categories in certain markets. Okay. Understood. And sorry, last one I promise. The $100,000,000 on fuel that you quoted earlier, is that a gross number or a net number? Because you charge fuel surcharges as well on delivery. So that's a gross number? Yes. Okay. Thank you. Miss, Just to follow-up on George's questions on the greenfield sites. Can you sort of say, firstly, sort of how much the split there is on the specialty side rather than just sort of a more of a general kit within that? It's all on we've deliberately put it on there because I think it's a really good question. So if you look here of our general tools 21 are from acquisition and 29. So we've done 50 locations in general tools and we've done 88 locations in specialty. Now again, be careful in terms of the relative size. But if you look at it, clearly bearing in mind this is currently 20 some percent of our business, we are proportionately growing our specialty faster than we're growing our general tool. And the split between the two, we kind of stick on the slide there Steve. And that's the same going into next year is the average split for the investment and then The problem is like Atlas, we first spoke to Atlas 18 months ago. So some of the it's predicting precisely when some of these bolt ons will actually happen and therefore committing to a number is very dangerous. We're tending to deal with private owners where this is their deal of a lifetime. And it can either happen very, very quickly. We've done 1 in 6 weeks and it's taken 18 months to 2 years. So look, directionally, it's where we want to go. Trying to be precise in the timing of some of these bolt ons is very risky. And then of those greenfield sites, how do you think about the sort of breakeven profile? Yes, that's just gone like that's got like crazy good. We always used to talk about it being 12 months. And then we said life's got great. It's got down to 4 months and it's less than that now. We've had ones that have broken even in a month. I mean, with this volume of so the whole greenfield rollout strategy has surprised us in terms of the pace. So remember, ones that have been open only 1 year are contributing to that 67% drop through number. That's not a long time. So and that's a pretty strong metric 67% of revenue growth dropping down to EBITDA. So the greenfields are profitable pretty good. We still say to get to reach full maturity is still about 3 years. Because what you do is you get an initial wave of it. 80% of the business we do in the greenfield now comes from people who deal with us somewhere else. And so as we scale advantages, our brand identification means we attract customers to our new locations far more quickly than we ever did historically. But we need to create that breadth of business to really reach those higher levels of I don't just make it sound simple, but getting some core construction work right now is not very difficult. But to get the breadth and sophistication of customer that we like to deliver the margins and ROI that we typically deliver that takes time in terms of just establishing that customer base. But getting a core quantum through to breakeven now is very quick. Hi. Daniel Johansen, UBS O'Connor. Coming back to the oil and gas and you stated 10%. What are those 10%? Is it revenue to oil and gas customers? Or is it products that are more used in oil and gas applications? It's a very good question. It is revenue to specific oil and gas customers. 95% of that will be telehandlers, big booms, generators and light towers, which are amongst our most highly utilized product in the country. So look, again, without wanting to underplay it at all, it's product we could deploy to other sectors. We don't do drills drill heads. We aren't doing very specific oil and gas product. We're doing general product to oil and gas customers. So it's and it's why we've always stayed away from the most specialty acquisitions. But that's not the pumps or anything. It's yes. The general product. We do very little almost nothing in terms of pumps. I would say we do none, but it's very small. At least 95% will be telehandlers, booms, generators and light towers. And in general terms, if we think about your exposure in Sunbelt, what portion of your revenues are from, let's say, oily states or the Gulf region or however you want to phrase it? No, actually, that's a good question. Our biggest exposure is Texas. We've gotten pretty much nothing in North Dakota and where Marcellus is, we've got very little. What you got to remember is most of these basins are in the middle of Norway. So I know this is well, obviously, everything in Texas is linked to oil and gas and there is some truth in that statement. However, if you look at any of the more considered analysis of the impact of these oil prices, the basins that are by far and away the lowest cost closest to the refineries where you are actually using well established infrastructure is Permian and the Eagle Ford, which are the 2 basins in Texas. And if you look at some of the multiyear projects, which are based around putting in the infrastructure into oil and gas, then again, we see no evidence that they're going to slow down anytime. So there is likely to be some knock on infrastructure projects, as I said earlier, around oil rig. Our biggest exposure was Texas. All of the predictions I've seen have shown no slowing of the pace of output in Permian. They do say that about oil sands. They do say it about Bakken, but not Permian or Eagle Ford. So our anticipation is that net, it won't make a big difference. If we trade off that with what's the impact of every consumer costing him less to fill up his car, what does that do to the housing market, what does that do to white goods, What does it do to the plastic or paper industry? Our view was It's a simple equation. It's a very, very complicated equation. Given its general tools, given its a low exposure, we really are not significantly concerned. Am I glad I did spend $1,000,000,000 on oil and gas acquisition recently? Hell yes. But in terms of the overall market, I don't think it's a big deal. Thank you. Mark Hassell from Canaccord. Can you just just going back to the beginning in Canada, Can you give us a simple question of sort of what the rental penetration is in Canada and why it's attractive to go to Canada? Other than what you said that people have asked you to come across to continue to sell them as a supplier. Yes. Look, I look at the penetration and it's an even worse analyzed market than the U. S. Is. So we don't really know is that it would be slightly lower than in the U. S. Right now. So we think there are structural reasons for us to be there. We also think that it is over dominated by 1 or 2 players in 1 or 2 geographies where people are looking for an alternative. So we think there is the same structural market opportunities that we have and it typically works on a slightly different economic cycle to North America, which again helps us to broaden our base. So we think there's both structural, cyclical and just opportunistic reasons why Canada is a good market for us. That appears to be it for questions. Once again, we thank you for your interest, and we look forward to seeing a number of you in Miami in January and the rest for our Q3 results. Thank you.