Good morning and welcome to Ashtead Q1 results presentation. Typically, we don't do a full presentation for the Q1 and Q3 results. However, given the mild uncertainty that's returned to financial markets recently, particularly relating to the U.S. economy, we felt it was both timely and appropriate to give a full update, not only on our current performance but probably more importantly on why we are confident in terms of our future outlook. As an overview, clearly in the U.S., we are benefiting from structural changes in the rental market, not end-market recovery. The evidence for this is the strong performance in Sunbelt , where we have seen 21% year-on-year revenue growth. This growth has been driven by both improved fleet-on-rent and yields, continuing well-established trends.
This revenue growth, together with operational efficiency, has resulted in strong profit and ROI progression, which Ian will expand upon in a moment. As a headline, we have made more profit in the quarter than we did in the whole of last year, and in fact, Q1 2011 group profits are our second strongest ever. Within these group numbers, it is also pleasing to report that A-Plant delivered 12% year-on-year revenue growth. Therefore, an excellent Q1, and importantly, the momentum has carried into quarter two. The U.S. recorded 25% year-on-year rental revenue growth in August, which is obviously a strong performance. Let me add a little more color to this by also reporting that August's fleet-on-rent was the highest in Sunbelt Rentals' history.
As a result of this performance and our confidence in our ability to continue to benefit from current market trends, you will not be surprised that we now anticipate a full-year result substantially ahead of our earlier expectations. It probably makes sense now to get into some of the detail of this performance, so let me hand over to Ian to deal with the financials.
Thank you, Geoff, and good morning to all in the room and to those listening on the webcast. My first slide summarizes the quarter's performance. We're particularly pleased with the 19% constant rate in rental revenues that we achieved this quarter. That 19% compares with 11% growth in Q3 last year and 16% growth in Q4, so our rental revenues, the key driver of our profitability, continue to be on an accelerating trend. The other main feature to these results to which I'd like to draw your attention is the strong drop-through as a result of the operational leverage inherent in our business model. This can be seen in the group EBITDA margins, which increased 2% to 35%, and in operating margins, which rose 4% to 17%.
The strong trading performance, coupled with a significantly lower interest charge, principally due to the benefits of the debt refinancing we undertook this spring, meant the profits before tax and amortization, as I'm sure you've seen, rose 211% to GBP 34 million for the quarter. Moving on to the divisional performance, and firstly Sunbelt . Here, as you can see, rental revenues rose 21% with a 10% increase in the volume of fleet-on-rent, a 7% improvement achieved in yield, and the first-time impact from January's Empire acquisition. From the chart on the lower right, you'll see that the $45 million rental revenue increase produced a $34 million increase in EBITDA, which drove Sunbelt 's EBITDA margin to rise 3% to 37% for the quarter.
A-Plant also delivered good growth of 12% in its rental revenue this quarter, with 3% more fleet-on-rent and a 5% better yield, whilst its EBITDA increased, as you can see from the bottom chart, to GBP 13 million. Moving from the results onto the balance sheet, this continues to be in great shape under all reasonable economic scenarios. Despite the GBP 59 million cash outflow in the quarter, which reflected the significant fleet investment and the usual seasonal increase in working capital that we experienced in the first quarter of our fiscal year, increased earnings ensured that net debt-to-EBITDA leverage improved from 3.1x a year ago to 2.8x today. We anticipate continuing to gently de-lever towards the lower end of our long-held 2 to 3 times target range over the coming phase of the cycle.
Just a reminder before I close on my final chart on page eight of why I believe our balance sheet is so strong. Really, graphically, you can see here, as you may also have noted from this morning's statement, that we have no debt maturities until 2016. That's almost five years ahead following our refinancing earlier this year. Our two debt facilities are also effectively covenant-free, given our strong availability, which rose to GBP 511 million from GBP 479 million at year-end. Yet, with a blended pre-tax interest cost of just 5.4% currently, the cost of these facilities is also relatively low. That concludes my presentation on the quarter's key financial performance, now back to Geoff for more about operations and outlook.
Thank you, Ian. Let's start our operational review with a look at Sunbelt 's revenue and the chart that we shared with you many times. I think the performance speaks for itself. As you can see, Sunbelt delivered 10% more fleet-on-rent and a 7% better yield than a year ago. For me, the most pleasing aspect of these charts is the consistency of the performance. We've now had 15 consecutive months of improvement in both volume and yield. The growth is across all of our geographies and product types and is clearly not dependent on short-term injections of demand. The nature of this improvement gives me confidence that it's a trend from which we can continue to benefit. I think this belief is supported by the physical utilization chart on the right-hand side of this page.
You can see that despite a 7% increase in the size of our fleet, we still remain at record levels of physical utilization, reflecting the strength of our current activity. Whilst I would like to spend the whole of the morning discussing a strong set of quarter one results, I suspect everyone is far more interested in what we see looking forward. Our view is that the macro lead- indicators, together with our experiences on the ground, suggest that end construction markets are stabilizing, albeit at a low base. Construction volumes are down some 30+% from peak, and some elements of the market have been in decline for five years. Therefore, there has been the major correction that was required. Whilst residential foreclosures remain an issue, we do not see any further material reductions from this point.
At the same time, we do not see any significant rebound, and we believe that, as they tend to do over time, construction markets will broadly track GDP with anemic growth. This environment would result in a continued sense of uncertainty, and it's unlikely that low-cost finance would become significantly more accessible. In short, the perfect ingredients for the continuation of current market trends. It is true that Ashtead has been banging on about increased rental penetration for even longer than the five years that I've been doing it. Indeed, I am on record as saying that it either happened this recession or we had to shut up about it. Why is the structural change so much more evident this time? In my opinion, you need to look at the difference in this recession to others.
The key here is both the severity and, as importantly, the length of the downturn. In past recessions, the strategy for both rental companies and construction companies was to age fleets for a couple of years and then reinvest during the recovery. This time, the length of the downturn has resulted in fleets being aged beyond their useful economic lives. Therefore, fleets have been shrunk or become less relevant from a competitive perspective. This has resulted in a shortage of good quality equipment, providing a significant opportunity for those with well-aged fleets and the capability to invest. This, therefore, is a recovery based on a shortage of quality equipment, not improved markets. This point is supported by the strength in used equipment pricing, as you can see from the chart on the right of this page.
Values have continued to rise for a number of months despite the continued weakness in construction demand. Also, these are average values for a wide range of equipment types. I can tell you there are certain asset categories where we are seeing values at or near previous peaks. Therefore, we are confident that the likely continuation of the current uncertain economic environment only maintains these trends, and we are clearly well-positioned to continue to benefit. Of course, it would be nice to be able to point to some independent statistics to support this shift and quantify it, but unfortunately, that's not possible. The best evidence we have is our own performance. Therefore, let's compare Q1 2011 with our strongest ever, which was Q1 2008. Despite the fact that construction markets are down 29%, we have only 1% less fleet-on-rent.
In fact, July 2011 was flat on July 2008, and as I said earlier, August 2011 was our best month ever, so you can see the trends. What I think is also worthy of note is the self-help from operational efficiency. Although the volume of work is down only 1%, the headcount is down 23%, and the number of stores is down 17%. Also, we have a fleet 4% smaller, so we are better utilizing the assets. These efficiencies have allowed us to continue to deliver strong margins and ROI despite our 12% yield reduction. Our strong performance is also as a result of our focused effort to diversify our business into high- ROI non-construction-related markets. We shared more information about our specialty businesses during our visit to Charlotte recently, and we will continue to do so.
However, by using the same comparison of Q1 2011 versus Q1 2008, you can see both the growth and the robustness of the yields in our specialty business. Specialty now represents some 20% of Sunbelt 's revenue and indeed now is also bigger than A-Plant. We have continued our strategy of aggressive organic growth, with three more pump and power stores opened in Q1 2011, following on from the four we opened last year, and we see significant opportunity in this division of the business. Hopefully, we've demonstrated why we are confident in our outlook, but you would expect us to reasonably consider what if. We operate a very flexible model, and indeed, our refinancing and fleet investment have put us in a strong position, whatever the outlook. We've grown the fleet by 7% in the quarter and de-aged it to 39 months.
Our current plan for the rest of the year is for disposals at original cost to broadly equal additions, and therefore, the fleet size will remain the same. In the event that the markets become materially tougher than expected, the only difference in the plan would be the volume of disposals. Larger fleet disposals would result in us having a fleet size that was the same as at April 2011, but importantly, some seven months younger. In this scenario, we could then button down the hatches and have two years of capital spend of circa 60% of depreciation. We then become highly cash generative, but in gently aging the fleet, we only take it to previous peaks, and therefore, we remain very competitive.
Given that many of our customers and smaller competitors have not started their fleet reinvestment, they would find it difficult to de-age their fleets for a further two years and still remain competitive and would likely generate cash by disposals. Therefore, you can see that we are confident that we would gain share in any environment. Moving very briefly to A-Plant, it is encouraging that recent improving trends have continued with 3% volume growth and 5% yield improvement. Returns are still below where we'd like them to be, but we have a plan which we are executing well to focus on rate improvement. A-Plant remains profitable, cash generative, and not a major distraction to management. I am confident that in time, it will benefit from its strong market positions and the group balance sheet strength.
Finally, to summarize, whilst it is likely that any cyclical recovery has been pushed back, we will continue to benefit from the structural shifts in the market. The scale of this self-help has been clearly demonstrated by an excellent performance in Q1, building on the momentum we have established over past months. Based on these trends, we believe that we can achieve previous peak profits without cyclical recovery and will exceed them once there is any recovery in end markets. Our recent refinancing, which has given us lower cost debt and long maturities, together with our timely fleet investment, have positioned us well, whatever the outlook. Therefore, I will reiterate that we now anticipate a full-year result substantially ahead of our earlier expectations. Thank you. That ends the brief presentation, so I will now hand over to Q&A, and I think you all know the drill. Gosh, that was quick.
Justin, I think you got your hand up just first there.
Sorry, Mark. I just wanted to compare.
Sorry, Justin Jordan RBS .
I just want to obviously highlight, I'll just dwell on current trading. Can you just give us a breakdown of that 25% in August in Sunbelt between fleet-on-rent, price, and obviously the Empire?
Yeah.
What are the sales guys saying to you in terms of current trading, current expectations over the next month or two? Obviously, every analyst and every strategist is materially concerned that what we're seeing in terms of macroeconomic indicators in the U.S. is falling off a cliff. What's it like in the real world for you?
No, no, that's a good question. Of the 25%, it's broadly 13% volume, 7% yield, and then you've got the Empire impact too, which sort of gets you up to your 25%. You can see that, you recall the mind- the- gap scenario, the 7% yield improvement has held firm and volume has grown. You won't be surprised when you see our physical utilization to hear that demand for equipment is very, very high. It's just been a continuation of the trends we've seen. There hasn't been any big peak. [IREE] hasn't had a significant impact into August. It happened with three or four days to go to the month end. We'll get a bit of benefit from drying there too. That's a good solid set of numbers. You've asked the question that we spend all of our time asking because we've got the AGM this afternoon.
We've got Brendan and Suzanne here in the back of the room. I would suggest you ask them the question once we finish the presentation. Brendan and I spend an enormous amount of time discussing why, where's the volume coming from? I can tell you that our team on the ground has never been more optimistic in terms of volume of opportunities that they're seeing right now. I had Brendan calling me from Mid-Atlantic a couple of weeks ago just saying, "Where's this recession?" I think drink was involved in some stage or another. That's what we can continue to see. Clearly, what we've said to the field in very uncertain terms is, "Give me a red flag." The moment you hear of a...
Because what I'm also saying is like, "I've got this starting in 30 days, this starting in 60 days, this starting in 90 days." We are constantly being beaten up for more fleet at the moment. What we're trying to do is strike that balance where we get the volume, but we also continue to drive the yield. If you remember this, sorry, do you remember this chart here? Sorry, where is it? This one here. Clearly, we've got fleet-on-rent. Fleet-on-rent is not our issue. If we could get that back towards previous peaks with that sort of drop-through, that would be a really impressive performance. We came into this year absolutely focused on yield. What absolutely surprised us is the volume. We thought we would have to give up some volume to get the yield, but there's just a shortage of good quality equipment.
As I said, it's hard to quantify that other than we're seeing more and more of our customers who may have sat on their fleets. They may still have the equipment, but do their operators want to use it now that it's six, seven years old? When you're sitting on fleet, you're also not putting maintenance dollars in. We put out red flags and said, "The minute you hear of projects," and the first project that we hear has been suspended because of lack of finance, we want to hear. I want to be the second person to hear that that's happened so we can take a view. Right now, they're looking at us as if we're mad. Clearly, we're trying to strike a balance. We're going into winter.
That's why we're saying we're going to keep the fleet flat from where it is now and not continue to grow, and we'll take stock again in the spring. We have to be optimistic with the current trends that we're seeing. As I said, there just feels like a shortage of equipment. The best way to explain that shortage of equipment is to see what's happening in second-hand pricing. If you look at some of our core assets, some of our assets which are absolutely linked to construction, let's take, I don't know, 3.5 ton-4.5 ton excavator, a standard back home. We're getting... I was in Charlotte with Brendan and Suzanne a couple of weeks ago. We got this young guy who I think is fantastic, who takes care of all of our used equipment. He was showing us some statistics.
We're getting 55% of original cost for six-year-old machines. That, which is absolutely what we got at the peak of the market. If you do the maths, Brendan will tell you what the cap factor is for a standard back home, 0.3%- 0.4%, something like that. We're 3.5 ton-4.5 ton , probably a bit better. If we get six years of that revenue, then you stick on 55% as a second-hand value, it's a hell of a return on our original cost. When you look at those OLV statistics, remember, cranes are in there and one or two other assets that are dragging it down. Every piece of evidence we have says there's just a shortage of equipment. There is nothing changed in terms of outlook in the economy or availability of finance that is going to make our customers invest more.
There is nothing changed which is going to make our small competitors, whilst they may wish to invest, have the ability to invest. That is why it is a shortage-driven recovery, not a demand-led recovery. Remember, we are a cyclical business. These results are good, but they will pale into insignificance when we get a cyclical recovery. The base from which we will be starting is going to be so much higher.
Yeah. Justin, within an overall disappointing Q2 GDP figures from the U.S., I think if you looked in the detail, you would see that one of the areas that was still exhibiting growth was business fixed investment, which obviously is not all construction, but an element of that will be corporate America investing. I think there are the early signs that the private non-residential construction sector, which has been at a very low level in the last few years, is just beginning to exhibit some signs of gentle recovery.
Look, as bad as it is, this is the most stable market we've had for about three years. I mean, look at these charts here on page 11. We've been dealing with - 20%, - 10%. General consensus is around about - 3% this year. We're not operating in great markets in terms of construction markets to be getting this sort of revenue growth. My view is there has been the major correction, which absolutely was required in construction markets. That's typically what happens in a recession. You get this big major correction, and then in a recovery, construction actually accelerates ahead of GDP. Over time, GDP and construction markets broadly track one another. I think we will broadly track GDP, which may be anemic, but it's going to be a hell of a lot better than - 20% and - 10%.
Yeah. Mark Hesse from Oreo, two questions if I may. The first question, obviously, look at the U.S. You know, there's a 75%+ drop-through from rental revenues to EBITDA. Is there any pressures that you might want to flag to us, potentially coming on staff costs or other?
No, no, not really. I don't think we've got any significant changes at all. I mean, if you look at the headcount, if you look at the back of the press release, we break it down from this year to last year between Sunbelt and Empire. From recollection, we've got about 60 more heads than we had a year ago with 10% more fleet-on-rent. I can tell you of that 60 heads, 40- some of them are in three new pump and power stores who have just started, who are actually a drag on the drop-through in the first quarter because they're just startups. Remember what we've always said about drop-through? I think it's misunderstood. We've always said on average, in the early stage of the cycle, we expect it to be 70%. That's broken down. If it's price, it's 90%. If it's volume, it's 50%.
We expect it to be in balance. That gives you 70%. If it's more volume than value, it's going to be lower than 70%. It's zero on greenfields because they just break. We did well to break even in the first 12 months. No, we think we've kept a very, very, very tight lead, as you can see on headcount. Look, we aren't immune to economic conditions. We have adopted a strategy where we've said we're going to focus on organic growth. You will recall at the year-end, we said we fundamentally believe we can put 25% more volume through our existing structure, whether you can see we've done 7% of that 25% in quarter one. What we said to the guys is, look, if overtime gets a bit high, we paid a bit more in sales commission, that's fine.
They're variable costs that can go away very, very quickly if there is a downturn. Don't bring in fixed cost. We've now, the pump and power, we've opened three locations in pump and power. There's another part of our specialty business where I think we're planning on opening three more locations quite soon too. In terms of the core of the business, existing stores, existing headcount, high drop-through.
Secondly, just a sort of tidying up question, really. Can you give us a feel for, of the overall CapEx guidance that you've given, how much of that is due for the U.S., and also the number of potential greenfield locations that you may or may not open in new metropolitan service areas?
In terms of general plans and tools, I think we are unlikely to open any new locations in the next 12 months. Our opportunity on greenfields is in our specialty business. As I said, we've opened three, and I suspect we'll open another three. It is not going to be a huge component. There is a small potential change to that if we get the opportunity for the right distressed assets. During the course of the quarter, we bought distressed assets of an aerial business in Philadelphia where we do not take on the location. I think we took on three of the sales guys, and that's about it. We took the fleet, and we're buying the fleet, good-aged fleet at half original cost.
There are more opportunities than opportunities we want to take because, you know, it has to be good-aged fleet, has to be in the right market, and it has to be makes that are consistent with our own brands of equipment and within our fleet. There are two or three others of those available at the moment that we're taking a look at. Whether we get them or not, it doesn't matter. Let me just give you an anecdote. It doesn't really matter if I get them, United, or RSC get them because the same thing will happen. We took on this business in Philadelphia, and actually, we assumed because rates were so low, when we put rates up, we would lose all of that volume. We actually decided we were going to move that fleet around the district into different locations, and it would just be growth CapEx.
We were upping rates by like 50% to customers, and we just didn't get enough of it back. It just stayed out on rent. We actually ended up having to buy more new equipment to go to the locations that we intended to spread it out to because we didn't get enough of it back from their existing customers. We were not doing 5% or 10% rate increases. Whether I buy these businesses or United or RSC buy them, you're taking out a weak competitor, you're pushing up the rate environment, and you're reducing the capacity in the marketplace. That is why there is, look, United and RSC are good businesses generating good performance, but don't think that's the rental industry per se. We are seeing more things come across our desk now than we've ever done, and the gap between the haves and the have-nots has never been wider.
About between 80% and 85% of the full-year CapEx will be in for the United States for the balance of the net or the growth.
Yeah.
Hi, it's Alex here at [UBS]. Two questions. First of all, wondering if you can just talk a little bit about monthly rates and the splits. Then secondly, just following on in terms of what you're seeing at the smaller peers and outside of the large ones, basically.
Yeah, sure. No, it's a good question. Again, you will recall when we were in Charlotte, we explained the difference between an important differentiation in terms of the mix of our business is less the product type and more the type of rental, i.e., is it daily, weekly, or monthly? When you look at our yield recovery towards previous peaks, again, it's a bit like the OLV. It's an average of lots of products and lots of rental types. In reality, we are heading very close to previous peaks on daily and weekly rates. In fact, Brendan could list districts and products where we are ahead of where we have been historically at previous peaks. I think we will, because of our improved pricing analytics, get daily and weekly pricing above previous peaks.
I just think we're significantly more sophisticated, both in terms of the back office support that we give and the power of Zilliant in the iPhone to drive those rates yet higher. We're significantly lagging that recovery in monthly rates. You would expect that. We often only negotiate those prices annually, often around the year-end. The world was very different last December to what it's going to feel like this December. Also, those big accounts have more purchasing power, and we have to take a long-term relationship view. There's been less recovery there. It's playing out very much as we'd anticipated to do. The power of the pricing analytics that we now have. If I'd sat back here in 2006, I probably couldn't have told you the different rates for daily, weekly, monthly. Now I can slice and dice it by product, by customer, by daily, weekly, month, by district.
We have the power of understanding that a lot, lot better. Yes, I mean, I think what we're seeing in daily and weekly shows the opportunity of where we can go in rates. In terms of smaller and medium-term guys, look, it's a mixed bag. Let's be clear. If you were not stretched in terms of finance and you're in a decent market, let's say Texas, life's probably feeling pretty good for you right now. Okay. In terms of, listen, somebody's phone is on the hook, it's not mine. Do you think it was Ian? Nobody phones me on results today. They only phone Ian. It can't be me. Somebody doesn't believe in numbers, Ian. Those smaller and mid-sized guys are under a lot of pressure. It's just the age of their fleet and their relevance and their ability to satisfy demand in a timely manner.
Our larger customers, you know, against a backdrop of this construction market, are working on ever tighter margins. Life's tough out there if you're a big construction company in North America. They've gone through the cycle of trying the lowest cost provider and being let down. They can't afford the equipment to not turn up. They can't afford for the equipment. We're seeing a lot of instances where people who've tried the lowest cost provider are now coming back to one of the bigger players who provide a better service. I believe that trend will continue because what's going to change? Even if you look at spreads, the difference in cost for finance between ourselves and our smaller competitors is huge now if they can get the finance. I think the other big change is certainly for customers and some competitors, people's risk appetite to debt has materially changed too.
I think we'll benefit from that. We're benefiting from the strength of our balance sheet relative to our customers and our competitors.
Sorry, just one follow-up in terms of what your customers are saying to you, and obviously, this is anecdotal rather than anything else. What are they saying about the fleets that they still own? Are they, I mean, where they're using them, are they likely to sell them and rent more? Just thinking about the structural growth side, I think.
Yeah, look, it's a tough one. Fewer people than you would anticipate are making big strategic decisions of, "Hey, let's dispose of my fleet." This is why this has been, I've said to you before, the increments we see on a weekly and monthly basis are tiny, but they're consistent. It's just a case of fleet coming to the end of its useful economic life. Something breaks down, do they fix it? We're seeing very few instances yet where people are making strategic decisions of, "Hey, let's just outsource." I think those opportunities will come. Actually, one of the areas where I think, which is a huge untapped potential for us, where we will see it first, is local government, municipalities, states, where here in the U.K., you know, when people talk about rental penetration, I think they immediately think of construction.
Let me tell you, most of our construction customers in America have similar levels of rental penetration to rental penetration here in the U.K.. What there isn't, there's big sectors where there's very low rental penetration. One of those sectors is municipalities and local government, where it's very high here in the U.K. People have outsourced a lot of activity to the Ameys, Carillions of this world. They themselves then rent. Given where we are with U.S. finances, it's my belief over coming years that you will see significantly more outsourcing in municipalities, and that will become one of the areas where we see the biggest shifts in rental penetration. It's certainly an area where we're intending on focusing. Actually, our product types are ideally suited to parks departments, utility departments, water departments, sewage departments, not for the big construction work, but for the day-to-day maintenance work.
Thanks.
Thanks. It's Mark Hesse from Oreo again. Just on the interest expense, one for Ian. Obviously, we can all times that by four in the quarter to get a figure for the full year. Are there any sort of IFRS additions that we should think of in addition to that for the full year?
No, not really. In terms of thinking about the full-year interest charge, the only thing to bear in mind was that debt did rise through the first quarter because of the usual seasonal investment in working capital. It will be a little higher than 4x the first quarter number, but take that plus a bit to allow for the higher debt. I think in interest rate terms now, you know, Bernanke and the Fed have been pretty clear that, you know, at least through mid-2012 and likely beyond that, we're unlikely to see market interest rates changing dramatically. That would be the other factor you'd normally have to think about, but that probably doesn't apply to this year.
Richard Bennett from Al's. I just wonder if you could talk briefly about A-Plant. I mean, a decent level of revenue growth, just why we're not seeing more in the way of operating leverage come through there.
Yeah, no, it's a good question. You won't be surprised it's something we've looked at too. I think there's two elements of it. I think first and foremost, you've just got to be careful quarter- on- quarter. You know, there is noise in quarter one last year versus quarter one this year. I'll give you a couple of examples. We had a couple of gains on sale, which are in the numbers last year from selling some properties, which aren't in this year's numbers. We've had a couple of bad debts. If we strip out the one-offs, which we can't really show you unless we give you a full set of management accounts, then you're going to have to take our word for it that the underlying profitability remains the same. There is also a slight mix change too.
We took on a big contract of work, of which a proportion of it was operated equipment. We don't do operated equipment. In the quarter, you're seeing the revenue, but there's no real drop-through. We're just passing on the cost. There's a small mix change which will be ongoing for the next three quarters. There's a bit of noise. We're confident that you will get back to sort of sensible drop-through numbers, certainly by this quarter.
Just on the U.K. again, can you just give us a feel for what you're seeing in terms of the rate environment? Obviously, we've seen the figures that you've talked about there. Can you give us a feel as to whether you're leading it or whether you're following other market leaders?
I don't know. I really don't know. I am sure every single Chief Executive will get up here and say we're taking the lead on it. The truth of the matter is, I don't know. You're as good as the information the salesmen give you when they come back from their visit. All I can tell you is that we have concluded that we're going nowhere, getting bigger at these rates. We've also concluded, hey, we've got a model that's worked great in North America. I can list all these cultural differences, why this wouldn't work in the U.K., but what have I got to lose? Where rates are right.
We have adopted exactly the same pricing metrics, the same data in terms of pricing, the same profit share plan, and the same sales commission plan, which is very, very generous, that we have adopted in North America, which just drives everybody to rate. The U.K. has been obsessed with volume all its business life. You can see for the first time ever, as bad as everything got, physical utilization in the U.K. always stayed great because we just kept it on rent. For the first time ever, we have said, I don't care if that drops. We have to stick with that because the minute you sort of say, actually, no, go and get some more feet out on rent, you've lost your momentum. We have said the most important thing you can do is that yield initiative.
All I can tell you is it is our biggest single focus. For the first time ever, I spent a fair bit of August going around locations in the U.K. I think people have got it. The salesforce have definitely got it. They've never been happier because this is an American-style incentive plan. If they get rates up, they get a big proportion of that. We can afford to be extremely gentle. 90% of it drops to the bottom line. We can afford to be very, very generous on the increments in rate improvement as we are in North America. The salesforce are extremely happy with it. You've got to sell it. You know, you've got to sell it.
I fundamentally believe that we are entering a phase in the cycle which is the same as the phase we've entered in North America, which is we have a younger, better fleet and a better service level than those who sat on their fleet for the last three or four years. Either people will pay me for it or I'll get my business somewhere else. Now, that's a really bold statement sitting here in an office in UBS, and a lot harder to do when you're standing on a job site in the wind and the rain in Newcastle on a Wednesday afternoon. Nonetheless, that's absolutely our focus. I believe we can see good momentum. Brendan will tell you, if you compare the statistics of the yield improvement, we've actually got off to a quicker start than we got off in America.
It will take longer because we've got more national accounts that take longer to change than the high proportion of transactional accounts we've got in the U.S. We started this plan, we'll say May before it really kicked off. The first three months, as you can see, have been really encouraging. Look, no one makes an acceptable return on investment in the U.K. market. This is a capital-intensive business. If you're going to spend money in the U.K., yields have to improve. Otherwise, there's no point any of us being here. They will do because ultimately, supply will become, you know, supply and demand will rebalance itself. We've just decided we've got to get the returns up.
Geoff, Mike Murphy at [UMS Securities]. Just looking at your current fleet plan, 2,309, you are at the moment 2,300 by the end of the year, which essentially means that the kit will stay static in absolute dollar terms. What are your plans as a board in terms of spend? Clearly, most of the spend comes in the first half of the year as opposed to the final quarter. Are you minded to, at some stage, maybe even be brave and invest further? I mean, you've talked about the downside, but is there equally an upside that you're?
Of course, it is. Look, we got Hillaried 18 months ago when we said we were going to start our reinvestment in fleet. I would suggest that has proved to be a very timely reinvestment in fleet. It's easy to be wise with hindsight. There are also lots of things we did back then which were stupid as well. Let's not kid ourselves. We believe that having a younger, more broader fleet gives us a unique competitive advantage. I think we have a team who are now confident in pricing for that. If you go to these numbers here, you can see that our return on investment, and Mike, it's you, so I'll point out it excludes goodwill. It's the infinite measure, but it's a good measure on incremental capital investment. On average, we're generating 14% return on investment. Therefore, on incremental CapEx, we're getting well north of 14%.
As Ian said, our debt cost is 5% and a bit. Actually, our marginal debt cost we're drawing the ABL at.
2.7%.
It's a 2.7%. Clearly, if we can continue to drive rates and there is an opportunity for good organic growth, we will take a view as markets go. Right now, I would have said we are looking to keep the fleet age broadly flat. I think we've got it to an age where it's competitive. It might go, you know, depending on which assets, it might go up or down a month or two, but that just depends on fleet mix. I think we would be looking to gently increase the fleet during the course of next year based on what we're seeing on the graph at the moment, subject to the caveat of we're looking for red flags given all of the noise that's in the financial markets at the moment.
Based on where we are right now in these levels of physical utilization and the noise coming out of the ground, we would be looking to grow our fleet. Again, we really need to take that decision November, December time where we would look to do. Our program, you know, again, we talked to this when we were in Charlotte. We had this program of let's wow the salesforce, let's wow the market with a wave of equipment on May 1. I mean, that was such a success. We would probably look to do something not broadly dissimilar. There are other things going on in the marketplace that will help us. You know, there's all this thing, sort of the impact of Tier 4 engines, where, you know, there are going to be customers who are going to demand Tier 4 engines.
I can promise you it's only us, United and RSC, who are investing in Tier 4 engines right now. There are real specific technical reasons why timely investment now is appropriate. I mean, there are certain product categories, like some of the big generators, where you're looking at 20%- 30% on cost between a Tier 3 and a Tier 4 engine. The fact we've got our spend in first will prove to be very wise. Again, we don't want to bet the bank given where we are with sort of the general economic climate, but we've got lots of headroom, lots of flexibility, and we can react to whatever happens. We're probably minded to grow, not reduce, as we sit here right now. I put the chart up to show what we would do in Armageddon, but if I'm honest with you, that's not our current headcount.
As Geoff just said, because of the seasonality in the business, all of this really now is about how much we spend for summer 2012 and the lead-in to the summer in March, April, rather than it is about what we need to be spending in the short term.
Okay. Just following on from that, you had a profit on sale of $2 million in Q1. You'd expect, given what we've seen in terms of views by use, that that ought to be sort of fairly consistent through.
If you look at it, [crosstalk] we didn't sell very much. We didn't sell very much. We will be selling more because to hold at two, three, you know, with only $156 million of a gross CapEx guidance of $325 million to come, we are clearly in the next few quarters going to be selling a lot more than we sold in the first quarter.
Oh, of course. Again, remember, if we choose, if we decide that the fleet needs to be bigger, it may well be that we continue to defer some disposals. Your fleet grows either by spending more money or selling less. What you might see is fleet growth but not have those disposals. That's your benefit. That's the benefit of getting your fleet age down quickly because once we're down to the sort of levels we are now, if we wanted to defer disposals for 6 or 12 months, it's still competitive. When you're up at 44, 46, 47 months, bearing in mind it's an average, you're sitting on fleet where it's less acceptable to the customer and it's costing you a lot of maintenance dollars, and you really need to sell that stuff. We've blitzed that stuff out of here over the last 6- 12 months.
We've probably got a bit more to go. We will definitely sell some fleet and catch up in the second quarter. A lot of it, our fleet growth will be dictated by disposals as well as additions.
Okay. Finally, from me, in terms of purchase price of equipment, what are you seeing at the moment? Because.
Yeah, I mean, obviously, there's big step-ups around the Tier 4 engine requirements. Some of that's justified and some of it's a golden opportunity, which I would take too. We're seeing small inflation for other more general product types. If we want to place big orders and set commitments, we can leverage that purchasing power now. The world's still not that good that people want to hold large customers like ourselves who have consistently spent over the last two years to run some yet. Tier 4 engines where, you know, where it's a bit like Robin Hood.