Earnings Call: Q1 2015

Sep 3, 2014

Hello, and welcome to today's Ashtead Q1 Results Analyst Call. Throughout the call, all participants will be in listen only mode and afterwards, there'll be a question and answer session. And just to remind you, this call is being recorded. Today, I'm pleased to present Jeff Drabble, Chief Executive and Suzanne Wood, Financial Director. Please begin. Thank you. Good morning and welcome to the Ashtead Group Q1 conference call where Suzanne and I will give our usual shorter updates on our current performance and then quickly move on to Q and A. So looking at the highlights on Page 2, 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 £120,000,000 Margins and ROI continue to be strong and despite significant investment in the business, we maintained our leverage discipline. Given the momentum evident in the business and reflecting our confidence in the future prospects for the group, we are increasing our full year guidance for capital expenditure to the range of £825,000,000 to £875,000,000 Therefore, we now anticipate the full year results ahead of our previous expectations. And with that, I'll hand over to Suzanne. Thanks, Jeff, and good morning. Our first quarter results are shown on Slide 4. And as Jeff mentioned, the group's underlying pretax profit was £120,000,000 compared to £99,000,000 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 and continued emphasis in both businesses on fall through, the group's EBITDA margin improved from 43% to 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 and Jeff will provide more details later. Sunbelt is shown on Slide 5 and again you see the strong 22% rental revenue growth. Despite opening 11 new stores in the quarter, of which 7 were greenfield locations and the remainder from acquisitions, we achieved our 60% targeted fall through rate. And as a result, EBITDA grew by 28% year over year and our EBITDA margin improved to 49%. Pretax return on investment in the U. S. Was 26%. A Plant's comparative numbers are on slide 6. Its rental revenue increased 19% as compared to last year and the fall through rate improved to 60% in the quarter. As a result, EBITDA margin increased to 35% and importantly, A Plant's ROI moved forward to 11%. Given our growth, the maintenance of our leverage discipline remains important and as shown on Slide 7, we continued to improve our position even as we took advantage of market opportunities. At July 31, 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 delevering. Looking forward to next April, we reaffirm our commitment to sustain leverage below 2 times in order to strike the right balance between financial stability and investment in growth. That concludes my comments. And so I'll hand it back over to Jeff. Thanks, Suzanne. So 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 9. 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 multi year growth forecast. We continue to capitalize on this opportunity as you can see with our same store growth a very healthy 17%. Therefore, we are growing at around twice the pace of the market due to our strong service offering and scale 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 and we have a good pipeline of both gold tons and greenfields. Here on Page 10, we break down rental revenue in further detail. Volume growth was 21% and yield was up 2%. Pure rate is actually of 3% to 4%, but 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. So now there are a lot more moving parts and 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, but this was an obvious anomaly. A number of factors again greenfields and bolt ons and major account wins can affect metrics short term. But in such strong markets, it's always going to sort itself out. And finally, bottom right, the notable point is again just how much the fleet has grown year on year, up 25%. And 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 £825,000,000 to £875,000,000 Why a range? Well, because we remain able to flex expenditure relatively easily and we'll continue to do so as we react to demand. We do not have to make commitments for the full year. Therefore, it remains an infracite science. Once again, a much improved performance from A Plant as it capitalizes on recovering markets, but also very clearly take 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% to 4%. And once some year on year anomalies have washed through, both divisions will ultimately trend towards these sort of numbers. However, good performance all around for air plants who are clearly heading for a record year very early in the cycle, which bodes well for the longer term opportunity. So 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 the covering markets, gain market share and execute a well established growth strategy. Our confidence in the outlook is I think reflected in our increased fleet investments, which will clearly drive further revenue. Despite the significant investments, we remain committed to responsible growth and keeping leverage within our stated range, I. E. Below 2 times EBITDA. And as a consequence, we now anticipate the full year results ahead of our previous expectations. And 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 Our first question is from the line of David Brockton 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. I just wondered, is this sort of an opportunistic activity? Are you 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. Yes. I think it's a bit I'm not sure you've got this all from big area, David. But it's 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. So 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. So that's the first one. The answer is there are lots of little bits which are affecting mix. So one of them is product mix. It is also true that there is some customer mix impact there also. We said about 2 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 accounting over the last 3 or 4 years and given continued disruption among some of our competitors, we are undoubtedly gaining market share in that area. So yes, some of it is customer mix also. And the third element is there's just a drag from the bolt ons and the greenfields. Remember, we have industry leading dollar utilization. So we're buying businesses, which are lower dollar utilization than us. Therefore, that has a drag effect. When we open a greenfield, it doesn't start at the same levels of physical dollar utilization that it reaches over 2 or 3 years. So whilst each individual acquisition and each individual greenfield as of itself is very, very small in a year where you have made so many acquisitions and open so many greenfields, the cumulative effect again has something of a drag. So there's 3 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% to 4%, which you would anticipate would continue given the strength of the market. So these are some anomalies that will wash through throughout the year. So in the same way, some of the positive anomalies in air 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% to 4%. Okay. Thank you. Our next question is from the line of Steve Wolf 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 to where the increase has come from? And then secondly, also on the CapEx, in the U. S. For the increase of 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 mean, I'm not sure we can split it down. 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. So 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, it was about 1.5% higher than it was a year ago. Based on 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. So 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 1 or 2 very significant accounts over the last few months. And again, one of the reasons why the physical utilization was lowered to Q4 was we were pretty much straight after the year end, but we had to marshal it before we had to go into one of those big national accounts. And it kind of went on rents pretty much straight after the year end, but we had to marshal it beforehand. So let's not get hung up on this product mix and this national account mix. It's a tiny, tiny swing and it's more a reflection of general levels of demand. And on the U. K. Side in terms of what the overall mix between the new number on CapEx U. K. Plus U. S? Yes. Look, it's going to be about the same, but clearly both are growing at a steady pace and both needs to be fed. So 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. Next question is from the line of Andy Murphy of Bank of America Merrill Lynch. Please go ahead. Your line is open. Good morning. I've got 3. 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? And Secondly, I was looking at the interesting breakdown in terms of the incremental revenues you put on Page 3 of your announcement. I was just wondering whether you'll be prepared to give us some indication of the relative margins on the same stores versus the bolt ons? And finally, on the impact on the U. K. Yield, I was just interested to know what the sort of the difference was that was causing the high rate of 9% when you clearly highlighted actually the underlying rates more around the 3% level. What was causing the sort of the balance after the 9%? Yes. Okay. But the non residential bit yes, 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 up until pretty much up until now. We're finding it very broad. I mean, you can just see it on the ground. I mean, what's our evidence? I mean, I think there's a lot of statistics have just come out in the last 1 or 2 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 the design business, they'll tell you they are incredibly busy on larger non residential projects. And so 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. And as we said for some time, remember that's our core market. And so that's very encouraging for us for the long term. 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. Lodging is very, very strong at the moment. It's a pretty good market I have to have handy at the moment. We you know, 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. So markets create. No, we're not going to break down the relative volume. We would have reached the point where we might as well give you the management accounts and break it down by that if we aren't too careful. Clearly, the same stores that have been in existence for a while is are better. And the one number I will give you is, I mean, dollar utilization is 60%. For those same stores, which enjoyed the 6 enjoyed the 17% growth, their dollar utilization is 65%. So you can see there is quite a range. But remember, within those same stores, our acquisitions and bolt ons we did in the last 2 years. So the ones that are not in same store are just things that have happened in the year. So we very quickly take them up the curve. And you remember there's a chart we showed at the year end, which stratified it by size of that. We've just put a few more on in the bottom this quarter than we've pushed up. So 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 3 years to reach full maturity. But no, we don't want to get too granular on margins by depots. In terms of U. K. Yields, it's the key with yield is all other things being equal, we think yield is the best measure because it covers lots of ancillary billings etcetera. The problem is when you get big changes in mix, which is what we've seen in both divisions through M and A and different elements of greenfield activity, it changes things. So 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 with pure yields because there's no more fleet on rent. So things like the Commonwealth Games where we've had a big, big presence, but there's been a big labor presence in that with traffic jobs, etcetera, That's just comes through in our measure as a very, very strong yield number. So it's predominantly a mix effect and the impact of ancillary billings. Okay. Thank you very much. So there's one off ancillary billings will work their way through. Okay? Thank you very much. Thanks, Andy. Our next question is David Phillips at Redburn Partners. Please go ahead. Your line is open. Good morning, everyone. Can I just ask about the pipeline of openings and bolt ons? I mean, it looks like you've had a strong start to the year on that front. And potentially, if the 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? Yes. It's a timing thing, David. I mean, it's I mean, 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. So we seem to go through waves where they all bunched together. So we haven't we've done we've not done very much over the last month or 2. And I'm looking at September late September, early October and there's a bunch of things that happened. So 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 until you've done the deal. So 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 and it will be broadly of the scale that we've discussed. Yes. No, understood. Understood. In terms of the new kit that you're going to buy over the next 6 months to a year, is it fair to assume that the worst the cost inflation is now in the past and you're kind of buying on a like for like installed 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 prices? Yes. It's a good question. And it depends on how you look at it. That's a really convoluted answer. On a year on year basis, you're absolutely right. Of course, on the cost to what it cost you when you replaced it, it takes a whole 7 years for that sort of Tier 4 element to work its way through. So when you compare it comparing a Tier four with a Tier four, so we're still so on a year on year basis, you're right. But 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. Yes. But €850,000,000 of total CapEx today will get you roughly the same amount of kit as it would have done 9 months ago or a year ago. I'd look 2% or 3% off. Yes. Perfect. Understood. Thank you. We now go over to Chris Kelleher at JPMorgan. 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? Yes. I mean, we remain exactly where we've always been, which is we fall into 2 very broad categories. One is effectively substitutions for greenfields. So 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. And so they are typically very small in size. I think the biggest one we've done was like 4 locations of a general tool business. The other was which where we're tending to focus is on specialty businesses where we're looking to expand the breadth of our businesses in our exposure. There we're probably more inclined to want to do larger deals, but it's not a huge amount of big specialty businesses around. So it will remain a combination of the 2. 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 non residential recovery. And again, that's we come back to this mix point. Now 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. But there's no getting away from the fact there's going to be a mix impact when the non res bit takes off. So to answer your question, same strategy is 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? So should we expect a sort of a 1% or 2% drag to continue? I mean like normally it will take about a year to come through. The only thing which would make that not to be the case is if we did a significant number of specialty acquisitions. Because this is where I think people kind of it's probably worth just spending time on this. We've discussed it before is to remember the relative metrics of a general tool business and a specialty business. So if we buy specialty businesses, typically they'll have a 40% or 50% physical utilization. So it drags down our physical utilization metrics, which gets all kinds of people agitated. But 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%. And so it dries up our physical utilization. If we buy an aerial business, however, the dollar utilization is probably somewhere between 35% 40%. So it drags down our yield. So absent the impact of M and A, it will take about a year for this to wash through. Okay. Perfect. Second question, the growth gap between yourselves and your other pay 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's happening on the ground in terms of account wins or anything else that might be relevant please, Geoff? Yes, sure. I'm prepared to beat the point of the gap is closing. But anyway, look, the market is getting better. So 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. And those who have underinvested through this downturn are not as fit and healthy as those of us who've been running at a high pace and investing heavily. We said 2, 3 years ago with the United RSC merger, we would see the benefit 2 to 3 years. We would see the benefit short term of like the small transactional customers, but it takes 2 to 3 years to take any significant share in key accounts. And we have taken a number and we see again, we see a good pipeline. One of our other big competitors, I mean 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. But again, we will take the transactional first and it will take a year or 2 to see the full impact of it. So 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 this year and finding that our service level is very, very attractive. So yes, we would expect to continue to gain share across KA accounts. Perfect. And 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? So did you have a rough estimate of greenfield additions for this year please? No, we don't, to be honest. I mean, because it's a bit of a moving feast. So no, we don't split it. And 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. Does the pursuit of more national account based business have a significant impact on your end market exposure? Okay. This is about the 3rd time. Can I reiterate we're getting way out of kilter here on this pursuit of national account work? Our strategy remains absolutely unchanged and our focus continues to be on that small or mid scale contract. It is true that there has been significant disruption. We were scaling market share in key accounts back in 2,005, 2,006, 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. Now it is true, we are looking to grow that part of our business as we're looking to grow all parts of our business. So 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. 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. And so I just on the end market exposure, does it have any effect on your sort of 65%? No, because the key 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 accounts we won recently. That has nothing to do with construction. We have won a couple of real big unrefinery 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. So you can both increase your share of national accounts, but also maintain your discipline about the breadth of equipment that or the breadth of markets that you serve. And we're very conscious of that. There is you'll 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 really not changing our long term strategic direction in terms of the mix of our business. Okay. That's great. Thanks very much. And 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 net growth in the high teens. Okay. That's great. Thanks very much. Sure. We now go on to Justin Jordan of Jefferies. Please go ahead with your question. Your line is now open. Thank you. Good morning, everyone. Can I just have a 2 part question around the fleet CapEx guidance? Is it fair to say from the macro data that we're seeing that sequentially it 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 because the underlying end macro data we can see into the non res and yes, I know the derivative ABI and residuals and whatever else. Looks like it's all nudging the right way sequentially. And is that a part factor in your increased CapEx guidance? Yes. That's a good question. Yes, it was sequentially better. Like I seasonally, it's always sequentially better, but it was particularly sequentially better this time around. And 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. And also a sense that this has actually been a bit of a late season because 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 be stopped people seem to have started projects a little later and are continuing to break ground later than was typically is typically the case. So 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. 25 months you've got the longest free days of any major rental business I'm aware of. Obviously, 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? Yes. And again it's one of the things which affects like this break down between rental revenues and total revenues. We're just not selling any assets because it's better to rent them. And 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. And so 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 to make it we're on normal replacement cycle. But I haven't looked at the stats since the year end, but we must we're going to be over half of the fleet is going to be less than 2 years old. Yes. Okay. And just one sort of clarification follow-up for me. Sorry. Obviously, you had a Sunbelt fleet of 3 point €596,000,000,000 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 $3,600,000,000 base by April 15? Yes. Yes. That's right. Okay. I think that's important because especially when we look at the balance sheet, the size of that asset now, it's and right now, a, it's revenue generating capacity. But 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 assets is a really, really strong point I believe in terms of our balance sheet. Okay. Sorry, just one final thought. FX, it looks like it's becoming less of a headwind for a year. Can you just remind us just let's say the impact on full year fiscal 2015 profitability of let's say $0.01 movement in dollar sterling? Yes, absolutely Justin. A 1% change is equal to about 4,000,000 dollars of PBT and you're right to point out in the Q1 we did have a significant difference year over year in terms of the quarterly average FX. Last year in the Q1, our the currency rate was about 1.53 and in this quarter it was 1.69. So that created a significant headwind of about £12,000,000 in the Q1 for us. Can I add another 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 referendums and various other things before we decide the world's all getting better from exchange rates. The good thing about exchange rates for us is it's all translational. So each time we report as we've talked about before and as I've talked about with a number of move this market 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. Good morning, Jeff. Good morning, Suzanne. Hi, Alex. A couple of quick ones. Just on the comment you made on rate, sort of underlying rental rate being sort of 3% to 4% rather than yield. And 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% to 4% rental rate. Do you see the possibility that, that with the cycle looking like it's improving with construction put in place, they're starting to really pick up. Should that be a minimum? Could that be materially higher? Yes. It's a good question. And I think eventually you well, actually you have to be right in order for us to get the returns that we desire because as you know, if all we do is match inflation then dollar utilization and returns go nowhere. So you have to be right. I mean, 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. And so it's going to take about a year for the mix. But you can't charge a different price from a Tier IV to a Tier III. I mean people don't ask for a Tier or 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. But it's going to take about a year as people grow their proportion of their Tier 4 before you see that impact. But if you but through the cycle, then I believe you will 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. And if you look historically at our cycles that tends to be what happens. Okay. Great. And then 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 teens, is it fair to assume that the specialty businesses are disproportionate to that maybe sort of high 20s? No, no, the opposite. I mean that's the problem at this stage. The specialty businesses sort of tick along at that 15% to 15% plus steady away have done all the way through when they were proportionately growing faster than construction for all of the last 4 years. But we're now at a stage where construction is going to be so strong that for a period of time, it will accelerate faster than specialty. So it actually that's why the mix gets affected a bit, Alex, because you just go through this kickoff phase in construction. And there's not much we can do about that in all honesty. We have to react to market demand. However, as the cycle goes on, then the gap will fall. And also what will happen is we'll start using more late cycle products with the ones we are actually make a greater return on as people go to fit out stage rather than breaking ground and steel. So there are nuances of mix through the cycle. It gets better the later we are in the cycle basically. Okay. Thanks. And then just last one for me. On the ancillary revenues, can you which affected the yield calculation, could you and I know there are lots of moving parts in it, but what are the main buckets of cost that go in there? And 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? Yes. I mean the 2 biggies are fuel and labor. So of course what you're going to 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, not because there's any less activity, just because fuel prices are going backwards. So reducing fuel price has a negative impact on our yields, for example, bizarrely. All the other ones labor. So things like traffic businesses, event work, big scaffolding jobs because there's no more fleet on rent. It's like all of that billing is effectively pure price in the yields calculation. So it's and again, what impacts it again would be the mix of special so specialty businesses tend to have the higher proportion of added value services like labor and fuel. And therefore, 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 Nossi at Peel Hunt. Please go ahead. Your line is open. Good morning, Jeff 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 distorting impact from EVE now that it's sort of a year on year? Distorting impact from Eve now that it's sort of a year under your ownership? Yes. Eve's washed through, so Eve's not had a plant in a very different place to the U. K. To Sunbelt. Sunbelt, this is the summer and this is the quarter when non res has broken out. So that breakout of non res does have an effect. We aren't that strong in the breakout of the UK construction market that it is early cycle products versus late cycle products. So what we're seeing in A Plant is a more cross the board recovery and that's why it hasn't had the negative. It will come. So in a year or 2's time, we'll be still delivering 3% or 4 percent rate growth and we'll be seeing 2% yield, not 9% yields because when we go bang with the non residential recovery and the lower dollar utilization products are in very high demand, it's like no one metric is great at all times in the economic cycle. So no, we aren't quite there yet, Andrew, in terms of A Plant. So A Plant was a far broader mix of products, hence the very positive yield. Really what Sunbelt was enjoying 2 years ago. I still think you've got to think of their plants being 18 months or 2 years behind its evolution of its markets to where Sunbelt is. That's certainly how it feels. Okay. And 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 do you sort of very much still leading the way on rate? 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 a 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, but no, the industry is not following us at the moment. Now that's true of 1 or 2 big players. There are some very, very good responsible players to I'd call out companies like VP amongst the list of excellent business takes a strong leadership position on Wave. There are others who fortunately who I do not believe do so. I understand. Okay. Thank you. Our next question is from the line of Eugene Khlerk of Credit Suisse. Please go ahead. Your line is open. Yes, good morning. Two questions from me. Jeff, you mentioned you referred to the excellent balance sheet strength. I would certainly agree on that part. I mean, given where your average asset life is versus leverage and I assume that the increased guidance is 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 put you closer to you or I? I mean I refer for example to share buybacks or increased dividends. And 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. So 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 sort of strategic target at this point versus 3 years ago? Yes. Good questions. Let me cover them separately. Buybacks and dividends. Well, as you've seen, we have been increasing consistently the ordinary dividend. And so 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 countercyclical, a long term consistent and clear ordinary dividend policy ought to provide some underpin and comfort to shareholders. So we will continue to increase the ordinary dividend. In terms of share buybacks and special dividends, are 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 deleveraging. You are right. If you look at the balance sheet and if you model with what I think is a long way out a downturn, we become very, very cash generative. Also the point they'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. So at the appropriate point in time, we will consider it. I'll remind everybody that we have used buybacks in the past, but unlike some of our peers, we bought back at the bottom of the market at 60p a share where we bought back 10% of the capital and we would like to repeat that strategy if at all possible. In terms of A Plant, look, I will repeat what I said always. Look, all options are open. That's true of every business. Everything is for sale. It just depends on the price. But you'll have to look at it practically. Yes, we're now with 11% return on investment. That's very encouraging. And we're clearly on an industry leading growth curve both in revenue and returns. Therefore, we don't need to give it away. What proportion of this of the group is irrelevant? Because the question is, in its own right, can we invest and get a good return? So the overall return on investment is 11%. Clearly, the return on the 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 of 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. So we're very comfortable where we are right now. Thank you. Okay, Hugh. If there aren't any other questions, we'd just like to thank you once again for your interest in the company. And we look forward to seeing you all with a further 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.