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&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 pre-tax profits of 33% at GBP 266 million. I'm going to leave the detail of this impressive performance for Suzanne to cover in a moment.
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. It's 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. Look, I want to cover this in a lot more detail in a moment, for now, let me hand over to Suzanne.
Thanks, Geoff, good morning. Our second quarter results for the group are shown on slide four in your pack, clearly the positive year-over-year trends continued with pre-tax profit for the quarter of GBP 145 million, compared to GBP 113 million last year. Consistent with recent quarters, our profitability was driven principally 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% to 46%. On the next slide, we've shown the group's results for the half year. At constant rates of exchange, rental revenues increased by 24%, profit before tax grew by 33% to GBP 266 million.
The EBITDA margin of 46% and the operating profit margin of 30% are consistent with those of the second quarter and result from higher revenues, operational efficiencies, and a continued focus on flow-through across the group. It was pleasing to see that both the U.K. and the U.S. businesses performed well in the six months. I'll cover the headline numbers for Sunbelt and A-Plant, Geoff will cover the growth drivers and our strategy later. Beginning with Sunbelt on page six, our ability to capitalize on market opportunities was evident in the first half's 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. As a result, Sunbelt achieved a record first-half EBITDA margin of 49%, an operating profit margin of 33%, and a pre-tax return on investment of 26%. We continue to be encouraged by A-Plant's progress, as shown on slide seven. The rental revenue growth at A-Plant was 18%, and it reflects both a 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%. 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 eight.
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. At Sunbelt, we now expect to invest between $1.17 billion and $1.22 billion 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.
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. Perhaps the more surprising point is that in the U.K., we do plan to spend approximately 50% more on CapEx this year than last. That expenditure will be allocated between fleet growth and de-aging, as there's a bit of catch-up to do. At the group level, our current forecast is for total expenditure for CapEx to be in the range of GBP 925 million to GBP 975 million, and that assumes a 1.6 rate of exchange. 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.
As we move on to the next slide, we'll take a look at our cash flow profile. For the first half, you'll see that free cash flow was GBP 172 million, negative, reflecting strong cash generation, but also a significant investment in the rental fleet. Our capital expenditure net of disposal proceeds received was GBP 492 million, and that's an increase of GBP 84 million ahead of the comparable period last year. In addition, you'll see that we invested GBP 113 million on small bolt-on acquisitions, and we returned GBP 46 million 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 carry-forwards 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&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 de-lever.
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. As a final point, before I turn over to Geoff, following the issuance of the tenor bonds back in September, the weighted average maturity of our debt is now just a bit over six years. That concludes my comments on the financial results, I will hand over to Geoff.
Thank you, Suzanne. Let's get into the operational details, starting with Sunbelt. As Suzanne just highlighted, it's been another great quarter with rental revenue of 25% against tough comparators. You can see that volume is again the big driver, up 24% year-on-year, and yield is up again at 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%-4%. You only have to look at our EBITDA margins of 49%, up from 46% a year ago, and our return on investment 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.
Year-to-date, average 73%, which is exactly what it was one year ago. I just want to remind everybody, look, 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 there used to be in our growth story. Here on slide 13, I try and break down and look at the underlying trends. 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.
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 two years is bolt-on acquisitions and greenfields, which contributed 8% revenue growth. Again, a very good performance. What I like about this is that we now have multi-layered growth. Markets are recovering, which is great, but still two-thirds of our growth are the same-store share gains and new stores is structural rather than cyclical.
This blend over time will of course change, 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. 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 in markets, but they also predicted that for 2014. 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. I guess 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, so this is very much a buy and build model. How have we done? 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. 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 it's 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. We see this as a bridgehead for further investment. It may be a small store, but we see Canada as a very exciting new opportunity.
Our strategy remains unchanged. We would expect to maintain our guidance of around 50 new locations for the financial year 2015/16. Although, as we have seen in the first half of this year, M&A growth tends not to be linear. While 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. Therefore, any acquisition or greenfield will be a short-term drag to metrics such as yield, dollar utilization, or drop-through. However, the return on investment is still very good at 20%-25%. 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 across the same store, where collectively we are delivering a 67% drop-through. 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 this signals a change in strategy or an acceleration of the pace. 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. I believe this is a really important indicator of stress in the business and something we are watching very carefully given the levels of investment. 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. Clearly, our emphasis remains on organic growth.
We also continue to invest in 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 have 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 2008 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, 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 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%-4%. This remains the sustainable level of yield improvement. 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. 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 U.K., which is very encouraging. As Suzanne highlighted, A-Plant delivered GBP 30 million of profit in the first half, which is close to its best ever full year. 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 U.K. As you know, I have not been the most bullish on the U.K. construction space in the past.
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 a blowout, we expect a good runway of growth. What is particularly nice to see 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 had to do something different. Our strategy of self-help and focusing on higher return customers and markets is clearly paying dividends. 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, we will continue our buy and build strategy in higher return specialty markets. To 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 three years has created a platform from 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 two 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 GBP 0.03 per share, we reiterate our policy to maintain the dividend through the cycle. With both divisions performing well and the benefit of weaker sterling, we now anticipate a full year result ahead of our previous expectations. With that, let's move to Q&A. If you could just wait for the microphone, state your name and organization. Look, you all know what to do. Gosh, that was quick.
Good morning. Andrew Murphy from Bank of America Merrill Lynch. Just wanted to touch on the U.K. and Canada as they seem to be not as much flavor of 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, and 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? That would be fairly dumb 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. 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.
We will continue to invest in the U.K. If 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. 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.
Just on Canada, does that present any more difficult problems than you would otherwise expect, looking from the outside? It's a different territory, a bit further away.
I was there a few weeks ago, and it's colder.
Other than that.
It's a long way from one place to another. Look, before we get all carried away about this, we've moved to Vancouver. We've got a location in Calgary and Edmonton. 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 business is in Canada. It's clearly a highly profitable market, and it's one we want to serve better. What you'll see now is we're going to follow on that investment with some pretty heavy organic fleet growth. I think you'll see us opening a couple of greenfield locations fairly soon, too.
We'll do it in exactly the same way as we've approached an expansion into Kansas, an expansion into Minneapolis. We will follow on in an initial bridgehead, which I think JWG really provides us. We spent a lot of time looking at Canada. I probably looked it up, my first acquisition opportunity in Canada three years ago. 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. We think we have taken the appropriate amount of time to find that right bolt-on. It has the potential for being a significant part of the group, but it's not going to happen overnight.
Thank you.
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. Look, 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. 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, 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 at 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 million. There's going to be a negative there. I spend $100 million on petrol for my delivery trucks, there's going to be an immediate benefit then. 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, yes. Could there be a bit of a knock-on impact of some of the infrastructure work in some of the oil-and-gas-rich states? Yeah. Again, I think you've got to look at them.
90% of our businesses are in either the Permian or Eagle Ford basins. They are the lowest half-cycle 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. 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 that it's going to be net positive, you've got to get into all kinds of economic theory around that.
Thank you. Morning, it's David Phillips at Redburn. Can I just ask a question jointly on investment between the organic and the bolt-on situation. Firstly, organic CapEx, what sort of level of inflation are you seeing now compared to maybe six months ago, how do you see that going next year? How quickly can you get access to the kit? Because I know previously you minded-
I mean, versus six months ago, we are not seeing significant inflation. We're seeing a bit, like a couple of %. The real inflation is against the replacement cost of what we were selling that we bought seven or eight years ago. 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, it's another reason why our customers are choosing to rent, not to buy. Have we got the full rate back yet for that weighted inflation? The answer to that is probably no, not just yet. 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. What we're seeing is average prices going up, but they have to continue to go up to reflect the inflation in Tier 4. It is an inflation headwind.
Bizarrely, it's pretty positive for the bigger rental companies who got a little bit ahead of the game and have that capacity. In terms of the two structural changes in our market, the shift to rental and the big getting bigger, I see that inflation in Tier 4 as being very, very positive.
Exactly. The incremental CapEx you're putting in today, do you expect that to be in place by the end of the Q1 next year? The kit.
Yeah. The numbers that we've quoted now is stuff we would fully anticipate to have landed. It's where we got out of kilter about a year ago when we started talking about capital. What you got to remember is, look, try to spread our capital a lot better. There's no point trying to land the quantum we're now buying on the 1st of 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. The vast majority of this increased CapEx, we aren't going to rent more equipment in December, January, and February than we are today. Most of it is coming in, and we want it landed. I know people got a bit agitated.
One or two 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? It was very, very important that we were just a little bit ahead of the curve in terms of our CapEx.
Great. Thank you. Just on bolt-ons, are you getting any more competition for buying these assets, or are you a preferred buyer now 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 three years that we thought we would get and we didn't get because somebody else bought it. Remember, we are not participating in the bigger deals with very aggressive multiples. You've seen one or two acquisitions, particularly in the oil and gas space over the last six months, where I struggle to see how you ever get a return on investment. We have a platform. We don't need to take that level of risk. No, we're certainly getting more people contacting us.
I'm hoping we'll do a deal in the next week or two where 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. The guy who owns a bunch of depots along that interstate has called us and said, "Do you want to sell? Do you want to buy?" The answer is, "Well, either yes, or we'll do greenfield." 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 their key guys, we want to keep their customers. We see this as a long-term growth opportunity for us. So are we the preferred and the only?
It's us probably stretching it a bit, but we're pretty close.
Okay. Thanks. I just have one more quick one. Market share guess would run about what? 7%, you think?
Yeah, we're heading that way. Look, one of our competitors increased our market share 20% in their last presentation. It's not the best-measured market in the whole wide world. If we're growing at 20-something and the rest of the market is growing 7%, look, when I went to school and did the math, that means we're gaining market share.
Sorry. Justin Jordan from Jefferies. You closed Q2 or started Q3, I guess, with the fleet up in Sunbelt 28% year-over-year at $4.2 billion.
Yeah.
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? Because it's running consistently at around 61%.
Yeah. 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 assets. For now, where we have significant share opportunities, we need to have the flex. We're bringing in a bunch of fleet. A very valid question is it too much? Are you able to cope with it? There are a couple of key measures we look at. Drop-through is a big one. If individual depots or individual districts are really struggling 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. Again, we won't panic over a month or two if they'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. Holding it broadly where it is right now and growing the fleet, which is kind of consistently what we've done for two or three years now, is what we want to continue to do. 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 cycle.
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 one-fifth of the size of the U.S. market.
Is it conceivable that Canada could be as big as the U.K., for example, for the Ashtead Group in-
If you look at market opportunity and actually the structure of the market, it really ought to be bigger because there is not the concentration. It is one of those markets, a bit like the U.S. One of the problems with the U.K. is you do not 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. Scale is a similar advantage in Canada to what it is in America. I think it has the real potential. One or two 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 have never bleated about FX when it has been a headwind. Obviously, it is potentially a tailwind going forward. Can you just remind us just the sensitivity on, let's say, a 1% move of-.
Yeah, sure.
Dollar sterling.
A 1% movement in the exchange rate is about GBP 4 million of PBT.
Thank you.
If you look at the first half, it's been about a GBP 17 million headwind. Depending on your assumptions on our growth, on your assumptions of Forex, we will mitigate a significant proportion of that. 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 two halves. That's for sure.
Morning. It's Rory from UBS. Firstly, on fleet age plans, you hinted that that could come down further. Where can you think that that could get to?
I know. Look, let's be careful with fleet age. Fleet age, if we keep buying as much fleet as we're doing, will mathematically come down. It isn't coming down in terms of our driving it down by accelerating the replacement cycle. There is a mathematical, because there's just 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, if you look at our disposables relative to our peers, we aren't really doing very many disposals. Why? Because we need to keep it out on rent. No, we are not reducing the fleet age.
It is the replacement that's bringing it down.
It's purely the mass of the proportion of new fleet.
Okay. Good. Thanks. Then on the yield, you said the underlying is still tracking kind of 3% to 4%.
Yeah
reported at two. Can you talk through the moving parts for the M&A mix, that kind of thing, and where that was last year or?
It is believably complicated because there are so many bits, and every single contributing bit is very small. I don't want to sort of push everything off till then. It's a bit we want to cover. I know a number of you are coming to visit with us in January, and we'll obviously publish the slides. It's something to cover then. For example, when we're buying businesses, on average, they are renting equipment out at rates which are 15% lower than ours. On day one, we don't change the rates, therefore, we get the volume, but it's a drag in terms of rate. Some of the mix in terms of we are slowly growing our proportion of bigger national accounts, 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. There's about six different things, all of which add up to 1% or 2%. They're all relatively small, but 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. Mix changes through the cycle. Ours is a tougher measure. It probably impacts what's happening to your bottom line. If you want an indicator of the strength of the market, that fixed mix measure's probably a better indicator of margin.
If you want to get some correlation between what's happening or what could happen to your profit and loss account, we think our yield number is a better measure. No one measure's great at every single point of every cycle. 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, one of the things we want to talk about at length in January is, well, where do we go with national 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 tweaks.
Okay. Again, it might be too simple, but that delta of kind of roughly two-ish. Can you say where that was last year? Leaves it at four.
Yeah, it was a lot smaller last year.
Okay.
It was a lot smaller because we weren't at those larger projects with bigger national accounts. 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. It was close to nothing a year ago.
Okay. That's great. Thank you.
Hi, it's George. Just one quick question, please, George. George Gregory from Exane. I think looking at the stats, you added 68
Branches to the U.S.
Yeah.
How does that marry with the comments on new locations? Is that the difference between M&A and greenfields?
If you go to the page. Let me get the right page here. Where is it here? If you look here, we added 65 locations. 65?
68.
68 in the year. You have to be careful, however, because there's locations, and there's locations. 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. 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 million acquisition, and it was one huge location. There is a broad mix. You just have to be careful. We would typically exclude Atlas from what we're talking about in terms of 50.
We're a little bit ahead of the pace of where we wanted to be in significant locations, but not as much as those statistics would suggest.
Perfect.
Geoff, morning. It's Alex Magni at HSBC. A couple from me. Just on the CapEx and in view of the Tier 3 to Tier 4 inflation. How much of the dollar growth in CapEx translates to usable equipment volume?
Yeah. I'm surprised no one's ever asked me this question. If you work on the basis that your average fleet on rent and revenues up 25%, physical utilization is flat, therefore how is that 28? I know it's partly it's point to point, the difference is inflation. 25% revenue growth with flat physical utilization, you can kind of work it out from here, Alex. It's in terms of number of units, if you knock off 3%-4% for inflation, you will get down to equivalent units. When we do our calculations, we always do it. Our average fleet on rent is based on a floors and price. It's a more volume statistic, whereas that's a value statistic.
Got it. 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 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 honest answer is I don't know.
Okay.
I'll come back to you on that.
Okay. Could I just press you a little bit on the strategy for the specialty business. Coming back, you had the previous chart where you showed the red dot specialty.
Yeah
The black one's general tool. Is that how it's operated? Do you run them in separate depots? Are the end markets for specialty
Going the wrong way again.
Obviously delineated that you run them through.
Yeah, 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. 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, 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, cross-selling opportunities. No, we have good structured heads of scaffold, oil and gas, pump and power, industrial cooling.
Okay. The drop-through in the ROI metrics that you were talking about earlier at the group level, do you find there's a distinction between general tool and specialty?
They are typically better in our specialty businesses.
Okay. Last one on that.
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. Even within general tools, remember, the distinction between our high ROI assets and our low ROI assets is, in essence, rental penetration. High rental penetration assets like big booms are our low ROI commodity products. Specialty looks like our more smaller tools specialty business within general tools. There's low ROI, and they're typically better drop through.
Okay. 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?
You know, that's.
Replacing what you currently do?
Again, it's a good question. We think there is growth in all of our current verticals. 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 it's longer-term steady growth through the cycle. 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 into. Again, we're going to get into a level of complication here. 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 specialist.
Climate control, following on from Tops and Atlas in our greenfields, we're probably the biggest in spot air conditioning now in North America. That started off as being this really cool, sexy part of the general tools. We said, "Actually, the potential in that market is so big. Let's invest in it and make it." There are three or four segments within general tool at the moment that we think really have the potential of being specialty businesses. Are they all going to be huge? No, but I think there's four or five of them that could be $200 million businesses. These will not signal big changes in what we do right now. It will just signal a change in emphasis on certain product categories and certain markets.
Understood. Sorry, last one, I promise. The $100 million on fuel that you quoted earlier-
Yeah
is that a gross number or a net number? Because you charge fuel surcharges as well on delivery.
That's a gross number.
That's a gross number?
Yes.
Okay. Thank you.
Just to follow up on George's questions on the greenfield sites, can you say firstly how much of the split there is on the specialty side rather than just more of a general
Yeah
within that?
It's all on. We deliberately put it on there because I think it's a really good question. 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. Again, be careful-
Yeah
in terms of the relative size. If you look at it clearly, bearing in mind this is currently 20-some% of our business, we are proportionately growing our specialty faster than we're growing our general tool. The split between the two, we kind of stick on the slide there, George.
That's the same going into next year as the-
Yeah
average split for the investment.
The problem is, like Atlas. We first spoke to Atlas 18 months ago. 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.
It can either happen very quickly, we've done one in six weeks, and it's taken 18 months to two years. 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.
Of those greenfield sites, how do you think about the break-even profile?
Oh, yeah. That's just gone crazy good. Look, we always used to talk about it being 12 months. We said, "Life's got great, it's gone down to four months." It's less than that now. We've had ones that have broken even in a month. With the volume of it. The whole greenfield rollout strategy has surprised us in terms of the pace that we Remember, ones that have been open only one year are contributing to that 67% drop-through number. That's not a long time. That's a pretty strong metric, 67% of revenue growth dropping down to EBITDA. The greenfields are profitable pretty good. We still say to get to reach full maturity is still about three years. What we 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. As we scale advantages, our brand identification means we attract customers to our new locations far more quickly than we ever did historically. We need to create that breadth of business to really reach those higher levels of I don't want to make it sound simple, but getting some core construction work right now is not very difficult. 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. Getting a core quantum through to break-even now is very quick.
Hi, Daniela Najar, UBS O'Connor. Coming back to the oil and gas, 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. 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. It's why we've always stayed away from the more specialty acquisitions for that very reason.
It's not pumps or anything, it's just the general product?
We do very little, almost nothing in terms of pumps.
Okay.
I would say we do none, but it's very small. At least 95% will be telehandlers, booms, generators, and light towers.
In general terms, if we think about your exposure in Sunbelt, what portion of your revenues are from, let's say, oil states or the Gulf region, or however you want to phrase it?
No, that's a good question. Our biggest exposure is Texas. We've got pretty much nothing in North Dakota. Where Marcellus is, we've got very little. What you got to remember is most of these basins are in the middle of nowhere. I know there's this, 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 Eagle Ford, which are the two basins in Texas.
If you look at some of the multi-year projects which are based around putting in the infrastructure into oil and gas, again, we see no evidence that they're going to slow down anytime soon. There is likely to be some knock-on infrastructure projects, as I said earlier, around oil. Our biggest exposure is 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. 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 would be
It's a simple equation
It's a very complicated equation. Given it's general tools, given it's a low exposure, we really are not significantly concerned. Am I glad I didn't spend $1 billion on an oil and gas acquisition recently? Hell yes. In terms of the overall market, I don't think it's a big deal.
Thank you. Mark Hessel from Canaccord. Come back to the beginning in Canada. Can you give us a feel, simple question 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 serve them as a supplier?
Yeah. We've got rental penetration. It's an even worse analyzed market than the U.S. is. We don't really know is that it would be slightly lower than in the U.S. right now. We think there are structural reasons for us to be there. We also think that it is over-dominated by one or two players and one or two geographies where people are looking for an alternative. We think there is the same structural market opportunities that we have. It typically works on a slightly different economic cycle to North America, which again helps us to broaden our base. 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. We look forward to seeing a number of you in Miami in January and the rest for our Q3 results. Thank you.