Good morning and welcome on this rather miserable day in London. I hope our results presentation will brighten things just a little. Obviously, it's our fourth quarter and full year's results presentation, and we'll follow the usual format. After a brief overview from myself, Ian will cover the financials. I'll add a little bit more operational color, and we'll move swiftly on to Q&A. All elements of the presentation will be broadcast, and a copy of the slides that we refer to are available on our website. Clearly, this was an encouraging performance, where particularly in North America we saw a good return to growth. Sunbelt 's rental revenues grew 10% as a result of 5% more fleet on rent and 3% improvement in yield.
This growth was supported by the benefits of the efficiency programs established during the downturn, and indeed we delivered this growth with fewer people and fewer locations than we started a year ago. As a result, profits grew a healthy 6x to GBP 31 million, and momentum was established in all key areas of the business, which has carried into the new financial year. As we signaled a year ago, we increased CapEx to GBP 225 million, which has proven to be a good decision as it has allowed us to smooth our fleet planning, maintain the age of our fleet, and support our yield initiatives. Our initial plans for 2011 are a further increase in capital expenditure to GBP 325 million.
Whilst the momentum we have established is likely to deliver a strong quarter one, we will continue to tread a cautious path until the outlook for the general economy and construction markets in particular is more certain. As a result, the majority of the expenditure is likely to be replacement, with modest fleet growth planned. We believe that we will continue to benefit from the structural shifts in the U.S. market, which I will cover in a little more detail. This, together with the self-help initiatives, allows us to anticipate another good year of progress in 2011 and 2012. Two other notable events in the year were: Marsh's refinancing of the ABL , which both extended our maturities and reduced our interest cost, and the acquisition of Empire, which further developed our highly profitable specialty businesses, which are less closely aligned to construction markets.
On reflection then, a very satisfying year. Now let's get into a little more detail, and I will hand over to Ian to cover the financials.
Thank you, Geoff. Good morning to everyone in the room and to those listening to the webcast. As many of you will know, our top-line growth has improved with each passing quarter this fiscal year, and this continued again in the fourth quarter, with rental revenues, the key driver of our profitability, increasing 16% at constant exchange rates to GBP 209 million. As has also been the case throughout the year, total Q4 revenue grew faster at 21% due to higher used equipment sales revenues as we began the cyclical reinvestment in our fleet and hence sold more used equipment. Quarter four revenue and cost growth is impacted by the first-time contribution from Empire, whose scaffold business model is lower EBITDA margin but much less asset-intensive than our other asset types, and hence offers equally good returns.
Q4 also saw a particularly strong impact from the one-time cost increases we've experienced this year as costs such as sales commission and staff incentives recovered from last year's depressed levels. Put together, these effects meant that flow-through in the quarter, and indeed in the whole of the past year, is not, we believe, representative of how the business will perform in the future, as Geoff will discuss shortly further. Despite these impacts, the 16% growth in rental revenue still drove a pleasing turnaround from last year's GBP 3.1 million loss to a Q4 pre-tax profit this time of GBP 2.7 million. My next chart shows the same summary of the full year results. Here you can see the operational gearing impacts inherent in our business model, with 8% growth in rental revenues driving 41% growth in operating profits.
Underlying pre-tax profit recovered from GBP 5 million last year to GBP 31 million, a good result we believe given that end construction markets remain at depressed levels. Before leaving this chart, I'd also like to draw your attention to the fact that EBITDA margins were held flat despite the higher used sales revenues, which have an inherently lower margin, and that our full year operating profit margin improved to 10%. Looking now at full year revenue in more detail, this chart shows the two businesses separately and gives the reconciliation of the change in rental revenues from a year ago. As you'll see at Sunbelt , our 10% full year rental revenue growth included a 5% volume improvement and 3% growth in yield, whilst at A-Plant we had a 2% volume increase and a 1% yield reduction.
Moving now on to divisional profit, this chart tracks the movement in full year EBITDA for each business and shows the underlying change in rental revenue and operating costs, and then the increased used equipment disposal profit in the U.S. Again, you see the operational gearing effect I referred to a minute ago with, for example, Sunbelt 's 10% rental revenue growth producing a 39% improvement in its operating profit. That concludes my comments on the trading results, except to say that in addition to the underlying results I've just discussed, there are also GBP 22 million of exceptional charges this year. As you'll see from the results release, however, these all relate to financing matters and not to operations, and they're also in line with the announcement we made when we renewed our ABL facility in March.
Moving from there from earnings to cash flow, this remains very strong with 99% of our EBITDA delivered into top-line cash inflow from operations. Payments for CapEx, as you can see here, were 5x higher as we began the cyclical reinvestment in our U.S. rental fleet, while used fleet disposal proceeds doubled to GBP 60 million. The increase in interest and tax paid reflects a stronger dollar than a year ago and higher interest rates following November 2009's extension of the ABL, partly offset by lower average debt levels. The increased interest impact from back in 2009 proved temporary with the ABL renewal announced at the end of March, largely reversing the margin increases. In total, therefore, despite the increase in gross CapEx paid to GBP 203 million, a level which has already exceeded our GBP 185 million depreciation charge, we still generated a net GBP 54 million from operations in the past year.
GBP 35 million of this was spent on acquisitions, principally Empire, with GBP 15 million paid to shareholders by way of dividends and the GBP 4 million balance applied to reduce outstanding debt. This chart then summarizes closing debt and shows how at the first stage of recovery our earnings have quickly brought net debt to EBITDA leverage back to 2.7x , well within our long-held 2x- 3x through the cycle target range. Reported debt at year-end benefited from the dollar reaching a GBP 1.68 low at the end of April. At the GBP 1.63 rate used in March's refinancing announcement, closing net debt was actually almost exactly in line with our GBP 800 million forecast.
As we explained when we met in Charlotte, the outlook over the next phase of the cycle is pre-eminent for broadly flat debt at constant exchange rates, perhaps up a bit in the early years of recovery if we judge that recovery to be strong enough to support early growth in fleet size.
At the same time, we'd expect earnings recovery, allowing us to continue to anticipate further reductions in net debt to EBITDA leverage in coming years. There is just one more chart on the debt structure, which really shows just how strong that is following the renewal of the asset-based facility in March, where we now have five-year maturities on both facilities, no amortization, as you can see from the chart here, given our strong availability, effectively no financial performance covenants, and a blended average interest cost of 5.7%. Finally, before I finish, there is a slide to remind you that over the last 10 years, which we set out here, we've always funded all our organic growth CapEx as well as our maintenance or replacement CapEx from cash generation. Historically, therefore, it's only been at times of larger scale M&A that Ashtead has increased debt.
That explains my confidence that we can continue to hold debt broadly flat while still offering good organic growth as we move through the next phase of the cycle. That concludes my commentary on the results. I hand you back to Geoff to give you his perspective on the divisions and on our outlook.
Thanks, Ian. Let's start with the U.S. This page is the one we've been sharing with you for a number of quarters now, detailing our fleet on rent and year-on-year yield improvement. When you stand back and look at the consistent progression through each of the four quarters, it's clear to me that we have achieved our primary objective of rate improvement very successfully. We did, in fact, exceed our own internal targets and also achieved good improvements in fleet on rent at the same time. Those of you who had the opportunity to visit our office in Charlotte recently will know that this is down to the strength of the team, the focus that we have put on this initiative, and the enhanced pricing analytics that we have developed in recent years, which will continue to provide a significant long-term benefit to the business.
As a result, by Q4, both fleet on rent and yield were up 6% year- on- year. Looking at the chart on the right, you can also see that we are continuing to operate at very high levels of physical utilization, which is encouraging. We focused in our Q3 presentation on what we called our winter yield plan. As you may recall, we identified that based on October's record physical utilization, we could have taken short-term benefits by doing some more volume at existing rates. Given that our focus is long-term improvement and return on investment via yield progression, we resisted that temptation, and our focus was to achieve a yield starting point at the beginning of the new financial year that was 4% higher than the corresponding point in the prior year. We are therefore very pleased to report that we achieved this objective.
The second compoqnent of this plan was to ensure that we capitalized on this momentum in Q1 with an injection of new fleet. We therefore placed early orders once it was clear that we were achieving our rate targets, and this allowed us to secure both pricing and delivery. We received $125 million of fleet in late Q4, with a further $200 million on order for Q1, of which $110 million of that $200 million was received in May. This has clearly energized the business as it was intended to do, and it supports our yield initiative. To demonstrate this, let me share with you that 79% of the equipment delivered in May was put out to rent, and the average rate achieved was between 5% and 10% higher than the average achieved for the rest of the fleet. All in all, a very successful program.
Our guidance for the full year is for around $400 million of gross capital in the U.S. I would reiterate, however, that at this point it is intended to be primarily replacement, and we need to strike the balance between volume growth and yield progression. We will continue to review this balance of growth capital versus replacement capital as the year develops. Of course, this all points to a strong exit from one year and entry into the new, which indeed has been the case. May total rental revenue grew 21%, and pure rental rose 15%, and I will explain the difference in these two numbers in a moment.
It would be fair to recognize that we did have a series of events that helped this performance, such as the active tornado season and significant flooding in the Mississippi, and you'll recall we're very well placed in terms of our specialty businesses to benefit from that. However, it is also worth noting that whilst this helps, the improvement is widespread, both in terms of geographies and equipment types. Let me now explain this difference between pure rental revenue and total rental revenue. Typically, ancillaries and pure rental revenue, which together give total rental revenue, move at a similar pace, and therefore total rental revenue is the number typically reported. However, there are two distorting factors in our most recent performance worthy of further explanation. Firstly, the Empire acquisition has a major impact.
Of the 942 employees in Empire at the year-end, the majority are involved in the erection and dismantle of scaffolding, and their time is billed through ancillaries. As Ian explained earlier, inherently, this is a lower EBITDA but much higher ROI business than the typical Sunbelt model. In addition, the passing on of a 40% year-on-year increase in fuel has a significant impact on ancillaries, and these two factors explain the exceptional growth you can see in Q4 and again in May, which distorts both the total rental revenue growth and the normal drop-through statistics. This distortion will continue until we get to consistent prior year comparators. However, we continue to focus on drop-through, and after taking all distortions into account, we are confident in reconfirming our guidance of circa 70% drop-through of total rental revenue growth in the coming year.
This focus on yields and drop-through fully supports our objective of ensuring that we develop a business model that gives good ROI through the cycle. Therefore, in the U.S. you can see that early in the recovery there has been good ROI progression, and we are already almost at cost of capital, and I would anticipate getting around this point on an LTM basis in quarter one of this year. Given this performance, a midterm target of a very healthy high-teens return is clearly realistic as markets recover. I think it's important to remember that this performance is being achieved against a backdrop of construction markets at their lowest level since 1983, with no material improvement forecast in 2011. Therefore, whilst we recognize there could still be some short-term bumps along the road in terms of the pace of recovery, our medium-term potential is both clear and very exciting.
In terms of the short-term outlook, we need to recognize that recent statistics have questioned the pace of any U.S. economic recovery. Having said that, we feel that the overall picture still suggests that we are at or near the bottom, although there is no doubt that unemployment and fuel inflation remain significant drags on any recovery. Certainly, the industry-specific indicators are far more encouraging, with second-hand equipment pricing continuing to recover. As you can see in the chart on top right, we continue to see a very close correlation between second-hand equipment values and rates. In addition, whilst quarter one construction stocks were down 10%, whilst the Q1 construction stocks are down 10%, we still expect the overall market to be around flat.
Therefore, it's difficult to predict the pace of any recovery, which is why it is also appropriate to introduce a note of caution despite our very strong current trading. Generally, if I compare current thinking with a generally held view of a year ago, any recovery has been broadly pushed back 12 months from 2010 - 2012 from 2011. The key remains residential construction, and currently foreclosure volumes and values are a major distortion on the market. Overall, therefore, we are planning on flat markets for 2011. However, that does not mean there is not self-help available in terms of benefits from gains in market share and the structural shift from ownership to rental. To demonstrate this, I would point out that despite the fact that, as I said earlier, Q1 2011 construction stocks were down 10%, Sunbelt's pure rental revenues grew 13% in the corresponding period.
We believe that this is down, as I said earlier, to the structural shift in the rental market, and we have covered this slide in the past, and therefore I won't dwell on it. I do firmly believe that both our results and those of our major peers lend weight to the argument that we are seeing both improvement in rental penetration, and I anticipate that the big will continue to get bigger as they differentiate their offering from the rest of the market and utilize their scale and balance sheet strength. I also believe that the key to sustaining this momentum in still volatile end markets is responsibility in terms of the supply side of the equation, and hence our caution in terms of fleet growth. Overall, therefore, this provides a clear insight into the medium-term potential for the rental market, as demonstrated by this global insight forecast.
Whilst I believe there is still some uncertainty around, so as not to be precise about the accuracy of this forecast, I am more certain that directionally it is accurate. Let's now move on to the U.K.. I am pleased to report that in the fourth quarter, the year-on-year trends showed some good improvement, with 2% fleet growth and 4% yield improvement, which is more encouraging and suggests we are nearing the bottom in the rental market. The outlook for construction markets, however, is still less certain than in the U.S. with the full impact of public sector cuts as yet to be assessed. The key is the speed at which private sector fills the gap, and our expectations are that it may be somewhat slower than some current forecasts suggest.
Having said that, given the significant defleating that has taken place within the industry and the aging of fleets, as occurred in the U.S. we expect supply constraints may point to a gentle recovery in our rental markets. In addition, there are certain markets where we do have strong positions, such as utilities, where the outlook is a little brighter. Therefore, May's rental revenue for A-Plant was up 11% year- on- year, which, following on from a good quarter four, is encouraging. Despite the market weakness, we anticipate a year of further progress in 2011 and 2012 in A-Plant. The problem remains for A-Plant, as it does for the U.K. industry as a whole, that whilst there may be a recovery, we are a long way from acceptable returns in a mature market with uncertain outlook.
Therefore, it's a case of either waiting it out for the long term or something needs to change in the industry, and we remained well positioned for a range of strategies. Therefore, to summarize, the year just ended was a good one, with significant improvement in profitability and strong momentum carried into the new financial year. The medium-term potential, particularly in the U.S. is clear, and therefore we will continue to reinvest into this business and hence the uplift in CapEx. Markets are at a historical low, which again points to the exciting medium-term potential. However, we will continue to focus on self-help, and we will anticipate a good year of progress, which will provide an excellent base to exceed previous peak returns as markets eventually recover. Thank you. That concludes the presentation. We will now move on to Q&A.
For the benefit of those listening on the web, can we use the usual protocol and wait for the mic and also state your name and organization prior to the question. Questions?
Can you just talk through the profitability difference on the rental ancillary revenues? Also, I might be opening myself up to looking silly here, but the margin you make on new and used equipment sales, I think you can probably work out used equipment sales though.
Yeah, I mean, we clearly make significantly lower margins on both new and used equipment sales relative to our pure rental revenue, and hence it has a significantly distorting effect. As we have increased disposals, because clearly as we increase additions, we also increase disposals, so as not to grow the fleet too aggressively, then through the cycle, we make a very small profit. Do you recall what the margins were in Q4?
Yeah, the used equipment sale margin, no, I'd just have to calculate that, Geoff.
It is relatively small. Our business is not one to make significant gains on sale. We look to through the cycle. We are making small gains now, but they're relatively small, certainly to the margins on rental. Our main focus and our main margins are on rental, absolutely. More used equipment sales does distort the total drop-through.
Again.
That's why we calculate drop-through based on rental revenue, excluding new sales and used fleet sales.
Including ancillary?
Including ancillaries, again, ancillaries' margins are smaller than pure rental revenues, particularly in a period where you're faced with 40% growth in fuel prices. Frankly, you know our margins will be going backwards in fuel until we catch up with that increase. Like any big sort of spike in a commodity, you lose at the early side of the cycle whilst you get contracts back up to pace to reflect current fuel pricing, and you gain at the back end of the cycle whilst that pricing stays in place a little bit longer as pricing comes down. Like any business that has to follow a commodity price, there is usually a lag in terms of when you put those prices, get those price increases, and there's a lag in when you take them off also. That's the phase in the cycle that we're in right now.
Encouragingly, we are able to pass on those fuel increases. There's normally this trade-off of people look at the total rate and some of the ancillaries, particularly delivery. Our ability to get surcharges and get improvements in fuel charges, I think, is encouraging for the overall rate dynamic. We are paying catch-up on fuel at the moment, Alex.
Okay. In terms of the Q4 comparative, I believe you mentioned in the statement something around commissions and etc. Can you just talk through the delta on some of the costs where some costs have had to come back in and whether that continues next year, etc.?
Yeah, I mean, I think you know this has been a bit of a turnaround year. What I would say is there are a series of costs, which is why we have looked at them and are confident in reconfirming our 70% drop-through number, which will not reoccur. They will either not reoccur because they were one-offs. As Ian stated, we had no operational exceptional items. Now, remember there were a series of events which would quite typically be potentially included in exceptionals. We believe operational costs should always just go through the operational lines unless they're very significant. Let me give you some examples of that. We've continued to cut heads. We've changed the Chief Executive in North America. We closed 50 Lowe's stores, for example. We had successful acquisition costs and failed acquisition costs. There were a number of one-offs which we would not anticipate should recover.
There were also a series of expenditures that returned from a zero level to a normal level, but they will stay at that normal level in the coming year. An example of that would be, for example, bonuses and profit shares. We exceeded our expectations. Our profit share and bonus program therefore paid out well. It's based on a percentage of salary. Therefore, that will be a fixed cost going forward even though revenues rise. There are a series of one-offs in this inflection year which do affect the drop-through, but we would not anticipate continuing into the new year. I'm fairly confident we'll be able to demonstrate that when we show you our Q1 results.
Yeah. Geoff, Alex, just to give you the numbers on the used equipment sales margin, through the cycle, we just recover our book value at the bottom of the cycle. We make about 20% - 25% margin historically at the top of the cycle. In the past year, it was a 10% margin. I think for those of you who cover Aggreko, in some ways, Ashtead's ancillary revenues are a bit like the pass-through fuel revenues that Aggreko reports. In order to really understand the margin, there is a different margin effect on that part of the business. That is why we say when you look at this year adjusted, we can see internally that we did achieve the 70% that we're looking for.
You know, as Geoff has just said, we expect to see it more clearly in the full year numbers next year if things shake out as we expect.
Slightly more than 50% of our ancillary revenues are linked in some shape or form to fuel. It's either the fuel actually used in the equipment or its transportation, which clearly is significantly affected by increases in fuel too. That 40% increase in fuel during the course of the year, a lot of which happened at the back end, did have a distorting effect.
Sorry, I was just writing down that was 50% of ancillary revenues.
Is in some shape or form, to a greater or lesser extent, linked to fuel. It's either transportation, deliveries, and pickups, or it's the actual fuel billed for the use in the equipment that we rent.
That 50% includes Empire within the ancillaries, does it? Is that adjusted for the inclusion of it? That's pre the inclusion.
That's pre the inclusion.
Okay, got it. Thank you.
It'd still be a third plus. Yeah.
I'm just curious about equipment lead times and how that's been changing over the last sort of 3- 6 months. I'm conscious that if we do start to see a recovery in the end markets, how quickly you can get new fleet into the pool.
No, it's a very good question. That's why we're very, very pleased with our program of having such a significant quantity of fleet arriving in Q4 and Q1. I like to think we, again, have got us slightly ahead of the curve. We were slightly ahead of the curve coming into the downturn and disposing of equipment. I remember standing in front of you a year ago saying we were upping CapEx, which was seen as an early call one year ago. We've done a similar thing for this sort of Q4 program. That has undoubtedly led to a lengthening of lead times, which is exactly what we would anticipate. The manufacturers are being responsible in terms of the pace at which they're adding manufacturing capacity, which I think is very, very sensible. We're now seeing for certain product types lead times. I was in the States last week.
We were looking to place some orders. If I'm placing a new order from scratch now for, let's say, some dirt moving equipment, I'm probably looking at a November delivery now. They are clearly lengthening. As I said, everyone is being pretty responsible in terms of putting extra manufacturing capacity. Of course, we're at a stage now where we know what's pretty much coming in Q1 and Q2. The extent to which we grow the fleet is not going to be dictated necessarily by us placing more orders, but potentially disposing of less. Within our capital planning right now, we have a plan for additions and we have a plan for disposals.
Given that our fleet age never reached the age that it did at the bottom of the last cycle, we could quite comfortably hold on to a lot of that for another year if we so chose to do. We have to strike that balance. We will continue to look at physical utilization, price momentum, and outlook for end markets in making that decision. As we did through, you know, we are constantly reviewing that decision. As I sit here right now, we are at incredibly high levels of physical utilization. There is a big call from the business for more fleet, and we're trying to manage that. Having said that, there was a big call from the business for more fleet in October, and we sensibly held that back. Now we're trying to look 6-1 2 months out, and the field are looking 6 days out.
Striking that balance between current needs and medium-term potential is what this business is all about.
Mike Murphy at Truist Securities . Geoff, can you say on the figures in May, either the pure rental or the total rental, let's start with total rental, of that 21% increase, how much was Empire? If you strip Empire out, how much of that was volume now?
Mike, we're not going to get down to splitting out a month's figures. Let me look at, we've given you a month just to give you some guidance of where the momentum is in the quarter.
If you take Empire out, because.
If you take Empire, if you look at the 15%, okay, of the 15%, broadly, that's 10% volume, 5% rate. Now, both rate and volume are inflated to a small degree because we've got a lot of specialty business in there, given the tornadoes and given the floods. As I said, we achieved our 4% yield gap for the start of the year, and that's sort of what we're looking to try and maintain through the year, recognizing that yields grew through the course of the year. What we want them to do is from that starting point of +4 , grow at the same pace, because obviously the year-on-year comparators start getting tougher. In May, it was 10% fleet, 5% yield. Are there further questions? It's very short and sweet.
Thank you very much for all of your time, and we look forward to seeing you for the quarter one results presentation. Thank you very much indeed.