Ashtead Group plc

Geoffrey Drabble - CEO Suzanne Wood - Group Finance Director

Rory McKenzie - UBS Andy Murphy - Merrill Lynch Justin Jordan - Jefferies Andrew Farnell - Morgan Stanley Karl Green - Credit Suisse Josh Puddle - Berenberg Rajesh Kumar - HSBC Sylvia Foteva - Deutsche Bank David Phillips - Redburn

Well, good morning. Welcome to this beautiful sunny day in London.

As usual, we've got our full year results, and it will follow the usual format. Suzanne and I will cover the financial detail and some operational trends, and as always, we'll swiftly as we can on the Q&A because I always think we’ve got a lot more color and a lot more understanding of the numbers once we get to Q&A.

So let me start with the highlights of another successful year. I think we got good end markets across most of the sectors together with ongoing structural change, so that continued to provide very good opportunities to us.

And we've talked about this before, but as we're standing back and considering the scale of the shift to rental and our market share gains over recent years, look, markets have been strong. There's been improved visibility and there's been a low cost of borrowing.

But our customers have consistently chosen the flexibility and reliability that rental and we provide. And this behavior in what's still a very young industry still is, in my opinion, a very encouraging dynamic, and we're going to discuss more of that this morning.

The trend of renting more for longer is not only good for our short-term performance, but more importantly it's a really good underpin to our longer-term growth plans. These behavioral shifts are now becoming institutionalized, and we now have the opportunity and, indeed, the -- both the operational and financial platform to rent a larger, broader fleet, and leverage our operating cost base.

The increased reliance on rental does make our customers more demanding, but it also drives those who can actually satisfy those needs. And I can only see this being a trend to that, and continues, particularly as the adoption of technology accelerates.

Well, exploiting these opportunities the same way as we always have done: through same-store fleet growth, Greenfields and bolt-ons. Therefore, it has been another year of significant investment with over £1 billion spent on capital, £437 million on bolt-ons, and over 100 new locations opened or added.

And our strong margins allow us to do all of this investment whilst maintaining our leverage well within our 1.5x to 2x EBITDA range. And our strong cash generation, supported by our clear capital allocation strategy, has allowed us to further enhance shareholder returns.

This cash generation, combined with our impressive growth, is, in my opinion, the standout highlight of the year. And the flexibility this strong cash generation provides allows us to look to the medium term with further confidence in our ability to enhance shareholder value.

And with that in mind, we are pleased to propose a final dividend of 22.75p, making 27.5p for the year. And so with that, I will hand over to our Finance Director, Suzanne Wood.

Thank you. Thanks, Geoff, and good morning to everyone.

Our fourth quarter results are shown on Slide 5. And as you can see, our underlying pretax profit for the quarter was £189 million, ahead of last year's £163 million.

The group's rental revenue grew by 11% at constant rates of exchange. However, the fourth quarter this year had 2 fewer billing days than last year.

And so on a billings per day basis, our rental revenue growth in the fourth quarter was 14%, which is right in line with the earlier quarters this year. This also had an impact on drop-through and margins in the quarter.

EBITDA margin was unchanged at 46%, while operating profit margin was slightly lower at 26%. This resulted from higher depreciation expense associated with our larger fleet and a higher cost base reflecting certain one-off expenditures that Geoff will explain in more detail a bit later.

On the next slide we've shown the group's financial results for the full year. And as you can see, it was another strong performance.

At constant rates of exchange, rental revenue increased by 13% with our growth outpacing the markets in both the U.S. and the U.K.

Similar to earlier quarters this year, the percentage change in our total revenue of 10% was less than the change in our rental revenue. This resulted from fewer fleet disposals as compared to last year, and we'll discuss this more in a moment.

EBITDA margin in the year improved to 47% and operating profit margin slightly reduced to 28%. We believe the margin performance was a strong one, particularly given that we opened 61 new greenfield locations, completed 15 acquisitions, along with the associated costs of acquisition and integration, and also invested in our infrastructure.

And as a result, for the year, our underlying pretax profit increased by 7% on a constant currency basis to £793 million. On the next slide, we'll take a quick look at our growth rate percentages after adjusting for the effect of gains on sale.

This provides a more accurate picture of the underlying business performance. Excluding the sale of used equipment from both years, revenue increased by 13% and underlying profit by 10%.

Turning over now to Slide 8, we'll review the divisional numbers beginning with Sunbelt. Rental revenue grew by 12% as Sunbelt continued to benefit from generally strong end markets.

EBITDA margins increased to 49% for the year while operating profit margin was broadly flat at 30%, owing to the factors I mentioned earlier. Sunbelt's operating profit increased by 7% as compared to last year as the continued operational efficiency of our mature locations more than offset the drag effect of new stores.

If we normalize for the effect of reduced fleet disposals by excluding gains on sale in the year, then the underlying profit growth rate at Sunbelt was 10%. On the next slide, we summarize our A-Plant annual results.

Rental revenue grew by 16%. However, the operating cost base grew at a similar rate as we integrated 4 acquisitions.

As a result, margins at A-Plant stayed relatively flat for the year. Like Sunbelt, A-Plant's operating profit growth percentage change of 7% was adversely affected by fewer fleet disposals in the year.

Excluding the impact of lower gains on equipment sales, our operating profit margin -- or, I'm sorry, our operating profit increased by 11% over the prior year. Turning now to Slide 10.

Our strong margins resulted in cash flow from operations of £1.4 billion, which was significantly higher than last year. As we’ve said many times, ours is an inherently profitable cash-generating business, and it's that cash flow which gives us substantial flexibility.

We used parts of the £1.4 billion to cover what I'll call nondiscretionary items like interest, tax, and replacement CapEx. The remaining cash flow of £927 million was available for discretionary items such as growth CapEx, M&A, and shareholder returns.

We chose to invest this year most heavily in growth CapEx to support the activity levels that we see on the ground. But even after the investment in growth CapEx, we generated free cash flow of £319 million for the year.

We then invested a further £421 million in bolt-on acquisitions, increased our dividend and repurchased shares. Going forward, we'll maintain our leverage within our 1.5x to 2x target range, and what is not spent on growth CapEx and M&A will be available for shareholder returns.

Slide 11, on debt and leverage, reflects our ongoing commitment to investing responsibly, maintaining leverage within our target range and ensuring that our debt structure remains flexible. At April 30, our leverage ratio was 1.7x, well within the target range.

We also continued to maintain a wide gap between our net debt and the secondhand value of our well-invested fleet. The gap between those 2 is now £1.4 billion.

And so our strong balance sheet and leverage remains a competitive advantage for us and positions us well in the near term. And with that, I'll hand over to Geoff.

Thanks, Suzanne. So let's look at Sunbelt in a bit more detail starting on Page 13.

And I believe that the quarter and the year, we're in a very uncertain time, reassuringly predictable, which you can see from the chart. Strong volume growth has continued in both general tool and specialty, with fleet and rent being up 18% and 13%, respectively.

Volume and physical utilization were strong in Q4, with yield continuing to be negative. So in overall terms, a very consistent performance with the most recent quarters.

But again, as always, the devil is in the detail. So Page 14 details physical utilization.

And these are really encouraging shots, particularly for general tools. Because as you can see, since the turn of the calendar year, we are at record levels of physical utilization in both general tools and specialty.

This reflects the benefits of longer, larger contractors -- contractors' or customers' shift to rental. But this higher physical utilization gives me a lot of confidence not only for the new financial year, where we've clearly got off to a good start, but the long-term potential is very encouraging.

If we can operate with consistently higher levels of physical utilization whilst retaining our service levels, this will result in much improved returns going forward. Page 15 is our typical look at drop-through split by store type that highlights the strong fleet and rent growth, improving physical utilization, but, of course, also the pressure on yields due to mix.

However, you can say that once again, the 58% incremental margins are much stronger than our current reported margins of 49%. On a technical point, this is undoubtedly, there were 2 less billing days this year in Q4, and that did have an impact on the reported numbers.

But this corrected itself with a very strong performance in May. We are becoming larger and more complex.

And so again, I think it's an area where the house we should go and visit in a little more detail, which we have attempted to do on Page 16. This slide just breaks down what's happening to drop-through and, therefore, margins at a store level.

So that's what we call profit center contribution. That's what our depot managers look at every day.

And this is a good way to look at underlying margins trends as a lot of the central spend reflect either long-term investment decisions or one-off events, not day-to-day trading. And I think the strength of the profit center contribution and the year-on-year improvement supports our view that despite the pressure on yield, the lower associated transaction cost make this very profitable incremental business.

There's clearly been a big increase in central overheads this year of 19%, and this largely falls into 2 buckets: IT development and staff retention. IT spend is up over 50% year-on-year as we invest in our future.

Well, we stressed recently how important technology is as a differentiator, and we will continue to invest in those customer-serving, customer-facing interfaces. We've had major one-off upgrades to our HR and payroll system given the growth in our headcount and are in the process of upgrading to the latest version of our operating system.

So as I said, they would be normally one-off costs. In terms of staff retention, you'll see what we've done in the U.K.

by adopting the living wage. But we're committed to taking care of our frontline staff because they contribute so much to our great service.

And we have similar initiatives under way in the U.S. And to this end, we've made significant provisions for discretionary bonus payments in Q4.

So in short, our operating margins are strong and improving. Yes, we've made some investment decisions this year, but our overall drop-through remains a very healthy 58%.

So our EBITDA margins, as Suzanne just showed, continued to improve. Again, it's worth remembering that our growth has been driven predominantly by structural change.

As you can see from the chart on the left, the one we've shown you before on Page 17. We've grown much more than both our end markets and our peers.

And what's driven this? Well, as you can see from the chart on the right, a lot of it has come from volume.

We've got 230% more fleet on rent this cycle. And from the start, it may have been obvious that given our low market share, the low rental penetration and the fragmented nature of the market, we could reset the scale of this business and improve returns.

And this opportunity remains as obvious today as it did then. Have we done this at the expense of rates?

Absolutely not. Rates have improved 30% through the cycle and are 9% higher than they were at the peak of the last cycle.

Growth leveled in here and there has been a pause in rates over the last 12 months as the market has corrected itself for issues such as oil and gas. But as you can see, it was not the major correction that was experienced by some.

We're absolutely confident that we can raise rates this cycle. We continue to make good progress on daily and weekly contracts, and now we did get a bit more traction on monthly.

Now I'm going to discuss this a bit more in a moment. So what do I expect for rates this year?

Well, I bank on flat and hope for a bit better. And around the edges, it really doesn't matter too much because there are still huge volume opportunities and further efficiencies of scale, so our growth will continue to be very profitable.

So why are yields negative if rates are flat? Well, if the mix of monthly contracts, which, as you can see from the chart, have now increased to 69% of the total of our business.

These higher volume major contracts have always been the ones which are more fiercely bid given the duration and the consistency of revenue. As I said, we are looking to improve these monthly rates.

But we are also taking a view of some of the larger projects to establish long-term relationships with those who traditionally owned. It just makes sense to facilitate this change to rental with the right balance of value and service.

But we've now proven over multiple years that we can grow our end markets by disrupting the traditional ownership model. And if we continue to get this balance right, it provides a long-term structural underpin to our growth and margin ambitions.

And that's why we remain very confident as to the achievability of our 2021 plans. Of course, we have to balance long term with the here and now, and I think we've done a pretty good job of proactively managing volume, yield and transactional cost, as witnessed by our improving profit center contribution, as we demonstrated earlier on Slide 16.

As you can see also, we got off to good start in terms of our 2021 plans with a number of Greenfields and bolt-ons during the course of the year. We opened 49 Greenfields in addition to the 24 bolt-on acquisitions.

So a very, very good start. Our growth plans for 2021 remain unchanged.

We're looking to have predominantly organic fleet growth. But also, what we're looking to do is to supplement that with bolt-on acquisition.

You can see we've done a reasonable amount of bolt-on acquisitions over the last few months, and a lot of that is around, again, part of our 2021 planning. What we found is I think the market also now accepts that there is this structural change, and I think people are approaching us more, recognizing that we are a viable option for them.

As you'll expect, Sunbelt's fleet spend is consistent with its growth plans. And we have another low replacement year, and we will see the full year benefit of our strong second half spend.

Also, let's not forget the fleet growth from bolt-ons, which will fully contribute this year. So in around -- for this year, I would expect very similar levels of capital expenditure.

So let's now turn to A-Plant where we continue to make good progress as we leverage our market strength. Volume obviously continues to be strong at plus 19% in the quarter, with yields a negative 4%.

Like Sunbelt, there's a mix element to yields where the biggest single factor is the inclusion of the Hewden assets, which I'll cover in a moment. Much has been made over recent years of the Sunbelt bolt-on greenfield strategy.

We've said a lot less about what's going on at A-Plant. Look, A-Plant added 28 locations last year, 12 via greenfield and 16 by way of bolt-ons, a very different trajectory to many of their peers.

Well, the 2 biggest deals were Lion's and Hewden's, and they have us expect it being a drag this year, but we will see the full benefit as we go into the current financial year. Look, Lions is an event for this business, which makes 90% of its profit in the first half of the year.

Therefore, buying it at the beginning of the second half made little short-term sense. However, it allowed us to fully integrate the business into a single site, incurring all of those one-off costs in the quieter time.

As we now enter the busy season, we are seeing the full benefit of these investments. As for Hewden's, when we look at the rates we inherit -- the individual rates we inherited in some of the operating procedures, well, they went bust for a reason.

Therefore, there's been a lot of work this quarter to clean it up and, in particular, understand the opportunity in the industrial market. Again, this is largely behind us, and we expect a strong year ahead.

Because of the high second half spend in both fleet and M&A, we do not need a lot of further investment in the current year, as reflected on Page 24. However, we expect low-teen growth with a drop-through in the low 50s as we benefit from the actions we've just taken.

So relative to A-Plant's 37% EBITDA margins, that would be another strong performance, and we will see margins and ROI improve again. Look, I mentioned throughout this update, and Suzanne did also, that our expectation is for both good growth and strong cash generation.

It's probably, therefore, worth reaffirming our capital allocation priority. We're anticipating continuing to operate within a leverage ratio of 1.5 to 2x EBITDA.

Given the strength of our markets and our medium-term confidence, we don't feel there's any need to be at the lower end of that range or indeed potentially below this range. Therefore, we will, as always, prioritize organic growth, then look to bolt-ons so long as the returns make sense.

After this, we will look to shareholder returns through both dividends and buybacks. And we've been very active with bolt-on M&A over recent months.

And therefore, we don't expect -- we haven't spent anything recently on buybacks. But to be clear, this purely reflects the opportunities that presented themselves and doesn't signal a change in our policy.

All our capital allocation decisions will be determined by relative returns, and we'll retain the flexibility to use all the levers available to us to enhance shareholder value. So we now have a well-diversified business where our end markets remain supportive.

This is supplemented by what are now significant shifts in the behavior of this industry. Our customers continue to rent more.

And as they look for greater support and flexibility, they rent from the larger, more sophisticated players. These shifts have and will continue to deliver very strong growth.

Some dynamics are changing, but it will be profitable growth, as witnessed by our strong incremental margins. As a consequence of multiple years of considerable investment in these trends, we have both the operational platform and the financial capabilities to further exploit these opportunities.

And this growth will be accompanied by strong cash generation, which will provide us with a range of options to further enhance shareholder value. We will, however, grow responsibly, remaining within our leverage range.

So in the coming year, you will see us continuing to execute on our well-established strategy, as detailed in our 2021 plan. So according to all the staffs and all the slides, I guess the real story is that it will be very much more of the same in the coming year.

And now it feels like a very appropriate point to move on to Q&A. We do the usual stuff where you wait for the microphone and say who you are for those who aren't in the room.

I'll give you a chance. Have a glass of water, too.

It's Rory McKenzie from UBS. You mentioned rising staff compensation costs in the U.S.

Are you seeing more threats to retaining staff? Just wondering if that's just competitors are investing one mark or being more aggressive.

No, I think we see a challenge in retaining staff. And yes, people are more aggressive at trying to take our staff.

But it's just equally from not our sector as it is from our sector. Well, look, we have drivers who are stopped at red lights and given cards that say please, this number -- give this number if you want another job.

And I think -- as I said, that's why we put in some big bonus -- retention bonuses in Q4. So I've moved on to the living wage here in the U.K.

I'd say there's an opportunity. Look, we have the wherewithal to provide a very good offering of base pay and other elements to our staff.

We're the winner in the sector. So yes, it is a challenge, but it's a challenge we're probably better able to meet them more.

So in terms of supply in the industry, it's not what we're seeing. I mean, if you look at our competitors' physical utilization, if we look at our physical utilization, if you look at the strength of the secondhand pricing in the marketplace, none of that suggests a big increase in the supply, the relative supply and demand in the marketplace.

I can't see any hard evidence of that. Are people spending more because the market's good?

Yes, of course, they are. But I -- in terms of the relative measures, no, I think very reasonable share.

And then just on rates. Would you expect any change in your pricing relative to the market?

You said historically that you -- across-the-board average, you may be 15% pre-annual, that kind of thing. Just wondering if the industry is now investing more because the market's good.

And so it's de-aging and you may be holding your fleet age flat or increasing it. Is that going to change that relative premium at all?

No. Remember our fleet age.

It's a -- the number you're looking at is a mathematical number. It's not actually what's happening in terms of relative age or what I call [indiscernible] age.

Our equipment is younger. Our equipment is still much younger than the industry average.

Our average is going up just because of the percentage of growth CapEx, so it's a purely mathematical phenomenon. We are keeping the equipment for exactly the same length of time as we've always kept it.

So I don't say that -- again, our best benchmark is when we do bolt-on M&A. Well, it's the first thing we do.

We check what's our relative rates, and we check what do they pay for equipment and what do we pay for equipment because it's the best benchmark we've got. And we've done a lot of M&A.

I would still say that 15% gap is about right if you take what I will perceive to be the highest quality independent rental company that was out there at the time, Pride, that we bought. That came down to about 11% or 12%, and that's without sort of real quality operators.

So I think we're able to retain most of that. Now the tough thing is these big, long contracts.

Now at the end of the day, there's 2 or 3 people who can do them. It's the truth of the matter.

And are we trying to strike this balance between, hey, let's get multi-rates open -- people who have never rented us before want over 1,000 pieces of equipment for the next 5 years, and we're getting 58% incremental margins. On the one hand, I'll say, hey, life would be a lot, lot easier if I could stand up in one of these presentation and say rates have gone up.

Then the guys are going, it's a 58% margin, and it's 5 years and lots of equipment. Do you want a deal or do you not want a deal?

So we are trying to strike that balance, but I do think we're facilitating the shift to rental.

All right. Thank you.

Just coming back to that point on rate. And you talked about bank on flat and hope for a little bit better.

Is that based on the signals that you're seeing on the monthly contracts you signed recently and held back by some of the 12-month plus ones that you've got?

If I look at our most -- look, this is data taken almost daily -- well, we do get it on a daily basis. But it doesn't make any sense on a daily basis, but we get it on a daily basis.

Now we -- and we look at it monthly. Since the turn of the year, we've had pretty good traction on daily and weekly rates.

Our daily and weekly rates are now the best they've ever been. Monthly -- a friend who is in the room, he would see it and look at the fourth decimal point, and he would see they were going up, I think I would debate that point.

They've stopped going down, and they're flat. Now does that mean there's going to be a turn?

Look, we are operating at 2% or 3% higher physical utilization than we've ever done in our history, and we're hearing similar things from our peers, so there ought to be the ability to push up rates. However, what happens is, we will push up rates on 5 small contracts, then a great whopper will come along and the metric will go down.

If you go right back into the appendices, if you look at our rates, they'll be -- they were very, very flat. There's a small dip in April.

They go back up May. Why did it go down in April?

Well, we stuck $100 million of Pride fleet in there and their rates were lower than our rates. So it took the average down.

So what I would say, on the ground is there is lots of opportunities to get rate up monthly, but there's going to be the occasional big contract and every time we do a bolt-on acquisition, our rates come down because they're 15% lower than ours. So -- but it's not a horrible environment.

It's not a great environment. And I just said we're trying to strike that balance between accommodating the shift to rental and getting good today rents and I think we've got the balance about right.

Yes, great. Very clear.

And just on the costs you've got in Q4, would it be fair with that hike in IT and some of the extra retentions, would it be fair to sort of think about £10 million, £15 million as nonrecurring in Q4? And then the balance is being actually which is going to pay people a little bit more so we don't get a churn in employment?

Yes, that's almost spot on. So if I’d be able to by £1 million on the top end of your number, that's almost spot on as a number, yes.

Andy Murphy at Merrill Lynch. Just one fairly general question on risk.

Given what's happened recently and some of the commentary about is the U.S slowing down, is it not slowing down, can you give us a few thoughts on what you're seeing on the ground either by industry and regionally?

Yes, look, we're just -- I think everyone's become a bit myopic about Donald Trump and his infrastructure program. And somehow, unless he cuts taxes and there's immediately $1 trillion promised in infrastructure, the markets are not strong.

The markets are very, very strong. We've got record levels of fleet on rent.

And it was last Monday, for the first time, we crossed $4 billion of fleet on rental for the first time at record levels of physical utilization. So the market's strong, and everything we're hearing from our customer base supports that.

And projects are getting pushed out. So we're very comfortable.

I think this lack of action around events that may well affect us in 3 or 4 years' time is distracting from the fact that the current markets are very, very strong. But people always get agitated about the non-farm roll pay, whatever.

Look, it's going to be hard for -- to get big steps up on that because you just can't hire [ph]. Look, it'd be hard to explain just how difficult it is to get drivers and mechanics right now.

Very difficult. So our experience on the ground across all sectors -- and gosh, even oil and gas.

I mean, I know it's like 1% of our business. But fleet on rent, yes, it was up 53% year-on-year.

Rates in oil and gas were up 17%. So that -- 53% and 17%, of nothing -- is pretty much nothing in the grand scheme of our numbers.

I mean, let's not get overexcited about this. But nonetheless, in terms of overall pressure on the market, back to Rory's point, that helps those companies who are more focused in that sector.

They have less need to move their fleet elsewhere. I mean, we -- either we -- last week was meant to be Infrastructure Week.

Who read everything about infrastructure? So I understand why people get frustrated about the lack of action.

But remember, none of it is going to affect the short term. We've got a good runway in the market as it exists today.

Any further stimulus just helps us longer it.

And Andy, I would also point you back to Project 2021 when we laid out those plans that was prior to the election. So those plans did not really include anything related to an infrastructure spending package, and nothing has really changed since that time.

And we're just over a year into 2021 now, and we're probably more confident, not less confident, of our ability to hit those numbers. Now sort of lacks small events possibly.

But notwithstanding that, the market looks very robust.

Justin Jordan from Jefferies. Just 3 quick questions, if I could.

Firstly, just on -- sorry to harp on the point on rate. Can we just -- you talked about -- was it bank on flat and hope to deal with better rate.

Can you translate that to yield? What's -- so is it a tough bit?

Yes, because it's all comes down to -- I mean, remember, we're only doing one bit of the mix per tier, which is the biggest effect at the moment. So the question will be, when does this stop getting worse?

So if rates stayed flat at about -- went from 69% to 68%, yield will get better. So, well, what is the precise mix of the millions of contracts that we write going to be between monthly, daily and weekly?

I have no idea. I have to believe that we must be reaching a point where it doesn't get much bigger than this.

And therefore, it becomes less of a debt inventory. Because the other factor, which is -- with many of this is -- remember, of course, is product mix, too.

So what we're also renting is a lot more of the lower dollar utilization. But it doesn't mean that the dollar utilization of those individual products is going backwards.

It just means the mix is changing. So how -- with all of the contracts we've got, rates are a bit of a stop at the dock.

But I think it's seems reasonable that we must be -- and that's how we feel. All yields look better in Q4 than they did in Q3.

But that's just because the sun starts shining when people start doing gardening and we get more daily and weekly contracts. It doesn't mean anything has gotten better, but it just means the sun started shining.

So you have to see it through your -- I don't know. I think it gets a bit better, but I can't bank on it.

But at the end of the day, because the lower transactional cost, the important thing -- I think, again, we're getting a bit bogged down on one metric. Our job is to enhance shareholder returns and improve margins.

With a lower transactional cost, this is going to be very, very profitable business. And if this was -- if this was signaling an oversupply in the market, and that's why yields were going down, I could understand the concern.

This is reflecting this big structural shift of people wanting to rent more. I see this as a very positive trend.

I don't see this as a negative trend. People wanting to rent more for longer is good for us in the long term, not bad for us in the long term.

And I think, just to put some metrics on that, if you look at Sunbelt's EBITDA margin for the year, it was 49.5%. If you exclude gains on fleet sales from that because they typically carry a lower margin, it was 51.5%.

Our drop-through for the year was 58%, so that 58% will naturally pull up those margins that are already a bit over 51%.

And again, Justin, take all of those extra one-off costs to same stores.

Exactly.

I think there's too much like hard work to try and allocate the 19 to Greenfields and bolt-on. So we've got big integration costs tied to the scores into the same stores.

That's why we've put this slide, because I think this is how we look at it. And here, you can split out -- look, this -- but we have had the pressure on yield over the last 2 years.

Look what's happened to profit center contribution over that period of time. It's just improved.

Now as we've grown the business, we -- look, if all we wanted to do was affect metric, you would say, hey, let's not do the system upgrade. Well, great, let's not do the staff retention bonuses.

And this number would be even better. Look, we totally buy into this long-term structural opportunity.

So it's important that we invest in it and we don't just drive a single metric. But even after that investment, 19% growth in central overheads, we're still delivering 58% drop-through.

I mean, that's 58% EBITDA margins. No wonder we're throwing off all this cash.

Just on that, though, with my next question. The cash -- sorry, £319 million in free cash flow current year, probably going to be, I guess, higher [indiscernible] in '18.

How do you -- what's happening with M&A valuations, first of all? And how do you balance potential M&A versus organic growth versus potential buybacks over that?

Okay, let's be clear. The most important thing we ever do is same-store investment.

In my opinion, people in the rental industry who have got it wrong in the past have been in far too bigger hurry to do M&A and put new dots in the map. Where it was good is that individual location next to its closest competitor in that town.

And therefore, organic fleet growth is always the most important investment we make. We will continue to be selective with M&A.

We know exactly what we like to do. But Pride is a perfect example.

Pride is the market leader in scissor lifts in Manhattan. It's not like number 2 or number 3 in -- on a national basis, but it's a shifter of our presence in that individual market.

It is the market leader. I was talking to guys yesterday because we're doing a roadshow in America next week and I want to take them out for dinner, a, because it'll be a nice break from talking to people like you; and b, they're quite funny.

And they have 2,000 scissor lifts on rent in Manhattan yesterday. 2,000.

Nobody rents a scissor lift without wanting to rent something else, too. It is a huge opportunity.

We -- year-on-year remain -- Pride was up 10% year-on-year from a single store, and it's operating at 80% physical utilization. We are buying good businesses and are making them better quick.

So we like bolt-on M&A. Are we paying higher multiples?

No, not really. The -- this is not as big change as a -- the reason why there's been a bullish in the last month or two is because we did our 2021 presentation 6 months ago, and we were somewhat surprised at the number of people who watched it and said, you know what?

They're right, you want to buy my business. I think 6 months later, that was the activity level which the [indiscernible] because the people on the ground recognize this structural shift.

If you talk to the Noto family who run this unbelievably good business, Pride, they knew that they couldn't remain a single product provider. To compete with us, they were going to have to make their business significantly more complex.

They knew they were going to have to invest in a significant upgrade to their IT system or they weren't going to be as competitive. And so they just decided it was time to get out.

So we will continue to be selective. We've said we'll stick within our leverage range, but there's a -- we're getting calls weekly.

We're not calling anybody else any longer, and that's how it all started out. We're just waiting for the calls to come in.

Just one final quick thing. It feels like a week is a very long time with politics right now.

Can you just remind us on just FX? Because it's obviously all over the place, frankly, I mean -- and just presents to you [indiscernible].

It's probably more accurate on yields than I am on ForEx. [Multiple Speakers].

Then I'll answer the question. So a 1% change in the exchange rate is equal to £7 million of PBT.

Andrew Farnell from Morgan Stanley. Just on the competitive dynamics, can you talk about anybody who's in the market that is either being aggressive or you consider to be aggressive in the future that may be a risk?

I wouldn't have said so. Look, I think people are being pretty responsible.

Look, as I said, there are big jobs where 2 or 3 of us are desperate to get those jobs, less so much for the individual job where people are moving out of ownership for the first time. You want to establish that.

You want to be that go-to-guy. So there are certain jobs where people are being aggressive.

But we're being aggressive as everybody else on certain jobs. And I can sit here and list things which I think we're doing what some of our competitors are doing and I'm pretty sure there could be some things that some individual salesman of ours have done.

But I wouldn't have said it was such a terrible market at all. I mean, there's always been this interesting dynamic, which is, is there somebody who comes in that disrupts the marketplace?

Is there that foundation which could do that and we aren't releasing that at the moment? I mean, Hughes would disagree with it I would argue also United what can do most major projects and they're nuts about it.

But Hughes could do a few of them. I can list a lot that couldn't do it because of their size and their product offering.

But they're sort of big player, too. After that, I think what you'll have to remember is, some of the businesses that look like 5, 6 or 7, they're just like conglomeration of lots of little dots where they might actually be the 10th, 13th or 14th best player in those markets.

They just add up to being a big number and they're not much of a threat at a local level. Small local competitors in the midsized jobs are far more difficult competitors than some of those people who would say they were in the top 10.

But I think the market is being pretty responsible. There's lots of demand.

Look at our returns. It's pretty good.

Is it wonderful? No.

Well, it's not like the first 2 years coming out of the cycle where look, you can see on the chart we showed you there, we were getting 10% rate improvements. It's not that market, but it's not a bad market.

And then just secondly, the Slide 18 where you talked about the mix, if there was a shift back towards daily and weekly, does -- would that change anything on your CapEx?

It would have made the yield number look a lot better. It may not make the EBITDA look any better because I will -- I would draw with it some incremental transactional cost.

I'm guessing it wouldn't make the whole EBIT different. It would take the pressure off this presentation around yields, but I'm not sure it would make any real difference in terms of our actual financial performance.

Would it make a difference? I guess the argument would be you would have lower physical utilization and you might have slightly more fleet.

Yes, I was more asking around CapEx. It won't change anything, right?

With CapEx, if the [indiscernible] would be if you have slightly lower physical utilization, you would need more fleet to have the same degree of revenue because you're going to have a lower physical utilization because of the turns of daily and weekly work. But at the moment, we're going in the opposite direction.

Yes, at the moment -- as I said, I think yesterday, we were 3% up year-on-year in terms of physical utilization. I mean -- and last year was the record year.

I mean, that is a material shift. You're all bright enough to do models to see what happens to our ROI if we can run the same level of revenue with 2% less fleet.

It's Karl Green from Credit Suisse. I've got 3 questions, if I can.

Just firstly, hopefully quite simple, did I understand correctly that the retention -- staff retention cost went through the central coast line? Or did I misunderstand that?

We -- typically, like the normal staff costs for APC go through the profit center contribution line. We launched the living wage in the U.K.

earlier this year, which we have seen has had a significant impact on reducing our staff turnover. We are in the -- there is not a similar program in North America, so we are introducing our own.

But it's taking some time to do it on a state-by-state basis. In lieu of that, we made some central provisions for some discretionary bonuses to tide us over until that program is in place.

And so those one-off discretionary bonuses went through central overheads.

Okay. Secondly, I think, Geoff, you made the point about where rates are, I think, 9% ahead of the peak of the previous cycle.

I mean, given we've had the shift towards Tier 4, can you indicate or give us some sort of measure as to how like-for-like dollar utilization?

Yes. There's a chart at the -- right at the very back of the appendices.

I like this chart and nobody else liked it, so we -- they made me stick it at the back. So yes, I'm glad you've asked because you've allowed me to go -- so it's Page 48.

Well then, let's start with Page 47 because we keep coming back to this balance, this balance of volume versus return, which I think is a fair debate. Look, we are 100% committed to this structural opportunity.

And therefore, we see that long-term investment and that opportunity being a sensible long-term investment. But I think when we get into what's going to happen next quarter, next month with rates, as a capital-intensive business, we believe there are 3 key metrics which are important when you look at them through the cycle.

And a number of you have raised this, and I think it's fair. So clearly, EPS is one of them.

Great job. But you can do EPS and absolutely kill ROI, so let's strike a balance.

But I think we'll probably gives ourselves a tick in the box in terms of EPS. EBITDA margins similarly despite the pressure on the yields.

Because of transactional cost benefit, EBITDA margins are great. But you can see that our group ROI has flattened and, indeed, has gone down this year.

So the sixty-four thousand dollar [ph] question is, does it keep going down or is that a blip? And of course, our view is the evidence would suggest it's a blip, and we would expect it to flatten and start to improve this year.

In fact, we're starting to just see that already around our mature stores. So the next page, Page 48, goes into some of those constituent parts because, Karl, at the end of the day, ROI and dollar utilization are pretty much one and the same.

If you -- now if you look at the return on investment on the top left there on Page 48, that's still on a profit center contribution level. So you can't reconcile it back to -- because you can't stick out the central costs to mature stores in Sunbelt.

But if you look at it, our mature stores' ROI is 27, total Sunbelt is 24 and Greenfields and bolt-ons 19. So our biggest pressure on ROI and, indeed, dollar utilization is just the effect of the Greenfields and bolt-ons.

Look, we're not as profitable and we don't get the returns on brand-new locations as we get on mature locations. I think that makes sense.

I think there's a couple of things which are starting to help us. The fleet age going up, as Rory mentioned, will improve the denominator of the calculation.

That's going to make a difference. And physical utilization being up again will reduce the denominator of the calculation and, again, will improve dollar utilization.

The big one is we're now past our biggest pressure because of Tier 4. So this is a chart I like.

And bear with me to try and explain this because it isn't easy. The green line is year-on-year rates improvement.

So you can see, as we came out of the downturn, we were getting -- we have years where we got 10% rate improvement. We never told you we got 10% rate improvement because we were telling you yields and yield was reducing that number.

But we were getting year-on-year 10% rate improvements. And so here, cumulatively, you have 30%.

And as you can see, rates have been flat over the last 12 months. Dollar utilization today is better than it was back in '11, but it's not as good as it was in '13 and '14.

Why? Because in '11, '12 and '13, we were getting better rate improvement and the yellow line is what were we getting in terms of cost inflation in our equipment and what was the year-on-year impact on that.

So of course, this period was great. We've had this big headwind where we've been getting rate improvement over recent years but not as much as the inflation we have seen in the equipment.

Remember, ROI is a trailing 12-month calculation. We're now pretty confident where now we're past this Tier 4 that these 2 lines are going to cross again or at least merge.

And as a consequence, we see going forward that we will not have this inflation pressure. So all at the same time for dollar utilization, we face the inflation pressure and we face the mix pressure.

And that's when you started seeing dollar utilization going backwards and when you started seeing pressure on ROI. Our belief is the mix will not get as worse as quickly as it's been getting, and these 2 lanes are going to merge.

And therefore, ultimately, we think we will see improvement in ROI and dollar utilization.

And just a very, very simple one. Can you just give us an early stay on interest and taxation expectations for this year?

P&L and cash taxes?

Sure. Sure, sure.

It sort of depends on which exchange rate you're using. But just to make things simple and then you can move and flex this on your own, Karl -- and we can talk to you after the meeting if you have a different assumption to use, but in terms of using an exchange rate of $1.25 for next year, that would give group depreciation of, in sterling, somewhere between £715 million and £720 million.

And in terms of interest expense, you'd be somewhere in the neighborhood of £125 million to £128 million, let's say, in sterling, at the group level.

That's quite a steer.

Yes, tax rate.

And in terms of tax rate, we are sort of right on the cusp between 34% and 35%, so rounding can make a difference depending on which jurisdiction is producing the most profits. But if I had to call it now, I would say 34% for the effective rate.

And in terms of cash tax for 2018, I would model that in the mid-20s percent.

It's Josh Puddle from Berenberg. Just following up on Andy's question.

Can you give us some comments specifically on what you're seeing in the U.S. non-resi construction market?

As I said, we still see it being very, very strong. I mean, starts are still good.

If you look at -- we've -- I haven't got the stat with me, but -- precisely, but if you look at the backlog data, the backlogs are getting longer. And there is a lot of projects going on.

I mean, it's just stronger. I mean, again, if you look at our physical utilization, if you look at our fleet on rent and if you talk to our customers and, indeed, our staff, we're very bullish about the start of this year.

Now there's the same counterbalance as there is with working days as there was for the fourth quarter. Our May rental revenue growth was up 20% year-on-year.

Now if you strip it back out for billing days, that's more like 15%. That's a reflection of how strong we find the market.

Rajesh Kumar from HSBC. If we look at the Slide 18, where you showed the split between day, week and month, is it fair to assume that month is the longest when people rent an equipment?

Or by month, you mean people are renting it between one to six months?

Well, by monthly, it means it is a minimum of a month. Some of those contracts might be three to five.

We might not see -- we're not noticing pieces of equipment that are three to five years. Now -- so again, part of the issue is not only the quantity that is being billed on a monthly cycle bill, but the actual duration of those monthly contracts, too, is actually getting longer also.

So it's a combination of the two.

So it is getting longer?

This is going to peak -- we're at this point now where people are coming to say it's a -- there are a number of big projects. We always use data centers because -- or let's use a U.K.

project for the moment, but we just won a contract for the A14 near Cambridge. It's a 3-year project.

We're providing all of the equipment for 3 years. That is equipment which that consortium would have traditionally bought for a project of that duration.

A combination of, I think, our flexibility, a general attitude to -- post the last cycle, attitude to capital investment, what they want on their balance sheet. They prefer the flexibility of ownership.

And that's was changing, is we've got data center -- we've got data centers where we have over 1,000 pieces of new equipment on rent for over 5 years. Historically, people would have bought that.

Now we -- they can manage our project better with our technology. We are competitive given our scale advantages in terms of how we buy the equipment.

And that's what's different. Now I think we will go through another cycle.

So our guidance ahead of our sales now and how we're meeting these [ph], we said -- I think we're at the difference -- the difference now where instead of bidding for this work, we were going to have joint partnerships on this. But no, I think -- will it that close?

This is a cycle where those projects for the first time are using rental. And that's what's -- honestly, that's what's causing more surprise in terms of our metrics.

The shift to rental -- you know we've always agreed with you, feel we would do well. We never quite thought we would get to anything like this.

It is that -- in these last 3 years -- look, forever, it used to be 60%, 61%. And the real shift has been these last 3 or 4 years.

And that's where you started to see some of the pressure on yield but equally where you've seen the benefit in the transactional costs.

So if we took your revenue and rated them by 10, 22 and 68 and said that your average duration was x and then it has increased by 1.2 weeks, that would be wrong effectively?

Yes, -- you don't have enough information to know it properly.

Yes. Can you give us some flavor on what's the average duration is like?

No, because I can -- it's like -- I know you like an average like an average store revenue and stuff like that. I just don't think it's that meaningful piece of information.

And I'd rather not give my competition really -- but you got to be honest, we're fairly granular information we get -- give you. At some point in time, we got to decide what's competitive information and what's not.

The other thing is, some of your competitors are implying that if the longer-duration revenues are there, then they need to mobilize -- they need to capitalize the mobilization and demobilization costs in the new IFRS change. Is that something you are considering?

No. I mean, that's -- I know that's the case with the Greco, but no, that's not the case with us.

[Indiscernible] Liberum. Two questions, if I may.

The first is on -- just on the U.K. If you could give us a sense of what you're seeing in terms of the competitive landscape there and perhaps the outlook for M&A.

And then the second question was just around perhaps parameters that we should think about for the buyback. Obviously, there's a leverage one, but is there anything else, the share price or anything, that you consider in terms of that, in terms of --.

Look, in terms of the U.K., the U.K. is again doing well.

I'd expect -- we're expecting around mid-teen growth again next year. We've had a couple of decent-sized acquisitions in the second half of this year, Hewden's and Lion's, which will kick in big style in the first half of this year, which will be good.

There's a lot for sale in the U.K. at the moment.

I think Loxam buying Lavendon got everybody excited about the multiples that were being paid, and so everybody became for sale. There aren't many businesses in the U.K.

with a Lavendon multiple. So it doesn't mean we're going to do them.

If you look at what we've done, we have consistently focused on specialty businesses. I think we will continue to do that.

That's had a really good track record in terms of improving our ROI and our margins. And so I think you will see more.

There will be -- I can't see there being any huge deals in the U.K. We're not looking to make transformational deals in the U.K.

I think the current market is good. Would you want to make a big bet over the next 2, 3 years on the U.K.

economy at this moment in time with the information you've got available? I'm not sure I would.

And so we -- again, we will look at multiple. In terms of sheer buyback, yes, there's a leverage point.

It then comes back to, well, where do we get the best returns? What does it cost to me for M&A?

I want multiples -- we were just crazy, [indiscernible], when we started our share buyback where I couldn't -- when we had a bit of a [indiscernible] after my shocking presentation in Q3 about 18 months ago when everybody thought the sky was falling in. We could buy our shares cheaper than I could buy some mom-and-pop rental company in Alabama.

That was nonsense. So we bought back shares.

That's no longer the case. It's a -- we will do it on a returns basis.

I do not believe the multiples for our business, and there's a lot of people in this room who will have really very different views of this, are racy given the structural opportunity in this business. So we are not buying shares because we think the share price is high.

We are not buying shares because the relative returns, when we're looking at the multiples we are paying for businesses and the pace at which we can improve and as witnessed by Pride, is so value accretive.

Good Morning, it's Sylvia Foteva from Deutsche Bank. Two questions, please, if I could.

My first is going back to that slide, sorry. So I -- when you do have a longer contract like a 3- to 5-year contract, do you bill monthly or do you actually -- I mean, how is [Multiple Speakers].

Yes, we bill monthly.

How is it structured?

So monthly basically means -- that's why we call them monthly cycle bill. So they get to bill every month.

But is the overall amount kind of agreed for the three to five years?

Oh, no. Look, it's -- because it's -- look, basically, they're saying we want about these many bits of equipment for about this long.

But the actual bits -- some of the bits of equipment will stay, some will change, sometimes will go, sometimes -- typically -- and that's part of the problem in terms of getting rates up. Typically, a lot of the rates might be -- well, we'll usually build in some degree of inflation in there.

But no, they just get billed monthly. So there's no -- we don't get a contract for x amount.

It's whatever the billing comes in every single month.

So then how would you win the tender versus someone -- somebody else in terms of [indiscernible]?

Probably we'll figure those and then we'll just see. We will be service provider.

All they're saying is look, we will take fleet from you. More often than not, they will give us an on-site.

So we will set a location on that major contract, and we will manage the needs. What they're not saying is precisely what their needs are and when they are.

But we have problems sometimes when our physical utilization drops down a little bit. But we've had contracts recently where someone says, hey, I want $50 million a fleet on this site.

It is going to start in March, and it does not start till May. It makes our physical utilization look terrible for 2 months, yes.

And so there is a general agreement of how we're going to service that contract. It's not a precise value amount.

All right. And then just on May figures, are you able to give kind of any of the run rates?

Yes, we said 15%. Now 20%.

On a reported basis, rent revenue was up 20% in the U.S. You've got to adjust it for billing days.

The billing days we lost in Q4, we got back in May. And so it really -- on a normal run rate, that's about 15%.

Okay. And so fleet on rent and --.

Fleet on rent is at record levels of fleet on rent. I told you on Monday we passed $4 billion for the first time with fleet on rent and with record levels of physical utilization.

It's kind of pretty good. I know you could sit here in the U.K.

and watch BBC reflections on Donald Trump's tweets when he thinks terrible is happening in North America. It's kind of not the case.

This is David Phillips from Redburn again. Just one follow-up on your Slide 48.

That slide, people like that one.

That fleet inflation number presumably is just the original equipment cost. If you factored into that over time the deflation you've had through scale on maintenance and things like that, do you think that would have dipped into negative territory in terms what it cost you for total cost of ownership?

That's a really good question. Honest answer is I don't know.

I'd be guessing. It is true that the cost of ownership as our fleets got younger has decreased.

The reason why we sell assets at the age we do is because we're seeing a sharp spike up in repairs and maintenance cost over a point in time. And we've been very focused on what we call whole life costing, which incorporates the cost of spares and repairs.

And indeed, the disposal values relative to the purchase -- people are asking about the state of the market right now. Correct me, so we're making about 43% of original cost and disposal proceeds at the moment?

Yes, 43% proceeds to original cost of equipment, and that's up 2 full percentage points over last year.

Over last year. And if you look at like a historical average, you go back where we told about the stuffs that we always told, we would always say 35%.

In the U.K., because of currency, like we got last 55% of original cost as proceeds or for almost 39% or something like that. So you're absolutely right, David.

You'll -- let me think of another slide for the next time you strike a conference all about -- the point you make is a good one. I don't have it in.

It is going down because not only do we have leverage in purchasing power on the equipment itself, of course we have it also with the spares. We've also have had a software system which actually we've worked in the U.K.

for a while now. We're just introducing it at the moment in A-Plant, which is called smart equipment, which, again, allows our depot managers to buy their spares far more cost effectively and far more efficiently.

So it's all part of this ongoing evolution of this business where we leverage our skill. Is that it?

Well, if that's the end of the questions, once again many, many thanks for all of your interest in the business. And there will be no time at all before we're seeing and talking to you again.

Thank you very much indeed.