Earnings Call: Q2 2013

Dec 11, 2012

Good morning, welcome to the Ashtead Group PLC Q2 results presentation. It will follow the usual format. Following an overview from me, Suzanne 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, we'd also like to spend a little bit more time looking at our medium-term outlook. Then as usual, we will follow with a Q&A. By way of a swift overview, obviously, we are delighted with record first-half profits of GBP 141 million. 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%, an 80% drop-through to EBITDA and our resulting margins highlights the improved operational efficiency in the business. Whilst 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 about to detail, it has been a good first half, as a result of the momentum clearly established in the business, we now anticipate a full year profit ahead of our earlier expectations. Having stolen all of the highlights, let me now hand over to Suzanne to cover the financials. Thank you. Thanks, Geoff, and good morning to everyone here today and also to those listening on the webcast. 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 four the second quarter numbers for the group. We reported an underlying pre-tax profit of GBP 79 million compared to GBP 51 million 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, 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 GBP 141 million. This represents a record level of profitability for group, as Geoff 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%. 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 six. 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 one 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%. 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%. 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 eight 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 GBP 182 million 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 morning's statement. Given the strength of the market, we are increasing our full year guidance for gross CapEx from GBP 450 million to GBP 500 million. 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 GBP 400 million 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 30th, we expect this ratio to approximate two times, thereby increasing our financial flexibility. As you will have seen, the quarter has continued recent trends of improving both profitability and the strength of the balance sheet. Geoff 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 two 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&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. With that, I'll hand over to Jeff. Thanks, Suzanne. 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 and October. A good first half, we enter our seasonally less predictable period with a strong momentum. This momentum, of course, has been supplemented by the impact of Hurricane Sandy. 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 three comparators as we have mobilized significant quantities of fleet, particularly from our Pump & Power division, as you can see from some of these photographs. The scale of the impact, 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 response to Sandy and 21% being underlying improvement. The initial emergency Pump & Power element will of course tail off dramatically, 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 & Power business, which has grown consistently, excluding these one-off events in recent years. We feel the short term is in good shape. 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 cliffs still looming. 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. It is fair to say that commentators have been consistently wrong in forecasting a recovery. It does feel like there's a little more momentum out there at the moment, we continue to plan on the basis that it is unlikely to get significantly worse from this point, a slow and gentle recovery over the longer term is the most likely outcome. 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, let us dust off our performance through the cycle chart, which we first unveiled in 2007. 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 three years and are already at record performance across a broad range of metrics. 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. 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? In terms of cyclical recovery, well, when does it begin? In the medium term, there are two probable outcomes. Firstly, a continued period of stagnant markets resulting in an uncertain outlook and a reluctance to commit capital. Well, 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 are and grow revenue and profits as activity increases. 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. 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 de-lever. As a result, as Suzanne said earlier, we expect leverage to fall to around two times EBITDA by the year-end. 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. 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 bear argument that the issue with our outlook is that rental penetration in a recovery goes backwards, so we will not see the full benefits of cyclical recovery. Firstly, let me be clear. There is no evidence in any market, in any cycle that this has happened to any significant degree. 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 zero, as you can see was the case between 2005 and 2007, 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. 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. In the early years of recovery, our customer base of 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. 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. This, again, will limit the flex capacity that is added. Similarly, whilst you can see from the chart on the right that we continued 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. 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. Our revenue and profits will still benefit significantly from an improvement in end markets and increased activity levels. Moving now to A-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 second quarter 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, we are making profits and generating cash, 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 two 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, we had continued success in that regard when you exclude the impact of these two specific accounts. Looking forward, we do not expect too much help from the market. However, capacity will continue to come out, 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. 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 two times through the cycle. The interim dividend has been increased by 50% to one and a half p. 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. With that, we'll move to Q&A, if 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 Jordan at Jefferies. Good morning. I've got sort of three 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 is the honest answer. The reason for that is it's incredibly complicated given the impact of Sandy. There's an awful lot of ancillaries in there, like extra labor, extra transportation, extra fuel charges. 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. Proportionately, it'll be, I'm guessing, and this is a pure guess now, 6%, 6%, 7% on in price and about 14 or 15 in volume. The yield will 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%. It needs a fair bit of analysis to give you a sensible number on that. Thank you. The follow-on 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%-3% price increases over the medium term. No, price increases, not yield. You know my views on their yield and rate statistics. Okay. I'm not going to benchmark against nonsense. In terms of what do we expect in terms of yields, which is the number we give. 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 four. The additional two 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 up yield. It becomes a little bit easier. We've talked about this before on the way down in terms of recovering fuel, transportation, et cetera. Therefore, as activity levels increase, we would expect yields to continue to improve. Our measure of yields in terms of it going down to 2%-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 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. That's the first quarter that we've seen this positive impact from higher yield. From a yields perspective, I think there's lots of growth opportunity because of that increased activity level. The whole rate thing, well, you need to ask her this. Just one final follow-up, I guess for Suzanne, really. JMR Industries, you've quoted the revenues and operating profits for the six months to the end of October. Should I simplistically just double that for a year? Is there any seasonality? We play it around about one times revenue. Okay. It will be earnings enhancing in the first year, and we will get north of a 10% ROI on our initial investment in year one with no growth and with no synergies. Thank you. To answer your question specifically, Justin, a doubling of that would be reasonably close. It'd be reasonably close. It's Texas. There's a lot of seasonality as in the rest of the business. Sorry. Hi, it's Alexander Hugh at UBS. Can I ask on the medium-term story what the extra capacity that you can put into the existing network is? Maybe if you just map out, you maybe not want to say exactly when the recovery is, but roughly how much will be new against existing depots? Yeah, sure. The vast majority will remain in existing locations. We still have an awful lot of capacity left in existing locations. 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 two-acre site to a three-acre site. It doesn't mean massive incremental capital investment. It means buying the plot of land adjacent to our location because typically what we run out of is physical space. There will be incremental overheads in it, more mechanics, more drivers, more trucks. Flexing the capacity. 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. 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 six already this year, and we've got seven with firm agreements, leases agreed where I know where we're going between now and April. Suzanne and I were reviewing the plan for the next two years only on Friday. We're in good shape in terms of adding those extra locations. They will have a small drag on drop-through, obviously, as we start putting in that incremental capacity. 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. Typically, the second half drop-through is smaller. We're also going to get some impact of putting in that incremental step capacity. You're still looking around 60%, perhaps a little bit more. Putting in this incremental capacity is not going to be a massive drag on the drop-through of the revenue growth going forward. Okay. It is fair to say that if you've got 400 depots now, that we should, whatever that is, 20%-25% new and 75%-80% existing. Let's put it in the context. Yeah. We will be adding half the number of locations United have just closed. United have 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. 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. Two very quick ones. In terms of supply lead times, just any color on where they are? Have they moved out? Yeah, no, there has been no significant change. You'd struggle to get a generator or a 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 three months. If you wanted to land on May the 1st because everybody wants every single piece of equipment to land on May the 1st, you should order it probably six months in advance. 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. A specific one on monthly rates. Just wondering how much are they up year-over-year? Can you? Monthly rates? Yeah. Sorry, I'm being a little bit. Oh, daily, weekly, monthly. Yeah. Sorry. Yeah. I don't know what they're up year-over-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. What is true is this year both daily, weekly, and monthly are up on last year. I just can't remember the percentage rate. It's not a stat I track that carefully. We can get back to you on that, Alex. Every single category is up, and previously monthly was not up. 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 better way to explain this. We're about 5%-7% down from our previous peak. Day and weekly rates are about 5%-6% better than our previous peak, and monthly rates are about 10% below previous peak. We've got 10% still to go on long-term contracts, and we're ahead of where we were. Forget previous highs. Given where transactional is already in this cycle, we will surpass previous highs in terms of rates. Okay. Thanks very much. Morning. Alex Magnus 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. Yes. Could you give us a sense of where that is now? 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. No. Our fleet mix has not changed materially during this cycle. Interestingly, what is an important trend, Alex, at the moment in residential is the growth in what is termed multifamily homes, which is flats to you and me. Okay? 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. It's a few more telehandlers, and the utility aspect is a little bit different, too. Our mix will handle it well. It will require some capacity. Yes, you're right. 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. That's why the most recent statistics are encouraging. Now, let's be clear. It's at a historically incredibly low level. There's some sexy percentage increases being bandied around, they're big percentage increases off a low number. The actual volume of those. The latest from 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 number, but 27% is still not a lot. 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. We are very encouraged by the improving trends. Now, again, as you know, for two 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's been foreclosures. Good early signs, don't be seduced because we're not by some big percentage increases off low numbers. Good early signs. 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? Yeah. What we do is we set up a code. What we say is, look, anything which is either a restoration and remediation, so pumping, heating, drying, coded to it. Equally, if it was just a telehandler to move a fallen tree, that we code it, too. Is it 100% precise? No, it's not. Pretty much anything which was outside a normal job that we had scheduled, that we were already renting on or were scheduled to rent on, that was summons because of Sandy, it's given a code and we get The reason why we can't 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 18-inch pumps ready to go to pump water out of the subway system. On top of just renting the pumps, we had all the fusion equipment. We had men ready to run the pumps. There's a lot of ancillary billings associated with that remediation work, which Suzanne, the guys are going to have to scrub through a few contracts to understand we get the breakdown of those numbers just right. Okay. Last one from me. On the spare capacity point, I remember about 18 months ago, you suggested there was something like GBP 500 million of extra fleet that your existing depot could absorb. Is that still about the right number? It's probably not far, again, let's remember, what if we hit a capacity? It's literally buy the plot of land out the back. It's not like I've got to build another factory or buy in long lead time equipment and get process capacity up to. Our constraint is typically space. 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. Yes, you're right. We look at it from two 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. 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. Morning. Andy Murphy at Merrill Lynch. Two questions. Just on the U.K., you mentioned a couple of contracts, one previously that. Yeah 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 other than. Yeah. It was up about 2%. Okay. Just secondly, on the. The reason for that is we're trying to broaden our customer base. Again, does that mean our rates have increased by 2%? Well, no. What we have is a greater proportion of our business. Our yields will have increased 2%, because what we're trying to do is We're doing the opposite of what everybody else says they're doing. Everybody else says we're going after big national accounts because they're more profitable and they're more stable. Well, you need some big national accounts, particularly in the U.K., where we've probably got a bigger proportion of them than anybody else. We've probably got too much. What we're trying to do is spread our emphasis away from pure construction, away from big construction companies. It's more about a shift in mix rather than it's an improvement in rate necessarily. Got it. Okay, the other question was on the U.S. expansion and the relationship between your 100 depot expansion and what URI are up to in terms of reducing their footprint. Yeah. Could you give us a flavor for how that sort of splits down in terms of their closures and your moving into new areas? Yeah. It may affect the timing a bit. We have not sat down. Well, that's not true. We have sat down. We have sat down and said, "Look, this is where they've closed 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 of put in place construction. There are good demographic analyses in terms of population growth, and we say, "Okay, we really need to be some places where we're not." For example, we've got nothing in Minneapolis and St. Paul. We've got nothing in Kansas City. We think they're two markets we should go. I have more fleet on rent in Charlotte, South Carolina. 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. 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 closures? 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. Let's be clear, United ARC are a very high-class rental business. 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 and the timing. Where we wanted to go, we've had this plan for quite some time. We've had this plan since before we bought NationsRent. We never really had the economic environment in which to do it. A catalyst to get on with it is undoubtedly the United Rentals. As I said, remember, we are talking about opening over the three-year period. We're not trying to monopolize on what's happened right now. Half the number of locations they've closed in the last three months. That's all we're trying to do. Thank you. Hi. Good morning. Andrew Nussey from Peel Hunt. Just following up a couple of points there. I think firstly on Sandy, you also give a feel for what the sort of the top line impact. Will there be anything sort of untoward in terms of the margin performance on that activity? Yeah, that's a good question. It may reduce drop-through a little bit because there'll be a lot of ancillary charges where the margins aren't as high. There'll be some pass-through elements in fuel, in labor. Will it be huge? It might change, say, a percent or two for a short period of time. Yes, no, that's a good point. Yes, there will be some impact there. 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 majors being the major rental companies? Yes. Sorry. Yes. I think that probably is true. I think you can see in a number of their actions that that's what they're trying to do. 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. It's a feeding frenzy. I can name three sizable contracts now where we've just said we're not even going to bid because at those prices you cannot make money. Yes, they are, but it's very, very difficult in the current climate. Now, what they are doing is they are all continuing to A number of them are continuing to de-fleet. A number of them are continuing to reduce overheads. There's various ways that you will improve return on capital. Wherever possible, I absolutely accept that the major rental companies are making an effort. None of them can look you in the eye and say when the big contract comes up, that it's not a feeding frenzy, and rates are probably worse, not better than what they have been. Thank you. Hi, David Phillips from Citigroup. Can I just ask about the utilization chart on page 12? Yeah. The drop-down that you've seen in November, I'm just trying to reconcile that to the 21% growth in sales ex Hurricane Sandy. Well, the key to that is, yes, it drops, but look, it drops every year. The key is not its direction. The key in terms of growth is its gap over the previous year. What we've got clearly is more fleet available and more of it utilized, and hence the growth. The terms in terms of year-over-year improvement is the gap between the green line and the black line. Yeah. I was looking at that going through the differences. It's a mix of all three. It's the utilization, it's the price, it's the size of the fleet is all adding to get up to the +20% ex Hurricane Sandy. Well, the +21% is total revenue. Revenue improvement will be broken down into volume of fleet on rent. Quantity of fleet on rent that we own, the physical utilization of that, and the pricing. Within that 21%, there is a number, let's say it was the same as the last quarter. I don't know what it was. Let's say it's 6%. That means 15% is from volume. That 15% will come from a combination of the fact that we own a bigger fleet and a bigger proportion of it is physically utilized than a year ago. That's the 21%. Perfect. Thank you. I've got a bigger fleet, it's better utilized, and I've got better prices. Okay, thanks. Sorry. Mike Murphy at Numis Securities. If you look over the last two years, Jeff, the return on capital, ROE, that's pretty good will, has risen from low double digits, 12% to 23%. Does that mean that, going forwards, 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. Yeah. What were the reasons for making acquisitions? Would it just be they're specialized or just because of good location? Yeah, that's a good question. 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? You're at this stage in the cycle, why wouldn't you focus on organic growth? Therefore, relative to our investment in capital, what we have been spending on M&A is minuscule, and that's likely to be the case going forward. Now, why would we do investments that let's M&A, which say, perhaps bring 10% or 12% or 15%, when you can get that percentage? 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've 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. 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&A. Therefore, the real benefit of some of these, I hope you will see in one recession's time or two 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 with the NationsRent deal, and I think it's proved to be 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. I think what you see from United Rentals is, yes, there are huge cost synergies. We took huge cost synergies out of the NationsRent. If there's big overlap, there's also a big integration risk in terms of lost revenue. Therefore, why would you take that bet when you can get these sort of returns on organic growth? Yes, we'll continue to do some bolt-ons in, especially. In terms of getting the 100 locations, look, if we decide we want to I'm picking a city. If we want to open five locations in city X, we may decide to buy a guy with three and open two green fields because he's just got great geographies and we want where he is. We may do some very, very small bolt-ons to fill out what I would class same business growth. Predominantly our M&A, certainly of any scale, is going to be focused around specialty businesses. The pool of acquisitions must have gone down just on the basis that some of those would have aged their fleets anyway. What might have been attractive two years ago, they're maybe end of life now. Well, the pool hasn't gone down because they've got great locations and great customers. We have to reflect in the price the age of their fleet. I'm not sure the pool has gone down a lot. 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. You're absolutely right, that has to come into our calculations because we can't have Our fleet is as young and as good as it's ever been. Mathematically it is. Let me tell you, when you walk around a location, it's hard to give a depot manager a hard time now in terms of why is that piece of rubbish broke in the corner. It's heartbreaking. You've got nothing to shout at them about. Our fleet is in good a shape as is. We can't then buy a business where the fleet is on average four 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." Immediately we do an acquisition like that, we are going to have to recapitalize it to a quality of fleet. We're happy to have the brand name Sunbelt attached to it. You're right. There are still very good rental businesses with some niche customers in great plots of land. 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. Nobody wants a rental company as their neighbor. Some people have got some great zoning, and we buy them because of their geography. Yeah. I just have one follow-on point to make to what Geoff said about the specialty bolt-on acquisitions. You know, I think it's important to consider when you think about the Tops 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. If there were to be, in the case of oil and gas, some differential or change in the cycle, the vast majority of that equipment could be deployed elsewhere. That's true. Let's be clear. Their customer base is oil and gas. They have a specialty product, which is a great tool for anyone who's invested. It's called a test separator, which calibrates the amount of oil, gas, and water coming out of a head end. People have to calibrate for taxation and mineral rights on a regular basis what it is. 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. You can work out from this press release just how profitable JMR is. You saw how profitable Tops were. 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, what we look for is a regional business that we can make national. 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. In terms of specialty, they are the key. If you go back and look at what the inherent ROI is in all of the 3 acquisitions we've just done, they were great profitable businesses. What we want to do is just replicate that model, not change that model. Can I just, a quick follow-up from two parts. Over the past, say, four quarters, if I look at the mix of where your revenue's coming from, spot, daily, monthly, how has that changed, if at all? Yeah. It hasn't changed a lot. You always have to be careful because the reason why it hasn't changed a lot is because you can't do it over four quarters because it's seasonally very different. What we've seen this quarter versus a year ago is 4% more contracts. Now, that's not huge, but as 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. 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. What we would like to see going forward is as activity levels rise, we should see daily and weekly rise, too. With our activity level tends to be more of those shorter contracts. We, unlike some of our peers, love that work. Just thinking of the gap now between your growth, your Q2 with United Rentals, which 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, there's some- Do you have any way of quantifying whether. Look, it's hard. You're right. We've grown 17%, they grew 9% 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've had. They've done a good job in all of their back office things like IT, fleet management. Huge job. It's an enormous task they've undertaken. Some degree of disruption is inevitable. Now, what proportion of the gap is due to that? I would guess very small, to be perfectly honest. It's impossible to calculate because the people I'll be getting is the guys who can't be bothered to drive another two miles to the next nearest location. I'll be getting the kind of customers that I like in any case. It'll 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 think they'll lose any, but I think some of those guys will choose to have an alternative when previously their alternative was United and RSC. That trend will take 18 months to two years because those are big guys who take a long time over their purchasing decisions. Alex, there has to have been a benefit. I know when I walk around our locations, our guys say there is a benefit. My guess is it's small. 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 two 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. I suspect it's permanent. Yes, there is some impact in there, certainly. Thank you. Mark Nelson from Oriel Securities. Just a few questions, if I may. On sort of staff cost look like sort of like for likes or 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. Remind me, is there any sort of accruing in these numbers for sort of staff bonuses that people- Yes are yet to get paid? Got to be- Yeah. Absolutely. You don't do it on a cash basis, i.e., it's Q3. No, 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. I think when you're looking at those numbers, if you just think about the six-month period year-over-year, the staff costs are up about 6.5%, Mark. If you strip out the fact that we have the Tops acquisition in there, we've got a number of green fields between the two of those. That's maybe 150 people or so. We also had commissions in that number, they would have risen automatically since rental revenue has grown so much. If you strip out those two elements that I think are easily explained as being incremental, you're really left with about a 2.5% 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. All of that relates to the U.S. There's no shocks to come where we say, "Oh, gosh, we forgot to accrue our bonuses. I was just double-checking that. That seems to be the run in our business anyway. Yeah. In the U.S., can you just talk about sort of manufacturer's prices and lead times and so on. Is it still cheaper? I'm thinking about this overall question. Clearly, you're not going to commit CapEx now till after the outcome of the fiscal cliff. Are we going to. sort of the high level. Is it cheaper for you still to buy two-and-a-half-year kit if you can get it in the market or what's happening with That's a really interesting point because one or two people have pointed to like slowing Rouse valuations. 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." You do get hoist on your own petard if you hang around long enough, I guess. Rouse values have slowed. That's true. If you go on the appendices slide, Mark, I even did a slide, right, especially for you and stuck it in the appendices. It's sticking it in the appendices. 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. They are our rates, not our yields for this particular amount. Over the period, we're about bang on. However, as you can see at various points, the two get out of sync. What happened was last year, which you can see on the chart top right. Because of the whole Tier 3 thing, Rouse got ahead of rates. All you've seen in the last few months is a bit of a catch-up. Ultimately, 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. They'll reach a point in time where people will say, "Why am I paying that much for a two-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?" As you get towards the top of rates, there is a natural ceiling on secondhand equipment values. Over the six months, Rouse values have been flat. It's been a bit of a catch-up. I would expect Rouse values to be broadly flat for the next six months, too. Yes, you're right. We are getting ridiculous returns on some of our secondhand equipment at the moment. That's why I stuck this chart down here, too. How I measure our effectively Rouse values is when we sell assets, what are we getting on average as a percentage of our original cost? You can see how Rouse values were just about back to the peak. There are a number of product categories where we're getting the best returns against original cost now than we've ever had. We are starting to reach a limit in terms of second. Until there's inflation in new equipment, there will be a limit to where Rouse values can go. You seeing any inflation in new equipment or is it still? We saw a lot last year. Last year. I think we're seeing a lot less this year. Where we got hit was last year because a lot of it got dressed up as, "Well, it's all about Tier 4 engines." We owed them some, in truth. The statistic still holds true. Maybe it's a bit high now. The key really is what do we pay now for a seven-year-old asset or a six-year-old asset that we're selling? What's the on cost over that period of time? Alex, what's it around 13, 14% now? Something along those. Yeah something along those lines. Over a six or seven-year period, it sort of works. If you were to look at it on an annual basis, we have nothing, nothing, and then a big jump last year. Just finally for me, just on I'm expecting almost nothing in terms of inflation this year. Okay, great. Just on JMR, a cheeky question, what's the difference in the equipment that they deploy versus that of the old Ashtead Technology? Oh, massive. Well, two things are massive. Firstly, it is all onshore rather than offshore. Actually, I think with the whole new technology in horizontal drilling and shale gas, I think what everybody's seeing is a big downturn in offshore exploration and a big uptick in onshore. It is a service business, so it is more downstream. Ashtead Technology was all about exploration, which tended to be far more cyclical. However much you're pumping out, you need to calibrate what percentages are oil, water, and gas. Whether you're pumping it out at full capacity or 50% capacity, you need to regularly calibrate that. The other difference is 90% in volume of its equipment is exactly the same as every other piece of equipment that I ever owned. Those test separators are a nice novel hook to get into that particular customer base. 90% in volume terms is light towers, generators, telehandlers, all stuff we deal with on a day-to-day basis. That's the big difference, and it makes a lot more money. Jane Barry from Barclays. Being slightly radical and just asking one question rather than three. Just on your slide 12 with your utilization chart. Yeah. 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. Yeah. Would the orange line represent what you would normally expect to see if we went back to previous years for utilization at this time of year? Yes. Remember we came into this year saying last year was the best year in terms of physical utilization we'd ever had. If you remember, a quarter ago or two quarters ago, we were really relaxed that the green line was below the black line because we said it looks more like normal. Yes, you're absolutely right. Your physical utilization in a 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 six foot of snow. The amount of work out there is irrelevant when you can't get out because of snow. Yes, you have to be careful within the quarter. Yes, Sandy's likely to be a positive. We do not know yet whether relative to last year, winter's going to be a negative. 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. If there's no more questions, first of all, I'd like to apologize for the slightly croaky delivery. Clearly, the business is in significantly better health than I am at the moment. Once again, much thanks for your interest, and we look forward to seeing you with our Q3 updates. Thank you.