Earnings Call: Q4 2014

Jun 17, 2014

Good morning and welcome to the Ashtead Q4 results presentation. Following on from the pleasing set of results we published earlier this morning, Susan and I will use this presentation and the Q and A to try and add a little more color towards behind this strong performance. What we also want to do this morning is to explain in a little more detail how building what's clearly a strong operational and financial base, we will deliver further growth whilst at the same time maintaining our financial discipline. So to briefly overview the highlights from a great year, it was good to see a very positive 24% increase in rental revenues against some tough comparators. What was particularly pleasing is that now both the U. K. And the U. S. Are contributing to this growth. This strong revenue performance was matched with good progression in both margins and return on investment and which now stands at a very healthy 19% for the group well above the cost of capital. Importantly, we continue to invest significantly in the fleet, but even after this spend, bolt on M and A and greenfield expansion, we have further reduced leverage to 1.8 times EBITDA in line with our commitments. Again, I think this just demonstrates our strong margins and cash generating capacity, which Suzanne will cover in more detail in just a moment. And finally, consistent with the progressive dividend policy, the proposed final dividend is 9.25p making 11.5p for the year. Again, a healthy rise underscoring both the current financial strength of the business and our future potential. So with that, I'll hand over to Suzanne to cover the financials. Thanks, Jeff, and good morning to everyone here and also to those listening on the webcast. We were pleased to report the group's Q4 and full year results this morning. As Jeff indicated and as shown on Slide 4, the positive trends continued. Our 4th quarter underlying pre tax profit of £69,000,000 compared favorably to £52,000,000 in the same quarter last year. Consistent with recent periods, our profitability was driven principally by a 24% increase in rental revenue at constant exchange rates. This revenue growth was further enhanced by operational efficiencies, which helped to deliver an improvement in EBITDA margin from 35% to 40% and an operating margin from 18% to 21%. Our full year results are shown on the next slide. The group's underlying pre tax profit for the year rose by 50% to £362,000,000 Not surprisingly, rental revenue was again the main driver, also increasing in the full year by 24%. This higher revenue combined with our operational leverage and focus on fall through resulted in an expansion of our EBITDA margin to 42%. Additionally, our operating profit margin rose to a record 25%. Now let's take a quick look on a divisional basis, beginning with Sunbelt on Page 6. From this graphic and in particular from the bridge on the top right showing the change in revenue from 1 year ago, you can see that Sunbelt clearly continued to capitalize on market opportunities. U. S. Rental revenue growth was comprised of a 17% increase in the volume of fleet on rent and a 4% higher yield. On the bottom right, we've demonstrated the fall through of incremental rental revenue to EBITDA. A 2014 fall through rate was 65%, despite adding 39 locations. As we said previously, maintaining a strong fall through rate is an important financial discipline to ensure that we grow our business responsibly. We believe Sunbelt's fall through rate and EBITDA margin of 45% for the year demonstrate this discipline as well as the strength of our operating model. Moving on to Slide 7 and A Plant now, we were encouraged by the smooth integration of the Eve acquisition, which certainly helped to drive part of this year's improvement. Looking at the bridge on the top right, you'll note that the UK's rental revenue growth was comprised of a 21% volume increase and a 9% yield increase. Our EBITDA margin for the full year at A Plant was 29%. However, if we exclude Eve from these results, A Plant's core business still showed healthy growth relative to the market. Excluding Eve, our rental revenue grew by 19%, about half of which was improved yield due to product mix. Now as we transition to the next few slides, we'll shift our focus to cash flow and balance sheet management. Both are key elements of our cyclical planning strategy. On Slide 8, we've highlighted our heavy investment in the rental fleet. Our net cash flow for CapEx in 2014 was £639,000,000 We believe that a high level of investment and growth is appropriate at the early stages of the economic recovery as we continue to responsibly invest and grow our market share, meaning that our volume growth is accompanied by improving yield, return on investment and leverage ratio. With our free cash flow only marginally negative in the year, the 2014 fleet investment was broadly self funded from operating cash flow as a result of our expanded EBITDA margin. This is in line with guidance previously given. Additionally, you'll note in the year that we invested £103,000,000 on a number of small bolt on acquisitions, which Jeff will discuss in more detail in a moment. After these acquisitions and our dividend payments, our net debt at April 30 increased by £218,000,000 As we indicated in the press release, anticipate a capital expenditure level in 2015 that's broadly similar to the year just ended. This should result in a percentage growth rate in our fleet in the lowtomidteens, and we expect to be able to fund that growth from our free cash flow. The group's young fleet age of 28 months further reinforces this competitive position and will allow us in 2015, like 2014, to direct a significant proportion of our total spend toward growth rather than replacement. As always, our CapEx plans remain flexible depending on market conditions, and we will adjust them as appropriate throughout the year. The next slide is one you've seen before and it outlines our debt and leverage profile. Including translation impacts, our year end debt was £1,150,000,000 However, from a leverage perspective, the 2014 increase in debt was more than offset by higher earnings, and therefore, our leverage ratio declined to 1.8x at April 30. This is in line with our view that improving EBITDA margins will allow us to support further growth while still delevering. As we look forward to next April, we expect the leverage ratio to continue to reduce further, and that clearly reflects our commitment to sustain leverage below 2x in order to strike the right balance between financial stability and investment in growth. Now having covered the last two slides, I'm sure some of you may be thinking that while it's true leverage is coming down, our debt is going up and that raises the question of when our free cash flow will turn positive. We therefore put together the slide on Page 10 to better explain our cyclical cash generation. We believe we're in the early stages of recovery and so have been growing our fleet size significantly in order to take advantage of the opportunity to increase our market share, while still generating strong returns. This means that our cash flow from operations is growing, but our free cash flow is marginally negative given our CapEx level. We've characterized this phase as the high growth phase on the chart. Our earnings and cash flow from operations will continue to grow, but eventually the rate of growth will moderate and so will our capital spending. We can fund organically about 12% volume growth. So once our growth moderates to a level below this, we will turn cash positive. Then as we see early signs that the market is beginning to decline, our CapEx will be sharply reduced, our fleet will gently age during the downturn, and as a consequence, our free cash flow will become highly positive, allowing us to reduce debt significantly. Therefore, we'll be able to maintain dividends through the cycle. Our strength lies in our starting point at such an early stage in the cycle, low fleet age, good margins and low leverage, which will allow us to continue to grow while retaining financial discipline. As a final point, I'll touch on our returns profile. As I mentioned earlier, this continued progression of return on investment is a key financial discipline and performance indicator for us to ensure that we grow in an appropriate manner. Therefore, it's pleasing to see it move forward in 2014 to 19%, including goodwill and intangibles, up from 16% last year. This combined with our reducing debt leverage puts us in a solid position from which to consider our 2015 prospects. And with that, I'll hand back over to Jeff. Thanks, Susan. So let's start the operational review by looking at how we performed in Sunbelt in the Q4 and a slide you've seen many times before. I think you can see that in terms of both volume and yield, the period continued the strong trends we have established and reinforces the momentum we have in the business in North America. Moving on to Page 14, I'll try to give a broader context to this performance. We tend to look at quarters and halves in isolation and what I hope this page shows is the level of consistency in our performance over the last 2 years. Whilst I would reiterate that precision is difficult in our business directionally, we have been very accurate. I know some struggle with this and presume that cyclical means volatile, but that's just not the case. We write around 1,000,000 contracts every year and no customer is more than 1% of our revenue. We also cover a very broad geography and sectors of the market and this again provides good stability. This is particularly true as non res recovers as larger multiyear projects further improve our stability. Our current performance certainly points to strong end markets. So it's been cyclical with a seasonal business with November being our peak fleet on rent month. In November 2013, we broke all records of fleet on rent. However, as early as April 2014, we were already back to these levels of activity and have surpassed them by May. We think this is encouraging and confirms the bold organic investment decisions we announced in December. So to summarize, the business is not as volatile as you may think. We are early in the cycle and we are a late cycle business. Remember, when markets turned down in 2,006, we had our best 12 months to July 2008. We will therefore have good notice when it is time to reassess our fleet expenditure, but that's just not now. So we now anticipate healthy volume growth for both the short and medium term, somewhere within recent ranges, I. E. Lowtomidteens. So against this solid backdrop, I would now like to focus on the reinforcement of our medium term strategy and our potential for yet further growth. Whilst our plans remain unchanged, I know or understood by most of you, let's just remind ourselves what our strategy actually is and how it is shaped by our market dynamics. We believe that we've created an operational and financial platform that provides significant scale benefits. Our view that the big will get bigger is I believe being evidenced. What is particularly encouraging is that we are realizing these scale benefits so early in the cycle, which provides a real opportunity for yet further growth. We will continue to achieve this largely through organic growth supplemented by greenfields and bolt ons, which are now playing an important part in our performance. This is a proven low risk, high return strategy, which as you will see in a moment is really working. As a result, in what remains a highly fragmented market, we believe there is a potential for further significant market share gains. So yes, of course, there is a cyclical element to our current and medium term potential, but the structural opportunities remain very compelling. So let's take a look at this in a little more detail. Sunbelt has clearly repositioned itself over the last 3 years both in terms of operational scale and financial stability. It's probably worth taking a moment to remember how far we've come. Rental revenues have grown 82% and are now $2,000,000,000 Margins are already at 45% and return on investment is 26%. From a financial stability perspective, the orderly liquidation value of our fleet has risen $1,500,000,000 reflecting both our fleetly aging and stronger secondhand markets. In this period, that's only risen $650,000 and of course, leverage has reduced significantly to under 2 times EBITDA. The headroom between our debt and the OLV of our fleet is a clear indicator to the current financial strength of our business. It of course be right to think that the purposes of this slide is mainly to pat ourselves on the back a little bit. However, more importantly, it shows that we've created a strong platform for growth both operationally and financially. Having said that, improving end markets pose their own challenges and a real danger to any cyclical business is that they get carried away with the upswing and overstretch. The watchword for the next phase is therefore very much responsible growth or as we like to put it internally, don't screw this up now. So how will we do that? And what can we specifically what can we expect from the market? Whilst there's always there's a range of views as the pace of recovery in construction market, all the commentators now do show growth. I think the reason for the range of views is often our forecasters look at different things, be it starts or completions and they classify work slightly differently. Having said all of that as we indicated a year ago, we are continuing to see very positive trends. Residential continues to be strong. This is now having an impact on other areas. Private non res is recovering and sectors such as oil and gas are particularly strong. The improving economy is also now filtering through to the municipalities and state finances. And whilst I believe it's too early to call a significant recovery in institutional expenditure, it should not be a major headwind. Overall then, I think we are where we have said we would be for some time, I. E, relatively early in the cycle with a good runway for continued growth. I believe the various elements of construction are at different recovery points and have different challenges. We believe that we probably have 4 to 5 years of steady growth ahead. That is not to say it will be a linear progression as it never is and there will be data points that may disappoint. However, once the larger and longer non res projects get underway as they are, these ripples really do have a decreasing impact on our own momentum. As you can see from page 19, 2013 2014 was a significant year in terms of our organic fleet investment. We spent over $1,000,000,000 on fleet, a number which not long ago would have seemed unimaginable. And as we've been highlighting for some time, the emphasis has moved away from replacement expenditure and fleet de aging to growth. A new gain with the focus predominantly being on same store growth although greenfields are playing a more important role. Our business is based upon industry leading customer service and while fleet is an important element to this, so are non fleet areas such as delivery trucks. And again, you can see here that significant sums have been spent with $119,000,000 in the year. For the coming year, we would anticipate broadly similar levels of expenditure. As Suzanne highlighted earlier, we expect low to mid teen percentage growth in our fleet size in the coming year, but we retain a high degree of flexibility as to precisely what that number will be. Here on page 20, I think we show the attractiveness of this organic same store fleet growth. The chart is an important one and compares the fleet size and margins of our locations between 2,008 today. As you can see, the margin and ROI has always been better the greater the fleet size. However, our significant same store fleet investment means that we now have a much greater proportion of extra large and large locations. The eagle eyed amongst you will see how this has evolved even since our Q3 results. Structurally, therefore, we are a higher margin business and so concerns about previous peaks somehow being a constraint through the cycle potential or misplaced. What we are seeing here are real scale benefits. The other piece and point to note is the improvement in our operational efficiency, which has resulted in same size stores having so much better margins than previously. So to summarize, same store organic growth is a low risk, high return strategy and whilst of course there are always some capacity constraints which will require investment, these are relatively small and therefore further progression in margins will continue. The same store growth will be as we said earlier supplemented by greenfields and bolt ons as we look to further increase our market share. You can see from the chart here on Page 21 that we've been adding a good mix of both greenfields and bolt ons with a greater relative growth in specialty markets. So we're increasing our medium term target from 500 locations to 600 locations. This remains a really fragmented market and potentially the clearly the potential clearly exists for further consolidation both through bolt ons as well as more grainfields. Page 22 is a map you've seen before where basically the darker the green, the greater our market share. What this shows is that we have an appropriate where we do have an appropriate concentration of locations, our model consistently delivers 15% plus market share. We just need more locations in certain geographies where we perhaps have not been a force for as long as some other regions. Remember, we're still a relatively young company and have a long way to go to reach full location maturity. Therefore, our greenfields and bolt ons will naturally be focused on those major designated markets where we have a foothold but insufficient market share. We will also expand our specialty locations where we can leverage a strong general tool presence. We would anticipate around 50 new locations in the current financial year. It's a strategy which is simple and it takes time. However, there's high return and appropriate to our requirement to target specific areas. Also, as I think Page 23 clearly demonstrates, it's really starting to deliver results. This page shows how greenfields and bolt ons whilst initially a drag on drop through in margins really start to contribute in years 23. Those greenfields and bolt ons that were completed in financial year 13 only delivered $32,000,000 of revenue in that year. They consequently were the drag on margins. However, these same stores delivered $108,000,000 of rental revenue in financial year 2014 and are expected to deliver between $120,000,000 $130,000,000 in the current financial year. You can see a similar trend in the greenfield and bolt ons completed in financial year 2014 and their anticipated performance in 2015. So for this current financial year, we anticipate somewhere between $275,000,000 $325,000,000 of revenue from new locations at now a very acceptable 20% to 25% ROI. To put this into perspective, based on the OREO 100, this would be the equivalent of creating a new top 10 player in the industry in under 3 years. It's also probably worth noting that this has been achieved whilst both reducing leverage and improving ROI. We've got a good process in place now and a well established team Therefore, our anticipation is that through this cycle, we will have added sufficient new stores and businesses to deliver between $500,000,000 $600,000,000 of incremental revenue by around about 2018 or again the equivalent of creating a new top 5 player in the industry at a 25% to 30% ROI. So I hope this all just highlights the medium term structural opportunity our financial strength and scale benefits provide. This of course is a key part of our strategy of doubling our market share at Aggressive, But with our recent track record of clear industry leading growth as you can see here on page 23 and our ever improving scale advantage, we feel very confident in reaching this target. Given our strengthening balance sheet, I guess a fair question is why not do all of this quicker with some bigger deals? Well, mainly because in my opinion there is a very small population of high quality assets out there and deals either in a new specialty sector or to significantly enhance an existing specialty market. Also a deal which significantly broadened our geographic footprint without too much overlap would also be somewhat attractive. Of course, overriding all of this will be our commitment to remain within our leverage targets through the cycle. So to summarize, we would never say never, but there remains a great opportunity for bolt ons and this will remain our bread and butter whatever other opportunities may present themselves. So moving on to A Plant, and a strong 4th quarter to round off a very strong year. Rental revenue growth was 19% excluding even 33% with it. So all in all, a very satisfying performance. As in the U. S, there's a greater sense of the corner slowly being termed in terms of our end markets. Residential, as we all know, is strong and non residential is definitely much stronger than 1 year ago. I remain to be convinced that's going to be a great year for institutional spend but accept it's probably not going to be a terrible one either. So in the range, improving end markets likely lie ahead. However, again, I would remind everybody that there remains both political and economic risk and so it could still be quite a bumpy ride. So as Suzanne said earlier, it's all about responsible growth. We are very aware that AirPlants ROI through the cycle has not been acceptable and therefore we've been making significant efforts to broaden both our customer and product base and improve efficiencies. Therefore, in what are still difficult end markets, it's pleasing to see the results of this work and a strong progression in ROI. So early in the cycle, this bodes well for significantly outperforming prior peaks as we have done in the U. S. Air Plant therefore will continue to invest sensibly in its fleet to reemphasize its industry leading customer service and we'll continue to look for complementary bolt on acquisitions mainly in specialty areas. So to summarize, both divisions are performing well and are beginning to enjoy recovering markets. We have successfully repositioned the business over the last 3 years and have provided an operational and financial platform from which we will responsibly invest in further profitable growth. Our strategy will remain unchanged with an emphasis on organic growth supplemented by greenfields and bolt ons and the fragmented nature of this industry clearly provides a further opportunity for the scale players and we anticipate further market share gains as well as the benefits from cyclical recovery. The dividend as we said has been increased to 11.5p a year consistent with our well established progressive dividend policy. And as a consequence, the Board looks forward to the medium term with continued confidence. And with that, we'll move on to Q and A. Just to remind everybody for people listening on the web, if you could wait for the microphone and state your name and organizers. Good morning. Mark Housum from Kepler. Good morning. Just on the Sunbrook business, you mentioned obviously the target of 50 locations a year sort of opening up Greenfield. Is that the optimal number that you can do given the sort of staff constraints? Or is it or could you push it higher? Yes. I mean it's a good question. Could you find more? Could you physically do more? Yes. The trade off always is of course how big a distraction does it become. And so we are looking at the pace of growth and we've been growing in this 20% to 25% range for 3 years now. I think we've struck the right balance between sensible growth which the management team can handle whilst also delivering margin progression and ROI improvement. We fear that the danger is that if we go too aggressively after that target that somehow that margin drop through won't be quite as good and we may lose some of the focus on same store growth which has been particularly attractive. I think if you look at our performance in the year, let me tell you how we try and look at it. If you look at Global Insight Reports, results of many of our peers, the market is growing at about 7% per annum. Our same stores, so we strip out all bolt ons, all greenfields, so we do sort of a supermarket type analysis as best we can. Our same stores are growing at about 14%. So we're growing at about double the pace of the market. And if we want to keep outperforming the market to that extent, we need to put lots of focus on same stores. We're obviously growing 24%, so the 10% is Greenfields and bolt ons. So as we look forward, we look forward with quite a degree of confidence because our view is the 7% will get better, I. E. The market growth will improve as we go into cyclical recovery. Will we always do double the market? Probably not. But will we continue to outperform the market? Yes, certainly. We've just got such scale benefits and we've got such a good operational platform and we also think we've got a good pipeline of greenfields and bolt ons. So we've got 3 dynamics going on there and it's to your point, it's a question of trying to get a balance between those. 3. Could 50% be 55% Yeah. Could it be 45% Yeah. It's what comes up. David Phillips from Redburn. Just wondered, have the maths of these bolt on acquisitions changed given the balance between what you pay for the assets and the location relative to what you then subsequently put in, in the 1st 3 months? And if you could just talk a little bit about Yes. I mean, it's still net book value. There's sort of There's still incredible value out there, to be perfectly honest. We aren't paying you can see from the numbers and what comes in, in terms of fleet, we aren't paying significant amounts of goodwill because we aren't paying significant amounts over the OLV of the assets. And when people look at fleet growth and look at maybe capital spends, people now are going to have to start also looking at the fleet acquired from M and A as well in terms of reconciling our fleet growth. So no, the sort of areas we're looking, why we like our model is, it's very, very targeted in very specific geographies. So we know we haven't got a big overlap or it's targeted on very specific product sectors. We are paying very sensible multiples, so we aren't paying but it's true that all of these businesses as soon as we bought them, we've had a really good track record really benefit from a little bit of injection of capital. A young fleet goes a long way in terms of improving customers' perception of a business and our customer service. So no, we are still paying relatively good multiples. In terms of greenfields, there's been a remarkable trend. If you go back when we first started this process 2 years ago, we started quoting it takes about a year to breakeven. About a year ago, we said actually we've done a lot better than we thought we're going to do and it takes 6 months to breakeven. They're now taking 4 months to breakeven. So we really have got a very well established model now. We started this program, I think we had a business development team of 2 and it's now 16. And they've become very, very good at opening these things, setting up marketing programs, making sure a sensible fleet investment comes in. I was talking to a professor at the manager who just said, look, I walk in, switch on the lights and everything else is done for me. And that typically wasn't the case. So I think we've got a good model and a good pipeline. You can see, gosh, we did 3 acquisitions in May in open 8 locations in May. So yes, there's a good pipeline ahead. And frankly, we're the only people doing anything very similar. And people ask why when it's so high returning. What you have to remember is, this is probably when all of our advisors say don't name names. Why did no trade buyer buy Volvo? Because they've done just that. They bought up a bunch of businesses, but there was no common platform. Unless you've got a well established common platform with good IT, good fleet planning, then just rounding up a bunch of ad hoc local rental businesses means you've just got a bunch of ad hoc local rental businesses. To pull it together into a high ROI business, you need that platform. And there's very few of us with that national platform. Great. And just second question, what are you seeing in your negotiations with the OEM kit suppliers? Has your pricing benefit versus the smaller guys remained as big? Yes. Again based on certainly based on the acquisitions we're doing, the delta we talked about last time around is still as big. This is a low inflation year for us. Now it deserves to be because the whole Tier 4 thing was the sort of they had fun and games with we had high inflation years around Tier 4 over the last 2 years. But no, we're into 0% to 3% depending on the equipment for inflation on current. And our delta certainly remains as large. Look it's true, of course it's true. As markets get better more of our small competitors will spend more money. Based on our discussions to date with our suppliers, our spend is a proportion of their total spend is going up not coming down. So yes, it's true. People are spending more, but our purchasing power is not weakening. Great. Thank you. Good morning. Andrew Nasse from Peel Hunt. Can we just look at A Plant in a little bit more detail? Clearly, there's been a bit of fleet mix there, which has helped the overall yield. Could you just flesh out on the movements there? And obviously, we're not being told to sort of extrapolate that improvement going forward. No, you're absolutely right. That huge yield improvement, as Suzanne pointed out and was a pain to point out as many times as you possibly could, is not going to continue. The EVE acquisition, we're past the anniversary of that now. So there was a good mix benefit of that. Having said that, A Plant are seeing yield progression. So again, what will it be for the year? 2, 3, 4 possibly, I would have said 4, but then you've kind of got a new management team at Speedy, you've lost the plot. So it might be 3. So we'll see, but it will be in that range. And secondly, just anything sort of May, June trading that sort of deviate from the trends that you saw at the back end of the quarter? Look again remember that slide. It's why why would it? It's not deviated over a 2 year performance in the U. S. The UK too. When we write so many transactions, nothing changes terribly quickly. I sometimes look at the volatility in our share price and think it's because some people think we're suddenly going to go from plus 24 to minus 24. We'll go from plus 24 to 22 And then we'll go to 18. It takes a long, long time. As I said, we've got to a good start in both geographies. For November 2013, those of you who know us know that Brendan and I in particular bet on everything. And we kind of had a bet on what our peak fleet on rent would be in November of 2013. And he's always more optimistic than me and he wouldn't buy miles. And we just thought that's just an incredible level of fleet on rent. To get back to that level as early as April was very, very surprising to us also. And therefore to be ahead of it also in May as we go through our normal seasonal uptick, The markets are strong, Hatcher. I know there's all kinds of some contra data points and there's worry about interest rates and Iraq and whatever else. But I can tell you right now there's an awful lot of construction activity on the ground. It's David Brockton from Liberum. Two questions. Just first on some of the sector activity within the U. S. I just wonder if you can just give us a feel to what extent the U. S. Business is now focusing on the energy sector within the U. S. And to what extent the fleet mix is changing with regards to that? The second question, which is with regards to the longer term target with regards to depot expansions. The $600,000,000 target and the medium term target, is that sort of identified opportunities? And would that represent maturity in your view with regards to the U. S. Market? Or was there much further to go on top of the 600? It's a good question. Let's start with the oil and gas. We look at oil and gas from 2 perspectives. We have a very specific oil and gas division that predominantly works around servicing wellheads and associated activity. And within our list of bolt on acquisitions over the last 2 years, you will have seen a number of deals which are in that space. It remains a relatively small proportion of our total business, but it's a very fast growing and very profitable one. And again, people get a bit confused because they'll say, well, there's less investment in oil and gas. Well, that's just not true because you need to look at this split. There's nobody spending an awful lot more to find any more oil and gas because they find loads of it, but there's nowhere for it to go. And so there's huge investment in all of the infrastructure to transport, refine and potentially ultimately export it. So that part of our business is very strong and we would anticipate it being strong for a long period of time because you don't just create new oil refinery capacity overnight. And so there are those long multiyear projects that we've been talking about. So we're feeling very good about that sector of the market, but it remains a small percentage of the market. Because as far as the percentage, is it sort of 1, 2, 3, 10? Yes, a couple of percent. But incredibly profitable and then that's from 0 2 years ago. Now the other part of the activity is our general construction business in areas where there has been oil and gas fines is also very strong because if you go into Bismarck, North Dakota at the moment or Midland, Texas, it costs you about $500 for the Courtyard Holiday Inn because there's just no hotels and nowhere for anybody to stay. So that investment in the infrastructure be it access roads, hotels, restaurants, accommodation is particularly strong too. In my opinion, the whole oil and gas infrastructure investment, so away from just new wellheads is what prolongs and elongates this particular construction cycle because there is a massive infrastructure need to support the deposits that have already been found. And every time I go to Houston, they show me another map with another basin which has got more capacity than the previous basin. So there's a lot there but there needs to be some investment in the infrastructure to extract and refine it. And the depot target? Yes, the depot one, it's again, where could it be? Look, our biggest competitor has 800 locations. Do we need to get to 800 locations or not? I don't know. For 600, I can give you the zip codes of where we want them to be. What I can't tell you is exactly when we'll get it. So you can do the math. We've got our 200 locations, we're going to do 50 years, it will take us 4 years. If 3 years in we're facing some form of Armageddon, we might end up with 550. If 4 years in, we've got another 3 or 4 years of growth, we might end up with 650 or 700. It seems to be a sensible pace of growth given the length of the current cycle as we see it, we will reserve the right to tweak it depending on how the cycle plays out over time. Thanks. Mark Hamson from Canaccord again. Two questions. Can you give us a feel for what happened to rental penetration in the U. S? I mean, previously you said that as the cycle turns up, you get a great benefit of the cycle turning up and people still switching over ownership to renters. Can you just feel firstly what's happened to that? Yes. I mean, if I'm being perfectly honest, well, we haven't looked on measured for a long time because we've just thought life's great. And we're getting sort of picky about it, but also we're trying to explain, trust us, we will be well in the downturn and people were a little more skeptical about that. Anecdotally, I would say we are still seeing a shift to rental penetration. You know my belief and I still hold with it, that pace slows to almost nothing as we go into cyclical recovery but doesn't go backwards and we get our next step change. I think that because of the length of this downturn and the scale at which rental penetration has increased, our customers have crossed a threshold where you can't go back. I think when rental penetration was like 20%, 30%, you kind of use it a bit during the downturn, but you still had all this infrastructure for ownership and you sort of drifted back. Now that is certainly over 50%, then people have just got used to rental. It's become an integral part of their business model. And at the same time, there's been increasing legislation around health and safety industries, issues even things like the DOT regulations on drivers and trucks, environmental legislation on carbon emissions just says it's hard work to go back to ownership. And then the final piece on the jigsaw is the inflation associated with Tier four engines means it's a hell of a shock of what the scale of reinvestment is relative to our current rental rates. So my view is it's still a factor. It will become a factor of decreasing pace as the cycle improves, but I have no fears of it ever going backwards. Just secondly for me. Just on the 30% or so of your U. S. Business, which is specialty, they've always been difficult to pin down exactly where that's going. Can you just say, do you have a feel at all as to how much of that would be going into residential remodeling etcetera or is it just too Virtually not a bit. I would have said, oh, hardly any of it goes to construction full stop. It's mainly either industrial or non building type work. So it's sewer repairs, it's oil and gas, it's industrial, it's air conditioning in offices. It's very deliberately targeted away from construction. It's maybe a breakdown we can try and do in a bit more detail for another time. And an increasing part of our general tool business is away from residential, our historical areas of construction, pretty much none of that 30% is focused on construction. Justin Jordan, Jefferies. Just following up from Mark Hansen's question. Can you give us a little bit more color on the Specialty business? And just in terms of you talked about the 14% or so like for like growth within the business overall. Is the specialty business exceeding that or growing in line with that? Yes, the specialty business has over the last 3 years and continues to grow at a better pace. Frankly, that will stop because as the cyclical construction just grows very, very quickly, the whole benefit of the specialty business is it grows steadily through the cycle as opposed to. Remember, our stated objective a long time ago was by the bottom of the next cycle, specialty would be 50% of our business. Now that gets harder when you go through the heated upswing of construction. But our business which is I know a bunch of you were out in the States with a presentation from Greco last week. Look, our pump and power business in America just looks like a Greco's pump and power business in America just grows faster. Our oil and gas business also is a very, very strong oil and gas business. So the whole purpose of those is that they are on different cycles and have different attributes to our typical construction business. And so then in terms of fleet CapEx going forward more than 30% of it is going into the specialist areas? I don't know if that was true last year because we spent so much on fee. But that would have been true over the 3 years leading up to now. The 3. And certainly if you look at the bolt ons a number of those are in the specialty. Yes, have a look at the page on bolt. This will probably give you some idea of it. If you look at it from a locations perspective, you go back to Page 21. Look last year, we added 15 general tool locations and 24. Now in percentage terms, we've got 300 general tool locations and 100 specialty. So proportionately, the number of the percentage growth in specialty is significantly greater than now with Tier 4 engines where precisely there was more fleet growth, I must admit, I don't know precisely. But you can see our intent in terms of both bolt ons and greenfields where our primary emphasis is. And if you look at the acquisitions A Plant did, they were all in specialty sectors. Two very quick follow ups. Firstly, as far as I can tell, latest industry data say residuals are up about 4.5% or so in North America. How positive or not is that for a yield going forward? Look it has to be positive. It's got to be positive because there has been because of Tier 4 significant inflation in equipment because people are going to have to sell all Tier 3 engines product and buy Tier 4. As a consequence, as they do that and some people are slow in doing that but are having to do it now, their starting point from which they have to generate a return is that higher capital cost. And that desire to grandfather in all Tier 3 is what's keeping secondhand equipment. There's a shortage of equipment generally and there's specifically a shortage of good Tier 3 equipment. So that again, if you go back some years, we haven't shown this chart for 2 or 3 years. There's a hell of a correlation between our rates and secondhand equipment pricing. And so you would expect that to continue. Just very quickly for Suzanne, can you just remind just the FX sensitivity of, let's say, every $0.01 movement in dollar sterling, what impact that has in the PPT line? Sure, absolutely, because we've certainly seen a lot of movement this year. Every 1% change in the FX rate is about £3,000,000 of PBT. Good morning. Alex Magni from HSBC. Some exceptionally dull ones from me, please. But just looking at the Q4 margin performance, a couple of observations. The sale of so the revenue from sale of equipment, was lower. And for 25 odd percent rental revenue growth, your staff costs were up 3%. I was wondering, was that just a change in the way you accrued bonuses through the year? What should we think on those going forward, both in terms of equipment sales, but also how your staff costs are likely to Yes. With respect to equipment sales, I mean, those margins are relatively constant. When you have new acquisitions coming in and you're trying to get things set up, you can have a little bit of deviation with margin in the quarter. But generally speaking, those are relatively constant. With respect to staffing costs, no, I mean, there's no real change in bonus accrual. I mean, again, if you're looking at a year over year change you have to take the currency effect into account. Be careful with the drop through in Q3 and Q4. The drop through looks really, really great in Q4. One of the reasons for that is because you're comparing it with some Sandy activity. Because what happened when we had Sandy the year previously, it looked like we had a good yield, but a lot of that yield was low margin pass through costs like transportation, fuel charging. So it inflated last year's yield and deflated last year's drop through. So this year when you lose that element of the revenue, your drop through just becomes artificially higher. So like I would still base around the 60% drop through for the year. And so there are some tweaks that there was a very high labor charge last year because of Sandy with all the extra delivery costs, manning costs, fueling costs, but they're typically very low margin activities. But would that have been in Q4 as well? Yes. So Sandy would have affected your Q4. It would have affected both Q and Q3 and Q4. So without Sandy both Q3 and Q4 probably had better yields year on year comparators than we're showing, but would have had much lower drop through than we're showing. Okay. And then the final one just to tag on to the end of the questions related to the Specialty business. If I remember correctly in whatever it was, 2010, when we came out to see it, specialty was about 20% of the group. So that's grown now to 30%. Within the specialty, I think there were 3 different businesses. Have those grown pro rata or is sort of pump and power the predominant Pump and power is still the specialty. The pump power and climate control, like you're joking, Bob, basically the agricoal local business because we do drying, we do air conditioning, we do heating, we do power generation, we do pumping too. That is by far and away the largest proportion of the business. And oil and gas is the fastest growing and probably on track to become as big as Pump and Power. And then we've got the industrial scaffolding bit which is growing but it's fairly steady. Okay. And do you operate with similar type similar unit size power generators? Would you tend to run at smaller? Yes, I mean we are a little on the lower side in terms of power project. The Agreco is still great at those much bigger Vic projects that probably need slightly less flexible customer service, but huge capacity of power. Our strength remains a bit like our general tool business at the lighter end where there is a requirement for greater flexibility in customer sales where we benefit from having so many more locations. Okay. Thank you. Andrew Murphy from Bank of America Merrill Lynch. I just got two questions. Just first of all, on the drop through rate, I heard what you said a second ago. Under what circumstances do you think that could slip from slip below the 60% level that you've achieved consistently and you've highlighted again this morning? And then secondly, just on the yield outlook for the U. S, could you give us a flavor for what you're seeing and like to see in terms of pricing as a proportion of what you might see plus what other activities you're doing to boost that yield up in terms of cost recoveries and other other incidentals? Well, in terms of look, let's be clear with drop through. What we've said consistently is we think we will average out around 60%. And that's been our guidance for about 3 years now and that guidance hasn't changed. As I said, the higher number this year is to a large extent achieved because of the comparators. So no one's saying we're going to hit 67% a gain because that's not what we said last year. And as I said, I think there are reasons for that. The 60%, the people were questioning us 3 years ago whether we could keep 60% going or not. We model it. And as long as given remember that the whole point is when a high proportion of our growth is same store growth and people rise up that scale, then there's no reason why there are not still very positive elements from same store organic growth. Now it's true that you reach a point where some of the stores are just full. We need to go to a bigger location, we need to buy more trucks and we need to recruit more people. So it's not a complete linear scale. Having said that, the number of times that's the case is relatively tiny. Mostly what we need to do is rent half an acre somewhere down the street as a bit of a lay down area. So there is always some incremental investment. So we continue to model it and see where we think the growth is going to come from and we're very comfortable at sticking to our 60% drop through. And we think it's a very sensible target to stick to and ensures as Suzanne says earlier that we are responsible in our growth. Yes, we get good top line growth, but we also get good progression in margins and ROI. Yes, that's exactly right. It's one of our key financial disciplines. We will grow at a pace so that we can be certain that we achieve at least a 60% drop through. That's one of the boundaries that we try to operate within as well as the leverage point that we mentioned earlier. And if you then look at yields, but remember our yields incorporates rate and other ancillary billings. That's not just rate and then there are other ancillary billings. Our yield typically rises 4%, 5%, 6%. I mean if you strip out the impact of Sandy which is the +11 and the 3%. So our expectation is it's going to do about the same again in the coming year. There's no reason why it shouldn't. Remember what we do is we don't go out and put out an annual big price increase. We just keep tweaking prices up a little bit through the year and it's become a regular part of our activity. The last thing we want to do is suddenly make that 10%. 70% of our business gets called in for delivery the following day usually sometime late in the afternoon. People we give people a great service and we allow them to not think too much about their purchasing decision. You suddenly said by the way it's 10% more, you make them think. We really don't want to do that. And so I would look that's the whole point of this chart. You would expect for the coming year, 2 years, even 3 years, the volume range to be somewhere in that range there and you would expect the yield range to be somewhere in there too. Nothing spectacularly different is going to happen one way or the other. It's Rob Plant from JPMorgan. You mentioned that the fleet age has gone from 44 months down to 27 months that customers like a young fleet. Have you got a target on how old you think the fleet could be? And could you be inefficient if you took the fleet age down to slide? Yes, absolutely. There's obviously clearly a trade off between where it's worth the difference and where it's just too young and you're just adversely affecting ROI. We would say that broadly we're about where we want to be right now. If it comes down any further, it's a mathematical anomaly I. E. There's so much feet growth that a greater proportion of it is very young and it drags it down. But in terms of our repeat cyclical reinvestment in our fleet, it's about where it needs to be right now. Otherwise, you're absolutely right. There's no upside from a pricing perspective and there's all the downside in the world from an ROI perspective. It's a balancing act we discussed a lot. James Marrow from Barclays. Just on acquisition spend, obviously, you spent £100,000,000 last year. You've already spent £30,000,000 this year. How should we be thinking about that number in our cash flow statements given clearly you're going to spend more? Do we notwithstanding your comments about investing once you've acquired these businesses, do we knock a bit off the CapEx line if you spend more on acquisitions? Should we be looking at those two lines together? It's a great question. I don't know if you have any of that to me. That's why I looked at Cezanne here. It really depends on that which is available in the market that comes up that we would have an interest in and our expansion plans is the honest answer. Look, and especially we're buying these focuses, it's hard to predict. We did one acquisition and the guy called it off because he's paid in Brazil. So how do you predict That sounds good. So how do you predict what your spend is going to be on that deal or not that deal. But in terms of the balance between CapEx and acquisitions? Of course, there's going to be some form of counterbalance because whether it's a greenfield or whether it's an acquisition plus it's hard to call. And so combined, there's going to be about 50. Now we buy a greenfield, we spend somewhere between 58,000,000 new fleet goes into the greenfields. Or some of that money will be on bolt ons. Yes, we're probably going to spend more than we did last year, probably if we can do the deals and if they all come off. We have a good pipeline. We think we've got a little bit better. And you're at that stage with small borders. Again, people think you can just start. Some of the deals we approach people on 2.5 years ago said no 2.5 years ago and they're ringing us back now. And so with small deals like that, it's very, very hard to be precise. Our expectation is it will probably be a little bit more, but there will be a bit of a counterbalance with what we then spend on greenfields. That's true. And then the second one was just on the EVE acquisition where you released the remainder of the provision for the earn out. Was that slightly disappointing? Or was it just a very aggressive earn? No, I'll be careful. Our audit doesn't ring the drum. It's accountancy gobbledygook is what it is in reality. What are you supposed to do? A guy sells you a business, he promises you that the business is going to like perform brilliantly for it and you go, I believe it if I say. So you refuse to pay them for that price. I'll pay you for your historical numbers and I'll believe your numbers because if you hit them, great. And we'll give you that much money if you do hit them, but then you think, well, he's never going to do that. Well, actually, it's kind of do it here. Well, the new accounting rule says you have to pretend that when you buy it that you've paid the maximum banked out and you've got to release something. Eves performed incredibly well and got to a very good start this year. Where, Oi? What's the date? Middle of June, I have no more panels left to rent to any festival or event anywhere in the country right now. And we've increased our fleet size by a third I think in terms of number of the panels. So Eve is doing great. It's accounting, sorry, I do apologize to the audit. It's just an anomaly. You might as well there's no point arguing about him hitting this really big upside number. You just go, well, okay, well, if you do, you do. So no, we're very pleased with how he's performed. Steve Ball from Numis. Just one for me, almost that same store chart, you've got the depots of the different sizes. What level of capacity utilization have you got in terms of the opportunity to turn medium into large by adding kit and large into extra large? Again, it's a good question. Look, in the main, we've got lots. If you were to look amongst those 420, I could probably list them. We've probably got 20 to 30 locations where you think how on earth am I going to shoehorn in another piece of equipment. Most of those are in downtown metropolitan areas, which tend to be our very oldest stores because we got zoning there long before it was a problem. We could probably never get zoning there again. So in certain locations what we'll have to do is supplement those stores with an out of town big lay down area. So yes, there is some. But relative to the benefits of just moving everybody up the scale, this organic growth will make margins better. So net we will continue to improve margins. But it's absolutely true there will be certain areas where there has to be some significant incremental investment. But taken in and around, it's a small amount. Yes. Mark Housum, Canaccord again. Just looking at page 23, just greenfields and bolt on strategy, so you're saying what comes from revenue from greenfields and acquisitions. Is it possible to say that for 14, we know you're paying fully sort of double assets of what the acquirers and the acquirers books are for the business you're acquiring? No, that we're paying just over. There's tiny goodwill in most of the Well, that's adjusting it for sort of agreed customer agreements and relationships and stuff like that. That's the adjustment. But just on the that those figures for revenue, can you just split how much of that is greenfields and how much of that is direct positions because that's what just No, we don't know. What we're saying is we pretty much know where we want to go. And therefore, in most of those geographies, we will be either writing a negotiating a lease and or at the same time trying to acquire an acquisition. If we can't get the acquisition for the price we want, we open a greenfield. And so a lot of them, we're literally about to put pen on paper with the lease when it flips to being a bolt on. So no, we can't really split it. I'll flip it another way then. If we assume you're buying these sort of small bolt ons for somewhere between 4 to 6 times EBITDA, is that fair? No, you wouldn't. No. Okay. Well, they're probably averaging that what, 3 to 4? Yes. Bear in mind. 3 to 4 times is Bear in mind, people in this room understand this concept of EBITDA. No one where buying a business from has ever in his financial records ever written down the word EBITDA, okay? He understands what his feet is worth, whether he has more cash at the end of the year or less cash at the end of the year. EBITDA here does not enter into any of our negotiations and valuations. It's all about what's your fleet worth, how much more than your fleet is your business worth. That's it. So your starting point always in these negotiations is the OLV of the fleet. Hector Faucette, S. Maury. One last round up question then. Just on could you just run through what you think the cash tax rate is going to be during the course of 'fifteen and forward? Yes, absolutely. In 2015, the cash tax rate will be sort of in the lowtomidteens area. So we're expecting a cash tax payment in 2015 of somewhere between £50,000,000 to £55,000,000 as we fully utilize the net operating loss carry forwards that we have in the U. S. And then as we move forward to 2016, the cash tax rate will be somewhere in the neighborhood of the low 30s. That would appear to be the end of the questions. Once again, thank you very much indeed for your interest in Ashtead. And we look forward to updating you again in September. Thanks very much indeed. [SPEAKER JEAN FRANCOIS VAN BOXMEER:] Thank you.