Good morning. I'm pleased to welcome you to the Ashtead Group plc Q4 and full year results presentation. We're delighted to be able to have this opportunity to give you a better insight into what's obviously been a pretty good year. I'll start with a brief overview. Suzanne will cover the financials, I will conclude with an operational roundup. As usual, we will move as swiftly as possible on to the more interesting element of Q&A. In overview, it's been another very good year, driven by the strong top-line growth, predominantly in Sunbelt. The strong momentum which we have discussed in prior quarters was sustained in Q4, with rental revenue at Sunbelt up 23% year-on-year. Group pre-tax profits came in at a record GBP 247 million, driven by impressive EBITDA margins of 38%.
These strong EBITDA margins allow us to continue to invest in the organic growth of the business with a gross fleet investment of GBP 580 million. Despite this significant investment, our cash generation has allowed us to further de-lever to 2x EBITDA, which further demonstrates the benefits of these strong margins. Also, the benefits of our focus on organic growth are demonstrated by the improvement in ROI, which is up to 16% from 12% a year ago. Finally, due to the improved profitability and cash generation and in line with our progressive dividend policy, we propose a final dividend of GBP 0.06 per share, giving GBP 0.075 for the year, more than doubling last year's GBP 0.035 per share. With that, I will now hand over to Suzanne to look at our financial performance in a little more detail. Thanks.
Thank you. Thanks, Geoff, good morning to everyone here today and also to those listening on the webcast. Our fourth quarter results are shown on slide four, as you can see, we continued our improving trend in 2013. Our underlying pre-tax profit was GBP 52 million, compared to GBP 26 million for the same quarter last year. Consistent with recent quarters, this performance was driven principally by a 21% increase in rental revenue. Our operational efficiencies helped to deliver a 34% increase in EBITDA, our EBITDA margin improved from 31% to 35%. Our full year results are shown on the next slide. Again, we were very pleased to report an 87% increase in underlying pre-tax profit, which rose to GBP 247 million. For the full year, our rental revenues increased by 19%.
These higher rental revenues, combined with our operational leverage, resulted in a 35% increase in EBITDA and a 58% increase in operating profit. Our EBITDA and operating profit margins were 38% and 21% respectively for the full year. Now let's take a more detailed look at the numbers on a divisional basis. We'll begin with Sunbelt on page eight. From this graphic, in particular from the revenue bridge on the top right, which shows the changes in revenues from one year ago, you can see that Sunbelt clearly capitalized on market opportunities. Its 21% rental revenue growth was generated by a 13% increase in volume and a 7% increase in yield. On the bottom right of the slide, we demonstrate our drop-through of incremental rental revenue growth to EBITDA. During 2013, it was 67%, that excludes gains on equipment sales.
As we said before, we'd expect it to reduce to approximately 60% during 2014 as a result of having used spare capacity in the network. As a final but key point, Sunbelt's EBITDA margin improved to 41%, thus demonstrating the strength of the operating model. Moving on to A-Plant, we were encouraged this year to see overall improvement given the difficult conditions in the U.K. For the year, A-Plant's rental revenue increased by 9%. This growth was comprised of an 11% growth in fleet on rent, partially offset by a 2% decline in yield, reflecting both a competitive environment and some shift in mix. EBITDA margin in this division improved to 28%, and A-Plant remains focused on improving its returns.
As we transition to the next slide, we'll shift our focus from profitability to cash flow and the management of our cash and our debt, as both of those are central to our strategy. The cash flow slide on page eight shows a significant investment in our fleet in 2013, one that we believe was appropriate given the strong volume and yield growth that we experienced during the year. For the full year, our net cash outflow on the fleet was GBP 487 million as compared to GBP 318 million last year. With our expanded EBITDA margin, this investment was broadly funded from our operating cash flow. Despite spending more than twice our annual depreciation charge on fleet renewal and growth, our free cash flow was only marginally negative at GBP 50 million before considering the effect of our small bolt-on acquisitions and our dividend payments.
Given the strength of the U.S. market and the opportunities we see before us in that jurisdiction, we're increasing our 2014 full-year guidance for gross capital expenditure to GBP 560 million. After considering disposal proceeds of GBP 90 million, our net CapEx should approximate GBP 470 million for 2014. Our fleet is now at its youngest age ever, some 32 months on a group basis, and as a result, a greater proportion of our capital expenditures in 2014 will be directed to growth rather than replacement or maintenance CapEx, as we strive to keep that fleet age relatively stable. As always, our plans remain flexible on CapEx, depending on market conditions, and we will adjust the CapEx amounts appropriately either up or down during the course of the year as demand develops. Moving on now to slide nine.
The absolute amount of our debt at April 30 increased to just over GBP 1 billion, including translation effects. However, from a leverage perspective, this increase was more than offset by higher earnings, and therefore, in keeping with our earlier guidance to the market, our leverage declined to two times at the end of the year. As discussed in recent quarters, we believe that our EBITDA margin will allow us to support further growth while still de-levering. We are therefore committed to sustaining leverage below two times, as we believe it strikes the right balance in a cyclical business like ours and will give us significant flexibility in the next downturn. In summary then, our medium-term outlook is that debt should remain broadly flat at constant exchange rates.
On slide 10, we show our return on investment, which is one of the best medium-term indicators of the strength of our business. We've made good progress, as you can see, at Sunbelt with pre-goodwill, pre-tax returns of just under 25% and also at group with a return of just over 16%. Both of those set records for the company in 2013. While A-Plant's returns are still challenging, we are making improvements there as well. That concludes my comments on the financial results, now I'll turn back over to Geoff.
Thanks, Suzanne. Let's look first at Sunbelt to see what is driving this great performance and try and explain why we are so confident in terms of our medium-term outlook. As you can see from the charts on the left, both fleet on rent and the yields have trended strongly throughout the year, with Q4 being no exception despite the comparators getting ever tougher. The strong utilization, particularly in the second half of the year, is clear from the chart, as is the continuation of these trends right up to the current day, as shown by the green line. You will recall that in Q3, we announced that we were pulling forward GBP 100 million of capital into Q4. That's proved to be a very good decision. What was particularly encouraging was our ability to get an entrant rent just so quickly.
I think it's worthy of note that these record utilization levels offer a fleet that is 17% larger than a year ago and 33% larger than only two years ago. The business then has strong momentum, which I said earlier, continued into May, where rental revenues at Sunbelt were up 26% year-on-year. It's been a good year, but more importantly, we believe there are a number of medium to long-term factors which will provide opportunities highlighted on this page. Now, before everyone gets carried away and adds them all up and gets it to 170% revenue growth for the new financial year, let me clarify that these are long-term opportunities. I was told by somebody that this was a growth algorithm. I think they took one look at my face and realized I have no idea what an algorithm is.
What I do know is what a good market looks like. Let's try and look at the market and why we think we have some significant headroom. First, let's have a look at cyclical recovery. As well as it has played a little part in our improvement to date, it is likely to be a more significant factor going forward. U.S. building construction is still at historical lows, and we saw modest growth in 2012, which I expect to continue in 2013, with 2014 and 2015 likely to see some acceleration. I think it's a view supported by most forecasters. Therefore, residential, as always, leads the recovery, but it will become more widespread over time. Let's look at this in a bit more detail. I'm often asked when or if we will get back to previous peak markets.
On page 15, I've tried to show where we were, where we are now, and probably more importantly, where do we think we are going. The first chart details all construction reported in dollars. The second focuses only on buildings based on square footage built to try and give a better idea of volume and strip out the impact of inflation. 2006 is commonly referenced as the peak, although that is not accurate for all elements of construction, particularly non-residential construction. However, against that 2006 base, you can see that in 2012, total construction in dollars was at 73% of the 2006 total. For buildings, however, which is probably where we tend to focus most of our business, clearly, we were only at 42% of that base. Forecasters are clearly predicting good growth in both value and volume through to 2017.
In dollar terms, we will be back to previous highs. It will have only taken us 11 years. However, that will not be the case in terms of square footage, where we will only be at 77% of previous peaks, and we will probably have some headway still to go. In short, we believe that the market has the potential to provide good growth for a number of years. In what looks like a recovering market, we believe that we are well set to continue to gain share. As you will see from the charts on page 16, we have grown our market share to 6%, and as you can see in the top right, over the last two years, we have significantly outperformed the market.
My optimism in gaining further market share is driven mainly by the highly fragmented nature of the industry, where our fleet size, fleet age, and operating model are all well-placed to gain share from the smaller players who find it increasingly difficult to offer the depth or breadth of fleet or the supporting infrastructure that the larger players provide. For such a capital-intensive market, the level of fragmentation is unusual, and in my opinion, unsustainable. The most important chart therefore is the market structure chart on the bottom left of the page, which demonstrates just how fragmented it is. There are approximately 5,000 rental companies in the U.S. Therefore, the top 100 are by definition clearly the larger players. These 100 are included in a league table, which has just come out called the RER 100.
Let's be clear, I don't think it's the most perfect list in the whole wide world, but it does help illustrate the point. We are number two with $1.6 billion of rental revenue. Number 100 has a $10 million rental revenue. Put another way, we have a rental fleet of $2.9 billion. If you've got a $10 million revenue, you've probably got a fleet of around $20 million. We brought in more than that last week. The point here is the gap between the top three and the rest is significant, and that gap is only going to widen. Whilst I expect all the big to get bigger, we do like our model. As you can see, we have Sorry, let me go back a bit here.
As you can see from the chart bottom right, we have consistently taken share from our larger peers through the cycle. We would expect that trend of industry-leading performance to continue. To summarize, it is true that we are benefiting to some degree from some short-term benefits in gaining market share, but these are minor relative to the longer-term structural opportunity which exists from taking share from the smaller players. Let me just remind everybody now of our particular model and where we like to operate. Whilst it is wrong to generalize too much about any company, as we all have some diversification, we do tend to have the greatest element of our work in the small to mid-sized contractors, and therefore, by definition, bump up against the smaller regional companies more often.
As you can see from the lower half of the chart, we have been very successful in gaining market share in our core market, with more than 24,000 accounts renting from us for the very first time this year and contributing an incremental $80 million of revenue. I believe that this demonstrates our strong service offering and the potential to further develop our share in this space, where we have focused for some time. We have also opened 23 new stores in the year, although these were very back-ended and had little financial impact in 2012/13. They will begin to contribute more in the coming financial year, and I expect a further 30 to 40 stores more evenly spread this time as part of our plan to increase our footprint by 25%.
I would also anticipate that somewhere between 25% and 30% of these additions will actually be small bolt-on acquisitions rather than pure greenfields. There is a good population. We have had some good success in recent months. As you can see, of the 23 we opened from the slide there, six of the locations were in fact from small bolt-on acquisitions. The structural move to rental was clearly a major support to our growth over the last three years, especially early on. I believe over the medium term, there is further potential for rental penetration to increase to around the mid-60s%, although probably not to the level seen in the U.K. As we benefit from cyclical recovery, I expect the impact of increased rental penetration will slow, and that is highlighted on the right-hand side of the chart there on page 18.
It will remain an important secular story supporting our longer-term growth. This performance through the cycle chart is one we have been showing since 2007 and highlights that our current peak performance across a broad range of metrics has been achieved without significant end market recovery. When we first showed it in 2007, it was to demonstrate that we felt that there was a real potential to benefit from structural change, even if cyclical recovery was still some way off. It would be wrong to claim any precision in any of our predictions, but it would be fair to say that directionally, it was quite accurate. Rather than sit back and bask in what has happened in the past, let us now look at our thoughts on how the cycle is now going to behave going forward.
Here we lay out what will happen if we get our anticipated gentle recovery in construction markets. We accept there's macroeconomic risk to this outlook. We are leaving the precise trajectory and length of any recovery for you to consider. However, in this scenario, revenue will grow and give the inherent operational leverage in the business, EBITDA margins and ROI will obviously continue to rise at a very healthy pace. Whilst the fleet will grow to support this increase in revenue, the fleet age will remain relatively constant as it is young enough already. Therefore, as a result of this lower replacement capital spend, debt will initially remain broadly flat and then decline, resulting in a significant reduction in leverage as profits continue to grow.
As a consequence of the strong cash generation, the dividend will continue to rise, only to levels that will be sustainable all the way through the next downturn. In short, we believe that we have an opportunity this cycle to generate a step change in our profit levels, and at the same time reduce the financial risk of the business through significantly lower leverage. In overall terms, we believe that we are at the early stages of cyclical recovery. In addition, there are structural opportunities which further support our long-term outlook. I think these charts are fairly self-explanatory. We believe the best representation of how to look at our business over time is the lower of the two charts. There's no circumstances are we suggesting that we are no longer a cyclical business, because clearly we are.
We believe we will continue to make a step change in terms of the performance delivered at each peak and trough due to these structural opportunities. Given the headroom which still exists in all of these structural opportunities, this is something that could continue for a number of cycles. Moving on to A-Plant on page 22. You can see how our investments in the long-term success of the business continues to pay dividends. With industry leading year-on-year revenue growth. Physical utilization, particularly in the fourth quarter, was very strong, as you can see from the charts there. We enter the new financial year with great momentum again demonstrated by the green line.
No one ever asks me what happened to May's revenue performance in the U.K. because they're so interested in the U.S. Even in the U.K., we were 9% up year on year. Finally on A-Plant, just to reiterate some of the numbers Suzanne gave earlier, A-Plant is clearly making good progress. From a low base. Given the strength of its market position and the financial strength of the group, we expect this trend to continue despite the fact that the market remains unlikely to provide any significant support. To summarize, with the momentum we have in the business, we now anticipate 2013-2014 profits being ahead of our earlier expectations. Based on the positive trends we've discussed, we believe that we are well-placed for further growth over the medium term. This, together with our financial stability, allows us to look forward with confidence.
Let's get on with the Q&A. If you could just please follow the normal protocols. Of course, have Swift lock. We're going to be on capital spend.
Yeah. Mark Hessel from Oriel. Just first question, obviously in the U.S. you saw 13% volume rise. Can you give us a feel for how much of that is competitor exits versus increase in rental penetration? Perhaps also the first year of housing and other upturn. Because I mean, previously you said it was 50% competitor exits, 50% rental penetration.
I don't-
some of the upturn has some sort of part to play.
I don't ever recall trying to break it down. I think we have consistently said we've no idea. I mean, how can you possibly know if something goes out on rent is because you've taken it from a customer, it's because there's more activity. You can't possibly know. What I can tell you anecdotally is that there is more activity on the ground now than has been there for a while. In no previous presentation have we said the market feels busy. We said we feel busy. We accept that there is still an uncertain economic outlook. Based on what we're seeing on the ground, supported by trends in forecasters sort of outlook on life, it appears that we are more likely to be on a path of cyclical recovery.
As you said, there's been a very strong residential market in 2012. There's a strong residential market forecast for 2013. We keep consistent as residential drags along so much with it. Two good years of residential will typically lead into a better environment for non-residential. We bottomed at 500,000 housing starts in North America. Depending on it, we're somewhere around 930 to 950,000, so we're well off the bottom. Having said that, the norm is probably around 1.2, somewhere between 1.2 and 1.4. Whilst there's been a good percentage recovery, there's still some headroom to go. There's no question about it. The market's busy. We're clearly gaining market share. You can look at the published results of some. Sorry about that. Obviously United Rentals's trying to block this part of the conversation.
You can look at some of our. Is it me or is it you? I mean, you can look at some of the end results of our competitors, and clearly we are gaining market share. You look at the Global Insight numbers, you look at last year, they said the market was growing through 7%, we grew 20%. We're clearly gaining market share, but precisely trying to split it is difficult. I reinforce what we said in the main part of the presentation is the whole United RSC thing gets asked a lot. It's a distraction. It's a short-term impact on our performance. We have been gaining market share consistently since about 2006, and that's largely been from the smaller competitors. United Rentals is a good company.
As I said in the main body of the presentation, given our scale, the big will get bigger, and that's a trend that will continue for some time.
Could you just give us a view for sustainable net debt through mid-year levels throughout the cycle? I think I sort of heard in the presentation about no more than 2x throughout the cycle. As you're currently going on that level of projected CapEx, you're going to be down to 1x or less in the next couple of years. Do you think that's right? Do you think 2x is more appropriate?
Well, again, we're running our business now with a view of what makes good economic operational sense. To a degree, the leverage is the output, not the input. We are not managing short term to a leverage target. Through the cycle, as Suzanne said, we recognize that as we get somewhere towards the peak of the cycle, we don't want to have both high financial leverage and high operational leverage. We believe that we have a once-off opportunity to really restructure this business. Because we've had such a good downturn and we're in such good financial shape already with our fleet age, our debt, et cetera, if we're sensible through this upturn, we can look very different at the bottom of the next cycle than we've looked at the bottom of previous cycles.
What we've seen is the reason why we've had such a good downturn was the financial flexibility and strength we had at the bottom of the cycle. This industry is notorious at over-investing in the upturn and crushing and burning during the downturn. We're trying to strike a balance with that. What will the exact CapEx be? What will the quantity of our bolt-on acquisitions be? We just don't know. It'll depend on the opportunities at the time. Based on sensible levels of investment, which would give us industry-leading growth, yeah, because of our high margins, we just can't not deliver.
Good morning. Andy Murphy at Merrill Lynch. Two questions. First of all, on M&A, you mentioned in the presentation that you thought the fragmentation of the industry was unsustainable. Could you just perhaps flesh that out in terms of what you think will happen? Will it be consolidation? Will Ashtead be driving it? I think perhaps not. Whether some of these smaller players will fall by the wayside. Secondly, on the CapEx spend for the year, could you give us a flavor for the proportion of maintenance spend versus growth?
The consolidation can happen from a whole host of reasons. It's just in terms of our relative growth and our relative performance and people exiting the market. Consolidation doesn't purely happen from M&A. If you think about that chart, where the consolidation needs to happen is on all those small players. Number 3 buying number 4 or number 5 buying number 6 doesn't change the dial very much at all, to be perfectly honest. Will we participate in M&A? Look, we've done some small bolt-on acquisitions. We'll continue to do so. We will, again, probably predominantly focus on specialty business. Again, as well as having good financial strength at the bottom of the next downturn, we have a broader base of customers. If we're right that we are now going into a long period of cyclical recovery, my work this cycle is done.
I don't rent any bits of equipment on a daily basis. My job is to think, what do we want the business to look like at the bottom of the next cycle? That's what we're turning our attention to now. What we're looking for is the right debt levels, but also a broader base of business. We will participate in some M&A. Right now, do I foresee a significant transformational deal? No, I don't, because I think it's the wrong area to where we want to gain share. Will others do it? Probably, because it looks good on a spreadsheet. Never delivered great ROI, as I can see, on any business historically, but it does look good on the spreadsheet. Go to the next question.
The proportion of that maintenance versus growth.
Yeah, look, the number's GBP 560. I just reiterate, it's not really capital. It's stock and trade. It's like asking Sainsbury's, how many loaves of bread are you going to sell? Okay. We value these things on really small increments of spend and on very short lead times. I have no idea. People ask me what our annual commitment is. We do a number for the budget because Suzanne says we have to, and then I never think it's right. If you remember this time last year, we told you it was going to be GBP 450, and it ended up being GBP 580. I think the first thing to bear in mind is you've not had the keys to the kingdom in doing any forecast because we give you a capital number. We will react very quickly as the market dictates.
Of that split, replacement will be around one times depreciation. Depreciation, Suzanne, what's the number?
It's going to be about GBP 265 million.
That will be a constant. Whatever the total number is, that GBP 265 will broadly be a constant.
Exactly.
Therefore, the rest will be growth. Remember, we pulled forward GBP 100 million of capital in Q3, which we hadn't planned to do. That came in and went out on rent. In the first six weeks of this year, we've landed another GBP 175 million of fleet, and you can see by the physical utilization, it's gone straight out on rent. In a 12-week period, we've landed GBP 275 million worth of fleet. We can flex what our spend is on a very short period of time.
Hi, Justin Jordan at Jefferies. I have got two follow-on operational metric questions. I just noticed physical utilization at Sunbelt, it was running at 71% last year.
Is that as good as it gets, or is there more you could do in that?
Yeah. On average, we usually say the sweet spot for us is about 70%. There are times, perhaps the last month or so was one of them, where you run a little bit ahead of 70%, but we typically like to keep it around 70.
Thanks. Just following on to dollar utilization, which was up at 60%.
60%.
Is there more you can do on that?
Yeah, that's certainly an area of focus for us. As we said earlier, we're interested in all the operational metrics, but in particular, dollar utilization and return on investment. We have said consistently that through the cycle, during the recovery, that we think that that level of dollar utilization can rise. It previously peaked at mid-60s.
Okay. I'm just curious how you guys as a management team or the board think about how to optimize utilization.
I did want to jump in on that.
How you try and gauge it.
Sat in front of a spreadsheet, high physical utilization is just good. We're at the level of physical utilization where I hate it. Okay. We're just too high because there is an inherent operational interface. If our average is 71, I've got some stuff at 95%, I've got some stuff at 50%, too. These levels of physical utilization, I'm spinning the equipment, and therefore, there is a greater operational cost. I think we're beyond those sweet spots. Clearly, at these levels of physical utilization, we need to bring in more fleet. If market share opportunities come available, how do I take them when I'm at this level of physical utilization? At this stage in the cycle, good physical utilization isn't always on an operational basis. Dollar utilization is the most important metric in the business. Within the business, we call it Capitalization factor.
It's the revenue that every single asset gets. We measure it by individual asset. I can tell you, if you said, "That asset there," I can go on the system, I can tell you by asset what the Capitalization factor is of that individual asset. It's what drives the business. We're looking at reinvestment decisions, where we put fleet. It's where we're getting the best Capitalization factor. The range is quite high, and it's why we like our model. I noticed recently one of our competitors who hasn't got any small tools started talking about how great Capitalization factor was on small tools, and that's true. The worst Capitalization factor in any rental company is big aerial. It's probably around 0.3, if you're really efficient, 0.4. We have products like air conditioning units where the Capitalization factor is two.
We repay the cost of the equipment after six months, and that lasts for two years. Now, the physical utilization is terrible. In terms of a return on that individual asset, it's just great. That's why Capitalization factor, and as a consequence, ROI, drives every decision. When a salesman says, "Here is the pricing for this equipment," the first thing everybody does is say, "What's the Capitalization factor?" Somebody wants to buy a new piece of equipment, the first question that comes up everybody's lips says, "What's the Capitalization factor?" It really drives our business. I would argue dollar utilization is a much better measure than physical utilization. We always get asked questions about physical utilizations. I once tried to not put the chart on these presentations and was shot down in flames. Okay.
The really far better measure, because it covers physical utilization, inflation in the original cost, and yield, is dollar utilization. At 60%, no matter what that's telling you, means we're buying an asset for GBP 100, I'm getting GBP 60 for it every year for the next seven years, and I'm selling it for GBP 40. That's why we've got great ROI.
Hi there, Nick Spolia, Public Health. I'm just looking at the ROI charts on page 10. Looks like on Sunbelt, you're back to peak, basically. On A-Plant, you're quite a long way off.
Not that one. That one. Trying to find it there. Sorry, go on. Carry on.
On Sunbelt, can you actually go further given the new dimensions of business now than where you went in 2006 in terms of ROI? On A-Plant, is there anything you can do to accelerate that a bit to make up that gap a bit quicker?
Look, all year we've been seeing consistently on both margins and ROI is that previous peaks are irrelevant. If you think of my graph of the structural direction of the business, in different peaks and different troughs, we are going to surpass previous peaks. It's a mathematical consequence of the investment we've got and the drop-through that we've got, that ROI has to grow. Look, we've focused on this a lot for a long time. There's the individuals in this room who were fairly instrumental in that, to be perfectly fair. It is our mantra now, is ROI. We think we can get ROI significantly higher. A question which that often leads to is, well, why isn't there more inward investments, because if you've just finished doing your MBA, that's what they tell you will happen.
If you go back to the fragmentation chart, the problem with that is you need an infrastructure. You can't just buy fleet. You need mechanics. You need locations. You need drivers. I've told some people this before. We drive 50 million miles a year delivering equipment. That's a lot of trucks and a lot of drivers and a lot of mechanics. For there to be significant inward investments, there needs to be an obvious leverage point here. Outside the top three, there isn't one. If you go beyond the top three, they're all at incredibly high levels of leverage. They've got to build up an awful lot of debt. The obvious macro concern about the extrapolation of those margins and return on investment is, what if there's a pile of inward investment? Where is it going to go?
You can't just turn up in one location with a bunch of fleet. You need to have multiple locations. You need to have drivers, mechanics, and it's that scale of infrastructure which is slowing down any excessive inward investment. We think we can grow ROI and margins significantly from this point.
Okay. Just on A-Plant, obviously 2% yield slippage, that's masked in terms of 11% more fleet and 9% more revenue. What can you do to?
Hold on a second. Look, A-Plant's ROI is heading in the right direction.
Yeah.
Look, it's not great. Do we really want lots of businesses with 5% return on investment? No, not really. It's covering its cost of debt. It's generating cash. Its profits are heading in the right way, and this number will be higher next year. There is no silver bullet for the U.K. construction economy, and A-Plant in particular. Sensible long-term commitment to the business and inward investment will take that the right way, you will only get the big spike, as you did here, when we've got some cyclical recovery. Our objective is that the big spike will come from about there, therefore, will get us way above 10%. The key is to stop it going down to these sort of levels the next downturn, because that's not sustainable as a business model. All of the rental industry looks like that.
Mark Hessel from Oriel again. Just a couple of questions. Just on looking at spending obviously money on new bolt-ons and branches, greenfield, some of those as well. Can you give us a feel for what you view the EBITDA drop-through will look like as a result of that? Because clearly there'll be some sort of drag effect.
Yeah. Do you want to go that one?
Yeah, sure. We've consistently, Mark, over the past two quarters, talked about the expectation that our drop-through percentages, which have been pretty strong over the last two years, would decline to around 60%. We tend to think of it in terms of drop-through. That's sort of the all-encompassing measure. With the effect of acquisitions coming in, all still of a relatively small size, to be fair, and the continued greenfield expansion, we think about 60% drop-through would be appropriate.
Okay. Just one for you, Geoff. I know you don't want to be drawn with regards to previous peaks and everything else. Can you give us a feel for where U.S. rates are? Obviously, you might want to talk about yield, but U.S. rates are relative to previous peaks.
Yeah. They're just about there. There's still this disconnect that weekly and daily rates are way above previous peaks already, and monthly continues to lag. They are back to previous peaks. I'd point to dollar utilization again, because whilst they are back to previous peaks, there has been inflation in our equipment cost between the previous peak and now. Getting back to previous peaks doesn't help us, which is why dollar utilization covers everything. It covers the inflation. To be back at previous peak dollar utilization, given we don't think there's much more can come from physical utilization, we need 10% more rate yield, which is about right. Obviously, every time we go into a negotiation, we're interested in year-on-year inflation.
We look at where we are in terms of when we sell a piece of equipment, what's the cost of buying a new one? It's not one for one, and it's about 112. Something that costs us 100 costs us 112 to replace seven or eight years later. That's about right. In total, rates are back to previous peaks, but the yield, given the cost of the equipment, so the ROI, we need another 10%. That needs to be 10% above whatever inflation we get from equipment.
Mike Murphy at Numis Securities. Following on from that question, or the answer, should I say, Geoff. Back in 2005, 2006, the dollar utilization was 68%. Last year it was 60%. What you're saying is actually that that 10% or 12% on top of that will take you to the 68% as the sort of target that you're looking for?
Correct.
Okay. Thank you.
We've got one more. Robert.
Good morning. It's Julian Cater from Canaccord. I've got two questions, please. First is, can you just explain the volatility in the Sunbelt yield between Q3 and Q4?
Yeah, that's a really, really easy one.
Okay.
Sandy.
Okay.
Frigging Sandy.
Fine. Okay.
We said at the time it was 5%. What you got to remember, it's mainly in yields because what goes out there is pumps and generators in the main, and therefore, we start charging for 24-hour usage. The fuel charges go up enormously. We're transporting the stuff from all around the country. If you strip out the 5%, then we're pretty constant all the way through.
Okay. Thank you. My second question is just in respect to the data on the new accounts that you put on slide 17. Can you give an idea of, I'm going to presume that's a gross number, what that equates to as a percentage relative to the existing base account?
Yeah, we've got about 400,000 accounts. 24,000. Look, what you got to remember is that's a lot of accounts. If you do the math of how much is the revenue per account, it's tiny. These are small guys. I don't know the statistic here. But my guess would be one of our salesmen or depot managers went to see less than a third of those accounts. When I hear competitors saying, "We're going to employ all these new sales guys and go and find that small business." Why? Why would you employ a salesman to go and find GBP 3,000 per annum of business? It makes no sense. It's just not cost effective. Look, the whole point is you win those accounts through your service level, your reputation in that industry. The analogy I do, I don't know how many of you rent cars when you go on vacation.
You rent from Avis and Hertz. No salesman's ever come to see you. No one says, "I want you to rent from us." The reason why you rent from them is because you know the quality of their equipment, and you know the quality of their service. That's how we win small accounts. It is just they're too busy. They don't want to see a sales guy. What's important about those 24,000 accounts is it's absolutely in our core space. It's the space where the fragmented part of the market operates. We love them. Lots of our competitors are less enthusiastic about them. Clearly, on those numbers, there's not a single big national account in there. That's really very encouraging as far as we can see. As you can see, we have 2,000 a month new accounts. That's phenomenal. Thank you.
Can you give some sort of feel for how much industry capacity has come down from the peak? Previously, I think you boasted about 12% of competitor exits.
Yeah.
There was also the majors had cut CapEx, they're obviously ramping it back up again. Can you give us a feel for how it boils down to now?
Look, I just don't have a good answer for this. It feels like a lot. It really does. If you look at our numbers in terms of those revenue growth numbers relative to how low construction is, be it capacity from our customers, we can't be growing at the levels we've been growing against a construction market that's been, at best, flat, without there being a significant benefit from our customers depleting and us taking significant market share. You see we're growing 20%; the market's growing 7%. That's an abnormal gap. I'd love to say we're going to do that sort of level of gap all the way through the cycle. I suspect we're probably not. It feels significant. You've got to define capacity.
What we're finding, why we're gaining market share, it's why I think we're starting to gain market share in the U.K., is not because people have got rid of assets, but it's now a 10-year-old asset, and they're competing against it. There's a physical capacity that's come out is less than the commercial capacity that's come out because they're just sitting on stuff that people don't want to rent any longer. That's the difference. I made this comment before. Why have we had such a good downturn? It's been so long. Therefore, people are just sitting on ever older equipment that breaks down and affects the efficiency of the operator. We've got the youngest fleet we've ever had. We're not the best followed industry in the whole world in terms of statistics, but it feels like a lot. You're the
I'll wait for everybody else.
Next time, you're just going to have to send the list in before you come.
While I'm waiting, you mentioned in the presentation, so you're seeing some inflation on new equipment-
Yeah
pricing. Can you give us a feel for what percentage that's been.
I told you, over the seven-year period, it's exactly 12%. We measure it very carefully because it affects our dollar utilization. We're obsessed with dollar utilization. One of the crazy things is, for all the time I've been here, the one number we never put up there is dollar utilization because the one time I did, everybody said, "Where's the physical utilization chart?" The way we run our business is on dollar utilization because getting rates of 5%, if the inflation in our equipment's 10%, doesn't take us anywhere. We'd stand here with a great big headline, "Woo-hah, rates have gone up 5%." Our dollar utilization and our ROI would over time be going down. That's why we like dollar utilization. It just takes into account everything. Okay. I think that's us done for questions.
Once again, thank you very much indeed for your interest in the company, and we look forward to talking to you in the next quarter. Thank you.