Ashtead Group plc

Geoff Drabble - CEO Michael Pratt - Deputy Finance Director and Treasurer

Rory McKenzie - UBS Jane Sparrow - Barclays Andrew Wilson - JPMorgan Steve Woolf - Numis Tom Sykes - Deutsche Bank Rajesh Kumar - HSBC Rahim Karim - Liberum

Okay. Good morning, and welcome to both those in the room and those watching on the webcast to the Ashtead Group Full-Year's Results Presentation.

With me today for the very first time is Michael, who I am sure most of you know extremely well. And so, we will be following the usual format.

So following a short presentation from myself and Mike on both the financials and some of the key operational themes, we will get on to the fun bit in Q&A. First, I will -- look at some highlights, and a solid Q4 confirmed a delivery of another impressive year.

It was further year of revenue growth, market share gains, strong margins, and cash generation. And this allowed us to continue to invest in a good balance of organic growth, bolt-on M&A, and we are able to start a share buyback program as we look to use all the tools available to us to drive shareholder value.

And you can see the scale of these investments here on the slide. Impressively, all of this was achieved whilst maintaining our leverage within our long-stated guidance of 1.5 to 2 times EBITDA as we continue to grow responsibly.

And we are also pleased to propose a final dividend of 27.5p making 33p for the year; up 20% on last year in line with our progressive dividend policy. Moving to page of highlights; the highlight to me is just a consistency of our performance as we continue to roll out our 2021 strategy.

Basically we have done exactly what we expected to do. And so with that, I will hand over to Mike to cover some more of the financial details.

Thanks, Geoff, and good morning. I didn't realize that I'll do two things at once here.

So when the slides don't keep pace, then please do let me know. So turning to slide five; that says our results for the year ended April 2018.

As you can see, it was another strong performance. At constant rate of exchange, rental revenue increased by 21% with growth outpacing the markets in all our geographies.

Margins were consistent year-over-year with an EBITDA margin of 47% and operating profit margin of 28%. The margin performance was good, particularly considering that we opened 62 Greenfield locations.

We completed 17 acquisitions which out of the further 52 locations. Those acquisitions are generally lower margin and bring with them associated cost of integration and the cost of acquisition.

As a result, our underlying pre-tax profit for the year increased by 21% on a constant currency basis to £927 million, while earnings per share, which benefited from reduction in the U.S. tax rate in January, increased by 26% to 127.5p.

Turning now to slide six, we will look at the divisional numbers beginning with Sunbelt in the U.S. Rental revenue grew by 20% as Sunbelt continue to benefit from strong end markets, and of course to a lesser degree hurricanes.

Both EBITDA and EBITA margins remained healthy at 50% and 51% respectively as the continued operational efficiency in mature locations more than offset the drag effect of the new stores. As a result, Sunbelt's operating profit increased by 20% to $1.3 billion.

Turning now to Sunbelt in Canada, slide seven illustrates how the scale of our operations in Canada was transformed by the acquisition of CRS in August. As a result, year-over-year comparisons are not particularly meaningful.

In absolute terms, Canada contributed revenue of CAD223 million and EBITA of CAD28 million. The margins reflect investment expenditure and integration cost that we incurred during the year as we seek to build a broad based business of scale in Canada.

Moving on to slide eight, which summarizes A-Plant's annual results; rental revenue grew by 11% in the year. This was a slight lower pace of growth in the first-half as we passed the anniversary number of prior year acquisitions.

And while our margins were slightly lower, a 35% EBITDA margin and a 15% operating profit margin represent a solid performance in a market, which has been pretty flat and competitive. Turning now to slide nine, our strong margins resulted in cash flow from operations of £1.7 billion, a 20% increase over last year.

Ours is an inherently profitable cash-generative business, and it is that cash flow which gives us a substantial operational and financial flexibility. We used part of the £1.7 billion to cover non-discretionary items such as replacement capital expenditure, interest, and tax.

The remaining £1.1 billion of cash flow was available for discretionary expenditure such as growth capital expenditure, M&A, and returns to shareholders. As is our preference, we invested most heavily in growth capital expenditure to support the activity levels we see on the ground.

Even after this investment of growth capital expenditure, we generated free cash flow of £386 million. We then invested a further £359 million in bolt-on acquisitions, increased our dividend, and repurchased shares.

Going forward, we'll maintain leverage within our 1.5 to 2 times target range. And what is not spent on growth CapEx will continue to be -- and M&A will continue to be available for shareholder returns.

Moving on to slide 10, on debt and leverage, and this reflects our ongoing commitments to investing responsibly, maintaining leverage within our target range, and ensuring that our debt structure remains flexible. At the end of April, [technical difficulty] which was 1.6 times towards the lower end of our target range, our debt has a weighted average maturity of six years and a weighted average interest of cost of around about 4%.

We also continue to maintain a wide margin between our net debt and the secondhand value of our well-invested fleet. The gap between these two is now £1.6 billion.

As we have highlighted before, these factors provide us with a high degree of financial flexibility, and we anticipate a number of years of earnings growth and significant free cash flow generation. This supports our plans for 2021 which Geoff will talk about further.

Finally, on the next slide, a brief update on the impact of U.S. tax reform.

Our 2017-18 effective tax rate was 32%, reflecting the reduction in the U.S. rate to 21% from January this year and the geographical mix of our profits.

In 2018-19 and thereafter, we expect an effective rate of 23% to 25%. The lowest statutory rate combined with the full expensing of capital expenditure for tax purposes over the next five years, will also favorably affect our cash tax rate.

Our cash tax rate was 10% for the current year. And we expect it to be mid to high single-digits for the next year, and thereafter, it to move up into the teens.

And then trend towards the effective rate of 23% to 25%. However, as you are aware, these things are a little bit subjective and they are sensitive to the level of capital expenditure any one particular year.

Additionally, the group benefited from the U.S. element of its deferred tax liabilities being re-measured at 21% rather than the historical rate of 35%.

This resulted in a reduction of £400 million in our deferred tax liabilities with a resulting one off non-cash exceptional credit to the income statement. And with that, I'll hand it back to Geoff.

Thanks Mike. So let's start the operational review with a look at Sunbelt.

Our growth in the fourth quarter continues to be ahead of our original plans with strong organic growth and bolt-on M&A. So once again, we have built our outlook for 2018-19 around that 2021 template we have talked to you about many, many times.

Obviously, we adjusted for current market conditions. So with all sectors and geographies performing well, we are a bit more confident than the year ago.

So we have tweaked our organic growth to 8% to 11% and our bolt-on growth to 3% to 4%. So, looking at overall growth for the new financial year of 11% to 15%, encouragingly, we got to a good start.

May's rental revenue was up 19% year-on-year. However, we are also aware that there was going to be some tough comps in Q2 and Q3 as we lap the hurricane activity.

So to simplify all this, we stripped out the hurricane activity both last year in terms of its impact on growth and as a comparison, we looked growing 16% or 17% last year. And we are expecting around about 16% to 17% growth again this year.

So, let's look at some of the detailed revenue metrics; mix worked against us again in the quarter due largely to a very wet late spring, rates continued to be positive at 2% to 3% ahead of the previous year. And as you can see from the chart, we've seen a better upper trajectory in both physical utilization and rates in recent weeks.

So the spring pop was just a little later than usual. But looking at volume, obviously that remains incredibly strong.

There was a lot of noise last year with M&A and hurricane activity but margins remained strong with EBITDA margins of 50% and EBIT margins of 31%. And it was particularly pleasing to see as we had anticipated our ROI improving from 22% to 24%.

Turning to drop-through, and as you can see for both the quarter and the year, it was 53%. We anticipate that that drop-through will continue with similar levels for the new financial year, which will obviously play through the margins.

So looking ahead, we look anticipate a continuation of strong growth, gently improving margins, and significant free cash flow, which again will provide us with a ranges of options to enhance shareholder returns. Clearly drop-through in margins had a lot of attention recently and so in order to expand our long-term expectations I've included here two charts that we covered when we were in New York recently.

But for me the key takeaway of these charts is the potential for further margin improvement is 333 stores that we've added since 2012 continue to mature. But it's easy to figure that we've doubled our location count.

So they have delivered the margin improvement that we have is a testament to the inherent operational leverage in or more mature and well-established locations. This of course is further enhanced as we rollout our cluster model as shown by the chart on the right, and relative returns and are more mature clusters, where we start to see the benefit of that broader fleet we've talked about many, many times and the diversification of our end markets.

But of course the pace of improvement of margins is not linear. And this year there has been a significant investment in our central overheads as we prepare the business for further growth.

But it was clear that we needed this investment, and so the next couple of slides let's just see why we are so confident that this infrastructure, the central overhead base is going to be supporting a significantly larger business in the coming years. Firstly, look, the markets are just really supportive, we got a very, very good market or environment, all our lead indicators continue to support the view that we have a good period of growth ahead both in our traditional markets, but have increasing importance in those non-construction markets, but again we covered -- as Brendon covered in detail when we were are in New York.

We got significant proportion of our growth as an outcome from these new markets. There is the concept of rents will become better understood and as we develop our physical and technological platforms focusing on availability, reliability, and ease.

Therefore, look, we've included the normal traditional construction stats that we've always included here, but just important are the broader indicators reflecting the general health of the U.S. economy.

And again, encouragingly, across all of these metrics, we see a good medium-term outlook. The second and to me, most important factor driving our growth expectations or the continued structural changes in our market, the OREO 100, which is report of the top companies in the industry has just been published for 2017, and it continues to highlight some interesting trends that we've been discussing for a while, i.e.

the big are just going to get bigger. Trying to explain this, if you look the chart on the right there, since 2010, we have delivered 19% compound annual growth and revenue.

The other top 10 players excluding us have seen a 10% growth whilst the overall market has seen 6%. So generally, all the logical needs have outperformed, but the real winners will continue to be the true scale players leveraging their broad product offering and those in our strong physical and technical platform.

Therefore, further consolidation absolutely feels inevitable. But what really excites me is despite this incredible 19% compound annual growth, we still only got 8% market share, unless they go out, and as Brendan explained in New York, we even think that 8% market share is overstated and our end markets are far broader than often recognized.

So, our momentum at the moment is the most tangible example I've seen of virtuous cycle of scale in action. So clearly, we see significant growth ahead, and that's why it was very, very important that we invested in the central overhead, so we had the infrastructure to facilitate that further growth.

Over time, obviously, we are not going to be making the step changes in central overheads and we will start a leverage that you will see that coming down as a percentage of our overall cost base. Moving on to Canada, look, there has been lot's going on here and therefore there is a lot of noise in the headline numbers.

However, we are seeing really encouraging trends with underlying rental revenue growth of 20% in Western Canada and 25% in Eastern Canada. And yes, there're some one-off costs in the quarter, but the underlying margins also remain very strong.

The integration has gone well and you will note in this morning's press release, for example, the acquisition of a business called [indiscernible] in the Greater Toronto area. This adds supports to our footprint in [indiscernible] offering in that key market.

And you will continue to see similar boards on M&A and Canada as we broaden our product offering and we broaden the geographies that we serve. I'm going to cover the organic growth potential for Canada in a moment when we get on to capital.

Moving onto A-Plant's -- and look, it has been a tougher year, underlying volume growth being steady, pricing is tough reflecting both a little of the heat coming out of the end market, but in my opinion more importantly there is just a bit of an oversupply of equipment which needs a correction. We seem to be in this bit of a high 80s as we wait for some significant first infrastructure projects to kick-in while as other projects have scaled back a bit.

So the reason is almost waiting for the next wave of construction. Having said that, there are some good early signs that the market is correcting itself, and we will continue to leverage our market leadership position and invest for the long-term.

We still see this as a very important market. So we expect a return to profitable growth again in the coming year, and May delivered an encouraging 9% year-on-year revenue growth, and a far better drop-through.

So what does all this mean for CapEx for the New Year? If you look at the bottom there in terms of the gross capital spend, you would be excused for thinking not a lot, however, I think this might miss some important trends.

I think the first thing to highlight is we got Canada separate. So be careful if you are comparing with any charts from Q3, which would have been consolidated number.

And in terms of anticipated spend in both U.S. and Canada, we both narrowed the range, so we moved a bottom of a bit and we tweaked the top a little bit too reflecting our positive outlook.

But going into detail, let's start with Sunbelt in U.S. dollars, because again currency distorted the Sterling numbers that we report.

And here you can see similar levels of CapEx in replacement expenditure, but not as much in non-fleet. So again, look, we made the big investment both in over hedge and capital around IT systems; last year we won't have that level of expenditure going forward, and that's why the CapEx in non-fleet has come down.

But in terms of growth expenditure, our growth expenditure is going to be at least the same as last year. And in my expectation it will be our highest spend ever.

Similarly in Canada, no replacements, not a lot of non-fleet at this point, but certainly doubled the growth expenditure again. So yes, you're going to see some more bolt-on M&A, but you're also going to see some significant fleet investment as we develop a model which looks more like the U.S.

model through organic growth. And then the A-Plant spend profile is very consistent to what we've just said.

Look, we're going to keep the fleet competitive and therefore a reasonable level of replacement expenditure, we see really long-term potential in the market, and therefore some non-fleet expenditure, a little bit higher as we invest in some of the IT initiatives that have been so successful in North America. But given what I said about the over supply in the market, obviously not an awful of expenditures.

So the U.K. growth expenditure has been tweaked back a bit.

So overall, I just think this gives a clear picture of how we see each geography, but as always I like the caveat that we place relatively short small orders on relatively short lead times, and therefore we always have the capability to flex our spend depending on the needs of the business. Moving on to capital allocation policy, nothing has changed.

Organic growth is the priority followed by sensibly-priced M&A with balance going to buybacks. This year we probably spend a little more than we first anticipated on fleet reflecting our strong organic growth, and we spent a smidge less on M&A than we probably expected to do, just reflecting some deals taking a little longer than we expected, no reflection on what we see as the anticipated pipeline.

But we spent 200 million on buybacks, so we're running at about 100 million a quarter. So therefore we now anticipate spending between 600 million and 1 billion under the program that we announced earlier.

We will keep updating that number as we go through the period as our spend requirements become a little bit clear. The key however is that we see buybacks forming a long-term integral part of our ability to enhance share order value in line with the capital allocation priorities that we just discussed on the last slide.

The key to our capital allocation is the scale of the cash generation driven by our really strong EBITDA margins. So this together with our strong balance sheet, low leverage and fleet age just gives us options.

So details here on the left of page 23 are the assumptions for our plans through the 2021. And as Mike highlighted in New York, we have the potential to allocate £3.5 billion to M&A or buyback to supplement our base case 7% to 10% organic growth.

Therefore, following on from eight years where we've delivered a not too shabby 64% compound annual growth in EPS, again demonstrating the operational leverage inherent in the business, we expect to deliver somewhere between 15% and 20% per annum through to 2021, and we remain very confident in our ability to deliver those plans. So to summarize, look, we're carrying good momentum into the new year.

The U.S. and Canada are obviously strong.

And after a couple of tough months, A-Plant is also showing the first signs of turning a corner. Markets are supportive, but the key is our ability to gain share and leverage our platform to exploit new opportunities in an ever growing rental market.

Hopefully, both today and recently in New York, we've demonstrated clear operational and financial plans deliver 15% to 20% per annum EPS growth through the 2021. Look, every corner won't be the same as we'll have significant events like last year's hurricanes.

But the overall direction of travel will be consistent. Also it's part of our overall plan to create shareholder value.

We remain committed to a progressive dividend policy and have therefore proposed a final dividend of £27.5 making £0.33 for the year of 20% on the prior year. And as always we will continue to grow responsibly, maintaining our leverage within our long-term guidance of 1.5x to 2x EBITDA.

Unsurprisingly, therefore, the board continues to look to the medium term with confidence. As I said right at the beginning, we now get the fun bit which is Q and A and you all know what to do.

Good morning, James, celebrating Harry's goal? Two goals, so both Harry's goals, sorry; anyway, right, that's it and shall we move on to Q&A now?

Good morning. Thanks, it's Will Hanis [Ph] from Jefferies.

Just a couple of questions, the volume is obviously very strong, your gross CapEx disposals to be lower, so that was indicative of certainly the rental revenues coming in at the top end of the range? And then secondly, just on Canada, can you just talk a bit more about the type of costs that went in there, the one-off costs and pending further any M&A whether that's just now complete?

Yes, look, we'd expected the margins in Canada to sort of even out around where they were prior Q3, so they're not quite the U.S. margins yet, but they're better than the UK.

So we'd expect EBITDA margins going forward of around about 40% and we would expect EBITA margins of around 20%. Look, if you go to the back of the press release from this morning, you'll see that we have tripled the number of locations in Canada this year and tripled the number of staff.

Now, once you put in that level of investment, you're going to start putting an infrastructure around it too. And so what you've seen is some integration costs moving feet around, moving people around, fiddling with locations, you've seen some one-off costs around IT and the HR, and I get beat up all the time by both the guys in Sunbelt and A-Plant, because I hate exceptionals.

I refuse to have exceptionals. Of course the -- because my argument is, look, we're going to open Greenfields, we're going to do bolt-on M&A, we're going to do these things all of the time.

That is our model. So how is it exceptional?

When you got a tiny little business the size of Canada and you do all of these things, it just stands out. We have the same level of drag in the U.S.

from opening - across the two geographies about a 100 locations. All of those things are dragging down the margin, but when the business is as big as Sunbelt is, it's just less apparent.

So there's a normal integration cost, there is a normal cost of putting in infrastructure supporting a business three times the size of what it was one year ago.

Yes, I just want to -- on the volume side, so…

For the U.S., the volumes -- look, the volume is good. We're through most of the hurricane activity, we've lapped some really big M&A over the last two or three months.

So we lapped Pride, we lapped Noble, we've lapped RGR, and we delivered 19% revenue growth again in what was not the greatest quarter in the whole wide world, because of the weather. It wasn't terrible.

But anyone who has been to America, it's just been as wet as can be. And you can see if you look at the chart on -- as we go back the other way, which page is it; this one here, and look, you got to look carefully, but look we've just started to have our spring pop in rate and physical utilization.

So the market is good. We're kind of nervous about what Q2 and Q3 will look like when you've got four hurricanes versus none, one, two, three, there is going to be some noise in there, but yes, look, there's no hiding the fact that we've got off to a very good start and markets are good.

Morning, it's Rory McKenzie from UBS. I'd assumed that you mentioned you talked about redefining how you think about clusters and breadth of rental markets.

And just knowing your budget, not the CapEx, how much you're going to say is going to these new areas, like, you talked about for the [FM] [ph] market, is it all just very, very tiny at the moment? And if it's not that small, and it's growing, are you [indiscernible] how much you're spending on more traditional construction equipment at the moment?

But we haven't broken it down by product categories, but as you would expect, then we're seeing bigger percentage growth in those non-traditional markets. Now, given their relative scale in absolute dollars, then clearly a significant proportion of our spend -- like there's no replacement spend in some of those -- so it's all about the growth expenditure.

And an increasing proportion of capital expenditure is going into those new [indiscernible] as it has done for a while now. Again, Brendan and the guys did a very good job of showing you through some of those smaller specialty businesses that -- well, we went through floor cleaning, then we went through climate control.

Now we've often talked about the growth in our power business, that's been supported by significantly larger fleet. I think over the last three years, we think we've then tripled our market share in power for example.

And there's not a chance we could've pulled off what we pulled off in the hurricanes were it not for the fact that we had the feet on the ground to do it. So yes, they -- I don't think we're in the stage yet of releasing by product category what our CapEx plans are.

But yes, clearly, the plans have to support our long-term intentions. That's the real -- the construction is always going to be a great market for us.

We're always going to be cyclical with construction. But even with construction markets being as strong as they are, it's becoming a smaller percentage of our business, which I think shows the commitment, our commitment to investing in those other specialty areas.

And then on the investment, are you talking about a 3% to 4% bolt-on growth with leverage already towards the bottom of your range, I think it was kind of six months ago --

Well, either we have to spend a lot more on M&A or we're going to have to spend -- [indiscernible] that buyback program.

But that -- I was going to say, because about a while ago, last year, you said that you felt you should probably be at the top end of that leverage…

And I still think we should be. And in all honesty, there's been a couple of deals which I'm hoping we'll be able to announce in the not too distant future which will take up the 3% to 4% and will take us to the top end of that leverage.

However, we're not going to commit to them, because if we can't get them over the line, we can't get them over the line. And at that moment in time, we will tell you we will apply more to buybacks.

So it's -- look, you're right, the math doesn't all add up in terms of what we said around leverage and what we've said around buybacks and what we've said -- but all we're doing is allowing ourselves a little bit of flexibility. If we overcommit ourselves in the bolt-on M&A line, there's a real danger that businesses get sucked into, well, I've just got to do the deal at any price.

I see no sense in that. I think we need to maintain the discipline that we've had and if at the end of the day that goes to buybacks and not M&A, so be it.

I think it's really important that we stick with this discipline of what drives the best shareholder value, not what drives the biggest business.

Great, thank you.

Good morning. Jane Sparrow from Barclays, and apologies if I'm asking something you've already answered, Geoff.

So the drop-through in FY18 was 50% reported, 53% if you ex out the scaffolding work.

Yes.

How do you think about that drop-through in the next couple of years, given wage inflation, rate increases, maturing Greenfields, et cetera?

Yes, I think we're fairly relaxed and I mentioned inflation and the fact that there was a shortage of labor, I think, before everybody else a year or two ago and I got slaughtered for that, everyone was, Ashtead is facing inflation like nobody else in America was. And again, if you go to the slide here and look at what is meant in terms of our individual store margins with the inherent leverage in those individual stores, it's kind of not made a lot of difference.

So I think inflations here -- would our margins be a little bit better if fuel wasn't going up -- yes, probably. But we are still seeing progression because of the inherent operational leverage in those individuals.

So what's pulling back? What has pulled back our margins is this investment here, which as I said earlier, I think is imperative in order for us to have a infrastructure as able to support the business, which we quite reasonably believe we can double our market share in a similar period to what we have recently just doubled it.

But it's no point trying -- this is a service business, the moment we lose service it goes backwards rather than it goes forward. So, at some point in time, if all we wanted to do was improve metrics and improved margins, why the hell would I open 126 locations and 32% -- if I had just opened half of the number of locations, my margin would just go up.

So we have to be careful that we don't run a business to hit a metric. It is important that we don't throw away discipline about strong profitable growth, but equally we need to get our minds around the fact that our objective is to double size of this business.

We have a very good track record, which will suggest we can do that, and we think we can do that in gently improving margins. If at the end of the day, I had a business that was twice a size of the yesterday and only had 30% EBITDA margins and not 31% EBITDA margins, I don't think I'll lose much sleep, okay?

So I think you've got to get your mind around the concept of growth and also get your mind around the concept that inherently these material locations is all of these locations here, which is -- over half of the locations mature towards that 40% and as we have now got over the step changes reflected in the capital, the investment with central overheads and we start to leverage that line, this will get better. Now, there is going to be some noise this year because of hurricanes and things, and you know, would it immediately be 32 or 33?

No. Will it get better over time?

All the math would suggest, "Would do," but actually what will also need to determine is that is how many new lines coming here, how much bolt-on M&A there is and what are the margins of those bolt-on acquisition activities. But we think, this is the most important shot, which is the gap between the top two and the rest is just becoming significant, is becoming significant.

If you compare our financial returns, and the next biggest player [indiscernible] made a profit yet, you know, in these great markets, if you look at the scale of all the investment potential and all growth relative to everybody else, then this is our opportunity to take this momentum and really redefine our position in this market. And that's what we are doing.

But we are doing it with sort of -- this is not going be a big land grab, we're not going to certainly say to you, "EBITDA margins are 45 and EBIT margins are 25, because look at the growth." That would be irresponsible.

So it's all about just trying to pick a path, which is growth, growth, growth, structural change supported by very, very strong margins. So that's a very long answer to, we think they are going to gently increase and because that's what we are saying happening in our most mature locations.

And then, just one on the U.K. as well, given the comments around competitive market's rate pressure, just curious as to why you [indiscernible] that were going into specialty businesses?

Well, again if you go to the CapEx, if you look at it, look, we've gone from third or fourth to market leader. In my opinion, the U.K.

industry has never had a market leader, not even close, there are people who are big for this. I can't think of a single, that's not true, if you go back [indiscernible] many, many years ago, acted like a market leader.

So we want to maintain our market leadership position. I still think there is share to be gained and better margins to be have predominantly.

So we are keeping our fleet competitive. And that's why there is a reasonable amount on replacement expenditure.

We think we need to differentiate ourselves to be able to get this order pricing that the U.S. gets, which means our service and our IT has to be better.

So we are making a big commitment in particularly IT this year in order to differentiate ourselves from our peers. But that's -- there is a growth -- the growth CapEx is tiny, and yes, the vast majority of it is in specialty areas.

So, our truck way business is a fair bit of spend, or serving business, there is a fair bit of spend, but in general, construction equipment -- the fleets are not going to get any bigger at all.

Hi, it's Andrew Wilson from JPMorgan. The question is on competition please, Geoff.

The strategy to move all -- I guess evolving strategy to move into the non-construction market, if you can call on that, are you seeing your big competitors do a very similar thing?

I think it depends on the area. And I think ultimately we will.

But if by big competitors you mean United, yes, and [indiscernible], but again they got no money to spend. So it's kind of around the edges, and the small guy is no, and that's you know -- that's the big difference here is that as we go into these big markets we can create a market, and we can create ourselves as instant market leaders and experts in that business.

I mean I keep banging on this, but then OREO 100 list is a really good treat, well, probably not to produce for me. And again looking at, I mean, well, our fleet size -- U.S.

fleet size, they have seven-and-a-half, seven -- almost 8 billion, okay, there are 5,000 rental companies in North America. We are number two with 8 billion of fleet.

You can see the list. Though based on a very generalist assumption of dollar utilization, the 100 largest rental company must have $27 million, $28 million of fleet.

How do you compete? Brendan will spend more than that on floor cleaning this year.

He will spend it more on floor cleaning products, like -- we will spend more on all of our key specialty areas than probably the 20th largest that we will spend in total. And so yes, we are committed to spending low specialty areas and we are going to leverage our scale, and we are going to -- and that's why organic growth, we believe is very, very important, while as bolt-on M&A will maybe an important.

There has been some speculation about crazy big M&A and we think [indiscernible] forward.

And then, just a second one from the U.K. side, just following up on the comment to previous question; given it's a bit more challenging, are you seeing the competitors do a similar thing in terms of investing in -- I think you mentioned technology and service, and…

No. Again, look, you look at their results, with what?

I know this sounds like I'm being no competitors and I don't mean to do. I think Sunbelt has done a remarkable job in a very difficult market with very few assets to turn the corner, and there is one to two of them who have turned the corner, but we need to differentiate the difference between turning a corner and having any [indiscernible] to do anything in particular.

So I'm not having a goal people, I think they've done a very, very good job. But at the end of the day, this is a business based on service and your capital capacity to provide that service is a big, big, big differentiator.

We've got ourselves into a position where we have this fantastic balance sheet; we have to deploy it sensibly in order to leverage that position.

Thank you.

Hi, good morning. Steve Woolf from Numis; just in terms of Canada now going forward with the acquisition this morning, where do you think all there is a medium-term opportunity, is it with the organic openings or is it with the M&A…

I think it's both. Look, it's like start to go, like we've been doing this in that U.S.

for five or six years, or longer, seven or eight years, and there has been one or two acquisitions in our time when both Brendan and I have gone, well, that's just changed everything. Be in the geography or how we look at the market, so we brought a company called Tops, tiny little business and a change completely how we looked the climate control.

We brought a business in Chicago, which is a big aerial business. We had stayed away from big aerial businesses, and we certainly, certainly went.

Well, if you run them this way, you use them, there is a way to focus on the product, it was an 'aha' moment for us, and we then started rolling out more big aerial locations. Buying CRS has been the closest we had for a long time to an 'aha' moment.

In terms of the footprint it has given us, the performance it has delivered on such a narrow product range, you just go imagine if they had a full product range. And by full product range, I mean aerial, I have virtually no aerial, never mind, [indiscernible] climate control, a lot more heating, never mind thinking actually to do next to nothing in the largest market in Ontario, which is Downtown Toronto.

And then you think -- and then you start seeing how that relationship with having a big Ontario business and a big Western Canada business works in terms of some of the bigger, larger accounts in Canada. It is a market way, it looks different to the U.S.

The number one in Canada has a disproportionately high market share, we're finding the market to be exceptionally receptive to a strong new entrant, and therefore I think you will continue to see us doing a combination of Greenfields and bolt-on. But that one for example, CRS, look, they just need fleet.

If you are trolling through your numbers, you'll see we made significantly lower gains on sale than we did -- that's because we're not selling anything, we're just renting it, we're sitting on huge gains. But we actually moved quite a bit of fleet in Canada in relative terms.

Why? Because we got to reconfigure it, it's part of what the integration cost, so we just got to get that fleet mix.

So we're genuinely excited about Canada. I think we got a super, super team there.

I thought we started with some great acquisitions early in Western Canada, but CRS has just been a "Wow," imagine what this could be kind of moment, and it's been a while since we had one of those we've been kind of rolling out the same over there, the same routine for a while, but it definitely falls into that category.

Good morning. Tom Sykes from Deutsche Bank; just wondered whether you're seeing any changes in markets CapEx post the Trump tax changes in any -- changes in depreciation rates?

No, we haven't. Look, there has been some form of accelerated capital allowances for us.

We don't believe anybody buys things just because of that. We've also not seen any incremental spending, because people are all excited about new investments leading on from those tax changes either.

And I think there is a muted optimism of what those tax cuts will do for our cycle. As I said before, our biggest challenge right now is getting trained drivers, mechanics; it's true for all of our customers.

So, if there is any more demand, it's not going anyway this year or next year; it's just elongating the cycle. So no, I believe the tax cuts will elongate the cycle.

I don't think anybody based on the sort of returns you get makes capital investment decisions in our industry because of tax rates.

Thank you. And then just on your comments on the labor market, what kind of sort of headcount ballpark budgets you're looking for the headcount increase; sorry, this year to hit the levels of revenue growth that you're seeing?

Well, obviously we want the delta. So I'm picking you a number here, and this is not a guidance; if we get 15% volume growth, I am guessing we're going to need something around the 11%, 12% headcount improvement, because some of that's going to come from rates, some of it's going to come from efficiency.

So there will be a delta. There will be a delta down from our revenue number, and that's a problem.

Keeping labor would be hard if we weren't growing so faster, but we got pretty good -- once we keep somebody for beyond three years, we got pretty good retention statistics. The issue we got now when you're growing as fast as we are and we're trying to fund that growth, it is the churn on the new guys that really, really hurt you.

Once they sort of get embedded into our business, understand our culture, understand the opportunities, the career opportunities in our business, we think we hold on to them pretty well. But that's the problem with growth, you've got stuff that growth.

Okay, thank you. And then just finally on the differences on the outlook for yield on the specialty business versus the general tool business, you've given the appendices sort of 5% just…

Yes, but be careful, that's with two [indiscernible]. There's going to be some weird and wonderful year-on-year comparative in specialty when we get to Q2 and Q3.

So that's -- I think the yield environment is generally better in specialty than it is in general tool. I think that will continue to be the case, but whether you can bank in another 5% without the added impetus of hurricanes I think that's probably unlikely.

Okay. So if you looked at that sort of as a run rate now versus pre-hurricane then you know, obviously you got a hurricane effect in your Q2 commentary if you look at it sort of…

From the top of my head, so we show you at every quarter go back and look at Q1 last year.

No problem, thank you very much.

Hi, Rajesh Kumar from HSBC. Just on the rental yield guidance, you got fairly good utilization levels, you got different level of volume growth coming through, your -- basically rates are rising, you've got inflation which is a good excuse to have a discussion about pricing, yet we are not seeing any like-for-like yield increase and…

So, you are the brave person who talked about yield. So honestly, so here I get into my rant about how can nobody understand yields, okay?

Exactly.

And I apologize that we will know every time we come into this presentation he says don't rant about yield. So I will try my very best not to rant about yield.

But we need to understand what yield is. Yield is like there is balancing number, which solely means nothing, you can -- look, if I could turn back time, we would have never put it in our presentations.

We inherited it from Ian who insisted that was a best metric in the world. The first time I ever met Brendan, I remember his saying, "This is just a dumbest metric in the whole wide world.

Nobody understands it," and he was 100% right. Nobody is going to -- yes, but we've told everybody about it for whatever.

We are stillstuck with it. Whilst, he can perhaps get rid of it, because look what's happening?

Okay, yield is changing not because of rate. So what physical utilization drives, what a strong market drives, it's rate improvement, so rate is getting better as you would expect it to be.

It's a tighter market, there is inflation, we need to pass on some of that inflation and rate, and we are absolutely doing that. The only thing that's driving yield backwards is mix, i.e.

we are doing more longer term projects, and look, surprisingly if you want to rent a product for two years at a 100% physical utilization, you pay a lower rate per day than if you want to rent it for the day. So the only thing that's driving yield down is actually a really quite good thing, which is we've got more and more fleet on rent to more and more customers for longer and longer period.

It comes out as a negative. I mean, look here, I think this is interesting, look, you just said minus 3% yield is terrible.

Okay? But we delivered 51% EBITDA margin.

So yields with 3% lower than one year ago, you know, where our EBITDA margins where in Q1 2017, 51%. So minus 3%, which looks terrible as a headline number, you would think, look, it's not indicator that it's the end of the mark-to-market, it's got stronger, it's made zero difference to EBITDA margin.

So look here, plus 3%, that looks fantastic and that must be better for margins. Well, actually we delivered 48% in Q3.

Do you know what the margins were in Q3 2017? 48%.

That plus 3% made no difference to margins, and that minus 3% made no difference to margins, because there is a chorus bonding adjustment to these longer or shorter rental period with transactional cost. So yield is -- this is far better, i.e.

on a like-for-like time and product mix horizon, so some generalities in that, so even that's not a perfect metric, is this strong market and is this strong physical utilization. This yield headline which gets all the attention, which is our focus, we've been sticking in presentation for the last 20 years, and -- has no correlation to what's happening with margin.

So then if you look at it here, if you go back you would think minus 3 to nil, that's going to be brilliant. Well, it's just made no difference.

So yes, you lose it in rate, but you gained it with physical utilization and you gain it in transactional cost. If I was to get really complicated about, there is a third dynamic which is product mix two.

So there're so many things affecting yield like how much is specialty, how much is general tools? You know, that it is not the best metric in the world.

We stick it in there because every time we either miss a line or a chart, James says, "Where is the last chart from last time?" So we certainly within that -- we very deliberately started putting rate and instead because we just think it's better.

The key is to look at these margins. And look, we've added 300 odd locations in the last few years.

We've had all of the integration cost of all of that. We have -- Brendan sits in an office that is now 100,000 square feet, which 18 months ago was 60,000 square feet.

There was no point growing a 10% in line with revenue or volume, because we are planning on being twice the size in the few years time, so we've had all of those sort of infrastructure investments, and yet we are still banging out 50% EBITDA margin, EBIT -- 31% EBITA margins. So look, I know there is always a bit of noise around all of this, but we can keep drawing mid-teens percent and bang out these margins, and we apply our balance sheet and our cash generation responsibly, we think that's okay.

Is there anything particular driving that longer duration contracts?

Yes, absolutely, which -- it's a combination of -- there are some really big projects around. We're all -- you know, getting up there in terms of the cycle and those large projects historically would have had a significant proportion of owned equipment.

And they haven't. So we've never had projects where -- we have projects where we have $25 million of fleet on a project.

That was unheard of some years ago, because people are just renting. So the negative yield, which everyone says, "Oh, we think, are you mad?"

Look, we are renting it all out for longer; it's a absolute clear demonstration of rental penetration growing in practice. And yes, it's a weird metric, but the key is follow the volume growth, follow the margin, that's a balancing we had number in the middle.

Thank you.

And that was hardly a rant, it was close to one, but it wasn't -- well, just going to…

Good morning. It's Rahim Karim from Liberum.

Just a quick question on the drop-through for '19, in fact it's flat year-on-year, should we take anything from that in terms of the potential integration costs and additional infrastructure?

Look, I think it's a reflection of where we are right now. Look, we used to have drop-through in the 60s, we were doing less Greenfields, less bolt-on acquisition, and we have more spare capacity in our existing locations too.

So it's come down to 53%. We think -- we've given guidance for 53% in the coming year too.

So, clearly our EBITDA margins are 58 will be gently enhancing. Now precisely what the drop-through will be, I'll come back to you, will depend on exactly how much bolt-on M&A we do.

That is why I keep going back to I think this is a good chart, because this is certainly how to find the right one, this is how we look at it; we have to differentiate, if the only reason margins -- if margins going down because these things going down, then we should be worried. If the headline margin is going down, because we've just -- that number instead of a 126 is 250 that's less of a concern because if you look at our track record of evolving the margins once we've done the bolt-on M&A, and once we've done the Greenfields it's very, very good.

So the headline number will be distorted by the general level of activity, but the key is that our mature locations, they are generating 40% EBTIDA margins, and there is a range within those. You know, that has to be encouraging.

It looks like we are done with questions. Nobody dare to ask another question after yield.

Look, once again, thank you for your attention. We do appreciate, and we are looking forward to updating you again for the key ones.

Thank you.