Earnings Call: Q2 2013

Dec 11, 2012

Good morning and welcome to the Ashtead Group Plc Q2 results presentation. It will follow the usual format. So following an overview from me, Susanne will take us through the financials, then I will give an operational update on each of the divisions. The operational review will obviously cover the key drivers for the quarter, but we'd also like to spend a little bit more time looking at our medium term outlook. And then as usual, we will follow with a Q and A. So by way of a swift overview, obviously, we are delighted with record first half profits of £141,000,000 To beat last year's record full year profits in the first half is quite a feat. The key driver to this is Sunbelt's rental revenue growth of 17%, but an 80% drop through to EBITDA and our resulting margins highlights the improved operational efficiency in the business. It's not the main story, the improved performance at A Plant was also nice to see. In November, in line with our strategy of focusing on scalable specialty bolt on acquisitions, we acquired JMR Industries, a business based in Texas specializing in the oil and gas industry. Details of the transaction can be found in the quarterly press release. As Suzanne is abanked to detail, it has been a good first half. And as a result of the momentum clearly established in the business, we now anticipate a full year profit ahead of our earlier expectations. So having stolen all of the highlights, let me now hand over to Suzanne to cover the financials. Thanks, Jeff, and good morning to everyone here today and also to those listening on the web cast. We appreciate your interest in Ashtead and this opportunity to provide you with an update on our business. I'm pleased to share with you this morning on Slide 4, the 2nd quarter numbers for the group. We reported an underlying pre tax profit of £79,000,000 compared to £51,000,000 for the same quarter last year, thus continuing our improving trend. This profit performance was driven principally by a 15% increase in rental revenue. In addition, our performance was further enhanced by operational efficiencies, which improved our drop through. As a result, EBITDA rose by 29% year on year, and our EBITDA margin improved to 41% in the quarter. Our results for the half year are shown on the next slide. Again, we were very pleased to report a 64% increase in underlying pre tax profit, which rose to £141,000,000 This represents a record level of profitability for group and as Jeff said, is more than we delivered in the whole of last year. In the first half, group's rental revenues grew by 15%. These higher revenues combined with our previously discussed operational leverage produced a 31% increase in EBITDA and a 47% growth in operating profit as compared to the same period last year. Our EBITDA margin improved to 41%. And as a final point before we leave this slide, I'll just note the net interest charge line as it reflects the benefit of our earlier refinancing activities. Now let's take a more detailed look at the first half numbers on a divisional basis. We'll begin with Sunbelt on Slide 6, since the U. S. Was the main driver of our performance as it continued to capitalize on market opportunities. From this graphic and in particular from the revenue bridge at the top right showing the changes in revenue from 1 year ago, you can see that Sunbelt's 17% growth was generated by a 10% increase in volume and a 5% rise in yield. On the bottom right of the slide, the EBITDA bridge demonstrates our drop through. As a result of high operational efficiency, 80% of Sunbelt's incremental rental revenue growth excluding gains on sale of equipment was brought through to EBITDA and as a result EBITDA margin was 43%. Moving on now to A Plant, we were again encouraged to see overall improvement given increasingly difficult market conditions. Our rental revenue grew by 8% and from the bridge, you'll note that the 9% volume increase was partially offset by a slight decline in yield, reflecting the competitive environment and product mix. For the half year, A Plant generated a healthy drop through of 66% and its EBITDA margin improved to 30%. And now as we transition to the next few slides, we'll shift our focus from profitability to cash flow and debt as the management of both these through the cycle are key parts of our strategy. The cash flow slide on Page 8 shows a significant reinvestment in our fleet in the first half of this year, which we believe was warranted by our volume and yield growth. The free cash outflow of £182,000,000 reflects these payments, which are always heavily weighted to the seasonally stronger first half. We expect that these seasonal effects will moderate during the second half given the lower relative level of spending. With respect to our current year capital expenditures outlook, I'd refer you to the guidance we included in this statement. Given the strength of the market, we are increasing our full year guidance for gross CapEx from £450,000,000 to £500,000,000 However, we don't anticipate any significant change in our cash payments guidance given the timing of fleet deliveries. We continue to anticipate net CapEx payments after disposal proceeds of approximately £400,000,000 this year. On the next slide, you'll note that as expected, the absolute dollar amount of our debt rose at 31 October due to our fleet investment activities. However, from a leverage perspective, this was more than offset by higher earnings and therefore our net debt to EBITDA leverage ratio declined to 2.4 times. As we look forward to April 30, we expect this ratio to approximate 2 times, thereby increasing our financial flexibility. So as you will have seen, the quarter has continued recent trends of improving both profitability and the strength of the balance sheet. Jeff will comment further on the operational details, but is also going to spend time discussing our medium term outlook. We've long believed that the best medium term indicator of our strength in our capital intensive business is return on investment. Therefore, the progress reflected on Slide 10 is very satisfying. The ROI for the 2 divisions is expressed excluding goodwill to best reflect our returns on significant organic fleet investment. The group's ROI, however, includes goodwill to reflect our returns on M and A. This is how we look at our business internally. What's clear from this chart is that our focus on operational efficiency together with strong organic fleet investment has paid dividends. While we recognize that there are challenges to be met at A Plant, the strength of Sunbelt's ROI and hence the group at this stage of the cycle allows us to consider the prospect of further investment in the business with a high degree of confidence. And with that, I'll hand over to Jeff. Thanks, Suzanne. So let's now look at the operational drivers on a divisional basis starting with Sunbelt and the quarterly revenue analysis. As you can see, once again there has been impressive revenue growth with a nice balance of volume and yield improvement and a strong seasonal trend in physical utilization, particularly in September October. A good first half and we enter our seasonally less predictable period with a strong momentum. This momentum of course has been supplemented by the impact of Hurricane Sandy. But just for clarification, there is no impact in these results as it hit just after the period end. It will however clearly have an impact in the quarter 3 comparators as we have mobilized significant quantities of fleet particularly from our Pump and Power division as you can see from some of these photographs. The scale of the impact, but also as importantly, the underlying momentum in the business is demonstrated by our November rental revenue. It was up 26% on the previous year with approximately 5% of this attributable to our sponsor Sandy and 21% being underlying improvement. The initial emergency pump and power element will of course tail off dramatically and future months will not be as significant as November, but it will remain a positive factor. Nonetheless, these figures are impressive and demonstrate the operational capability we now have in our Pump and Power business, which has grown consistently excluding these one off events in recent years. So we feel the short term is in good shape. So let's now take a little bit more time to look at the medium term outlook. There continues to be a lot of uncertainty out there with fiscal cliff still looming. However, as you can see from the charts on page 14, end markets have clearly stabilized, albeit at historically very low levels. There is a broad consensus that it is likely to get better from this point with residential being a key component, although it is fair to say that commentators have been consistently wrong in forecasting a recovery. However, it does feel like there's a little more momentum out there at the moment and we continue to plan on the basis that it is unlikely to get significantly worse from this point and a slow and gentle recovery over the longer term is the most likely outcome. So what does this all mean for us? To try and explain where we believe we are and to highlight why we are optimistic in terms of outlook that this does stop our performance through the cycle chart, which we first unveiled in 2,007. It may be an oldie, but it's a goodie and our performance over the last few years has shown that whilst it's hard to be precise in terms of short term forecasts, Directionally, it has been spot on. You can see from the operational data on revenue, fleet age, fleet size, margins and return on investment that we've had a strong 3 years and are already at record performance across a broad range of metrics. However, when you drop to the bottom at the market data, it highlights that this performance has not been driven by any recovery, but rather structural change within the rental industry that has seen both increased rental penetration and a start towards consolidation in a fragmented market. However, what is important to remember is we remain a cyclical business. Given the good results we have posted on the share price recovery, it is natural for people to be asking when does it end. However, in terms of cyclical recovery, well, when does it begin? So in the medium term, there are 2 probable outcomes. Firstly, a continued period of stagnant markets resulting in an uncertain outlook and a reluctance to commit capital. While in this environment with our strong balance sheet, we will continue to benefit from structural change. As you can see from the charts on the right, we believe that we still have plenty of headroom both in terms of rental penetration and market share opportunities for recent structural trends to continue for some time. Alternatively, we begin to see recovery in end markets, which given the length and depth of the downturn, we anticipate as being a multiyear period of growth. We then begin to behave like the cyclical business we owe and grow revenue and profits as activity increases, but from the strong base that we've already established. It is worth noting that although it was a strong quarter, we wrote 23% fewer contracts in this quarter relative to Q2, 2008, a reflection of just how far there is to go in terms of recovery in pure activity levels. However, one significant advantage relative to previous cycles is the fact that pre cyclical recovery, we already have such strong EBITDA margins, as you can see 39% and an optimum fleet age of 31 months. This of course allows us to reduce maintenance capital spend going forward to around depreciation. As a consequence, we will become very cash generative where historically that has only been the case in a downturn. Therefore, we are in a position where we will be able to both support significant growth and delever. As a result, as Suzanne said earlier, we expect leverage to fall to around 2 times EBITDA by the year end. And looking forward, we would expect to operate below this level. There are of course scenarios where we may temporarily step out of this range and we will continue to invest in the long term growth opportunities that are available to us. However, through the cycle, our high margins and well invested fleet should allow us to operate at lower levels of leverage than previously was the case. We have spent a lot of time on this chart, but it does highlight the current strength of all our operational metrics. I hope it also demonstrates why based on a range of end market scenarios, we remain highly confident as to our medium term outlook. Let me also try to deal with the bare argument that the issue with our outlook is that rental penetration and a recovery goes backwards. So we will not see the full benefits of cyclical recovery. Firstly, let me clear, there is no evidence in any market in any cycle that this has happened to any significant degree. However, to be fair, what you can see from the charts of our experiences in the U. S. Is that there is indeed an impact on structural change during an upturn. In terms of rental penetration improvement, it does slow during the height of an upturn perhaps to 0. As you can see was the case between 2,005 and 2,007, but it did not go backwards. This is a trend I would anticipate to happen again next cycle, but only when recovery is well underway. So why doesn't rental penetration go backwards? Well, firstly, people just simply get used to rental. It's a very flexible option. And given the length of the downturn and the revised operational solutions that have been put in place, they're now well established. There are also longer term drivers such as health and safety as well as environmental legislation supporting rental which will continue to inhibit further investment. Also in the early years of recovery, our customer base, a small subcontractors need to invest heavily in working capital before they can or want to invest in capital assets. In the current financial environment, this is a key factor in terms of fleet investment. And whilst it is one thing to invest in some variable capacity in an upturn, at what point do you increase your number of locations, your repair capabilities, your logistics, your delivery fleet? A lot of the support infrastructure has come out of fleet ownership and I believe it would require a very long and sustained recovery before anyone was sufficiently confident to make long term investments in these areas. So this again will limit the flex capacity that is added. Similarly, whilst you can see from the chart on the right that we continue to gain share during the last upturn, it was at a slower pace than we are currently enjoying. Therefore, again, I would expect that trend to repeat itself next upturn and the pace of share gains to slow. But it will not reverse given the advantage the larger players have in the market. In short, we do not anticipate getting a double benefit of structural change and cyclical recovery, but our revenue and profits will still benefit significantly from an improvement in end markets and increased activity levels. Moving now to Air Plant. What is apparent from recent customer and competitor results announcements as well as general commentary on the U. K. Construction market is that life in the U. K. Is not getting any easier. Therefore, a 9% increase in rental revenue for the Q2 is pleasing and demonstrates the relative success in our strategy to use our group strength to be well positioned as markets eventually recover. We are under no illusions as to how tough the U. K. Is, but we have a good management team. We are outperforming the market and we are making profits and generating cash and it's not a distraction. Frankly, right now in the U. K. That constitutes a result. In terms of the specifics of volume and yield, you can see the full impact of the 2 large contract wins that we identified in Q1, which have added good volume, but adversely impacted yield. These two wins do not change our overall strategy of improving rates and broadening our customer base and we have continued success in that regard when you exclude the impact of these 2 specific accounts. Looking forward, we do not expect too much help from the market. However, capacity will continue to come out and we are committed to maintaining the quality of our fleet and our infrastructure to take advantage of the opportunity this will provide when markets eventually recover. This strategy is already proving effective and will we believe continue to do so as this recession drags on. So to summarize, it has been another great quarter. With the momentum clearly established in the business, we now anticipate a full year profit ahead of our earlier expectations. Furthermore, we are well placed to see further growth over the medium term from either continued structural change or end market recovery. As I said earlier, we are still a cyclical business with cyclical recovery still to come. Given our strong margins and the investment we have already made in our fleet, we expect our net debt to EBITDA leverage to be sustained below 2 times through the cycle. And the interim dividend has been increased by 50% to 1.5p. And therefore, with a broad range of metrics already at record levels at this stage of the cycle, together with a strong balance sheet to support medium term growth, the Board is able to look forward with confidence. So with that, we'll move to Q and A. And you can just follow the usual protocols of waiting for the microphone and stating your name for the benefit of those on the web. Good morning. Justin George of Jefferies. I've got sort of 3 kind of interrelated questions, if I may. Firstly, obviously, on current trading. Can you give us a little bit of color on the 26% in November between volume and yield? No, we can't right now as you understand, sir. And the reason for that is it's incredibly complicated given the impact of Sandy. There's a lot of ancillaries in there like extra labor, extra transportation, extra fuel charges. So to give a very precise number would be difficult. In terms of the underlying, given where we have been incrementally improving at a very consistent rate, it's not going to look very different in terms of the mix of volume and yield to what we've seen. There's nothing will have fundamentally changed. So proportionately, it will be, I'm guessing, and this is a pure guess now, 6% 6%, 7% on in price and about 14% or 15% in volume. So the price the yield would have probably gone up a little bit, but not a lot and volume will be the balancing item. The bit that will be complicated is the 5%, because there's so many one off ancillary charges within the 5%. So it needs a fair bit of analysis to give you a sensible number on that. Thank you. And the follow-up from that was just what is your sense of the outlook for yield in calendar 2013? Obviously, your competitor a week ago talked about over the medium term, 2% to 12% price increases over the medium term. I think price increases on yield. You know my views on their yield and rate statistics. So I'm not going to benchmark against nonsense. So in terms of what do we expect in terms of yields, which is the number we gave. What's interesting in the 6% for this quarter is that from a pure rate perspective, it's about what we've been seeing most consistently, it's about 4. The additional 2 is from ancillaries as activity levels increase. It's why we like the yield measure, because as activity levels go up, you get a better mix of smaller customers, which tends to drive the yield. It becomes a little bit easier. We talked about this before on the way down in terms of recovering fuel transportation etcetera. And therefore, as activity levels increase, we would expect yield to continue to improve. So our measure of yields in terms of it going down to 2% to 3%, I think we will do better than that. In terms of rate, they may be right. There will come a point in time where rates will normalize to around inflation. I do not think we're at that point yet, because I don't think we've had sufficient recovery. Now I could be proven right and I could be proven wrong. What's interesting, I mentioned in the body of the presentation that our the number of contracts that we wrote in the quarter were 23% down, actually against Q2, 2008. Against last year, they were up 4%. I don't think we've had a quarter since our recovery started where we've written more contracts. We've had better fleet on rent and we've had better yield, but we've not had higher activity levels on a year on year basis. So that's the first quarter that we've seen this positive impact from higher yields. So from a yields perspective, I think there's lots of growth opportunity because of that increased activity level. And the whole rate thing well you'd ask of this. Just one final follow-up I guess for Suzanne really. JMR you quoted the revenues and operating profits for the 6 months at the end of October. Should I simplistically just double that for a year? Is there anything you could say? We clearly pay around about one times revenue. Okay. And it will be earnings enhancing in the 1st year and we will do just over we'll get it north of a 10% ROI on our initial investment in year 1 with no growth and with no synergies. Thank you. But to answer your question specifically, Justin, a doubling of that would be reasonably close. It'd be reasonably close. It's Texas. There's not the seasonality, it's the rest of the business. It's Alex here at UBS. Can I ask on the medium term story what the extra capacity that you can put into the existing network is? And maybe if you just map out on a take you may not want to say exactly when the recovery is, but roughly how much will be new against existing Geppes? Yes. The vast majority will remain in existing locations. We still have an awful lot of capacity left in existing locations. And let's be clear, given the size of our depots to actually increase the capacity in one of our locations means moving across the street from a 2 acre site to a 3 acre site. It doesn't mean massive incremental capital investment. It means buying the plot of land adjacent to all locations because typically what we run out of is physical space. There will be incremental overheads and more mechanics, more drivers, more trucks. So flexing the capacity, because when you look at the numbers, when we look at some of our capital growth numbers, it does make you sweat in terms of where does all of this equipment go. It's when you divide that number by 400, you realize each individual location actually isn't doing an awful lot. So the vast majority will continue to be from existing locations. However, we set out in the last results presentation a plan to add around 100 locations over the next two and a half years. We said we'd do 13 this year and we're on track to do that. We've done 6 already this year, and we've got 7 with firm agreements leases agreed where I know where we're going between now April. And Susanne and I, we're reviewing the plan for the next 2 years only on Friday. So we're in good shape in terms of adding those extra locations. So, and they will have a small drag on drop through obviously as we start putting in that incremental capacity. So going forward, are we going to keep delivering 80% drop through? Well, no. Firstly, because on a yearly basis, we don't because the 80% is in the first half, not the second half. And typically, the second half drops really smaller. And we're also going to get some impact of putting in that incremental step capacity. But you're still looking around 60,000,000,000, perhaps a little bit more. So it's certainly looking this putting in this incremental capacity is not going to be a massive drag on the drop through of the revenue growth going forward. Okay. But it is fair to say that if you've got 400 defos now that we should whatever that is 20%, 25% new in 17% or 18% Yes. I mean let's put it in the context. We will be adding half the number of locations United have just closed. We will take our depot next. So in terms of scale of challenge, United just closed the equivalent of half of the whole of my business. They've got 800 locations and this will take us to 500 locations. So we have that capacity. We have a number of metropolitan areas where we don't yet have a presence, where we want to get in and we've got areas where we think there's some easy expansion to just fill out some gaps. Okay. And then 2 very quick ones. In terms of supply lead times, just any color on where they are? Have they moved out? Yes. No, there has been no significant change. You'd struggle to get a generator or light tower anywhere in North America after Sandy hit, that's true, but that will sort itself out pretty quickly. Core assets are on similar lead times to what they are, which is anything from immediate to 3 months. If you wanted to land on May 1, because everybody wants every single piece of equipment to land on May 1, you should order it probably 6 months in advance. But ignoring just that initial injection of capital, we've seen nothing in terms of lead times lengthening. And I don't anticipate that we will. Okay. And then a specific one on monthly rates. Just wondering how much are they up year on year? Can you Monthly rates. Yes. Sorry, I'm not saying Weekly, monthly. Sorry, yes. I don't know what they're up year on year. Just because I can picture the chart, but I can't remember what they are. I can tell you where they are against peak. So what is true is this year, both daily, weekly and monthly are up on last year. I just can't remember the percentage. It's not a stat I track that carefully. We can get back to you on that, Alex. But every single category is up and previously monthly was not up. So we're at the stage now where in overall terms, I'm going to flip to rate here for a second because it's a bit it's a better way to explain this. We're about 5% to 7% down from our previous peak. But day and weekly rates are about 5%, 6% better than our previous peak and monthly rates are about 10% below previous peak stage. So we've got 10% still to go on long term contracts and we're ahead of where we are. Forget previous highs. Given where transactional is already in this cycle, we will surpass previous highs in terms of rates. Okay. Thanks very much. Good morning. Alex Maggi from HSBC. If I can start with housing, if I remember a few years ago housing we estimated was about 15% of your revenue base. Can you give us a sense of where that is now, presuming it gets back to presuming it recovers and presuming it gets back to 15% of revenue. Can your current asset base address that? Do you need any different emphasis in where your CapEx goes? Yeah. No, it's a good question. Look, our fleet mix has not changed materially during this cycle. And interestingly, what is an important trend, Alex, at the moment in residential is the growth in what is termed multifamily homes, which is flat to you and me, okay? Now an apartment block looks exactly the same as an office block or a shopping mall. So therefore, the equipment types are exactly the same. You're right in identifying that single family dwellings do take a lighter end of equipment, a few more telehandlers and the utility aspect is a little bit different too. So our mix will handle it well. It will require some capacity. And the issue rights, it's typically around 15% of our business. It will be less than that right now because residential is so small. The key to residential, however, is what residential drags with it. I know we've had this discussion. I've had it with you, Alex, many times before. The key to a recovery in construction markets in North America is a recovery in the residential market, because it just drags so much with it. And that's why the most recent statistics are encouraging. Now let's be clear, it's at a historically incredibly low level. So there's some sexy percentage increases being bandied around, but the big percentage increases of a low number. So the actual volume of those, so the latest McGraw Hill, which is a good report because it's a good lead indicator because it starts is saying single family dwellings are going to be up 27% in 2012. That's a great, great number, but 27% and not a is still not a lot. But directionally, it's really important because a recovering residential market sucks with it, supporting small scale non residential construction. There's an awful lot of taxation revenues associated with residential, which helps fill the gap for local municipalities, so local municipalities can spend too. So we are very encouraged by the improving trends. Now again, as you know, for 2 years now, the core fundamentals have pointed to there ought to be a residential recovery and it hasn't happened yet and the big drag has been foreclosures. So good early signs, but don't be seduced because we're not by some big percentage increases of low numbers, but good early signs. And can I just follow-up with a few of the previous questions? Regarding your estimate of the impact from Sandy, is that just the remediation work that you were called in to do? Or do you have a way of estimating? Yes. What we do is we set up a code. And what we say is look anything which is either a restoration or remediation, so pumping, heating, drying, coded to it. But equally, if it was just a telehandler to move a fallen tree that would be loaded to. Is it 100% precise? No, it's not. But pretty much anything which was outside a normal job that we have scheduled that we were already renting on or was scheduled to rent on that was summons because of Sandy. It's given a code and we get now the reason why we can't ask Justin's answer Justin's question, that's great, but it's going to take a few weeks to scrub those numbers to be absolutely sure what it is. Because for example, we had 12 inches 18 inches pumps ready to go to pump water out of the subway system. But on top of just renting the pumps, we had all the fusion equipment. We had men ready to run the pumps. So there's a lot of ancillary billings associated with that remediation work, which Susan and the guys are going to have to scrub through a few contracts to understand we get the breakdown of those numbers just right. Okay. And last one from me. On the spare capacity point, remember about 18 months ago you suggested there was something like $500,000,000 of extra fleet that your existing depot could absorb. Is that still about the right number, sir? It's probably not for all. But again, let's remember, what if we hit a capacity? It's literally buy the plot of land at the back. It's not like I've got to build another factory or buy in long time long lead time equipment and get process capacity up to it's our constraint is typically space. And then the real estate market in North America has not recovered sufficiently yet for that to be a significant problem. We might have to move across the street. So yes, you're right. We look at it from 2 perspectives, if you remember. We look at it in terms of the physical capacity and what the market based on the current economic outlook could bear. As the economic outlook gets better, increasingly the constraint is the space. So but again, remember step changes in our capacity in terms of that footprint are not big investment. They're not long term or financially onerous investment decisions. Okay. Thank you. Andy Murphy of Merrill Lynch. Two questions. Just on the U. K. You mentioned a couple of contracts won previously that basically forced the yield down. Could you give us a flavor for what you think the underlying yield has been for the rest of the business? Yes. It was up about 2%. Okay. And just secondly on the The reason for that is we're trying to broaden our customer base. So again, does that mean our rates have increased by 2%? No. But what we have is a greater proportion of our business. So it's our yields will have increased 2%, because what we're trying to do is get it we're doing the opposite of what everybody else says they're doing. Everybody else is we're going after big, big national accounts because they're more profitable and they're more stable. Well, we would you need some big national accounts, particularly in the U. K, where we've probably got a bigger proportion than anybody else, but we probably got too much. What we're trying to do is spread our emphasis away from pure construction, away from big construction companies. And so it's more about a shift in mix rather than it's an improvement in rate necessarily. Okay. The other question was on the U. S. Expansion and the relationship between your 100 Depot expansion and what you or I are up to in terms of reducing their footprint. Could you give us a flavor for how that sort of splits down in terms of their closures and your Yes. It may affect the timing. But we have not sat down. Well, that's not true. We have sat down. We have sat down and said, this is where they close 200 locations, where would we like to open locations and where are there opportunities? Of course, we've done that as has every other rental company in North America. However, it is not the key driver in where we decide to go. We have got fairly sophisticated maps where we look at things like the size of the metropolitan area. There's good statistics now about projections have put in place construction. There are good demographic analyses in terms of population growth that we say, okay, we really need to be some places where we're not. For example, we've got nothing in Minneapolis and Port. We've got nothing in Kansas City. We think there are 2 markets we should go. I have more fleet on rent in Charlotte, South Charlotte sorry, Charleston. I've got more fleet on rent in a tiny little town like Charleston than I've got in San Francisco at the moment. That makes no sense. I've got a presence in San Francisco. So there's certain geographies where we think we should go. Now, would we have opened 100 locations quite as quickly as we intend to do so if there wasn't the opportunity for the gap being provided by the United Closers more than anything else because there's a bunch of really talented guys out there right now who are used to operating in a high class rental business. And let's be clear, United Dollar Sale are a very high class rental business. So it isn't impacting where we're going. It probably has some influence on the pace at which we're going and perhaps the prioritization of the timing. But where we wanted to go, we've had this plan for quite some time. We've had this plan since before we bought Nations Renters. We never really had economic environment in which to do it. A catalyst to get on with it is undoubtedly the United RSA. As I said, remember, we are talking about opening over the 3 year period. So we're not trying to monopolize on what's happened right now. Half the number of locations they've closed in the last 3 months. That's all we're trying to do. Thank you. Good morning. Andrew Nussi from Peel Hunt. Just following up a couple of points there. I think firstly on Sande, you also gave a feel for what sort of the top line impact. Would there be anything sort of untoward in terms of the margin performance on that? Yes. That's a good question. There may it may reduce drop through a little bit because there'll be a lot of ancillary charges where the margins aren't as high. So there'll be some pass through elements in fuel, in labor, which probably aren't. But will it be huge? It might change, say, 1% or 2% for a short period of time. But yes, no, that's a good point. Yes, there will be some impact there. And secondly, just following up on the U. K. Obviously, the phrase increasingly difficult. Certainly the majors certainly seem to be sort of toeing the party line in terms of focusing on returns on capital. Do you feel that's still the case as you look forward? The major being the major rental companies? Yes, sorry. Yes. I think that's probably is true. I think you can see in a number of their actions that that's what they're trying to do. But unfortunately for big contracts and what you've got in the U. K. At the moment is lots of big contracts and it's almost the opposite way around to the it's a feeding frenzy. So I can name 3 sizable contracts now where we've just said we're not even going to bid because at those prices you cannot make money. So yes, they are, but it's very, very difficult in the current time. And what they are doing is they are all continuing to a number of them are continuing to the fleet, a number of them are continuing to reduce overheads. So there's various ways that you will improve return on capital. So wherever possible, I absolutely accept that the major rental companies are making an effort. But none of them can look UAI and say when the big contract comes up that is not a feeding frenzy and rates are probably worse not better than what they have been. Thank you. Hi, David Phillips from Citigroup. Can you just ask about the utilization chart on Page 12? Yes. The drop down that you've seen in November. I just want to reconcile that to the 21% growth in sales ex Sandy. And Well, I mean, the key to that is, yes, it drops, but nothing drops every year. The key is not its direction, the key in terms of growth is its gap over the previous year. So what we've got clearly is more fleet available and more of it utilized and hence the growth. So the terms in terms of year on year improvement is the gap between the green line and the black line. Yes. So I was looking at that going to the differences. So it's a mix of all 3. It's the utilization. It's the price. It's size of the fleet is all I need to get up to the plus 20% if you make sense. Well, the plus 21% is total revenue. Revenue improvement will be broken down into volume of fleet on rent. Well, so fleet on quantity of fleet on rent that we own, the physical utilization of that and the pricing. So within that 21%, there is a number. Let's say it was the same as the last quarter. I don't know if it was. We haven't, but let's say it's 6%. So that means 15% is from volume. That 15% will come from the combination of the fact that we own a bigger fleet and a bigger proportion of it is physically utilized than a year ago and that's the 21%. Perfect. Thank you. So I've got a bigger fleet, it's better utilized and I've got better prices. Mike Murphy, Numis Securities. Given that if you look over the last 2 years, Geoff, the return on capital, all right, that's pretty goodwill, has risen from low double digits 12% to 23%. Does that mean that going forward, I mean you talked about organic growth investment in the fleet. Does that mean that we're unlikely to see much in the way of acquisitions? I know you've had one there. And what were the reasons for making acquisitions? Would it just be the specialized or just the particular location? Yes. Absolutely. I mean you're absolutely bang on, of course, Mike, which is that when you're getting that degree of return on your organic capital, why wouldn't you focus And you're at this stage in the cycle, why wouldn't you focus on organic growth? And so therefore, relative to our investment in capital, what we have been spending on M and A is minuscule and that's likely to be the case going forward. Now why would we do investments that let's M and A which say perhaps bring 10% or 12% or 15% when you can get that percent as well. Because in specialty businesses what we want to do is broaden our exposure to markets where we think there is long term potential and where over the long haul it will make us marginally less cyclical. Now I am under no illusion. How can I possibly say I bought an oil and gas business and it's made me less cyclical? It might make me differently cyclical. Clearly, we've inherently bought into a cyclical business. So but generally speaking, what we want to do is broaden our exposure away from some of our traditional construction markets, which are still very, very important to us. And that's why we will do M and A. And therefore, the real benefit of some of these, I hope you will see in 1 recessions time or 2 recessions time in terms of the breadth of the market that we have. In terms of their contribution to the growth and the profit this upturn, they're likely to remain minimal. We did a pretty good job of the Nations Rent deal and I think it's proved to be in a very well timed deal in the sense of we benefited from the structural change. In my opinion, and I could still again be proved wrong, the key to that deal was there was very little overlap. We intended to close around 20 locations. We closed more because it was the downturn. But there was a I think what you see from the United Dollar Seal is, yes, there are huge cost synergies. We took huge cost synergies out of the nation's rent. But if there's big overlap, there's also a big integration risk in terms of lost revenue. And therefore, why would you take that bet when you can get these sort of returns on organic growth? But yes, we'll continue to do some bolt ons in especially. Terms of getting the 100 locations, look, if we decide we want to like I'm picking a city. If we want to open 5 locations in City X, we may decide to buy a guy with 3 and open 2 greenfields because he's just got great geographies and we want where he is. So we may do some very, very small bolt ons to fill out what I would class same business growth. But predominantly our M and A, certainly of any scale, is going to be focused on specialty businesses. And the pool of acquisitions must have gone down just on the basis that some of those would have aged their fleets anyway. So what might have been attractive 2 years ago if they're Well, the pool has gone down. We've got great locations and really great customers. We have to reflect in the price the age of air fleet. So I'm not sure the pool has gone down a lot, but the reason why we don't do a lot when as you know a number of businesses even here in the U. K. Come on the market is I don't think people sensibly include in their acquisition price the recapitalization of an aging fleet. And you're absolutely right that has to come into our calculations, because we can't have 1 hot our fleet is as young and as good as it's ever been. Like mathematically it is, but let me tell you when you walk around the location, it's hard to give a depot manager a hard time now in terms of why is that piece of rubbish broken in the corner. It's heartbreaking. You've got nothing to shout at them about. And so our fleet is in good shape as it is. We can't then buy a business where the fleet is on average 4 years older because you can't say, well, you're going to get our old stuff and you're going to get our new stuff. So immediately we do an acquisition like that. We're going to have to recapitalize it to a quality of fleet. We're happy to have the brand name Sunbelt attached to it. So you're right. I think the population, but there are still very good rental businesses with some niche customers in great plots about many of them because many of them got there at a time before zoning people decided that a rental company we are genuinely in zoning next one up from a scrap metal dealer. So nobody wants a rental company as their neighbor. So some people have got some great zoning and we'll buy them because of their geography. Yes. I just have one follow on point to make to what Jeff said about the specialty bolt on acquisitions. I think it's important to consider when you think about the top acquisition we did in April and the JMR acquisition, the oil and gas business we bought a couple of weeks back that the type of equipment that is used by both of those businesses is equipment that can be used anywhere across the country. Many times when you do these specialty bolt on acquisitions, what you're really buying into is a different method of distribution and a different customer base that produces a higher return. So if there were to be in the case of oil and gas some differential or change in the cycle, then the vast majority of that equipment could be deployed elsewhere. And that's true. But let's be clear. The customer base is oil and gas. They have a specialty product, which is a great tool for anyone who's in this. It's called a test separator, which calibrates the amount of oil, gas and water coming out of a head. People have to calibrate for taxation and mineral rights on a regular basis what it is. But in terms of volume of equipment, it's light towers, generators and the like, which we do all day long. The criteria when we look at a specialty business is really straightforward, which is it needs to have a narrow customer base. So it genuinely is a specialty business. It needs to be massively profitable. Look at the then you can work out from this press release just how profitable JMR is. You saw how profitable tops were. And the reason why it has to be really profitable is we don't want to reinvent the wheel in terms of a business model. What we want to do is take or we look for is a regional business that we can make national, that we can all we bring to the party is a checkbook and lots of locations and we scale it. We want them to bring the expertise. You will not see us buying a fixer upper specialty business. Now we might buy a fixer upper general tools business because it's just in a great location and we know all about that stuff. But in terms of specialty, they are the key if you go back and look at the what the inherent ROI is and all of the 3 acquisitions we've just done, they were great profitable businesses. And what we want to do is just replicate that model, not change that model. Can I just have a quick follow-up to the parts? Over the past, say, 4 quarters, if I look at the mix of where your revenue is coming from spot, daily, monthly, how has that changed if at all? Yes. It hasn't changed a lot. And you always have to be careful because it's and the reason why it doesn't change a lot is because you can't do it over 4 quarters because it's seasonally very, very different. And so what we've seen this quarter versus a year ago is 4% more contract. Now that's not huge, but it's a number. But in terms of what it means was we had more like a normal summer. We just had that little bit of more small activity going on, a little bit more landscaping, a little bit remodeling in houses. That's what's so what you've got to look at is quarter on quarter on an annual basis because there is a seasonal mixture. Through the cycle, it has not changed as much as I anticipated it would. But what we would like to see going forward is activity levels rise, we should see daily and weekly rise too. It's because we'll have activity level tends to be more of those shorter contracts. And we, unlike some of our peers, love that work. And then just thinking of the gap now between your growth, your Q2 with United Rentals, it was 9% on their equipment in their Q3. The interpretation of that is that as a lot of us have been expecting, there's been some benefit from the integration they're doing. Again, that's Is there any way of quantifying whether that's It's hard. It's hard. So you're right. We've grown 17% to 8% in the quarter. That's a big gap to be fair. Why is that? Clearly, as I said, let's not underestimate the scale of the challenge they have. And they've done a good job in all of their back office things like IT, fleet management, huge, it's an enormous task they've undertaken. Some degree of disruption is inevitable. Now what proportion of the gap we is due to that. I would guess very, very small to be perfectly honest. But it's impossible to count it because the people I'll be getting is the guys who can't be bothered to drive another 2 miles to the next nearest location. I'll be getting the kind of customers that I like in any case. So it will be all the small walk in type trade predominantly. They won't have lost a single big national account yet because of this. I think they might lose. I don't know if they'll lose any, but I think some of those guys will choose to have an alternative when previously their alternative was United and Odyssey. But that trend will take 18 months to 2 years because those are big guys. It will take a long time over their purchasing decisions. So Alex, there has to be a benefit. I know when I walk around our locations, all the guys say, there is a benefit. My guess is it's small. And my guess is, however, it sticks because if you listen to Mike in United, what his strategy is around big accounts and what mine is around small, we couldn't be more different in terms of now the great thing is there's room for both of us with those 2 strategies. The sort of guy I've won is the sort of guy I want to keep and I'm not sure it's the sort of guy he does want to keep. So I suspect it's permanent, but yes, there is some impact in there certainly. Mark Hassell from OREO. Just a few questions if I may. Just on sort of staff costs look like sort of like for like, so they're up sort of 2% at the group level. It's difficult for me to judge what that split would be between U. S. And U. K. Just remind me, is there any sort of accruing in these numbers for sort of staff bonuses that people will actually get paid? Because it's going to be more or is it not you don't do it on a cash basis, I. E, it's accrued based on the earnings that the company has generated because most of those plans are tied to ROI and EBITDA type measurements. And I think when you're looking at those numbers, if you just think about the 6 month period year over year, the staff costs are up about 6%, 6.5% mark. And if you strip out the fact that we have the top acquisition in there, we've got a number of greenfields between the two of those. That's maybe 150 people or so. We also have commissions in that number, and they would have risen automatically since rental revenue has grown so much. So if you strip out those two elements that I think are easily explained as being incremental, you're really left with about a 2%, 2.5 percent growth in staff costs overall, which is a combination of just wage inflation in the U. S. And also a few extra people as you'll see from the headcount information in the back. But all of that relates to the U. S. But there's no shocks to come. We say, oh gosh, we forgot to accrue our bonus So I'll just double check-in that. But the that seems to be the run-in our business anyway. But in the U. S, can you just talk about sort of manufacturers' prices and lead times? And so is it still cheaper? I'm thinking about this overall question. Clearly, you're not going to commit CapEx now to after the outcome of the fiscal cliff. I've got to offer a high level. But just if I could just is it cheaper for you still to buy 2.5 year kit if you can get it in the market or what's happening? Yes, that's a really interesting point because 1 or 2 people have pointed to like slowing RAS valuations and I'm responsible for that because I told everybody stop looking at ABI because it's a rubbish indicator and look at secondhand equipment pricing because it's a great indicator. So you did get hoist on your own petard if you hang around long enough, I guess. The gross values have slowed. That's true. But I mean, if you go to the appendices slide, Mark, I even did a slide, right, especially for you in sticking in the appendices. Because if you look through the cycle, which is the top left chart there, you can see there is a great correlation, as I suggested there might be at the time between secondhand equipment prices and our rates. And they are our rates, not our yields for this particular amount. So over the period, we're about to bang on. However, as you can see at various points, the 2 get out of sync. And what happened was last year, which you can see on chart top right, because of the whole Tier 3 thing, RASK got ahead of rates. And all you've seen in the last few months is a bit of a catch up. Now ultimately, the relationship between but this trend in an upturn won't go on forever. All trends work for certain periods in the cycle. And this one won't go on forever. And it won't go on forever because you're right. There will reach a point in time where people will say, why am I paying that much for a 2 year old one when I can buy a new one for not much more? More so than people will say, why am I paying more for a daily rental? So as you get towards the top of rates, there is a natural ceiling on secondhand equipment values. But so over the 6 months, RICE values have been flat. It's been a bit of a catch up. I would expect RICE values to be broadly flat for the next 6 months too. So but yes, you're right. We are getting ridiculous returns on some of our secondhand equipment at the moment. That's why I said this chart down here too. How I measure our effectively right value is when we sell assets, what are we getting on average as a percentage of our original cost? And you can see how Roussval users, we're just about back to the peak. But if you there are a number of product categories where we're getting the best returns against original costs now that we've ever, ever had. So we are starting to reach a limit in terms of second. So until there's inflation in new equipment, there will be a limit to where Ralf's fab news can go. You're seeing any inflation in the equipment or is it We saw a lot last year. Last year, I think we'll see a lot less this year. Where we got hit was last year because a lot of it got dressed up as well as all about Tier 4 engines. And we owed them some in truth. The statistics still holds true. Maybe it's a bit high. The key really is what do we pay now for a 7 year old asset or a 6 year old asset that we're selling? What's the on cost over that period of time? And it's 13%, 14% now, something along those lines. So over a 6 or 7 year period, it sort of works. But if you were to look at it on an annual basis, we have nothing, nothing, nothing and then a big jump last year. Just finally for me. Just on But I'm expecting almost nothing in terms of inflation this year. Okay. Great. Just on JMR, a cheeky question, what's the difference in their equipment that they deploy versus that of the old Ashtead Technology Group? Massive. Well, 2 things are massive. Firstly, it's all onshore rather than offshore. And actually, I think with the whole new technology in horizontal drilling and shale gas, I think what everybody is seeing is a big downturn in offshore exploration and a big uptick in onshore. Also it is a service business. So it's more downstream. Ashteq technology was all about exploration, which tended to be far more cyclical. These if you whatever however much you're pumping out, you need to calibrate what percentages are oil, water and gas. So whether you're pumping it out at full capacity or 50% capacity, you need to regularly calibrate that. And the other difference is 90% in volume of its equipment is exactly the same as every other piece of equipment that I ever had. Those test separators are a nice novel hook to get into that particular customer base. But 90% in volume terms is light towers, generators, telehandlers, all stuff we deal with on a day to day basis. So that's a big difference. And it makes a lot more money. James Barry from Barclays being slightly radical in just asking one question rather than 3. Can you just follow your slide 12 with your utilization chart? The sort of gap up, the black line versus the orange line was, I assume due to the fact that you had a very sort of mild winter last year. Would the orange line represent what you would normally expect to see if we went back to previous year, so utilization at the time of year? Remember, we came into this year saying it's last year was the best year in terms of physical utilization we'd ever, ever had. Therefore, if you remember a quarter ago or 2 quarters ago, we were really relaxed but the green line was below the black line because we said it looks more like normal. So yes, you're absolutely right. Your physical utilization in the tough winter could very easily drop to the orange line. Winter doesn't care whether you've got a lot of work that you're not doing or a little bit of work you're not doing. You're just not doing any work because of 6 foot of snow. So the amount of work out there gets just is irrelevant when you can't get out because of snow. So yes, you have to be careful within the quarter. Yes, Sandy is likely to be a positive. We do not know yet whether relative to last year, winter is going to be a negative. And that's why we just advocate a little bit of caution in terms of the quarter that people don't get ahead of themselves based on the strength of the year November results. Well, if there's no more questions, first of all, I'd like to apologize for the slightly quirky delivery key of the business since it is in significantly better health than I am at the moment. But once again, much thanks for your interest, and we look forward to seeing you with our Q3 updates. Thank you.