Hello, welcome to today's Ashtead Q1 Results Analyst Call. Throughout the call, all participants will be in listen-only mode. Afterwards, there'll be a question and answer session. Just to remind you, this call is being recorded. Today, I'm pleased to present Geoff Drabble, Chief Executive, and Suzanne Wood, Finance Director. Please begin.
Thank you. Good morning, welcome to the Ashtead Group Q1 conference call, where Suzanne and I will give our usual shorter update on our current performance, quickly move on to Q&A. Looking at the highlights on page two, it's clearly another very strong quarter as we capitalize on recovering markets in both of our geographies. Group rental revenue growth of 22% delivered a 33% rise in pre-tax profits to GBP 120 million. Margins and ROI continue to be strong. Despite significant investment in the business, we maintained our leverage discipline. Given the momentum evident in the business, reflecting our confidence in the future prospects for the group, we are increasing our full year guidance for CapEx to the range of GBP 825 million-GBP 875 million. Therefore, we now anticipate the full year results ahead of our previous expectations.
With that, I'll hand over to Suzanne.
Thanks, Geoff. Good morning. Our first quarter results are shown on slide four. As Geoff mentioned, the group's underlying pre-tax profit was GBP 120 million compared to GBP 99 million for the same period last year. Rental revenue was again the main driver of profitability. It increased by 22% in the quarter at constant exchange rates, reflecting the strong performance at both Sunbelt and A-Plant. With the added benefit of our operational leverage, continued emphasis in both businesses on fall through, the group's EBITDA margin improved from 43%-46%. We believe these improving metrics, along with the group's return on investment of 19%, including goodwill, demonstrate the strength of our business model. As we move on to the next couple of slides, I'll quickly cover the headline numbers for Sunbelt and A-Plant. Geoff will provide more details later.
Sunbelt is shown on slide five. Again, you see the strong 22% rental revenue growth. Despite opening 11 new stores in the quarter, of which seven were greenfield locations and the remainder from acquisitions, we achieved our 60% targeted fall-through rate. As a result, EBITDA grew by 28% year-over-year, and our EBITDA margin improved to 49%. Pre-tax return on investment in the U.S. was 26%. A-Plant's comparative numbers are on slide six. Its rental revenue increased 19% as compared to last year. The fall-through rate improved to 60% in the quarter. As a result, EBITDA margin increased to 35%. Importantly, A-Plant's ROI moved forward to 11%. Given our growth, the maintenance of our leverage discipline remains important and is shown on slide seven. We continue to improve our position even as we took advantage of market opportunities.
At July 31st, our net debt to EBITDA leverage ratio declined to 1.9 times at constant rates of exchange. This supports our long-held view that improving EBITDA margins will allow us to support growth while still de-levering. Looking forward to next April, we reaffirm our commitment to sustain leverage below two times in order to strike the right balance between financial stability and investment in growth. That concludes my comments. I'll hand it back over to Geoff.
Thanks, Suzanne. Let's look at each division now in a little more detail. Clearly, it was another strong performance in rental revenue from Sunbelt, as you can see on page nine. I've broken down the revenue to highlight the various market and structural dynamics that are taking place. Our markets are now clearly recovering, with construction likely up around 8% year-on-year, with further multiyear growth forecast. We continue to capitalize on this opportunity, as you can see, with our same store growth, a very healthy 17%. We are growing at around twice the pace of the market due to our strong service offering and scale of benefits. In addition to this, a further 7% growth has come from greenfields and bolt-ons as we execute the strategy to both expand our geographic footprint and increase the relative scale of our specialty businesses.
We continue to see real long-term structural opportunity in what is still a highly fragmented market. We have a good pipeline of both bolt-ons and greenfields. Here on page 10, we break down rental revenue in further detail. Volume growth was 21%. Yield was up 2%. Pure rate is actually of 3%-4%. Here is one of the areas where you see the drag on a yield measure like ours of so many greenfields and bolt-ons and the change in mix so early in the non-residential recovery. Remember, we have completed 13 acquisitions, which together with greenfields, have added 58 new locations in the year across a range of market sectors with different characteristics. Now there are a lot more moving parts than was historically the case. Physical utilization is running at anticipated levels.
I know some concern was expressed at the year-end that it was down a little bit. This was an obvious anomaly. A number of factors, again, greenfields and bolt-ons and major account wins can affect metrics short-term. In such strong markets, it's always going to sort itself out. Finally, bottom right, the notable point is, again, just how much the fleet has grown year-on-year, up 25%. It is this investment that is allowing us to meet our customer needs. Given the strong demand, we've taken another look at our fleet investment requirements. You can see on page 11 the importance of the combined Q4 and Q1 spend in supporting the busy season.
The early landing of equipment in Q4 clearly allows us to react to market needs for the new financial year and has again proven to be well timed as the market has ramped up. Based on current trading and the prospects for the group going forward, we have now increased capital guidance for this financial year in the range of GBP 825 million-GBP 875 million. Why a range? Well, because we remain able to flex expenditure relatively easily and will continue to do so as we react to demand. We do not have to make commitments for the full year, therefore it remains an imprecise science. Once again, a much improved performance from A-Plant as it capitalizes on recovering markets, but also very clearly takes significant market share. Revenue was driven by both healthy volume and yield growth of 9%.
Can I just add a small health warning to the 9% yield number? Actually, the rate rise is the same as the U.S., i.e., around 3%-4%. Once some year-on-year anomalies have washed through, both divisions will ultimately trend towards these sort of numbers. However, a good performance all around for A-Plant, who are clearly heading for a record year very early in the cycle, which bodes well for the longer-term opportunity. To conclude this brief Q1 trading update, clearly it was another strong quarter from both divisions. Revenue growth remains the key driver as we continue to capitalize on recovering markets, gain market share, and execute a well-established growth strategy. Our confidence in the outlook is, I think, reflected in our increased fleet investment, which will clearly drive further revenue.
Despite the significant investment, we remain committed to responsible growth and keeping leverage within our stated range, i.e., below two times EBITDA. As a consequence, we now anticipate the full year results ahead of our previous expectations. With that, Hugh, we will now open the call to questions, and if people could just follow the normal protocols of stating your name and organization for those listening in. Thank you.
Thank you. Ladies and gentlemen, if you do wish to ask a question, could you please press zero and then one on your telephone keypad? If you wish to withdraw your question, you may do so by pressing zero and then two to cancel. Then after I announce you, please just ask your question, and there will be a brief pause while questions are being registered. Our first question is from the line of David Sheridan at Liberum. Please go ahead. Your line is open.
Morning, all. I had a quick question with regards to the impact on yield in Sunbelt through Q1, just with regards to larger customers and product mix there. You seem to be taking on more aerial type activity. Is this an opportunistic activity, taking on larger customers as a result of that? Or is it something that we should expect going forward in terms of the evolution of the strategy of the business? Thanks.
Yeah. I am not sure where you got it all from, big aerial there, David. It is certainly the case that if you look at where we are in the cycle, then clearly we are very early in the non-residential recovery. Therefore, the equipment needed at the start of projects is different to the equipment at the end of projects. One of the elements is undoubtedly product mix. It does not highlight a change in strategy; it just reflects different levels of demand at different times in the construction cycle. That is the first element. The answer is that there are lots of little bits which are affecting mix. One of them is product mix. It is also true that there is some customer mix impact there also.
We said about two years ago that one of the impacts from some of the market changes would be that larger customers would look for alternative sources of supply. We have built up a very strong national account team over the last three or four years, and given continued disruption among some of our competitors, we are undoubtedly gaining market share in that area. Yes, some of it is customer mix also. The third element is there is just a drag from the bolt-ons and the greenfields. Remember, we have industry-leading dollar utilization. We are buying businesses which are lower dollar utilization than us, therefore that has a drag effect. When we open a greenfield, it does not start at the same levels of physical and dollar utilization that it reaches over two or three years.
Whilst each individual acquisition and each individual greenfield as of itself is very small, in a year where you have made so many acquisitions and opened so many greenfields, the cumulative effect, again, has something of a drag. There's three real key things there. Mix of customer, mix of products, and the drag of greenfields. Remember, rate is progressing very well sequentially through the year, and the rate increase remains 3%-4%, which you would anticipate would continue given the strength of the market. These are some anomalies that will wash through throughout the year. In the same way, some of the positive anomalies in A-Plant, which from the same rate gives a positive 9% yield, they'll wash out too. And both businesses will trend over time to broadly where they are with rate, which is 3%-4%.
Okay. Thank you.
Our next question is from the line of Steve Woolf at Numis Securities. Please go ahead. Your line is open.
Morning. Just a couple on the CapEx side for me. In terms of the split prior and now, in terms of Sunbelt and A-Plant, where the increases come from. Then secondly, also on the CapEx, in the U.S. for the increase at Sunbelt, how much has that been driven by the demands of the national account side that you've sort of larger customers you've taken on?
I'm not sure we can split it down. Look, we have an increased level of demand. Be careful. It's a bit like the whole physical utilization thing at the year-end. People get bogged down in the metric and make it a big, big deal. We are talking minute changes in mix here, both in terms of the national accounts and the change in product mix, which all combined have had a bit of a drag on yields. The CapEx is driven by the fact that we're seeing very strong markets. If you look at our physical utilization, I know there's a body out there who thinks it must always be high in a big number. I worry. Physical utilization, when I looked at it yesterday, was about 1.5% higher than it was a year ago. I know some people would think that's great.
I worry at this stage in the cycle when it's that high. You need some flex to be able to take care of your customers. It's just a general reflection of the level of demand and our high utilization is why we're having to increase our CapEx. It's not because we've suddenly won a raft of big national accounts. It is true, we have taken on one or two very significant accounts over the last few months. Again, one of the reasons why the physical utilization was lower to Q4 was we were mobilizing equipment to go into one of those big national accounts and it kind of went on rents pretty much straight after the year-end. We'd had to marshal it beforehand. Let's not get hung up on this product mix and this national account mix.
It's a tiny swing and it's more a reflection of general levels of demand.
On the U.K. side, in terms of what the overall mix between the new number on CapEx, U.K. plus U.S.?
Yeah, look, it's going to be about the same. Clearly both are growing at a steady pace and both need to be fed. If you look at the volume growth, we are going to have to invest in both of them to maintain that level of volume growth.
Perfect. That's great. Thank you.
Okay.
Our next question is from the line of Andy Murphy of Bank of America Merrill Lynch. Please go ahead. Your line is open.
Morning. Got three. Can I just try and explore the non-resi recovery first of all? Can you just give us a bit of color around sort of the evidence that you're seeing, and perhaps what sectors that are particularly seeing the growth coming through? Secondly, I was looking at the interesting breakdown in terms of the incremental revenues you put on page three of your announcement. I was just wondering whether you would be prepared to give us some sort of indication of the relative margins on the same stores versus the bolt-ons. Finally, on that impact on the U.K. yield, I was just interested to know what the sort of difference was that was causing the high rate of 9% when you clearly highlighted actually the underlying rate's more around the 3% level. What was causing the sort of balance up to the 9%?
Yeah. Okay. Look, the non-residential bit, the non-residential market is key recovering. As you know, we've been calling that now for about 18 months, and people have been debating the point well, pretty much up until now. We're finding it very broad. You can just see it on the ground. What's our evidence? I think there's a lot of statistics have just come out in the last one or two weeks pointing to around about 8% growth. You know I hate the measure, but the ABI index is at the highest levels it's been since 2007. You look at our own chairman's business, WSP from a design business. They'll tell you they are incredibly busy on larger non-residential projects. There's a whole bunch of both practical evidence of what we're seeing on the ground and data points which show that non-residential is really picking up.
As we've said for some time, remember, that's our core market. That's very encouraging for us for the long term. In terms of geographies, it's very broad based. In terms of sectors, again, pretty broad based right now. There's strong points. We said this before, Gulf Coast oil and gas is very strong. Lodgings is very strong at the moment. It's a pretty good market, Andy, at the moment. You know us, we're not ones to unnecessarily upgrade on things like CapEx too early in a year. We just had to look at the level of activity, number of contracts, physical utilization, and say, "Look, we need to upgrade capital now to meet this demand." Market's great. No, we're not going to break down the relative margin.
We're going to reach the point where we might as well give you the management accounts and break it down by depot if we aren't too careful. Clearly, the same stores that have been in existence for a while are better. The one number I will give you is, dollar utilization is 60%. For those same stores which enjoyed the 17% growth, their dollar utilization is 65%. You can see there is quite a range. Remember, within those same stores are acquisitions and bolt-ons we did in the last two years. The ones that are not in the same store are just things that have happened in the year. We very quickly take them up the curve. If you remember, there's a chart we showed at the year-end, which stratified it by size of depot.
We've just put a few more on in the bottom this quarter than we've pushed up. We will push them up. We have a very good track record of them reaching normalized levels. We've said in the past it takes about three years to reach full maturity. No, we don't want to get too granular on margins by depots. In terms of U.K. yields, the key with yield is, all other things being equal, we think yield is the best measure because it covers lots of ancillary billings, et cetera. The problem is, when you get big changes in mix, which is what we've seen in both divisions through M&A and different elements of greenfield activity, it changes things.
Let's say in the U.K., the sorts of things which have significantly increased the yield is just the amount of ancillary labor charges that we are able to charge out, because they effectively just come through as pure yields because there's no more fleet on rent. Things like the Commonwealth Games, where we've had a big presence, and there's been a big labor presence in that with traffic jobs, et cetera. That just comes through in our measure as a very, very strong yield number. It's predominantly a mix effect and the impact of ancillary billings.
Okay. Thank you very much.
Those wall-off ancillary billings will work their way through. Okay?
Thank you very much. Yeah.
Thanks, Andy.
Our next question is David Phillips at Redburn Partners. Please go ahead. Your line is open.
Good morning, everyone.
Hi, David.
Can you tell us about the pipeline of openings and bolt-ons? It looks like you've had a strong start to the year on that front. Potentially, if that run rate continues, you're on track to beat the 50 target that you set. Is that just a timing thing, or do you think there's a chance you might nudge up towards 60 in terms of new locations by the end of the financial year?
Yeah, it's a timing thing, David. The greenfields are to a degree in our control, but even then, lease negotiations sometimes take longer than you think they're going to do. Acquisitions, as I'm sure you know, can sometimes drag on. We seem to go through waves where they all bunch together. We've not done very much over the last month or two, and I'm looking at late September, early October, and there's a bunch about to happen.
Yeah.
Look, 50 was always meant to be a guideline rather than a cast-in-stone number. You're probably right, particularly around some of the bolt-ons. The risk is probably more on the high side than the low side, but you never know till you've done the deal.
Yeah. No, understood.
There is a real danger of setting yourself a number and being stuck with hitting that number. We will do the right deals at the right time, it will be broadly of the scale that we've discussed.
Yeah. No, understood. Understood. In terms of the new kit that you're going to buy over the next six months to a year, is it fair to assume that the worse the cost inflation is now in the past and you're kind of buying on a like-for-like install base basis to where you would have been at the start of this year, or is there still a little bit of residual inflation coming through in OEM pricing?
Yeah. It's a good question, and it depends on how you look at it. That was a really convoluted answer. On a year-over-year basis, you're absolutely right. Of course, on the cost to what it costs you when you replaced it takes a whole seven years for that sort of Tier 4 element to work its way through. When you're comparing a Tier 4 with a Tier 4. On a year-over-year basis, you're right.
Yeah
The key is on that replacement cycle basis. Of course, it's going to take a while for that big inflation that we saw in Tier 4 to wash its way all the way through.
Yeah. GBP 850 million of total CapEx to-date will get you roughly the same amount of kit as it would have done nine months ago or a year ago.
I'd knock 2% or 3% off.
Yeah. Perfect. Understood. Thank you.
Yeah.
We now go over to Chris Gallagher at JP Morgan. Please go ahead. Your line is open.
Good morning. I was just wondering on the acquisitions, is there anything particular that you area you're looking at?
Yeah. We remain exactly where we've always been, which is they fall into two very broad categories. One is effectively substitutions for greenfields. It's general tool locations where instead of doing a greenfield, we are increasing our geographic footprint by doing a small bolt-on rather than a greenfield. They are typically very small in size. I think the biggest one we've done was four locations of a general tool business. The other was where we're tending to focus is on specialty businesses, where we're looking to expand the breadth of our businesses and our exposure. There, we're probably more inclined to want to do larger deals, there's not a huge amount of big specialty businesses around. It will remain a combination of the two.
Given our stated aim, which is to grow the relative scale of our specialty businesses, we really need to be focusing more in that area than we do general tools, because general tool business is naturally going to grow faster than specialty for the time being, just because we're in that hotspot of non-residential recovery. Again, actually, come back to this mix point. Whether we like it or not, the non-res business for the first time in a long time is going to grow faster than our specialty businesses. The benefit of specialty businesses is you get steady growth, and you don't have a cycle. There's no getting away from the fact there's going to be a mix impact when the non-res bit takes off. To answer your question, same strategy as always, a bit of both, to be honest.
Okay. Thank you.
We now go over to George Gregory at Exane BNP Paribas. Please go ahead. Your line is open.
Good morning, all.
Hi, George.
Hi. Three questions, if I may. First, could I just check, Geoff, on that yield drag. Would you expect it to be similar throughout the year? Should we expect a sort of a 1% or 2% drag to continue through?
Normally, it will take about a year to come through. The only thing which would make that not be the case is if we did a significant number of specialty acquisitions. It is probably worth just spending time on this. We have discussed it before, to remember the relative metrics of a general tool business and a specialty business. If we buy specialty businesses, typically they will have 40% or 50% physical utilization. It drags down our physical utilization metrics, which gets all kinds of people agitated. They probably have a dollar utilization of 80% or 90%, so it improves our yield metrics, which again, gets various people all excited. If we bought an aerial business, we bought a big aerial business in Q1, physical utilization is great.
Physical utilization on our aerial right now is probably 80-some percent against an average of 72%. It drives up our physical utilization. If we buy an aerial business, however, the dollar utilization is probably somewhere between 35% and 40%, so it drags down our yield. Absent the impact of M&A, it will take about a year for this to wash through.
Okay. Perfect. Second question. The growth gap between yourselves and your other peer is finally beginning to close, which I suppose should come as no surprise to anyone. I just wondered whether you could maybe add some color as to what is happening on the ground in terms of account wins or anything else that might be relevant, please, Geoff.
Sure. I am prepared to bait the point that the gap is closing, but anyway. Look, the market is getting better. Everyone is, of course, spending a bit more money. However, the great thing about the market recovering is people are testing out their supply chains. Those who have underinvested through this downturn are not as fit and healthy as those of us who have been running at a high pace and investing heavily. We said two, three years ago with the United RSC merger, we would see the benefit two to three years. We would see the benefit short-term of the small transactional customers, but it takes two to three years to take any significant share in key accounts. We have taken a number and, again, we see a good pipeline. One of our other big competitors, it is public knowledge, Hertz has some problems at the moment.
They are a business which is almost all key national account work. We are undoubtedly going to take some share from there, too. Again, we'll take the transactional stuff first, and it will take a year or two to see the full impact of it. We're just in that nice phase, a couple of years in, where we are seeing the benefits of previous market consolidation, but we're also seeing our big non-res construction customers checking out the quality of their supply chain as they get busier and finding that our service level is very, very attractive. Yeah, we would expect to continue to gain share across key accounts.
Perfect. Final question, just following up on a prior question. You talked, I think, about 50 branch additions through greenfield and bolt-ons. Did you at any stage split that between greenfield and bolt-ons? Do you have a rough estimate of greenfield additions for this year, please?
No, we don't, to be honest. It's a bit of a moving feast. No, we don't split it. It's not going to make a huge difference in terms of how you would model it.
Okay. Thank you very much.
We now go to Josh Puddle at Berenberg. Please go ahead. Your line is open.
Yeah. Hi there. Good morning.
Hi.
Does the pursuit of more national account-based business Significant impact on your end market exposure?
Okay. This is about the third time. Can I reiterate, we're getting way out of kilter here on this pursuit of national account work. Our strategy remains absolutely unchanged, our focus continues to be on that small or mid-scale contractor. It is true that there has been significant disruption. We were gaining market share and key accounts back in 2005 and 2006 and 2007. This is not some change in strategy where we are pursuing aggressively national accounts. If anything, they're pursuing us aggressively as they seek better service level. It is true, we are looking to grow that part of our business as we're looking to grow all parts of our business. It does not signal a change in strategy. It's not going to be of such significant scale that it is going to change long term any of our metrics.
Look at our drop-through and look at our EBITDA margins. Look, it is one small part of a whole number of things where we've tried to explain what's going on with mix. It does not, under any circumstances, signal a change in strategy.
Sorry, just on the end market exposure, does it have any effect on your 65%?
No, because national accounts are not all construction accounts. We aren't allowed to name the name, but there's a large entertainment business based in Orlando and Florida whose account we won recently. That has nothing to do with construction. We have won a couple of real big oil refinery work down in the Gulf Coast. That is all industrial work. Again, I think there's this view that the big national accounts are only construction accounts. You can both increase your share of national accounts, but also maintain your discipline about the breadth of markets that you serve. We're very conscious of that. You'd be right in saying that without continually reassessing our strategy, you could chase low-hanging fruit at this stage in the construction cycle.
We're very conscious of, A, taking the opportunity, but B, not changing our long-term strategic direction in terms of the mix of our business.
Okay, that's great. Thanks very much. Just secondly, I was wondering if you're willing to say what your new CapEx guidance implies for volume on rent growth for this year?
Yes, Josh. Hi, this is Suzanne. We think that the CapEx guidance that we've given should result in a volume fleet on rent growth in the high teens.
Okay, that's great. Thanks very much.
Sure.
We now go on to Justin Jordan at Jefferies. Please go ahead with your question. Your line is now open.
Thank you. Good morning, everyone. Can I just have a two-part question around the fleet CapEx guidance? Is it fair to say from the macro data that we're seeing that sequentially looks month-on-month like Q1 probably got better in the sense that maybe July was better than June and better than May, as it were, and possibly August was better than July? The underlying end macro data we can see into the non-res, and yes, I know the dreaded ABI, and residuals and whatever else, looks like it's all nudging the right way sequentially. Is that a part factor in your increased CapEx guidance?
Yeah, Justin, that's a good question. Yes, it was sequentially better. Seasonally, it's always sequentially better, but it was particularly sequentially better this time around. Yes, a combination of looking at that trends of fleet on rent and reaching, as I said, reaching levels of physical utilization which were higher than last year. Also a sense that this has actually been a bit of a late season. Our numbers were so good, we said the cold winter hadn't had an impact on our numbers. Well, actually, as we look at it now, people seem to have started projects a little later and are continuing to break ground later than is typically the case. Yes. There's no getting away from the fact that markets are strong and appear to be improving.
Okay, thank you. Just a very kind of slightly geeky question.
Just the fact that I'm insured.
At 25 months, you've got the longest fleet age of any major rental business I'm aware of. Your sales revenue as a proportion of total revenues going forward is going to increase at a much lower percentage than, let's say, your volume rent or rental revenues.
Again, it's one of the things which affects this breakdown between rental revenues and total revenues. We're just not selling any assets because it's better to rent them. We're so busy we can't afford to take them off rent at the moment. Our fleet age now is just a mathematical function. We are trying to replace CapEx on its normal recycle schedule. On that basis, it ought not to get any younger. Mathematically, just because the growth is so high and so much of it therefore becomes new, it sort of mathematically gets younger. In physical terms, it's not, if that makes sense. In the sense that we are not accelerating replacement cycles to make it younger. We're on normal replacement cycles.
I haven't looked at the stats since the year end, but we're going to be over half of the fleet is going to be less than two years old.
Just one sort of clarification follow-up for me. Sorry. You had a Sunbelt fleet of GBP 3.596 billion at the end of April, and that's up, I think 9.5% or something in Q1. With the increased fleet CapEx that you're now doing, should we be thinking about that being up very high teens or something on that GBP 3.6 billion base by April 2015?
Yep.
Yes.
Yep.
That's right.
Okay. I think that's important because especially when we look at the balance sheet. The size of that asset now, and right now, its revenue generating capacity. Thinking long, long, long way out, as a support to our debt and showing the strength and solidity of the group now. That asset that we're creating, that young, easily disposed asset is a really strong point, I believe, in terms of our balance sheet.
Okay. Sorry, just one final follow-up. FX. It looks like it's becoming less of a headwind for you. Can you just remind us just, let's say, the impact on full year fiscal 2015 profitability of, let's say, a one cent movement in dollar sterling?
Absolutely, Justin. A 1% change is equal to about GBP 4 million of PBT, and you're right to point out, in the first quarter, we did have a significant difference year-over-year in terms of the quarterly average FX. Last year, in the first quarter, the currency rate was about 1.53, and in this quarter, it was 1.69. That created a significant headwind of about GBP 12 million in the first quarter for us.
Can I add a note of caution about, well, it's all suddenly got better in terms of exchanges. We've had months of it being bad. We've had about a week of it being good. My view would be, let's see how it pans out post Scottish referendum and various other things before we decide the world's all getting better from exchange rates.
Yeah. The good thing about exchange rates for us is it's all translational. Each time we report, as we've talked about before and as I've talked about with a number of you, we'll just mark it to whatever the rate is at the time.
Thank you very much.
Our next question is from the line of Alex Magni of HSBC. Please go ahead. Your line is open.
Thanks. Morning, Geoff. Morning, Suzanne.
Hi, Alex.
Couple of quick ones. Just on the comment you made on rate, sort of underlying rental rate being sort of 3%-4% rather than yield. As you see that going forward, just thinking of how the effect of the Tier 4 regulations affect industry pricing, which you'll ride the tails of. I would have thought that alone drives you about 3%-4% rental rate. Do you see the possibility that that, with the cycle looking like it's improving with construction put in place, data starting to really pick up? Should that be a minimum? Could that be materially higher?
Yeah, it's a good question. I think eventually Well, actually, you have to be right in order for us to get the returns that we desire. As you know, if all we do is match inflation, then dollar utilization and returns go nowhere. You have to be right. I think we've been asked this question once or twice on recent calls. My view is you get about a year's lag whilst people are starting to ramp up, because most people haven't got much Tier 4 yet.
Yeah.
It's going to take about a year for the mix. Because you can't charge a different price from a Tier 4 to a Tier 3. People don't ask for a Tier. In the main, don't ask for a Tier, so the average price has to go up, which is the benefit of us having bought so much Tier 3. It's going to take about a year as people grow their proportion of their Tier 4 before you see that impact. Through the cycle, I believe you'll be right. I'm not sure you'll see it this year, but in later years in the cycle, I actually think you will be right. If you look historically at our cycles, that tends to be what happens.
Okay, great. Just on the growth thing, I'm not going to pose another sort of CapEx question, but on as you look at the overall fleet growth now sort of high 10s, is it fair to assume that the specialty businesses are disproportionate to that, maybe sort of high 20s?
No. The opposite. That's the problem at this stage. The specialty businesses sort of tick along at that 15%+ steady away, have done all the way through, and they were proportionately growing faster than construction for all of the last four years. We're now at a stage where construction, it's going to be so strong that for a period of time, it will accelerate faster than specialty. That's why your mix gets affected a bit, Alex, because you just go through-
Yeah
this kickoff phase in construction, there's not much we can do about that, in all honesty. We have to react to market demand. As the cycle goes on, the gap will fall, and also what will happen is we'll start using more late cycle products. The ones we'll actually make our greater return on, as people go to fit out stage rather than breaking ground and steel. There are nuances of mix through the cycle. It gets better the later we are in the cycle, basically.
Okay, thanks. Just last one from me. On the ancillary revenues, which affected the yield calculation, and I know there are lots of moving parts in there, but what are the main buckets of cost that go in there? I suppose the question on that is, what cost buckets should grow in line with activity and what cost buckets can sort of swing around a bit?
Yeah. The two biggies are fuel and labor. Of course, what you can be doing is you can be doing a lot more volume, but if fuel prices go down, ancillary revenues look as if they're going backwards.
Yeah.
Not because there's any less activity, just because fuel prices are going backwards. A reducing fuel price has a negative impact on our yields, for example, bizarrely. The other one's labor. Things like traffic businesses, event work, big scaffolding jobs, because there's no more fleet on rent. All of that billing is effectively pure price in a yields calculation. Again, what impacts it, again, would be the mix of specialty. If specialty businesses tend to have the higher proportion of added value services like labor and fuel, and therefore, if they're growing slightly slower than construction, that's why you get a negative mix effect.
Understood. Perfect. Thank you.
Okay.
We now go to Andrew Nussey at Peel Hunt. Please go ahead. Your line is open.
Morning, Geoff and Suzanne. A quick one around rate and A-Plant and its sort of sustainability. With the sort of rate improvement pretty much across the asset base, or was it still sort of skewed more to sort of early cycle stuff? Equally, was there any sort of distorting impact from Eve Trakway now that it's sort of a year under your ownership?
Eve Trakway's washed through. Eve Trakway's not. A-Plant's in a very different place to Sunbelt. Sunbelt, this is the summer, and this is the quarter where non-residential has broken out. That breakout of non-residential does have an effect. We aren't that strong in the breakout of the U.K. construction market that it is early cycle products versus late cycle products. What we're seeing in A-Plant is a more across-the-board recovery, and that's why it hasn't had the negative. It will come. In a year or two's time, they'll be still delivering 3% or 4% rate growth, and we'll be seeing 2% yields, not 9% yields. When we go bang with the non-residential recovery and the lower dollar utilization products are in very high demand, no one metric is great at all times in the economic cycle.
No, we aren't quite there yet, Andrew, in terms of A-Plant. A-Plant was a far broader mix of products, hence the very positive yields, really what Sunbelt was enjoying two years ago. I still think you've got to think of A-Plant being 18 months to two years behind its evolution of its markets to where Sunbelt is. That's certainly how it feels.
Okay. Do you feel, probably a harder question to answer, do you feel that the peers in the U.K. are sort of following you, or are you very much still leading the way on rate?
I think you just have to look at those of our listed peers who give data on their revenue growth to know the answer to that question. Unfortunately, we have an industry where there are a number of big players with very low physical utilization, some of them with very inexperienced management teams who think the only answer is to lower rates and get physical utilization up. They will learn it doesn't work. No, the industry is not following us at the moment. Now, that's true of one or two big players. There are some very good, responsible players too. I'd call out companies like Vp amongst the list of the excellent business, takes a strong leadership position on rates. There are others who, fortunately, who I do not believe do so.
Understandable. Okay, thank you.
Our next question is from the line of Eugene Klerk at Credit Suisse. Please go ahead. Your line is open.
Yes, good morning. Two questions from me. Geoff, you mentioned you referred to the excellent balance sheet strength. I would certainly agree on that part. Given where your average asset life is versus leverage, and I assume that the increased guidance on CapEx is included by sort of keeping the leverage level for less than 2 times as well. With all of that, do you see that there is possibly an increased chance of adding additional shareholder return elements to your investment story, particularly as consensus puts you closer to your ROI? I refer, for example, to share buybacks or increased dividends.
Secondly, on A-Plant, over 2 years ago when analysts asked you about your strategy towards A-Plant, you sort of used to answer those questions by saying, well, A-Plant returns are less than the cost of capital, so until they are above it, that's really a question that doesn't need answering. I think right now your return rates are probably at or above the cost of capital. Given that, and given the fact that A-Plant is unlikely to increase as a percentage of your business, are you looking at strategic options for A-Plant given the return rates? Is that becoming a more realistic a sort of strategic target at this point versus a few years ago?
No, no. Good questions. Let me cover them separately. Buybacks and dividends. Well, as you've seen, we have been increasing consistently the ordinary dividend. Unlike some of our peers like United, we do pay a regular ordinary dividend. Our view is in a cyclical business like ours, where cash is contra-cyclical, a long-term, consistent, and clear ordinary dividend policy ought to provide some underpin and comfort to shareholders. We will continue to increase the ordinary dividend. In terms of share buybacks and special dividends, well, I'm more inclined to share buybacks than I am special dividends. I think if you've got a good solid ordinary dividend policy, that ought to suffice. Share buybacks, look, right now we are still net using cash even though we are de-leveraging. You are right.
If you look at the balance sheet and if you model, well, I think it's a long way out a downturn, we become very cash generative. Also, the point we're very cash generative, we're likely to see more weakness rather than strength in the share price. That strikes me as a sensible time to do a share buyback, not when we are investing heavily in high returning growth at the top of the cycle. At the appropriate point in time, we will consider it. I would remind everybody that we have used buybacks in the past. Unlike some of our peers, we bought back at the bottom of the market at GBP 0.60 a share, where we bought back 10% of the capital. We would like to repeat that strategy if at all possible. In terms of A-Plant, I will repeat what I've said always.
Look, all options are open. That's true of every business. Everything's for sale. It just depends on the price. You'd have to look at it practically. Yes, we're now at 11% ROI. That's very encouraging, and we're clearly on an industry-leading growth curve, both in revenue and returns. We don't need to give it away. What proportion it is of the group is irrelevant. The question is, in its own right, can we invest and get a good return? The overall ROI is 11%. Clearly, the return on the incremental GBP we're putting in there is better than that. This is still very early in the recovery. For now, we're doing what we said we would always do. If somebody came along and made a fantastic offer, would we listen? We listen to everything. I can't see that happening.
All the peers are broke, and most private equity tend to be bottom fishers. Given the strength and growth of this business, this is not a business we need to give away. It is a very valuable business, and it's a growing asset. We're very comfortable where we are right now.
Thank you.
Just a reminder to all participants that if you wish to ask a question, could you please press zero and then one on your phone keypad now, and press zero and two if you wish to cancel. There'll be a further pause while questions are being registered.
Okay, Hugh. If there aren't any other questions, we'd just like to thank you once again for your interest in the company. We look forward to seeing you all with a fuller update at the half year. Thank you very much indeed.
This now concludes our call. Thank you all very much for attending. You may now disconnect.