Earnings Call: Q2 2011

Dec 9, 2010

Good morning, and welcome to the Ashtead Q2 results presentation. I'm Geoff Drabble, Chief Executive and with me this morning is Ian Robson, Group Finance Director. We will follow the usual format. After a brief introduction from me, Ian will cover the financials, then I will spend some time explaining what we are seeing here on the ground. In particular, I will attempt to demonstrate, as we did a year ago, where we believe we are in the cycle and where we think the market is going. Finally, I will share a Q and A session. And for information, the pack referred to in this presentation is available on the website. Those of you who follow us regularly will know that the consistent theme of our recent presentations has been managing the cycle. We are delighted therefore to note that the subtitle for this presentation is Return to Growth. We are also pleased to be able to report our 2nd consecutive quarter of profit growth with half year profits at constant exchange rates of 41 percent to £30,000,000 This improvement has been driven by a combination of rental revenue growth and tight cost control. U. S. Rental revenues are up 9% year on year driven by a yield improvement of 3% and strong fleet on rent, with physical utilization at a 5 year high. As previously indicated, capital expenditure for the half year has been increased to £96,000,000 as we ensure that we have the appropriate fleet size, mix and age for the next phase of the cycle. However, due to our strong EBITDA margins, we have still generated £30,000,000 of cash. This has resulted in our leverage reducing to 2.9 times EBITDA, already back to within our long stated target range of 2 to 3 times. Consistent with the progressive dividend policy announced in June, we are pleased to announce a 3% rise in our interim dividend to 0.93p per share. Therefore, given the momentum we have established in the business, our outcome for the year is expected to be ahead of our earlier expectations. I will now hand over to Iain, who will cover the financials in more detail. Thank you, Geoff, and good morning to everyone here in the room to those listening on the webcast. My first slide, page 4, summarizes the results for the 2nd quarter in which top line recovery accelerated as you can see from the pleasing 6% growth we delivered in rental revenues at constant rates of exchange. Total revenues which includes sales of used equipment grew faster than this as we stepped up our fleet replacement capital expenditure generating significantly increased sales of used equipment. But it's the rental revenue growth which was key to the profit improvement and allowed us to produce Q2 EBITDA growth of 9%. Operating profits increased faster at 32% as we delivered more revenue from a slightly smaller fleet and hence a reduced depreciation charge. After interest 2nd quarter profit before tax increased nearly 50% at constant rate to £18,000,000 Margins also remained strong with the Q2 EBITDA margin holding flat at 33% despite the drag effect of the extra used equipment sales which increased revenues but only impact profit marginally. Operating profit margins also improved usefully to 14.5% from 11.9% a year ago. Page 5 shows the same view of group revenues and profits at constant rates, but for the first half rather than for the second quarter. Here rental revenue growth was 3%, reflecting the slower start to the year, but this was still sufficient to generate a similar pattern of profit growth, leading ultimately to 61% growth in first half earnings per share. It's also worth noting that for the 6 months, both EBITDA and operating profit margins increased over the previous year. My next slide looks at first half revenues by division and shows how Sunbelt has returned to revenue growth whereas at A Plant, the rate of revenue decline again slowed. You can also see the impact in Sunbelt of the higher used equipment sales I mentioned earlier. And this chart on Page 7 gives the same divisional view for profits and shows the bridge between 2,0092010 with the growth in revenue and costs leading to a $13,000,000 or 6.5% increase in first half EBITDA in Sunbelt. At A Plant, good cost control meant that its EBITDA also increased by 3% if you look at the unrounded numbers despite the revenue reduction. Generation. The first thing to explain here is that the reduced conversion ratio from EBITDA to cash inflow from operations in H1 2010 reflects investment in working capital in the first half mostly through higher receivables as we saw revenue start the cyclical recovery from recession. This impact is accentuated by the fact that our first half ends in October which typically sees the highest monthly revenues of the year and hence the highest month end receivables. Therefore, working capital is likely to reduce in the second half and consequently I'd anticipate the cash conversion ratio to rise towards the mid-ninety percent range by year end in line with our previous experience for the recovery phase of the economic cycle. In line with the guidance for increased fleet investment this year we gave in June, this chart also highlights the increased payments for capital expenditure all of which was replacement spend together with the related increase in used fleet sale proceeds. Interest payments rose year on year partly due to the timing of payments and partly due to the higher interest rate interest margin payable on our ABL debt facility following last November's maturity extension. 12 months on that impact is of course now fully in the run rate. Putting all that together means that we generated £30,000,000 of net cash flow in the first half, £10,000,000 of which was used to pay the 2010 final dividend with the balance of £20,000,000 applied to debt pay down. That debt pay down and the first stage of the cyclical recovery on our earnings are summarized on this chart and saw net debt to EBITDA leverage at 31st October, 2010 fall back to 2.9 times as Jeff mentioned earlier. So after only 12 months at the bottom of the recession outside of target, as expected we're now back within the 2x to 3x net debt to target range leverage we first established back in 2004. And on Page 10, a brief reminder that all our debt is committed for the long term 4.5 years on average at 31 October 2010 with no meaningful debt maturities due until November 2013. My next chart on page 11 highlights another key reason why we've been able to manage our debt so well through the recession, namely the highly cash generative nature of our business in times of weaker rental demand. As you can see in the past two and a half years, we paid down from cash flow £435,000,000 or 36 percent of peak debt. And that's from cash flow after investing enough to keep our fleet age competitive, after the £39,000,000 we spent in 2,008 and 2,009 on buying in 59,000,000 shares at an average price of 66p and after all the dividends we paid in that period. As a result of the debt pay down, despite the adverse impact of the recession on earnings, as you can see leverage rose only gently a maximum of 3.3x net debt to EBITDA at January 2010 and as I mentioned a moment ago is now back within our long run 2 to 3 times target. All that means that we therefore have all the financial capacity we need to step up fleet investment once again to ensure we're positioned to take advantage of the opportunities ahead. And lastly from me on the usual chart on Page 12, which sets out the availability on our asset based facility, our continued debt pay down and the first stages of recovery in used equipment values have raised availability by over $100,000,000 since year end to $639,000,000 at 31 October 2010, well ahead of course of the $150,000,000 availability level at which all our debt is effectively covenant 3. That concludes my comments today. I'll therefore pass you back to Jeff to give his perspective on our operations and outlook. Thank you, Ian. Let's now look at the individual businesses starting with Sunbelt on page 14. As you can see, we have enjoyed a strong second quarter with good revenue performance leading to profit growth of 34%. Again, we've continued to benefit from improving trends throughout the quarter. To understand what's going on, let's look at constituent parts of rental revenue as shown on page 15. These charts demonstrate our momentum in fleet on rent where we continue to see strong sequential growth throughout the year. Also having seen a return to year on year growth of 1% in quarter 1, this has grown to an impressive 6% in quarter 2. We have seen sequential improvement in yields throughout the year. And by Q1 the year on year impact was neutral. Yield improvement continued through Q2 and therefore we are particularly pleased to report a 3% year on year improvement for this quarter. Also as you can see from the chart on the bottom right, we have seen an 8% sequential growth in yield during the year, which is much better than a typical seasonal uplift. Also again for clarification, our yield measure encompasses all of our business and both rate and mix and is therefore a typically harsher measure than rate alone. We are pleased with our revenue performance, but we have talked in the past about our tight cost control and the need to focus on this through the recovery to ensure high drop through to profit, an area we feel we can improve upon relative to the last cycle. As you can see from the statistics on the left of the chart, whilst our fleet on rent and therefore our activity is up 6%, we continue to keep a tight control on our operating metrics. This is also reflected in the flow through from our rental revenue growth shown here on the right where after adjusting for improved profit on fleet sales and non recurring cost growth, we have seen a 70% drop to profit. This is in line with our expectations and will remain an area of focus. So we're seeing encouraging current operating metrics and therefore let's look to the medium term and assess where we are in the cycle and what lessons can be learned from previous experiences. We believe that we learned a lot from some tough lessons in the last downturn, which stood us in good stead this time, and we want to continue to do the same during the recovery phase of the cycle. We would therefore like to share some of this analysis with you. As you can see from the chart top left, we have seen a much larger decline in construction than the last recession and the inflation adjusted construction demonstrates both that we are at historically very low levels of activity and how short lived the previous recovery was in real terms. Despite these much larger reductions in construction volumes Sunbelt's rates have in fact followed a remarkably consistent pattern. Bottoming at the same point is during the much milder recession in 2003. In addition, you can see that secondhand equipment values, although very briefly falling below previous lows, have bounced back to similar levels as those experienced last time. These trends and recent performance support our early decision to prepare for recovery by prompt reinvestment in our fleet as Ian discussed earlier. What is particularly encouraging is our relative strength as compared to last time and therefore the improved opportunity to benefit from recovery. We are clearly starting with much stronger EBITDA margins than back in 2003, 33% versus 28%. And with continued focus on profit flow through as discussed earlier and the not yet realized opportunity to benefit from the scale provided by the nation's rent acquisition, we anticipate stronger peak margins than those previously delivered. Clearly, we are now a much bigger business than last time around, which provides the opportunity to leverage this scale and national footprint through organic fleet growth, which delivers high incremental returns. Not only we are larger but our financial position as you can see is much stronger. Our fleet is not as old as last time and we have a very different funding position as you can see from the charts. Therefore, whilst our financial position inhibited our initial growth last time, we believe we are now well positioned to benefit from recovery. This of course brings us to the all important question of what recovery, when will it happen and what shape will it be. Construction markets appear to be at or near bottom with gentle recovery widely forecast for 2011, accelerating in 2012. Again, like the last time, most commentators are anticipating a residential led recovery. However, given the major drags of unemployment and availability of finance, some caution does need to be attached to these predictions. And indeed it must be noted that we are coming off historical lows and it will be some time before we return to recent peaks in total construction volumes. However, whilst total construction volumes may remain low, we believe there is significant opportunity for structural change within our industry. A combination of higher rental penetration due to uncertain demand and a scarcity of funding, market consolidation as the big get bigger and reduced capacity due to aggressive fleet reduction and long supplier lead times will lead to sustained growth in the rental market. We believe there is good evidence to support this thesis. Whilst there's clearly less workaround with the Department of Commerce recording that It is encouraging in terms of the outlook for the industry to see the major players already performing so much better in what are still fragile markets. For our own part, we now enjoy the highest level of physical utilization than we have had for the past 5 years, again a very encouraging metric. Taken together then, a gentle recovery in construction markets, together with a structural change in the U. S. Rental industry, provides clear medium term growth opportunity. Included here is the forecast for the U. S. Rental market as published by Global Insight as recently as November. This confirms 2010 as being at the bottom of the market as we have long anticipated and gentle recovery in 2011, accelerating from 2012. It also shows the medium term potential for the market as a result of the structural change discussed earlier. I would add the same caveat to this forecast as most given the general economic uncertainty and standing back from it, it feels a little bullish. However, directionally, I do feel they have it about right, recognizing the impact of increased rental penetration, particularly at the recovery stage. And having spent some time understanding the underlying assumptions and inputs, we believe it to be a well thought through model. Moving on to the U. K. There are clear signs that the business performance is now stabilizing, albeit at relatively low levels of profitability. From both a sequential and year on year perspective, fleet on rent has improved throughout the year and we continue to experience strong levels of physical utilization. The key as it has been for some time in the UK is yield. And again, there have been improving trends, although the overall levels of return throughout the industry remain disappointing. Our all encompassing yield figure has improved by 4% during the year and the year on year measure has improved significantly to minus 2% in the quarter. Given general uncertainty in the UK economy, there is probably less confidence at this point in time in UK construction forecasts. However, as in the U. S. There are some reasons to be hopeful that we are at or near the bottom for our rental market. The level of de fleeting has due to financial constraints been greater in the UK than in the US and this will undoubtedly help. Therefore, we remain committed to this market as we believe that from a market and financial position, we are well placed to perform well in the long term. However, in the short term, returns are likely to remain relatively low without structural change. So that leaves us with the final question of where do we go from here. I guess the short answer is that we believe our performance throughout the cycle has demonstrated that our operational and financial strategies are working. We will continue to focus on balanced reinvestments in our existing businesses, leveraging our scale and financial strength. We intend to continue to develop our high return specialty businesses. And finally, we will ensure that we deliver profitable growth with a major focus on improving returns on investment. Thank you. That concludes the presentation. We'll now move on to Q and A. Given that it's all being broadcast, if you can wait for the mic and state your name and organization for the benefit of those listening in. Thank you. Good morning. Andrew Nussey from Peel Hunt. Obviously, your yield sorry, excuse me, your yield analysis includes both price and mix. I wonder if you could just give us any anecdotal flavor on the 2 specific influences on yield, both in the U. S. And in the UK. Somebody wants to answer. Over to Alex. That's a better answer, Alex. Can you pass it on? Yes, I mean at this stage in the cycle typically your mix will be worsening and therefore your rate is improving more than the yield number will give you. Why is that? Because you tend to get more work with big national accounts tend to be longer term rentals on those big projects. We derive a lot of extra revenue from short term transactional business. So what you would say is the rate improvement is greater than that, which is expressed in the yield improvement. Now there's all kinds of moving parts and some people try and dissect it all. And frankly, you're going to get lost in the analysis if you do that. So we look at it very broadly for our own purposes, but the all encompassing measure, so you can just reconcile revenue movement to revenue movement. If you change the volume, then that's why we use that all encompassing yield measure. Because at the end of the day, if you make a long term strategic decision to just rent more to big national accounts, that's a pretty fixed yield change. And so but our rate is improving better than our yields. Okay. I guess that kind of follows on a little bit to my second question in terms of the progress that Sunbelt's making in terms of developing with the larger national accounts as these contracts come on review? I think we've done well. If you actually look at the business we've done with the national accounts, in actual fact what happened is the value of business has stayed constant and therefore as our total rental revenue came down through the recession it became a greater proportion of the total. So we're pleased with what we've achieved and we will continue to do that, but we remain committed to a balanced mix of business. We have gone out of our way to keep the infrastructure necessary to participate at that smaller and medium term contractor, particularly with the residential led recovery. A lot of that goes through the medium smaller contractors. Improving residential market tends to have a knock on effect to the smaller scale non residential construction. People, when they think about non residential construction, tend to think about that somewhat glorious model which is down in the foyer here in terms of big office developments. We're thinking about churches, court houses, kindergartens which is more linked to it. So yes, we have made a focus on national accounts. We made a greater focus on industrial and that's been a successful decision through the downturn. But let's not lose sight of our real core market which is still that medium to small term contracting. Hi, Phil Sparks from New York Region Securities. Just having a look at Slide 18, where you've got the store numbers at the beginning of the Sundal from 2,003 compared to 2010. So how could you tell us how that's changed since the actual peak of the cycle, say around 2,007, 2008? Oh, Ian, do you remember the numbers? Immediately after the Nations Rent acquisition, we were probably at just over something just over 400. It's on the back page of all the results releases, which are on the It's a good part of your website. A bit more than that with Lowe's. Yes, with Lowe's, yes. Excluding Lowe's, I think we were closer to sort of 4.30 with Lowe's. So if the 80th has disappeared, how much of that was consolidating the acquisition? How much has been cyclical downsizing? And so where would you see that 3, 4, 6 going to then over the year for the next few years? I can't look, I haven't got the analysis with me. What was consolidation because of consolidation? What was consolidation because of downturn? I don't know is the honest answer. I mean the big step change from the peak is we've lost 50 small Lowe's stores, which was a strategic decision. In terms of where we are in terms of our fleet now, we see no need from an economic perspective to further reduce that cost base. We think we're in the right geographies. We think we've got the right presence in those geographies. You'll probably see it starting to grow, but relatively slowly. So we've got 3 pump and power stores already planned for the early part of next year. You might see another 2 or 3 locations. But the key is our real growth opportunity is when we acquired Nations Rent, there were various phases where we saw the benefits from the deal, notwithstanding the desire to have a greater presence in North America. There was initial cost savings, which we delivered very, very quickly. The second phase was to get their prices up to levels which were similar to Sunbelt, which we were starting to achieve well. And some of you will remember because we showed a chart back then, we said a typical nation's rent store had a smaller fleet and a narrower range of equipment than a typical Sunbelt store. And our real growth opportunity was to take that fixed cost base and leverage the revenue opportunity from that location. Frankly, when we got when we hit the wall with the recession, we never moved on to that phase. So it's not like we're creating a new strategy now. We're just having feeling we got through to the other side of this where we're dusting off what was always going to be Phase 3 of the integration of Nations' rent. So you won't feel going to see a massive explosion in a number of locations, which is why you will see a better drop through than if you compare with our performance last time around. Because last time around, we were a big regional player trying to become bigger and we were doing this through a high volume of new greenfield sites, which are obviously an initial drag on the profitability. This time you're going to see a lot more organic growth within a fixed cost base. Well, I've got the mic. And my second question for you. Just on the slide underneath there, Fleet Age. It sounds very much like the CapEx investments is directed towards the U. S. At the moment. That's true. So in terms of how the split between fleet age or the trends between fleet age is between the U. S. And U. K, what's the U. K. Trend looking like next couple of years? Well, the U. K, we're starting from a position where the UK has generally a younger fleet than the U. S, which in part is due to the fact, part is due to product mix because we have a much larger aerial work platform fleet in North America than we do here in the UK and therefore there's an aerial work platforms generally are older than the rest of our fleet. Given the level of investment, we will tend to see the U. S. Stay flat to come down and the U. K. Probably has capacity over the next 2 years to rise slightly. Do we have this precisely? Yes. The numbers are that the UK is at 40 months at the end of October and the U. S. Is at 46 overall, but that's 43 months in the U. S. For the non aerial product and 47 for the aerial. So you can see how the aerial product is a little bit older and but A Plant is still younger at 40 months than even the non aerial within Sunbelt. In the UK, air plant's fleet for its type of equipment is very, very competitive from an age perspective. We went through a big reinvestment in Fleeter North in the UK in 2,000 and six-two thousand and seven to overcome what was a perception problem from 2,003 that they had a very old fleet. Hi, it's Alex Hu at UBS. Just a quick one. Can you talk about pricing or your views on pricing and rates over the winter? What you're doing internally on that, what your competitors what you think your competitors are thinking or what you're seeing from your competitors on the ground and stuff? Yes. I mean, our well, let's take the U. S. 1st and foremost. Our objective in the U. S. Through this winter is to not give up as much of the cane as we did in previous winters. We have got yields back up. Typically, there is a seasonal decline in yields. Our objective is to start next spring at a similar level to yield to where we were at the end of October. Now the question is how do we get there? Do we get there in a flat line or do we go down and do we go back up? That will to a certain extent depend on how tough a winter it is and how irrational people get if it becomes a tough winter. We suspect not. We're hoping it's going to be far flatter this time around And we're certainly starting to see certainly our major peers attempting to impact rate particularly on their transactional work which is the area where we bump ahead with them the most. So our objective is to not give up the ground we've gained this year. Now exactly what that curve will be between through December January is a little difficult to be precise. But that's all clear stated objective and it's very clear with our sales force that that's their primary focus. And their motivation incentive plans are based around that. Okay. Thanks. And then just as a follow on, in terms of in the past, you've talked about part of your yield improvements come when you start getting transport costs or freight costs or whatever, when you start being able to recover those things. Is that coming back? Yes, it is. We're certainly seeing the ancillary revenues improving. Okay. Thank you. Mike Murphy, Numis Securities. Can you talk about the other non operating cost growth in the United States, please? You mean on Jeff's chart from earlier? Yes, I'm just in the text because I'm just looking at what's happening to operating costs outside of obviously depreciation and Well, you need to be careful, Mike, because remember now we've got equipment sales in revenue and we've got the cost of that equipment in operating costs. Yes. So really the best way of looking at the flow through is that chart that Jeff set out on 2016 because what that does is in the published financials, in the cost growth, you've actually got the impact of those that higher amount of used equipment that's being sold. By reconciling here rental revenues with the reported earnings, you're seeing the true picture on the flow through, not distorted by increased used equipment sales. Okay. And that non recurring cost growth, can you say what it was? Yes. I mean sorry, go on. Go on, go. I mean, we have gone out of our way over the last 2 or 3 years to not have exceptional. Our view is you sort of restructure your business, you tweak your business a little bit every year and okay, you've got rid of a few people, you've got rid of a few locations, how come that's exceptional. However, in terms of us monitoring, you can see during that period we closed 50 stores in Lowes, that's part of it. And there were some other expenditures which we would have said were one offs around preparing for this recovery phase, which where we won't get that sort of growth in expenditure again. But as you can see, I mean, in terms of there were costs associated with the operating and keeping the operating metrics low. But we haven't put a special exception line in. Of course, we then also got to adjust. We can't then take also credit for the delta in profit on equipment sales either. So the actual net effect of the 2 is fairly minimal. Yes. Because I suspect if you've done this analysis, you wouldn't have obviously identified the 6, but you wouldn't have taken the 3 out either. And you can see it's still a pretty high flow through at 13 on 23 as well. And just going forward, I mean, clearly, actually, during the recession, you've been very tight on spare parts, facility costs, vehicle costs, etcetera. Going forward as the business grows, do you feel actually that you will be able to keep that growth beyond the organic growth in the organic recovery in the business? Yes, it's a good question. And it's why we sort of put it up there and why it's we spend every month when we get our resources, let's talk about the drop through. So it is an area of focus. You're right, obviously through the downturn, you really tighten things up. And we've had a wage freeze for 2 years. As we continue to deliver these sort of performances and as general economic circumstances change, will we be able to maintain that? Probably not. Will there be perhaps a little more spend? Yes, there will. But if we look at the drop through still, that target of around 70% we still think is realistic. But yes, obviously some areas of expenditure are going to inflate a little bit. But the key to us is, look here 6% more activity, 6% fewer people. So the core wages and salaries line is lower. Now for that smaller number of people, we are going to have to look at the incentive plans. We're going to have to look at salaries. But it's all about leveraging that semi fixed cost base which will be acquired on Nations Rent. Can you talk a little bit about CapEx for the next 12 months and the year after that? Yes. In relation to whether you're going to just maintain the fleet in its current shape or at what point, what triggers will there be for expanding fleet? Yes. Look, great question. And probably the thing we sit and discuss the most, apart from looking at charts on cycles, as we said back in the spring when we said we're going to increase expenditure then again making those calls early in the cycle is what we think will really improve our performance. So it is a big decision. We do our budgets February, March, which has the benefit that we have got December January out of the way and we will look and see what the market is like. So we'll give specific guidance when we do our Q3 results. But directionally, if we spend around 100% of depreciation this time around, I would have said, I can't see it being less than 150% of depreciation. Now what the precise number is, I don't know. Right now, it will do a bottoms up budget and we will compare that with what we're seeing from a macro perspective. But directionally, it's clearly going to increase. And there will be a greater growth element than there has been over the course of the last 12 months. For this year, the initial guidance we gave, we will stick to that guidance. And if you have a look at it, typically we spend our CapEx quite early in the year. This year we've deliberately phased it through the year for two reasons: a, to make sure we were right about the shape of the recovery and secondly, to drive the yield improvement. We have to manage at an operational level of sales force mixed messages of here's a bunch of new stuff to get out on rent and by the way get more for it are complicated ones to balance. Our primary focus over the last quarter and going through this winter is around improving yields to improve long term returns on investment. Well, just maybe, Andy, to put some numbers on that £150,000,000 just to help you. If that's where it came out and we'll give you where the budgets have concluded in March, it would be 2.75 gross, 2.25 net at 150% of depreciation. Okay. Can you just give us a flavor of if you want to give and what when you started to build gross spending with you expand the range of products that you offer particularly? Yes. No, it's a good question. There will be within our fleet planning, we sort of literally download to every individual profit center this is what's due to be replaced. What do you want to replace? So they can replace dollars. So they can either just replace like for like or they can reconfigure into another asset. So they'll pick or they can just downsize altogether. What we're seeing, we will see a bottoms up reconfiguration into earlier cycle products, which will be a general trend within our fleet, probably towards more dirt moving equipment at the lighter end and probably towards more small tools, which so we will review that and say, well, the sum of all of those PC sort of inputs, does it make sense from a macro perspective? So you will see that natural reconfiguration, which we do every single time we do fleet replanning. From a strategic perspective, I think you're going to see more investments in our pump and power business. It's been a particularly strong market for us. A lot of work on utilities as part of the stimulus package. You've got an aging infrastructure in North America. So I think strategically you will see a big increase in that area and perhaps 1 or 2 other specialty businesses too. Thanks. Mark Harrison from RBS. Two questions, if I may. Could you give us a feel firstly for level of sort of inflation you're starting to see or not in new equipment purchases from the manufacturers is the first question? Again, good question. We're not quite there yet and we're in negotiations. Look, we've benefited from placing early orders this year and we got a little bit ahead of the cycle then, which has helped us keep prices flat. And we would anticipate doing relatively well in terms of placing early orders for next year too. So I wouldn't expect it to be too horrendous from a perspective of what we pay for the next cycle of acquisitions. Directionally, I think the manufacturers have been very responsible and kept their capacity low unlike the last recession where they put an awful lot of equipment out there on low cost leases, which created an excess of supply and fragmentation in the market. They have been a lot more disciplined this time. They're clearly going to use that to drive prices before they add an awful lot of capacity. I mean, the tax changes in North America announced this or the continuation of the tax policy of getting 100 percent capital allowances I think will further encourage people to perhaps spend next year which again will probably drive up prices. Given the size of our fleet, new equipment price inflation isn't the end of the world for us. New price inflation equals secondhand equipment inflation, secondhand equipment inflation equals rental rate increases. And so when you look at our additions relative to the proportion of our fleet, when you look at people making decisions whether to rent or buy, a little bit of inflation is no bad thing for us. But right now, we aren't experiencing anything too bad. Secondly, I suppose it's the $1,000,000 question really. Just could you quantify sort of the potential size of that sort of self help that you've got to come through in Nations rent, whether that's an EBITDA terms or I mean, we're all aware that it's obviously a cyclical Well, we don't because the honest answer is we don't know. Look, we got this sent through by Global Insight a couple of weeks ago. And we took a step back. When you see this chart for 2015 rising up there and when you're saying by 2013 we'll be back to previous peaks, It feels ambitious. Now when you sit down and talk them through what builds up that model, the logic of the increased rental penetration is well thought through. This is based on very modest improvements in construction consistent with most of the reports that are out there. So it's all about that structural change in our industry. How do we put a number on a mark? I don't know. We think directionally it feels about right. We've got a chart in there which shows how well all of our major U. S. Peers are doing. So there it's 7%, 8%, 9% revenue improvements in the market that's 14% down. That would suggest to us that as we said coming into this recession, we've either got to get improvement in rental penetration this recession or we've got to shut up talking about it. I think we've got evidence that we've seen we're starting to see that structural change. I think the contention of Global Insight which seems a logical one and they have gone back and looked at what happened with purchases by rental companies from manufacturers in the previous cycle. What they've concluded is actually the penetration really accelerates in the recovery phase because we're at the stage now where me and the other rental companies are planning some quite significant reinvestment next year in our fleet. I don't think construction companies is top of their list of priorities right now. The manufacturers this year and continuing to next year are going to be pretty much full with major rental companies, which has got to drive the rental penetration. So it was a bit neatly ducked there. And you can all see this chart in terms of the increase in rental penetration, what that would do to the market, talking about sort of your self help for what you've got in Nations Rent. Oh, so my point Reconfiguring the other products and everything else, what you could do, what efficiencies and everything else? Yes. Look, I could see our fleet, it's probably down a little bit less than people anticipate from peak to trough. In the U. S, it's only down 13%, which is less than our peers. So we took our fleet down swiftly and aggressively, but then we've actually kept it very flat through the bottom of the cycle. So within that infrastructure, we clearly have the capability of adding back a minimum of that fleet size. And then we've got whatever we get from yields too. So there is a good extra volume and value of business that could be leveraged through what is a semi fixed cost base. Obviously, as Mike pointed out, there are going to be there's going to be some inflation as we catch up with wage freezes and repairs and spares, but it's still in very, very big drop through. And it's why we think it's a very compelling organic growth story, which is why we are focusing on this capital reinvestment. And if you look at the margin chart that Jeff showed on page 17 and just bear in mind that the decline in 2,007 was entirely about the fact that that was the point at which we bought the underperforming Nations Rent business and you could see where our margins were, where patent were going and look where we're starting from this cycle. And so I mean, I guess our view is that look, we've spent the last 2 years talking about how bad will it get and when will we bottom, when will it recovery. And we think we've performed relatively well there. Look, we still have to manage what might be a bumpy month or a bumpy quarter. There is uncertainty out there. It would be nonsensical to not recognize that. However, we just think directionally there is so much structural help available from that change in rental penetration. And the consolidation, not necessarily through M and A, but just the big getting bigger in a capital intensive industry in North America. Within I mean let me just give you a couple of statistics to remember. A 1% increase in rental penetration equals a $700,000,000 growth in our end markets. We are the 2nd largest player in the United States and we've only got 5% market share. So that's why we think there's a lot of self help available. Geoff Allen from Arden Partners. Just a quick one, a bit off field, but do you have any further any ambitions to expand outside of the geographical areas that you're in at the moment? Look, what I hope we've shown here is we think we've got a great organic growth story. You'd never say never, Geoff. Not a priority, though. Not a major priority. Mike Morris from JPMorgan, CASN. Just a quick one across product mix, Jeff. The recovery shape that you see this time around with perhaps different patterns of growth across infrastructure and nonresidential construction, that versus last time around, does that imply that your the shape of your new fleet is going to be different than it has been in the past? Yes. It will tweak around the edges. It's interesting. Our fleet department in North America sort of bucket our fleet into early recovery, mid cycle and late cycle products and we measure the utilization on each and it's and we plotted it versus what we saw last time and it's been scarily predictable. I mean when we stand back and reflect on what's happened over the last 2 years, as awful as it felt in the middle of it, actually, it's all followed a remarkably consistent pattern with the last cycle. And so yes, you will see, as I said earlier, you will see a trend towards some more earlier cycle products. So what are earlier cycle products? Well, it's not rocket science. You've got to do foundations before you do roofs. So there's going to be more there's going to be a little bit more dirt equipment before there's going to be a lot more aerial work platforms of the bigger variety. However, there's going to be more residential and small work. So within scissors and the smaller aerial that will probably become a bigger area of focus. Having said all of that, in the scheme of our whole fleet, you won't see material changes. And with the very early cycle products, the sort of site huts and these sort of things, is there any sign yet of proof of utilization? Yes, there is. Yes, I mean, even here in the U. K, I'll be impressed if you can rent a welfare unit, which is something which got your canteen toilets that goes onto a site pretty, pretty quickly. I think our