Good morning, welcome to the Ashtead Q4 results presentation. Following on from the pleasing set of results we published earlier this morning, Suzanne and I will use this presentation and the Q&A to try and add a little more color to what is behind this strong performance. What we also want to do this morning is to explain in a little more detail how building what is clearly a strong operational and financial base, we will deliver further growth whilst at the same time maintaining our financial discipline. 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 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, 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, both on M&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. Finally, consistent with the progressive dividend policy, the proposed final dividend is GBP 0.0925, making GBP 0.115 for the year. Again, a healthy rise underscoring both the current financial strength of the business and our future potential. With that, I will hand over to Suzanne to cover the financials.
Thanks, Geoff, and good morning to everyone here and also to those listening on the webcast. We were pleased to report the group's fourth quarter and full-year results this morning. As Geoff indicated, and as shown on slide four, the positive trends continued. Our fourth quarter underlying pre-tax profit of GBP 69 million compared favorably to GBP 52 million 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 GBP 362 million.
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%. Let's take a quick look on a divisional basis, beginning with Sunbelt on page six. From this graphic, and in particular from the bridge on the top right showing the change in revenue from one 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 have demonstrated the fall-through of incremental rental revenue to EBITDA. 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 seven 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 U.K.'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. 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 eight, we've highlighted our heavy investment in the rental fleet. Our net cash flow for CapEx in 2014 was GBP 639 million. 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 GBP 103 million on a number of small bolt-on acquisitions, which Geoff will discuss in more detail in a moment. After these acquisitions and our dividend payments, our net debt at April 30th increased by GBP 218 million. As we indicated in the press release, we 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 low to mid-teens, 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, we will adjust them as appropriate throughout the year. The next slide is one you've seen before, it outlines our debt and leverage profile. Including translation impacts, our year-end debt was GBP 1.15 billion. However, from a leverage perspective, the 2014 increase in debt was more than offset by higher earnings, therefore, our leverage ratio declined to 1.8 times at April 30th. This is in line with our view that improving EBITDA margins will allow us to support further growth while still de-levering. As we look forward to next April, we expect the leverage ratio to continue to reduce further, that clearly reflects our commitment to sustain leverage below two times in order to strike the right balance between financial stability and investment in growth.
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. Once our growth moderates to a level below this, we will turn cash positive. 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. 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. 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. With that, I'll hand it back over to Geoff.
Thanks, Suzanne. Let's start the operational review by looking at how we performed in Sunbelt in the fourth quarter in 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've tried 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 two years. While 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 million 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 multi-year projects further improve our stability. Our current performance certainly points to strong end markets. What has been cyclical with 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. 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 2006, 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. We now anticipate healthy volume growth for both the short and medium term, somewhere within recent ranges, i.e., low to mid-teens. 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 are 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 the potential for further significant market share gains. Yes, of course, there is a cyclical element to our current and medium-term potential, but the structural opportunities remain very compelling. Let's take a look at this in a little more detail. Sunbelt has clearly repositioned itself over the last three 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 billion. 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 $1.5 billion, reflecting both our fleet de-aging and stronger secondhand markets. In this period, debt's only risen $650,000. Of course, leverage has reduced significantly to under 2x EBITDA. The headroom between our debt and the OLV of our fleet is a clear indicator to the current financial strength of our business. You'd 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, 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." How will we do that? Specifically, what can we expect from the market? While there's always a range of views as the pace of recovery and 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, and 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. While 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 four to five 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 and 2014 was a significant year in terms of our organic fleet investment. We spent over $1 billion on fleet, a number which not long ago would have seemed unimaginable. As we've been highlighting for some time, the emphasis has moved away from replacement expenditure and fleet de-aging to growth. Again, 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. While fleet is an important element to this, so are non-fleet areas such as delivery trucks. Again, you can see here that significant sums have been spent with $119 million 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 % 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's an important one and compares the fleet size and margins of our locations between 2008 and 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. Concerns about previous peaks somehow being a constraint to through the cycle potential are misplaced. What we are seeing here are real scale benefits. The other pleasing point to note is the improvement in our operational efficiency, which has resulted in same-size stores having so much better margins than previously. 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 progressions 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.
We're increasing our medium-term target from 500 locations to 600 locations. This remains a really fragmented market and the potential clearly exists for further consolidation, both through bolt-ons as well as more greenfields. 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 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, it is 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 two and three. Those greenfields and bolt-ons that were completed in financial year 2013 only delivered $32 million of revenue in that year, and they consequently were a drag on margins. However, these same stores delivered $108 million of rental revenue in financial year 2014 and are expected to deliver between $120 million and $130 million 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. For this current financial year, we anticipate somewhere between $275 million and $325 million of revenue from new locations at now a very acceptable 20%-25% ROI. To put this into perspective, based on the RER 100, this would be the equivalent of creating a new top 10 player in the industry in under three 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 million and $600 million of incremental revenue by around about 2018, or again the equivalent of creating a new top five player in the industry at a 25%-30% ROI. 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 and aggressive, 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? Mainly because in my opinion, there is a very small population of high-quality assets out there. 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. To summarize, we would never say never. There remains a great opportunity for bolt-ons, and this will remain our bread and butter, whatever other opportunities may present themselves. Moving on to A-Plant, and a strong fourth quarter to round off a very strong year. Rental revenue growth was 19%, excluding EVE 33% with it.
All in all, a very satisfying performance. As in the U.S., there's a greater sense of a corner slowly being turned in terms of our end markets. Residential, as we all know, is strong, and non-residential is definitely much stronger than one year ago. I remain to be convinced that it's going to be a great year for institutional spend, but accept it's probably not going to be a terrible one either. In the round, improving end markets likely lie ahead. However, again, I would remind everybody that there remains both political and economic risk, so it could still be quite a bumpy ride. As Suzanne said earlier, it's all about responsible growth. We are very aware that A-Plant's ROI through the cycle has not been acceptable. Therefore, we've been making significant efforts to broaden both their 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. Early in the cycle, this bodes well for significantly outperforming prior peaks, as we have done in the U.S. A-Plant, therefore, will continue to invest sensibly in its fleet to reemphasize its industry-leading customer service and will continue to look for complementary bolt-on acquisitions, mainly in specialty areas. Let's summarize. Both divisions are performing well and are beginning to enjoy recovering markets. We have successfully repositioned the business over the last three 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.
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 GBP 0.115 a year, consistent with our well-established progressive dividend policy. As a consequence, the board looks forward to the medium term with continued confidence. With that, we'll move on to Q&A. Just to remind everybody, for people listening on the web, if you could wait for the microphone and state your name and organization.
Yes. Good morning. Mark Howson from Canaccord.
Hey, Mark.
Good morning. Just on the Sunbelt business, you mentioned obviously the target of 50 locations a year sort of opening up greenfield.
Yeah.
Is that the optimal number that you can do given sort of staff constraints, or could you push it higher?
Yeah. 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? We are looking at the pace of growth, and we've been growing in this 20%-25% range for three 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. 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's 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%. We're growing at about double the pace of the market. 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. As we look forward, we look forward with quite a degree of confidence because our view is the seven 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. 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. We also think we've got a good pipeline of greenfields and bolt-ons. We've got three dynamics going on there, and to your point, it's a question of trying to get a balance between all three. Could 50 be 55? Yeah. Could it be 45? Yeah. It's what comes up.
Hey, good morning. David Phillips from Redburn. Just have the math 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 first three months? If you could just talk a little bit about.
Yeah
Is it still net book value, this sort of acquisition?
There's still incredible value out there, to be perfectly honest. 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. 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&A as well in terms of reconciling our fleet growth. No, why we like our model is it's 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 high.
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. No, we are still paying relatively good multiples. In terms of greenfields, there's been a remarkable trend. If you go back to when we first started this process 2 years ago, we started quoting, it takes about a year to break even. About a year ago, we said, "Actually, we've done a lot better than we thought we were going to do, and it takes 6 months to break even." They're now taking 4 months to break even. We really have got a very well-established model now.
When we started this program, I think we had a business development team of two.
It's now 16. They've become very good at opening these things, setting up marketing programs, making sure a sensible fleet investment comes in. I was talking to a profit center manager who just said, "Look, I walk in, switch on the lights, and everything else is done for me." That typically wasn't the case. I think we've got a good model and a good pipeline. You can see, gosh, we did three acquisitions in May and opened up eight locations in May. Yeah, there's a good pipeline ahead. Frankly, we're the only people doing anything very similar. 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'd done just that.
They'd bought up a bunch of businesses, 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.
Yeah, great. Just a second question. What are you seeing in your negotiations with the OEM kit suppliers?
Yeah.
Has your pricing benefit versus the smaller guys remained as big?
Yes. Look, again, 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. 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 two years. No, we're into, what? 0%-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 as a proportion of their total spend is going up, not coming down. Yes, it's true, people are spending more, but our purchasing power is not weakening.
Great. Thank you.
Good morning, Andrew Nussey 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? Obviously, we're not being told to extrapolate that improvement going forward.
No, you're absolutely right. That huge yield improvement, as Suzanne pointed out, and was at pains to point out as many times as she possibly could is not going to continue. The Eve acquisition, we're past the anniversary of that now. There was a good mix benefit of that. Having said that, A-Plant are seeing yield progression. 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. We'll see. It will be in that range.
Secondly, just anything in sort of May, June trading that sort of deviate from the trends that you saw at the back end of the quarter?
No. Look, again, remember that slide. Why would it? It's not deviated over a two-year performance in the U.S. The U.K. 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 +24 to -24. We'll go from +24 to 22. Then we'll go to 18. It takes a long, long time. As I said, we've got off 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 won by miles.
We just thought, "That's just an incredible level of fleet on rent." To get back to that level as early as April was incredible. Was very surprising to us also. Therefore, to be ahead of it also in May as we go through our normal seasonal uptick. The markets are strong, Andrew. I know there's all kinds of some contrary data points, and there's worry about interest rates and Iraq and whatever else. I can tell you right now, there's an awful lot of construction activity on the ground.
Morning. It's David Sherborne from Liberum. I have 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 for 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 target, 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 is 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 two perspectives. We have a very specific oil and gas division that predominantly works around servicing wellheads and associated activity. Within our list of bolt-on acquisitions over the last two 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 is a very fast-growing and very profitable one. 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've found loads of it, but there's nowhere for it to go.
This huge investment in all of the infrastructure to transport, refine, and potentially ultimately export it. 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. There are those long multiyear projects that we've been talking about. We're feeling very good about that sector of the market, but it remains a small percentage of our business.
Could you give us a feel of the percentage? Is it sort of one, two, three, 10?
Yes, a couple of %.
Okay.
Incredibly profitable. That's from 0, 2 years ago. The other part of the activity is our general construction business in areas where there has been oil and gas finds is also very strong because if you go into Bismarck, North Dakota at the moment, or Midland, Texas, it costs you about $500 for a Courtyard by Marriott because there's just no hotels and nowhere for anybody to stay. 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, 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.
Every time I go to Houston, they show me another map with another basin, which has got more capacity than the previous basin. There's a lot there, but there needs to be some investment in the infrastructure to extract and refine it.
The depot target?
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. You can do the math. We've got our 200 locations, we're going to do 50 a year, it'll 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 Harrison from Canaccord again. 2 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.
Yeah
People still switching over ownership to rented. Can you just give us a feel firstly what's happened to that?
Yeah, if I'm being perfectly honest, Mark, we haven't looked or measured it for a long time because we've just thought life's great and we're getting all sort of picky about it. We're trying to explain, trust us, we will do 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 used it a bit during the downturn, but you still had all this infrastructure for ownership, and you sort of drifted back. Now that it's certainly over 50% then people have just got used to rental. It's become an integral part of their business model. At the same time, there's been increasing legislation around health and safety 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. Then the final piece in the jigsaw is the inflation associated with Tier 4 engines means it's a hell of a shock of what the scale of reinvestment is relative to our current rental rates. My view is it's still a factor.
It will become a factor of decreasing pace as the cycle improves, I have no fears of it ever going backwards.
Just secondly from me, just on the 30% or so of your U.S. business, which is specialty-.
Yeah
they've always found it 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, et cetera? Or is it just
Virtually none of it. I would have said 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. Maybe it's a breakdown we can try and do in a bit more detail for another time. 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 at Jefferies. Just following up from Mark Harrison's question, can you give us a little bit more color on the specialty business? Just in terms of, you talked earlier 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?
Yeah. The specialty business has over the last three years, continues to grow at a better pace. Frankly, that'll stop, because as the cyclical construction just grows 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. Our business, which is, I know a bunch of you were out in the U.S. with a presentation from Aggreko last week. Look, our pump and power business in America just looks like a Aggreko's pump and power business in America, just grows faster. Our oil and gas business also is a very strong oil and gas business.
The whole purpose of those is that they are on different cycles and have different attributes to our typical construction business.
In terms of fleet CapEx going forward, more than 30% of it then is going into the specialist areas?
I don't know if that was true last year because we spent so much on fleet.
Okay.
That would've been true over the three years leading up to now.
Okay.
That's three.
Certainly, if you look at the bolt-ons, a number of those are in the specialty area as well.
Yeah. Have a look at the page on board. This will probably give you some idea of it.
Okay.
If you look at it from a locations perspective, if you go back to page 21. Look last year. We added 15 general tool locations and 24. In percentage terms, we've got 300 general tool locations and 100 specialty. Proportionately, 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. You can see our intent in terms of both bolt-ons and greenfields, where our primary emphasis is. If you look at the acquisitions A-Plant did, they were all in specialty sectors.
Two very quick follow-ons.
Firstly, as far as I can tell, latest industry data say residuals are up about 4.5% or so in North America.
Yeah. About that.
How positive or not is that for 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 engine product and buy Tier 4. As a consequence, as they do that, 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. That desire to grandfather in all Tier 3s, what's keeping secondhand equipment. There's a shortage of equipment generally, and there's specifically a shortage of good Tier 3 equipment. Again, if you go back some years, we haven't shown this chart for two or three years. There's a hell of a correlation between our rates and secondhand equipment pricing, you would expect that to continue.
Thank you. Just very quickly for Suzanne.
Can you just remind us just the FX sensitivity of, let's say, every $0.01 movement in dollar sterling, what impact that has in the PBT line for-
Sure. Absolutely. We've certainly seen a lot of movement this year.
Right.
Every 1% change in the FX rate is about GBP 3 million of PBT.
Thank you.
Morning. Alex Magni from HSBC. Some exceptionally dull ones from me, please. Just looking at the Q4 margin performance. A couple of observations. The revenue from low margin activity, sale of equipment.
was lower. For 25% odd 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 track revenue?
With respect to equipment sales, 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. Generally speaking, those are relatively constant. With respect to staffing costs, no, there's no real change in bonus accrual. 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 great in Q4. One of the reasons for that is because you're comparing it with some Sandy activity. 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. It inflated last year's yield and deflated last year's drop-through. This year, when you lose that element of the revenue, your drop-through just becomes artificially higher. I would still base around the 60% drop-throughs for the year. There are some tweaks. 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.
Would that have been in Q4 as well? Just to be clear.
Yeah, Q3 and Q4.
Sandy would have affected your Q4 as well as
It affected both Q3 and Q4.
Okay.
Without Sandy, both Q3 and Q4 would have 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. Then the final one, just to tag onto the end of the questions related to the specialty business. If I remember correctly, in whenever it was, 2010, when we came out to see you, specialty was about 20% of the group.
Yeah.
That's grown now to 30%.
Yeah.
Within the specialty element, there were three different businesses. Have those grown pro rata or is Pump and Power the predominant driver of your specialty?
Pump and Power is still the Pump, Power, and Climate Control, like you were talking about, basically the Aggreko local business.
Right.
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. Oil and gas is the fastest growing.
Okay
Probably on track to become as big as pump and power. Then we've got the industrial scaffolding bit, which is growing, but it's fairly steady.
Okay. Do you operate with similar unit size power generators, or do you tend to run at smaller average sizes?
We are a little on the lower side in terms of power project. The Aggreko are still great at those much bigger projects that probably need slightly less flexible customer service, but huge capacity of power.
Yeah.
Our strength remains a bit like our general tool business at the lighter end, where there is a requirement for greater flexibility in customer service, where we benefit from having so many more locations.
Okay. Thank you.
Good morning. Andrew Murphy from Bank of America Merrill Lynch. I've just got two questions. First of all, on the drop-through, Rose, I heard what you said a second ago. Under what circumstances do you think that could slip below the 60% level that you've achieved consistently, and you've highlighted again this morning? Secondly, just on the yield outlook for the U.S., could you give us a flavor for what you're seeing and likely 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 incidentals?
Well, let's be clear with drop-through. What we've said consistently is we think we will average out around 60%. That's been our guidance for about three 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. No one's saying we're going to hit 67 again because that's not what we said last year, and as I said, I think there are reasons for that. The 60%, though people were questioning us three years ago whether we could keep 60% going or not. We model it. 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.
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. 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 laydown area. There is always some incremental investment. 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. 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, we also get good progression in margins and ROI.
Yeah, 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.
If you then look at yield, remember our yield incorporates rate and other ancillary billings.
That's not just rate. There are other ancillary billings. Our yield typically rises 4%, 5%, 6%. If you strip out the impact of Hurricane Sandy, which is the +11 and the 3. Our expectation is it 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. 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. That's the whole point of this chart. You would expect for the coming year, two years, even three 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.
Thanks. It's Rob Plant from JP Morgan. You mentioned that the fleet age has gone from 44 months down to 27 months, that customers like a young fleet.
Yeah, they do.
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 too low?
Yeah. No, 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 fleet growth that a greater proportion of it is very young and it drags it down. 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. Spot on. It's a balancing act we discuss a lot.
Jane Sparrow from Barclays. Just on acquisition spend. Obviously, you spent GBP 100 million last year. You've already spent GBP 30 million this year. How should we be thinking about that number in our cash flow statements, given clearly you're going to spend more? 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?
I have no idea. It's a great question. I have no bloody idea to be perfectly honest.
That's why I look at Suzanne.
You know, I mean
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, especially if we're buying these small businesses, it's hard to predict. We're doing one acquisition, and the guy called it off because his python was ill. how do you predict-
That sounds like.
I didn't go for that stock.
How do you predict what your spend is going to be on that deal or not that deal?
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. Combined, there's going to be about 50. Now, we buy a greenfield, we spend somewhere between five and eight new fleet goes into a greenfield, 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 orders. Again, people think, well, you can just start. Some of the deals we approached people on two and a half years ago said no two and a half years ago, and they're ringing us back now.
With small deals like that, it's very hard to be precise. Our expectation is it'll 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.
The second one was just on the Eve acquisition, where you released the remainder of the provision for the earn-outs. Was that slightly disappointing or was it just a very aggressive earn-out?
No. Be careful, our auditors are in the room. 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 perform brilliantly forever. You go, "Well, I'll believe it if I see it." You refuse to pay him for that price. You say, "I'll pay you for your historical numbers, and I'll believe your numbers because if you hit them, great. We'll give you that much money if you do hit them." You think, "Well, he's never going to do that. Well, actually, he's kind of do it." Yeah. Well, the new accounting rule says you have to pretend that when you buy it, that you've paid the maximum amount out and you've got to release something.
Eve has performed incredibly well and got off to a very good start this year. Where are we? 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 panels. Eve is doing great. It's accountancy. I do apologize to the auditors. It's just an anomaly. There's no point arguing about him hitting this really big upside. Nobody just go, "Well, okay. Well, if you do, you do." No, we're very pleased with how he's performed.
Steve Woolf from Numis. Just one from me. On 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 412, 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, and we could probably never get zoning there again. In certain locations, what we'll have to do is supplement those stores with an out-of-town big laydown area. Yes, there is some. Relative to the benefits of just moving everybody up the scale, this organic growth will make margins better. Net, we will continue to improve margins.
It's absolutely true, there will be certain areas where there has to be some significant incremental investment. Taken in the round, it's a small amount.
Yeah. Mark Harrison, Canaccord again. Just looking at Page 23, just greenfields and bolt-on strategy. Obviously, you're saying what comes from revenue from greenfields and acquisitions. Is it possible to say for 2014, we know you're paying probably double net assets of what's in the acquirers' books for the businesses you're acquiring.
No. We're paying just over. There's tiny goodwill in most of the-
That's adjusting it for sort of customer agreements and relationships and stuff like that. Right. That's the adjustment. Just on those figures for revenue, can you split how much of that is greenfields and how much of that is from acquisitions? Because that's what I just want to-
No, we don't know. What we're saying is we pretty much know where we want to go, therefore, in most of those geographies, we will be either writing a lease, 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. A lot of them, we're literally about to put pen on paper with the lease when it flips to being a bolt-on. No, we can't really split it.
Sure. I'll flip it another way then. If we assume you're buying these sort of small bolt-ons for somewhere between four to six times EBITDA, is that fair?
No, you would be-
No. That would be high
way overpaying.
Way overpaying. Not even in the ball park. Thank you.
Well, they're probably averaging at what? Three to four?
Yeah.
Now, bear in mind.
Three to four times is more.
Bear in mind, people in this room understand this concept of EBITDA. No one we're buying a business from has ever, in his financial records, ever written down the word EBITDA. Okay? He understands what his fleet's worth, whether he has more cash at the end of the year or less cash at the end of the year. EBITDA does not enter into any of our negotiation in valuations. It's all about what's your fleet worth, how much more than your fleet is your business worth. That's it. Your starting point always in these negotiations is the OLV of the fleet.
Good morning. Ed Forbes, S&P Global. One last roundup question then. Could you just run through what you think the cash tax rate's going to be during the course of 2015 and forward?
Yeah, absolutely. In 2015, the cash tax rate will be sort of in the low to mid-teens area. We're expecting a cash tax payment in 2015 of somewhere between GBP 50 million to GBP 55 million as we fully utilize the net operating loss carryforwards that we have in the U.S. As we move forward to 2016, the cash tax rate will be somewhere in the neighborhood of the low 30s.
Thank you very much.
Mm-hmm. You're welcome.
Well, 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. Thank you very much indeed.
Thank you.