Earnings Call: Q4 2013

Jun 20, 2013

Good morning, and 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, Susanne will cover the financials, and I will conclude with an operational roundup. But as usual, we will move as swiftly as possible on the more interesting elements of Q and A. So 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 pretax profits came in at a record £247,000,000 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 £580,000,000 Despite this significant investment, our cash generation has allowed us to further delever to 2 times 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. And finally, due to the improved profitability and cash generation and in line with our progressive dividend policy, we propose a final dividend of 6p per share, giving 7.5p for the year, more than doubling last year's 3.5p per share. So with that, I will now hand over to Suzanne to look at our financial performance in a little more detail. Thanks, Jeff, and good morning to everyone here today and also to those listening on the webcast. Our 4th quarter results are shown on Slide 4. And as you can see, we continued our improving trend in 2013. Our underlying pretax profit was £52,000,000 compared to £26,000,000 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, and 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 pretax profit, which rose to £247,000,000 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% 21%, respectively, for the full year. So now let's take a more detailed look at the numbers on a divisional basis. We'll begin with Sunbelt on Page 8. From this graphic and, in particular, from the revenue bridge on the top right, which shows the changes in revenues from 1 year ago, you can see that Sunbelt clearly capitalized on market opportunities. Its 21% rental revenue growth was generated by percent increase in volume and a 7% increase in yield. On the bottom right of this slide, we demonstrate our fall through of incremental rental revenue growth to EBITDA. During 2013, it was 67% and that excludes gains on equipment sales. But 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. And 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. So 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 8 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 fleet was £487,000,000 as compared to 3.18 last year. With our expanded EBITDA margin, this investment was broadly funded from our operating cash flow. So despite spending more than twice our annual depreciation charge on fleet renewal and growth, our free cash flow was only marginally negative at £50,000,000 before considering the effect of our small bolt on acquisitions and our dividend payments. So 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 £560,000,000 After considering disposal proceeds of £90,000,000 our net CapEx should approximate £470,000,000 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. And 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 9. The absolute amount of our debt at April 30 increased to just over £1,000,000,000 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 2x 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 delevering. We are therefore committed to sustaining leverage below 2 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. So 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 pretax returns of just under 25%, and also a group with a return of just over 16%. Both of those set records for the company in 2013. And while A Plant's returns are still challenging, we are making improvements there as well. That concludes my comments on the financial results. And now I'll turn back over to Jeff. Okay. Thanks, Iza. Okay. 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 putting forward $100,000,000 of capital into Q4. That's proved to be a very good decision. And what was particularly encouraging was our ability to get it out on 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 2 years ago. So the business then has strong momentum, which I said earlier, continued into Maine, where rental revenues at Sunbelt were up 26% year on year. So it's been a good year. But more importantly, we believe there are a number of medium- to long term factors, which will provide opportunity as highlighted on this page. Now before everyone gets carried away, and that's the more look and gets us 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 our growth algorithm. I think they took one look at my face and realized I have no idea what an algorithm is. But what I do know is what a good market looks like. So 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 there's been 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 2015 likely to see some acceleration. I think it's a view supported by most forecasters. Therefore, residential, as always, leads to recovery, but it will become more widespread over time. So 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 the 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. 2,006 is commonly referenced as the peak, although that is not accurate for all elements of construction, particularly non residential construction. However, against our 2,006 base, you can see that in 2012, total construction in dollars was at 73% of the 2,006 total. For buildings, however, which is probably where we tend to focus most of our business, but then clearly we were only at 42% of that base. Four capacitors are clearly predicting good growth in both value and volume through to 2017. And in dollar terms, we will be back to previous highs. So 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. So 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 2 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 the league table which has just come out called the OREO 100. And 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 2 with $1,600,000,000 of rental revenue. Number 100 has a $10,000,000 rental revenue. Now put another way, we have a rental fleet of $2,900,000,000 If you've got a $10,000,000 revenue, you've probably got a fleet of around $20,000,000 We brought in more than that last week. The point here is the gap between the top 3 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 and we would expect that trend of industry leading performance to continue. To summarize then, it is true that we are benefiting 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's 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 midsize 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 markets with more than 24,000 accounts renting from us for the very first time this year and contributing an incremental $80,000,000 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've also opened 23 new stores in the year, although these were very back ended and had little financial impact in 20 twelve-thirteen. However, 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% 30% of these additions will actually be small bolt on acquisitions rather than pure greenfields. There is a good population and we have had some good success in recent months. And as you can see, the 23 we opened from the slide there, 6 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 3 years, especially early on. I believe over the medium term, there is further potential for rental penetration to increase to around the mid-60s percent, although probably not to the level seen in the UK. As we benefit from cyclical recovery, I expect the impact of increased rental penetration will slow. And that's highlighted on the right hand side of the chart down on page 18. However, it will remain an important secular story supporting our longer term growth. This performance of the cycle chart is 1 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 2,007, 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 will be wrong to claim any precision in any of our predictions, but it would be fair to say that directionally it was quite accurate. So rather than sit back and bask on what's happened in the past, let's 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 this macroeconomic risk to this outlook and we are leaving the precise trajectory and length of any recovery for you to consider. However, in this scenario, revenue will grow and given 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, but only to levels that will be sustainable all the way through the next downturn. So 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. So 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, but we believe the best representation of how to look at our business over time is the lower of the two charts. But there's no circumstances are we suggesting that we are no longer a cyclical business because clearly we are. But we believe we will continue to make step change in terms of the performance delivered at each peak and trough due to these structural opportunities. And also, given the headroom that still exists in all of these structural opportunities, this is something that could continue for a number of cycles. So moving on to Air Plans on Page 22. And 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 Q4, was very strong, as you can see from the charts there, and we entered the new financial year with great momentum, again demonstrated by the green light. No one ever asks me what happened to May's revenue performance in the U. K. Because I'm still interested in the U. S. But even in the U. K, we were 9% up year on year. And finally on A Plant, just to reiterate some of the numbers Sasan gave earlier, A Plant is clearly making good progress. From a low base and 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. So 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. And this, together with our financial stability, allows us to look forward with confidence. And so with that, let's get over to Q and A. And if you could just please follow the normal Yes. It's Mark Alsom from Morior. Just first question, obviously, in the U. S, you saw also 13% volume rise. Can you give us a feel for how much of that is of competitor exits versus increase in rental penetration and perhaps also sort of the 1st year of sort of housing and other upturn? Because I mean, previously, you said it was 50% competitor exit, 50% rental administration. But some of the upturn, there's some sort of part to play. I don't ever recall trying to break it down. I mean, we have consistently said we have 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 just 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, but we accept that there is still an uncertain economic outlook. Based on what we're seeing on the ground, supported by trends in the 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 and there's a strong residential market forecast for 2013. Again, consistent as residential drags along so much with it. 2 good years of residential will typically then lead into a better environment for non residential. So we bottomed at 500,000 housing starts in North America depending on we're somewhere around 930,000 to 950,000. So we're well off the bottom. Having said that, the norm is probably around $1,200,000 somewhere between $1,200,000 and $1,400,000 So once it'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 markets. Hey, you can look at the published results as obviously United is trying to block this part of the conversation. You can look at some of our Is Emil or is it you? You can look at some of the 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%. So 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 Dollar Sea 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 2,006 and that's largely been from the smaller competitors. So United 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. Secondly, could you just give us a view for sustainable net debt to EBITDA levels throughout the cycle? I think you've sort of heard in the presentation about no more than 2 times throughout the cycle. I mean, as you're currently going on that level of projected CapEx, I mean you're going to be down to 1 times or less in the next couple of years. I mean do you think that's right? Or do you think we're 2 times more? Or more growth? 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 measuring 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 do want to have both high financial leverage and high operational leverage. And 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, etcetera, 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. And 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 continuity of our bolt on acquisitions be? We just don't know. It will depend on the opportunities at the time. But based on sensible levels of investment, which would give us industry leading growth, yes, 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 and 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? And will it be consolidation? Will Ashtead be driving it? I think perhaps not. Or whether some of these smaller players will fall by the wayside? And 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. And just in terms of our relative growth and our relative performance and people exiting the market. Consolidation doesn't purely happen from M and A. And if you think about that chart, where the consolidation needs to happen is on all those small players. So number 3 buying number 4 or number 5 buying number 6 doesn't change the dial very much at all, to be perfectly honest. So will we participate in any? Look, we've done some small bolt on acquisitions. We'll continue to do so. We want to gain probably predominantly focus on specialty business. So again, as well as having good financial strength at the bottom of the next downturn, we have a broader base of customers. But if we're right that we are now going into a long period of cyclical recovery, then my word 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. And that's what we're turning our attention to now. So what we're looking for is the right debt levels, but also a broader base of business. So we will participate in some M and A. Right now, do I foresee a significant transformational deal? No, I don't. I think it's a long area to where we want to gain share. Will others do it? Probably because it looks good on a spreadsheet. Never deliver great ROI as I can see on any business historically, but it does look good on the spreadsheet. So what's the next question? Yes. Look, I mean, the number is 5, whatever, 560,000,000. I'll just reiterate, it's not really capital. It's stuck in 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. So if you remember this time last year, we told you it was going to be 450,000,000 and it ended up being 5 80,000,000. So 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've given you a capital number. We will react very quickly as the market dictates. But of that split, replacement will be around 1 times depreciation. So depreciation, Susan, what's the It will be about 265,000,000 dollars So and that will be a constant. Whatever the total number is, that $265,000,000 will broadly be a constant. And therefore, the rest will be growth. But remember, we pulled forward $100,000,000 of capital in Q3, which we hadn't planned to do. That came in and went out on rent. In the 1st 6 weeks of this year, we've landed another $175,000,000 of fleet. And you can see by the physical utilization, it's gone straight out on rent. So in a 12 week period, we've landed $275,000,000 worth of Now we can flex what our spend is on a very, very short period of time. Justin Jordan in Jefferies. I've got kind of 2 kind of follow on operational metric questions. I just noticed physical utilization at Sunbelt, it was running at 71% last year. Is that kind of as good as it gets? Or is there more you could do in that? Yes. 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. And just following on to dollar utilization, which was at 60%. 60%. Again, is there more you can do on that? Or is that Yes, 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. And we have said consistently that through the cycle as during the recovery that we think that level of dollar utilization can rise. It previously peaked at sort of mid-60s. Okay. Can I just I'm just curious how you guys as a management team or the Board think about how to optimize utilization and add additional fleet? I did want to jump in on that. How you're trying to gauge it? Sat in front of a spreadsheet, high physical utilization is just good because you get it. We're at the level of physical utilization where I hate it, okay? We're just too high because there is an inherent operational 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. And so I think we're beyond those sweet spots. So 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? So 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 cap factor. So, 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 into the system, I can tell you by asset what the cap factor is of that individual asset. And it's what drives the business. So we're looking at reinvestment decisions where we put fleet. It's where we're having the best cap factor. And 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 Cap Factor was on small tools and that's true. So the worst Cap 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 cap factor is 2. So we repair the cost of the equipment after 6 months and that lasts for 2 years. Now the physical utilization is terrible. But in terms of a return on that individual asset, it's just great. And that's why Cap Factor and as a consequence ROI drives every decision. So when a salesman says, here is the pricing for this equipment, the first thing everybody does is say, what's the cap factor? Somebody wants to buy a new piece of equipment, the first question that comes up everybody's lip says what's the cap factor. So it really drives our business. And 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 we'll shut it down in flames, okay? But in essence, they're really far better measure because it covers physical utilization, inflation in the original cost and the yield is dollar utilization. So it's 60%. Remember what that's telling you. It means we buy an asset for 100, I'm getting 60 for it every year for the next 7 years and I'm selling it for 40. That's why we got green over Hawaiian. Nick Spole here, Public Talent. We're just looking at the ROI charts on Page 10. Looks like on Sundal, you're back to peak basically. And then on A Plant, you're quite a long way off. So Look, I'm trying to find it then. Sorry, go carry on. So on Sunbelt, can you actually sort of go further given the new dimensions of business now than where you went in 2006 in terms of ROI? And on A Plant, is there anything you can do to accelerate that a bit to make up that cap a bit quicker? Look, what we've been seeing consistently on both margins and ROI is that previous peaks are irrelevant. Because if you think of my sort of graph of the structural direction of the business in different peaks and different troughs, we are going to surpass previous peaks. Look, it's just a mathematical consequence of the investment we've got and the drop through that we've got that ROI has to grow. And look, we 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. So, it is our mantra now is ROI. So, we think we can get ROI significantly higher. A question which that often leads to is, well, why isn't there more in with investments because if you 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 50,000,000 miles a year delivering equipment. That's a lot of trucks and a lot of drivers and a lot of mechanics. Then for there to be significant in with investments, there needs to be an obvious leverage point here. And outside the top 3, there isn't one. And then as you go beyond the top 3, they're all at incredibly high levels of leverage. So they've got to pay off an awful lot of debt, because the obvious sort of macro concern about the extrapolation of those margins and return on investment is what if there's a pile of in with investment. But where is it going to go? Because then 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 investments. So we think we can grow ROI and margins significantly from this point. Okay. Just on A Plant, obviously, 2% yield slippage. That's math in terms of 11% more fleets and 9% more revenue. What can you do to Well, how's that going to Look, your A Plant's ROI is heading in the right direction. It's now look, it's not great. Do we really want lots of businesses with 5% return on investment? No, not really. But 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. So there is no silver bullet for the U. K. Construction economy and A Plant in particular. Sensible long term commitment to the business and in with investment will take that the right way. And you but you will only get the big spike as you did here when we've got some cyclical recovery. But the big spike with our objective is that the big spike will come from about there and therefore will get us way above 10%. The key then is to stop it going down to these sort of levels of the next downturn because that's not sustainable as a business model. But all of the rental industry looks like that. Mark Housum from Morio again. Just a couple of questions. Just on looking at spending and obviously money on new bolt ons and branches, greenfield some of those as well. But can you give us a feel for what you view the sort of EBITDA drop through will look like as we saw that? So clearly there'll be some sort of drag effect. Yes. The one that you want to comment? Yes, sure. And we sort of consistently, Mark, over the past few quarters talked about the expectation that our drop through percentages, which have been pretty strong over the last few 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. So 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. And just one for you, Chairman. I don't want to be drawn with regards to previous peaks and everything else. Can you give us a feel for where sort of U. S. Rates are? And obviously, you might want to talk about yield, but U. S. Rates are relative to previous peaks. Yes. I mean, 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. So they are back to previous peaks. At point to dollar utilization again, because once they are back to previous peaks, there has been inflation in our equipment cost between the previous peak in 2009. So getting back to previous peaks doesn't help us, which is why dollar utilization covers everything. It covers the inflation. So to get so to be back at previous peak dollar utilization, given we don't think there's much more can come from fiscal utilization, we need 10% more rate yields, which is about right, because we measure inflation. I mean, 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? Because it's not one for 1 and it's about 112 for assuming that cost us 100, costs us 112 to replace 7 or 8 years later. So that's about right. We need about it. So in total, so rates are back to previous peaks. But the yield given the cost of the equipment, so the ROI, we need another 10%. And that needs to be 10% above whatever inflation we get from equipment. Mike Maffei, Numis Securities. Just following on from that question or the answer, should I say, Jeff. Back in 2,005-two thousand and six, the dollar utilization was 68%. So last year, it was 6%. So what you're saying is actually that 10% or 4% on top of that will take you to the 68% is the sort of target that you're looking for? Correct. Okay. Thank you. It's Julian Kate from Canaccord. I've got two questions, please. First is, can you just explain the sort of the volatility in the Sunbelt yield between sort of Q3 and Q4? That's a really, really easy one. Sandy. We said at the time it was 5%. What you got to remember with that, 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. So if you strip out the 5%, then we're pretty constant all the way through. Okay. And 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 of Yes, we've got about 400,000 accounts. So 24,000. But the way you remember is that's a lot of accounts. If you do the maths 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, what if our salesmen or depot managers went to see less than a third of those accounts? When I hear companies saying we're going to employ all these new sales guys and go and find that small business, why? Why would you employ your salesmen to go and find 3,000 dollars per annum of business? It makes no sense. It's just not cost effective. So 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 holiday. You rent from Avis and Hertz. No salesmen 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. If it's just they're too busy, they don't want to see a sales guy. So what's important about those 24,000 accounts is it's absolutely in our core space. It's the space where that fragmented part of the market operates. We love them. Lots of our competitors are less enthusiastic about them. But clearly, on those numbers, there's not a single big national account in there. So that's really very, very encouraging as far as we can see. So as you can see, I mean that's 2,000 a month new accounts. That's phenomenal. Thank you. Can you give us some sort of feel for sort of how much industry capacity has come down from the peak? I mean previously there's I think you've said about 12% compared to exits. Yes. And then there was obviously the majors that had cut CapEx, but then obviously ramping it back up again. But can you give us a feel for how it boils down to you now? Yes. Look, I just don't have a good answer for it. It feels like a lot. It really does. And 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 that we can't be growing at the levels we've been growing against the construction market that's been at best flat without there being a significant benefit from our customers depleting and us taking significant market share. And you've seen we're growing 20% the market's growing 7%. So 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. But it feels significant. And then you've got to define capacity, because what we're finding, why we're gaining market share, it's why I think we're starting to gain market share in the UK is not because people have got rid of assets, but it's now a 10 year old asset and they're competing against it. So, 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. And that's the difference. And we now I made this comment before. Why we have such a good downturn? Because it's been so long. And therefore people are just sitting on ever older equipment that breaks down and affects the efficiency of the operator. And we've got the youngest fleet we've ever had. So I don't we're not the best followed industry in the whole world in terms of statistics, but it feels like a lot. Can you just give us you mentioned in the presentation, so that you're seeing some inflation on new equipment pricing. Can you give us a feel for percentages that's been from? I told you, well, the 7 year period is exactly 12%. We measure it very, 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? So but the way we run the whole business is on dollar utilization because getting rates of 5% if the inflation in our equipment is 10%, doesn't take us anywhere. We'd stand here with a great big headline, oh, rates have gone up 5%, but 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. But 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.