Earnings Call: Q3 2014

Mar 4, 2014

Hello, and welcome to today's Astjet Group Third Quarter Results Analyst Call. Just to remind you, this call is being recorded. Today, I'm very pleased to present Jeff Travell, Chief Executive and Suzanne Wood, Finance Director. Please begin. Good morning and welcome to the Ashtead Q3 results presentation. With me this morning as always is Suzanne Wood, our Group Finance Director. As is customary for our shorter Q1 and Q3 updates, we will cover some operational and financial highlights before swiftly moving on to Q and A to add some color to our current performance in the markets in which we operate. Looking at the highlights, it feels like no time since we presented the half year results and frankly there's not a lot new to say. We continue to execute well on our simple well established strategy of organic fleet growth supplemented by greenfields and small bolt on M and A. This has resulted in strong revenue growth, up 23% year to date and record pre tax profits for that period of £293,000,000 Our responsible approach to growth is evidenced by our strong performance in improving EBITDA margins to 43% and group ROI to 18%, as well as reducing leverage to 2 times EBITDA. So overall, you can see that all our key metrics are improving and have already passed previous peaks and encouragingly, we are still relatively early in the cycle. As a consequence, we intend to remain focused on our existing strategy and anticipate further progression in all of these metrics. And with that, I will now hand over to Suzanne to cover these financials in more detail. Thanks, Jeff, and good morning. Our Q3 results are shown on Slide 3, and we're pleased to report an underlying pre tax profit of £80,000,000 as compared to £53,000,000 for the same period last year. Consistent with past quarters, the principal driver of our profitability was revenue growth. At constant exchange rates, our rental revenue increased 22% over last year. Jeff will cover the volume and yield drivers for both Sunbelt and A Plant in more detail in a moment. This quarter's performance was further enhanced by our operational leverage and the related strong fall through of incremental revenue to EBITDA. As a result, our EBITDA margin improved from 36% to 41% in the quarter and our operating profit margin improved from 19% to 23%. Our 9 month results are shown on the next slide. On a year to date basis, underlying pre tax profit increased by 61% to a record £293,000,000 Rental revenue grew by 24% at the group level and we also benefited from the operational leverage I mentioned earlier. This was demonstrated most clearly at Sunbelt where we brought 63% of our incremental rental revenue through to EBITDA despite adding 30 new locations in the 9 months. During this period, our EBITDA margin increased to 43% and our operating profit margin rose to 26%. An important financial discipline that underpins our business strategy is our focus on leverage and balance sheet management. We summarized our current position on slide 5. Given the improving trends in our business, we've continued to invest in our fleet and take advantage of market opportunities. As expected, the absolute amount of our net debt increased at January 31. However, from a leverage perspective, this was more than offset by higher earnings. At January 31, our net debt to EBITDA leverage ratio declined to 2 times on a constant currency basis. We expect this ratio to continue to trend lower given the strength of our EBITDA margins and our plan is to sustain leverage below 2 times in the medium term. With respect to the structural element of our balance sheet management, we took the opportunity in December to fix a portion of our floating rate debt. As previously disclosed, we issued $400,000,000 of senior notes due in 2022 at an attractive implied yield of 5.6%. The transaction was leverage neutral and the proceeds of the issuance were used to repay the secured ABL Bank facility under which we currently have borrowing availability of $790,000,000 We now have a better balanced essentially covenant free debt structure with an average maturity of 6 years and an average cost of 4%. That concludes my comments. And so I'll hand it back over to Jeff. Thanks, Suzanne. So let's turn to Page 6 and look at some of the details starting with the Sun Belt. Well, as Suzanne has just outlined, it was clearly a good Q3. I think we're all a little uncertain as to the impact of the Sandy comparators and then throw in a new weather phenomenon called polar vortex whatever that means and you potentially have all the ingredients of a tough Q3. Therefore, to deliver 17% volume growth and 3% yield growth was an excellent performance, which in my opinion tells you all you need to know about both the momentum we have in the business and the strength of our end markets. Turning to Page 7, and as you can see, we now have a well established pattern of industry leading growth metrics. With 70% of our orders being received for delivery either the same day or next, you do not have much visibility. However, trends do get established over a period of time with both volume growth and yield varying within a relatively narrow range. Also the progression will not always be linear. However, with clear evidence of improving end markets, we look forward to our traditional spring season with continued confidence. Typically, we do not do much in the Q3 presentation other than update current trading. However, I felt after the half year results that there was a lack of clarity around the potential to surpass previous peak margins through the cycle and the short and long term impact of greenfields and bolt ons in all of this. I'll try to explain this on Page 8 comparing previous peak margins to the relative scale and the maturity of the business. In 2008, whilst the market remained strong for us, we were still a young business with only 14 profit centers with fleet sizes of more than $15,000,000 As you can see from the chart, generally fleet size and margin are closely correlated. Scroll forward to 2014 and whilst our end markets are yet to fully recover, you can see the impact of both our market share gains and improved operational efficiency. This is demonstrated by both the quantity of locations in the larger bands and the margins within these bands. So we now have 41 locations with a fleet size greater than $15,000,000 Therefore, progression and scale is important to margin growth, something which will naturally come as markets recover. However, for the longer term story, greenfield and small bolt on acquisitions are an important part of our strategy. No doubt in the short term, they are a drag on margin growth. However, as they grow through the bands, they become the next generation of margin enhancement as others mature. Hopefully, therefore, you can see that whilst we are better than we were, we still have a long way to go in benefiting from maturing of our profit center network as well as having the inherent opportunities of scale generated by cyclical recovery. As a result, we anticipate that our margins and ROI will continue to progress through this cycle. Moving on to A Plant on Page 8 and again very encouraging trends. Growth excluding the Eve acquisition is 18% reflecting 10% more fleet on rent and 7% yield improvement. Based on recent updates from our listed peers, we are clearly gaining market share. And there are clear signs across the broader geographies that markets are no longer a headwind. So once again, we are looking forward with a greater confidence as to the medium term outlook. So what does all this mean for capital? Well, for the balance of the year, we would reiterate the guidance for the increased spend we highlighted in December. Based on current activity levels, this was clearly well at times. The risk of this is probably to the upside, but this is mainly a timing debate in terms of how much lands between now and the end of April. For financial year 2015, based on our current fleet planning, our rental fleet growth will be in the low to mid teen percentage range. Although as always that can be tweaked through the year based on the demand that we experience. The precise capital amount will once again be heavily influenced by Q4 intake based on our outlook for the first half of financial year twenty sixteen. So whilst the overall amount would likely be broadly the same as this year, this will not be finally decided until the end of the first half as indeed it was this year. So to summarize, we clearly have strong momentum in the business and continue to benefit from improving end markets. Good execution of our well established strategy of primarily organic growth will continue to be our focus. We remain committed to our financial disciplines of lower leverage and high drop through of revenue growth, which will ensure further progression in both margins and return on investment. Given the current performance, we anticipate low to mid teen percentage fleet growth for financial year 2015, although we retain a high degree of flexibility around this number. And finally, therefore, the Board now anticipates a full year result ahead of its earlier expectations. So thank you for listening to the call and we will now move on to Q and A, where I'd ask you to state your name and organization before asking questions. So Hugh, over to you. Thank you. And then after you announced by myself, just simply ask your question. And if you find that question has been answered or wish to retract that question, simply press 0 and then 2 Our first question is from the line of Eugene Cleric at Credit Suisse. Please go ahead. Your line is open. Yes. Good morning, everyone. I have three questions, if I may. First of all, could you give us an indication as to what's happening to input cost? Are you seeing any trends developing in terms of the prices that you have to pay for your equipment to your suppliers? Secondly, in a recovery environment, could you elaborate a bit on your financial metrics? And in particular, the yields that or the yield improvements that one could expect in a full blown recovery for U. S. Non resi? And finally, you touched upon the leverage likely to fall below 2 times and you're now guiding to a level of less than 2 times going forward. To what degree does that mean that topics like share buybacks and special dividends come into play? All right. That's a lot of questions. I'll try to remember all three there. So the first one is input costs. We're seeing you have to be careful in terms of how you look at input costs. But let's start with overheads. I mean, we're seeing a gentle inflationary impact on most of our input costs around the 2% to 3% range. Salary costs are going up about that sort of level. Some of the other general overheads are going up in those kinds of levels. In terms of our fleet, year on year cost increases are relatively modest as they were this year, so in the 2% to 3% range. But you need to be careful when you look at inflation relative to fleet because the more important measure is if you're selling a 7 year old asset, how much more of the original cost is a replacement asset to that 7 year old cost? So there has been some big inflation with things like Tier four engines. And so you need to look at that whole weighted average of replacement cost to 7 years ago. And there the cost is around about mid teens. Lowtomidteens is the sort of average cost we're seeing in replacing like for like averages. But again, it's very hard to again, you're talking averages, the difference between a generator and a compressor versus a excavator that cost variation is huge depending on the relative level of the engine cost. So that's a terribly complicated answer. But in the short term, we're seeing relatively low inflation. There's been reasonable inflation over a 7 year period, which leaving on to your second question is why getting rates is very, very important and why as we've company because that takes into account the input cost of your fleet. It covers physical utilization and it covers rate. And we've said on numerous occasions now that we anticipate getting dollar utilization back to previous peaks, which was around the mid somewhere around the mid-60s and we're currently around about 61% in Sunbelt. So our anticipation would be that we will continue to get yield improvements that those yield improvements will be in excess of the inflation that we see in equipment and hence our dollar utilization will increase. I'll deliberately put a slide in there on Page 7 to try and explain where we are with both volume and yield. Because I think in a business where we've got low visibility, you might think that's a concern. But because we're a business of lots of small transactions, there has to be a vast change across a large number of transactions for things to swing meaningfully outside the range. And as you can see on page 7, we have been very, very consistent for a long period of time with the yield progression and we've been very consistent. I find that I could have took another year on this and it wouldn't have looked terribly different. So we think there is the environment in recovering markets for us to continue to improve yields and to continue to drive physical sorry, dollar utilization back to previous peaks. In terms of reducing leverage, yes, we've been committed to do that for some time. At the moment, we think it's important to focus given our high return on investment and the market share gains that we're getting in the growth in our top line. We're going to spend heavily on organic fleet growth. We want to take leverage down. In terms of meaningful returns to shareholders. As you have seen over the last couple of years, we have consistently increased our ordinary dividend. We increased it significantly at the half year. We gave pretty clear guidance we were going to do that again with a full dividend at the year end. And we will continue to progress that dividend policy. Our view is we want to de link operational leverage from financial leverage and we want to get to a dividend level, which gives a significant underpin to the share price through an inevitable downturn. So the key to raising the ordinary dividend is its sustainability through the cycle and so people can come to depend on it. Further returns to shareholders, well, let's see where we get to over a period of time. Thank you very much. Our next question is from the line of George Gregory at UBS. Please go ahead. Your line is open. Good morning, both. I have three questions, please. And first, I have to apologize in advance, Jeff, but I am going to ask about the weather. Excellent. I just want to know to what extent it did actually impact Sunbelt in Q3 and to what extent I suppose the natural question is given how good performance was in Q3 despite the Sandy comp and admittedly bad weather, whether actually things are improving relative to Q2 underlying. Is the first question. Perhaps we'll take them sort of 1 by 1 is perfect. George, weather is a really weird thing in terms of is it a good thing or is it a bad thing? Weather delays normal construction and therefore in terms of the timing of work, it can be a negative thing. However, bad weather creates events, which create work, which would not otherwise be there. So in the round, weather is probably net positive. It may be poor for a period, but then you get a catch up because you need extra work to clear the snow. There's more potholes. There's more flooding. There's more burst pipes. So next bad weather is incrementally positive to work. It just affects the timing. This has been weird. I mean, like I said, I mean, there's this thing called polar vortex, which in the old days just used to be called bloody cold. And but what happened was we got a number of very short, sharp bursts of weather. And then it sort of warmed up and we had lots of incremental work. So I wouldn't overplay it one way or the other. I mean we've got I was in flying out of Philadelphia last Thursday and there was snow on the ground. There was snow on the ground still. I don't think you can say, well, there won't be weather in Q4 and therefore without the weather there is an accelerating momentum. Because I think what we got was whilst it was harsh weather, it worked well in the sense that it tended to be short, sharp shocks and then we had periods of clear ups. I don't know, George, as the honest answer. What is the perfect weather pattern? There's never one. We get less heating revenue if it's warm. So no, I mean, clearly our markets have stayed strong. I think the Sandy comparator was a tougher challenge. And certainly, I think the yield improvement relative to Sandy is probably a better indicator than the volume growth despite the weather. Okay. Makes sense. Second question, in terms of your fleet mix table, Jeff, sort of a branch mix. What is the fleet mix within an extra large location versus a small location? What I'm ultimately trying to get to is, is the fleet mix similar between the large and smaller branches? Or is there something in the fleet that is making a skew in returns? No. No. I mean fundamentally the skew in returns is you've got 3 times the fleet. You don't have 3 profit center managers. You don't have quite 3 times the space. You don't have 3 you're just leveraging that fixed cost base. It is true there might be a small you probably got a few larger assets, which actually would be negative from a returns perspective. But what you have got, so the fleet mix is probably not quite as good as in a small location bizarrely. But what you've just got is the leveraging of those overheads. And that's the key. And so what's encouraging is that we have been able to take number of depots up through the banks. Frankly, had we not opened greenfields and done bolt ons over the last 18 months, We'd have very, very little in the small category. Now if you look at that chart on Page 8 and you go to the end of the chart, you can see actually the return on investment on the small locations has gone backwards and that's because we just got a very high number of very new stores. So undoubtedly those new stores are dilutive to the margin growth. But what happens is as they work their way through the bands, it's the next generation of higher ROI businesses. And we need and that's a big benefit of having this opportunity to add, I guess, our long term target now is to get to somewhere around 600 locations, another 200. And so but in those feeding in the bottom, I'll say dilutive in the short term and the medium term, they are all growth drivers. Because obviously, some stores will ultimately mature. I'm going to I'm even asking how many stores are near maturing and I understand is I don't know. Back in 2008, our biggest location which is a location down in Florida had $29,000,000 of fleet and we were convinced there was no more market share to be had and there was no more space to put fleet. That location now has $41,000,000 of fleet. And so how long was I in terms of maturity back in 2,008? But inevitably some will reach some degree of maturity. And therefore, we need to keep feeding ones in at the bottom. Okay. Very clear. And final question, just following up on the first one actually. You mentioned that fleet inflation relative to 7 years ago was sort of in the teens. I recall back to a slide you presented in the Q2s where the fleet inflation looked a lot higher than that. Has that got anything to do with the upstream economics or what was Yes. Yes. No, that's true. You're absolutely right. We did put a chart in there, which showed specifically for Tier 4 engines, the fleet inflation was higher. Okay. And then so you're absolutely right. If you have a fleet, which is predominantly large excavators or large area, then you are probably because you have a greater proportion of your fleet had Tier 4 engines. The problem with this business is George, we keep quoting averages to you. And because we have such a wide range of fleets, assets which cost us $150,000 down to assets that cost us $200 that the averages can sometimes be skewed. Our percentage is based on our fleet mix. If you've got a higher Tier 4 proportion, you clearly would have a higher inflation number. Okay. Very clear. Thanks very much. Okay. Thanks George. Our next question is from the line of Alex Magni at HSBC. Please go ahead. Your line is Just to continue on the Slide 8 you put up on the fleet sizes. If you were to look at your experience with sort of regional and smaller competitors, so take United out of the equation, How much of the competitive fight, the competitive capacity is against players in the small or medium Pretty much all of it. Size? Pretty much all of it. I mean, we've been we've done a number of small bolt on deals right now. I mean, the actual some of the largest small guys, if that's a term I can actually use, may have a number of locations. So they may have 4 or 5 locations, but invariably they'll have around about $5,000,000 worth of fleet. And so we for all it's good, Alex, to for us to push certain stores over the range, But I'm genuinely guessing here because you never know the perfect let's say we had 600 stores, we might have 100 in the top category and we might have 100 in the bottom category. But our core business is somewhere around that $8,000,000 to $12,000,000 fleet range where we are bigger than the local guy, but it's not a massive depot. If you were to compare that fleet mix with, say, United, then they would or even Hertz, they would trend to far more at the larger end. So it's not the case that we want every single location to get to the top of the chart there. That will be the wrong mix given our competition and given our fleet mix and customers. So you're absolutely right. And under no circumstances is the goal to have 600 locations with over $15,000,000 on more fleet. Okay. And apart from sort of obviously leveraging just on the number of staff and the size of the park, Is there a material difference in utilization rates? Do you find that bigger size, there's a point at which size gets you to a mature utilization rate? No, the utilization doesn't matter quite as much. It's just so they're very similar physical utilization. It's just the leverage of the cost base. Okay. And then just sort of tagging on slightly to that. But the if you looked across the piece, so 2 sort of related questions, but how much of your fleet is now in Florida and the Gulf States? And if you look across the park, how many of your locations would benefit from sort of additional depot density? Yes. I think there we need to just go back to if you get a chance is to go back to the slide we showed at the half year, Alex, on Page 18 of that slide, which just shows where our relative market share is. We have incredibly high market share in Florida. Therefore, the likelihood of us adding significant market share there is slim. There are parts of the Gulf Coast where we're very strong and there's other areas where we are less strong. So again, the key is to look at that chart we put out on pay at the half year, Alex. I'm happy to take you through it if you want to do that offline in terms of specific geographies. Perfect. Thank you. Our next question is from the line of Justin Jordan at Jefferies. Please go ahead. Your line is open. Thank you. I better ask 3 questions. Firstly, I just want to touch on end markets. Obviously, 21% rental revenue growth is a stellar performance in Q3 and well done. But that's history. It's all about Q4 and 2015. What are you seeing in end market conditions that you're able to deliver this sort of rental revenue growth in environment where the ARA think rental revenue growth will be 8% in calendar 2014, non res construction activities forecast to be up 4% to 12%, somewhere in the range of maybe circa 5% this year. I'm just kind of wondering what the secret sauce is to how you're able to deliver such stellar growth numbers? That was a magic sauce like we bought, but I wouldn't be sat here chatting to you, Justin. It'd be very, very hard to be sat in some beach in the Bahamas or something, looking by Internet sales of magic sauce. But I don't know. You're right. The overall market looks to be growing at around about 7% to 8%. That seems to be the norm when we look at some of our peers results. And as you say things like ARA statistics and McGraw Hill. We have had 3 years now where we have grown at least double that pace. Why? I think we have I think Alex's point earlier in terms of the customer base we predominantly face is a good customer base to compete with given the advantages of scale. I think we've got a good fleet mix. And frankly, I just we're a very settled business. We particularly focus on those midsized contractors where I think service is more important. I think when you get to the larger guys, you're dealing with purchasing agents who are more interested in price and have lost they've never been responsible for service on a job site. So I think it's lots of little things that we are executing quite well. And we also have this opportunity to add on these greenfields. We are the 2nd largest player, but we have half the number of locations of our biggest competitor. So it makes all the sense in the world for us to fill out our geographic density. So I think we've got a lot of things going in our favor. I think the key is to not lose the plot because of this good performance and just keep doing what we do. That's a terribly sophisticated answer, but I don't have a better one for you. Thank you. And just following up, I guess, on a similar theme, just on the sort of competitive landscape over the last quarter or 2, I'm just thinking there was quite a confident feedback from the recent rental show from many of the small and mid sized rental operators. I appreciate one of your peers in the U. S. Seems to have struggled to get its Q4 results at the moment. But has anything materially changed in the competitive landscape in the last quarter or 2? No, not really. This will be the 3rd AR ratio in on the TROT, whereas the feedback from the AR ratio is great news, spend is up. When was the last time you saw one of our suppliers guiding upwards on there? So it's a bit like running a retail store and putting up a notice saying there's no truth in the rumor that there's a shortage or something. They would like it to be true. Our feedback from our suppliers is that they anticipate as being a greater percentage of their business in the coming year, not a smaller percentage of that. Okay. Thank you. And inevitably in a stronger market people will start to spend again. But remember that we went through this a lot of the half year. A lot of that spend initially has to be replacement spend. Sure. Just finally for me, just despite the stronger market, obviously, you have a material FX headwind year on year in Q4. And I guess into fiscal 2015, it looks like it's about a 5% FX headwind year on year. Can you just remind us what the sensitivity is to both, I guess, the PPT line and equally the net debts and net debt EBITDA in terms of whatever you say 1% movement in dollar sterling might mean? Sure. With respect to PBT, Justin, a 1% change in the dollar exchange rate equates to about £3,000,000 of PBT. Okay. And And with respect to debt, I mean, we always quote that in constant currency terms will include a debt at actual rates. Our leverage would have been 1.9 at actual rates as opposed to 2 at constant, but we do tend to just quote that in constant rates. Great. Thanks, Suzanne. Our next question is from the line of Dave Phillips at Redburn Partners. Please go ahead. Your line is open. Good morning, Jeff. Good morning, Suzanne. Hi, Dave. Just ask them 1 by 1, please. You've obviously been really busy on the bolt on front and 30 additions to the end of Q3 of branches mix of greenfield and bolt on. Would you give us a rough idea where you think you'll be in actual location numbers by 1st May the next financial year? I've not really done the math. I think we've done 30 so far and we said we'd do 50 for the year. Therefore, by definition, is around about 20 to add. And we're trying to grow at a pace of around about 50 per annum and that will be the number for next financial year, too. Now there's no science in that in terms of could it be 45 or could it be 55. It's going to be around about that number. Why that quantum? It's just driven by what we think we can operationally, efficiently deliver whilst at the same time delivering high same store growth. And if we don't the danger is if we do it too much, it becomes too big a drag on margin, too big a drag on drop through. But more importantly, just becomes too big a distraction for the field. So we're going to continue to grow at that sort of pace for the foreseeable future. When we think about growth, Dave, we think about it as being sort of bounded by a couple of financial disciplines. One being that we'll grow at a pace where we can maintain our fall through to EBITDA at or above 60% and keep our leverage below 2 times. Yeah, Yes. Understood. Understood. And how would you classify the pipeline for bolt ons over the next 12 months? Do you think it's better than it was 12 months ago? Yes. No, it definitely is. It's a lot better. I mean the thing is with like small bolt on deals, it's only they usually take longer in terms of the whole gestation period than a big deal because you're dealing with an owner who is it's his baby. He's built the business. So we've been going at this now for around about 18 months. And there's people we started talking to about 18 months ago who've seen us do a few of these things. I think we go out of our way to do them well because you get a reputation for not nickeling and diming people. And as a consequence, we probably have a greater pipeline than we've ever had. We've certainly got a significantly larger team doing it than we had 18 months ago because they've been out in the market. Now the question is how many do we want to do relative to Greenfields. But the key is to have options and we probably we certainly have more options. I certainly know for next financial year, we're actually taking our management team through a couple of weeks ago in Orlando. The next 50 so locations that we want to open literally by zip code. And what I can't tell you right now is how many precisely are going to be greenfields and how many precisely are going to be bolt ons. But it's going to be a mix again. Yes. Understood. So it'd be fair to assume then I guess that of next year's CapEx roughly again, dollars 75,000,000 €80,000,000 of the CapEx would be going into bolt ons that you've made this year just to bring the fleet into line with where you are. Yes. That's a really good question because why have I given historically we've given a capital number and left people to work out a growth number. We've done the opposite this time around, which I know is dangerous when I do think CAGNY got it horribly wrong in Q1, but people misread what I was trying to say on CapEx. The guidance we have given you is what we believe assuming all of our growth is greenfields and there are no bolt on acquisitions. Now the reality is that capital number will vary because some of it will come out and go into M and A lines. So really now to get a proper handle on what our growth is going to be, you need to look at the M and A line as in conjunction with the capital line. And that was kind of a hard message to get across. It was easier just to throw out the percentage. You've also got to kind of dial into that equation, which is we could choose to reduce our replacement expenditure given the fleet age. So for example, we spent £81,000,000 on trucks out thereabouts this year. That's likely to be close to the 50 or 60. So people could get all hung up about capital is going down. We just took an opportunity to get ahead of the spend on some trucks. So there's lots of moving parts around bolt ons, greenfields, replacement spend, non fleet spend. We're just giving you a capital number is going to be misleading. We've got a fair idea of what organic fleet growth is going to be, but some of it will be bolt on, some of it will be greenfield and there may be other bolt ons on top of that. Yes. Understood. Understood. And just finally, one of the smaller U. S. Guys that I called last week and was talking about was asked about what he thought the Tier 4 pricing benefit would be. So you pay more for the kit and ultimately it gets passed through the customer. And I think I was slightly surprised that the answer nothing at the start because the customer actually would probably want Tier 3 to begin with. I agree with him. I couldn't agree with him more. So don't expect anything to happen from that for 12, 18 months or so? 12, 18 months. No, no. Over the life of the asset, over the life over the next 4 to 5 years, it will be very, very positive. The 1st 12 months will be a nightmare because there isn't enough in there where people just say, well, just give me a Tier 3. But as time goes on, what will happen is your average pricing will rise faster than the average increase in the cost of your fleet. But the 1st 12 months, it's all it's a bit like whenever commodity prices increase, you lose on the initial upswing because it's harder to pass them on, but then you don't take them down on the way back down. So over the cycle, you probably are okay, but it's purely a timing thing. I guess that was HME because they put their numbers out last week. I think they're absolutely right. I would totally agree with them. Fine. Thanks. And so hence your acceleration of CapEx to get more the Tier 2 and Tier 3 stuff in? And that's why exactly we spent so much on replacement last year and the year before to grandfathering that Tier 3. And so remember that replacement element of spend could well come down. That's not an indication of a lack of confidence in the market. It's just a reflection of we pulled a little bit forward. That's why just giving a capital number, I felt was dangerous this time around as opposed to giving a clearer guidance on growth. Yes. That's very clear. Thank you very much. Our next question is from the line of David Brockton at Liberum. Please go ahead. Your line is open. Good morning all. I'm going to break the trend of 3 questions and just ask one with regards to the U. K. Business where I guess you've got ROI up quite significantly. Just wondering if you can talk about whether you're now starting to see a tailwind there or whether you really do think it's all market share gain that's driving that? We've had the luxury. We've seen a couple of our listed peers come out results over the last 3 or 4 weeks and their U. K. Growth has been well, there hasn't been any. So that would suggest it's not as yet end markets. Having said that, our sense is it's certainly not headwind any longer. And one of the encouraging things from my perspective is talking to the guys out in the field, there is a broader confidence outside London than there was say 6 months ago. So I'm not sure it's dialed in significantly to the numbers yet, but in terms of projected projects and confidence in activity levels as we go into a new budgetary period, then the guys are more optimistic than they've been for some time. So I think it may be premature, David, to call it a tailwind yet, but it's certainly not a headwind. Thank you. Our next question is back to the line of Ugi Klaric at Credit Suisse. Please go ahead. Your line is open. Yes. One more follow on question, if I may. You obviously talked about your market share goals. And I guess obviously didn't give a time frame for that. Should we assume that your Depo growth numbers sort of suggest the time frame that you're looking at in terms of reaching a doubling of market share? I mean it's one way to look at it. We haven't given the timeline because we don't know. Poor Ozan here, I don't know how many models she's to the pace depending on economic recovery. Remember, a big chunk of our market share gain is going to come from stores moving up the ranks. So that's existing stores. Don't assume that it's not that close a correlation between greenfields and market share gains. Over the last 3 years, nearly all of our market share gain has come from the same stores and that will continue to be the case. So no, I think it's a bit simplistic to try and correlate it just with greenfield. Okay. Thank If there's no more questions, then we'd just like to thank everybody for all. There are 2 questions one question which has jumped in and that's Steve Wolf at Numis Securities. Steve, over to you. Good morning. And just one final follow-up for me. Could you give a bit more color on the Specialty business within the Sunbelt performance? Just any benefits you've had from there and where the plans are? Perhaps on bolt ons there? I mean, the specialty business continues to perform well. Look, we have a temperature control business. Temperature businesses do well when it's hot in the summer and cold in the winter. So we've had a terrible summer because it wasn't that hot and we've had a great winter because it's been very, very cold. Pump and power in particular had very, very tough comparators with Sandy. And you can see that actually when you look at the relative rate growth, but look how strong the drop through has been in this quarter, because an awful lot of the revenue on Sandy was the ancillary revenues around pump and power. And that's why the drop through has been so high particularly in Q3. It's still a very important part of our business. It's a part of our business. Again, if you look at our bolt on acquisitions, a lot of them are focused around that specialty business. And we have a long term ambition that at the bottom of the next cycle, it will be 50% of our revenue. And we continue to make strides to ensure that's the case. Excellent. That's great. Thanks. Thanks, Steve. Okay. And with that, I'll pass it back to you to close. Okay. Well, everybody, once again, thank you very, very much. I don't know if it's a reflection of the growing interest. I remember the day, the good old days of Alexia where we got half questions, now we get 3 questions, which I suppose is a reflection of our size. Look, we look forward to updating you again at the full year. And as I said, thank you very, very much for your interest in the company. This now concludes the call. Thank you very much for attending.