Sunbelt Rentals Holdings Inc (SUNB) Q3 2017 Earnings Report, Transcript and Summary

Hello, and welcome to today's Ashtead Group PLC results call for the Third Quarter. [Operator Instructions] Just to remind you, this call is being recorded. And today, I’m pleased to present Geoff Drabble, Chief Executive; and Suzanne Wood, Finance Director. Please begin.

Thank you. Good morning and welcome to the Ashtead Q3 results call. It’s an early start today, so I’m aware that many of you have the results/presentations to get to this morning, so after a short update on the financials and current trading from me and Suzanne, we will move on swiftly to Q&A. So starting on Page 3 and the highlights, clearly been another good quarter, reflecting the continued strength of both our strategy and our end markets. Group rental revenues of 13% to date, and importantly we continue to grow profitably as witnessed by our improving margins. If these very healthy margins of our strong balance sheet that allow us to continue to invest in the growth of the business. So, year-to-date we have invested £812 million in capital, we spent a further £196 million on bolt-ons and in total added 77 new locations. We’ve also increased the interim dividend and spent almost £50 million on share buybacks. We therefore continue to invest significant amounts in our future development whilst maintaining leverage well within our target range of 1.5 to 2 times EBITDA. I’ll comment our first thoughts on growth for next year a little later, but for this year, we anticipate full-year results in-line with expectations. So, with that I’ll hand over to Suzanne.

Thanks Geoff and good morning to everyone. The third quarter results for the group are seen on Slide 5 and we were pleased to report early this morning an underlying pre-tax profit of $179 million pounds compared to $139 million last year. This represented an increase of £40 million of which £29 million was attributable to the benefit of weaker sterling, a constant rate of exchange, our pre-tax profit increased by 8%. Rental revenue increased by 14% year-over-year and as Geoff said, the growth was profitable as reflected by our 46% EBITDA margin and our 26% operating profit margin. On the next slide, we’ve shown the group’s results for the nine months. On a year-to-date constant currency basis, rental revenue grew by 13%. Similar to the first half, the constant currency percentage change in our total revenue is lower than the change in our rental revenue. This resulted from fewer fleet disposals as compared to the prior and will discuss that further in a moment. For the nine-month period EBITDA margin increased to 48%, reflecting the higher revenue base and good drop through, particularly in our more mature stores. Operating profit margin remained strong at 29% despite the integration of 13 bolt-on acquisitions across the Group and our ongoing Greenfield program. Our underlying pre-tax profit in the nine months increased by £123 million to £605 million with weaker Sterling benefiting the period by £82 million, and on a constant currency basis profits increased by 9% that compares to the prior year. 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 we believe of the underlying business. The first three factors listed at the bottom of Slide 7 have caused anomalies in a year-over-year growth rate, no different from the first half. Excluding the sale of used equipment from each of the nine-month periods, revenue increased by 14% and underlying profit increased by 13%. The final bullet point on the slide refers to the effect that certain of our provisions such as those we record for loss of certain assets have on a reported margins on fleet sales. In periods of low sales levels like this year these fixed costs can have a disproportionate affect on margins because no revenue is associated with them. The important take away from this point is that the trend on actual margins realized remains broadly in line with previous periods. Turning over now to Slide 8, we’ve shown the year-to-date results for Sunbelt, which were principally driven by a 13% growth in rental revenue as it continued to benefit from generally strong end markets. With the continued operational efficiency at mature locations more than offsetting the drag effect of new stores Sunbelt's operating profit increased by 9% year-over-year. If we normalize for the effective reduced fleet disposals by excluding gains on sale, then the underlying profit growth rate was 12%. And from a margin perspective importantly, EBITDA margin improved to 50% and operating margin remained a robust 31%. Slide 9 summarizes A-Plant’s year-to-date results. Rental revenue grew by 17%. However, the operating cost base grew by 16% as four acquisitions were integrated including two specialty businesses that were acquired in late October. These specialty businesses were lower margin, but higher returning. As a result margins remained broadly flat in the nine months. Like Sunbelt, A-Plant’s operating profit growth metrics of 7% was adversely affected by fewer fleet disposals this year. Excluding gains on equipment sales, a more normalized underlying profit growth was 19%. On Slide 10, we’ve summarized our year-to-date cash flows. On the strength of our margins the Group's cash flow from operations was £1.1 billion and it’s the strength of the underlying cash flow that I really want to highlight. Ours is just an inherently profitable cash generated business. We use part of this £1.1 billion to cover what I’ll call non-discretionary items like interest and tax and of course in a rental business like ours replacement CapEx. The remaining cash flow of £651 million was available for discretionary items such as growth CapEx, M&A, and shareholder returns. Thus on the bottom half of the slide you can clearly see our capital allocation policy and operation. This year we’ve chosen to invest most heavily in growth CapEx to support the activity levels we see on the ground in particular in our same stores where the growth business is profitable. We invested a further £180 million in bolt-on acquisitions, increased our dividends and repurchased shares. As we continue to maintain our leverage with our 1.5 to 2 times target range, what is not spent on growth CapEx or M&A will continue to be available for shareholder returns. Slide 11, on debt and leverage, basically reaffirms our commitment to investing responsibly maintaining leverage within our target range and ensuring that our debt structure remains flexible. All these factors require discipline and contribute to a strong balance sheet, which we have long maintained as one of our core strengths. As expected this year, our debt increase is our investment in fleet and bolt-ons increased. However, weaker Sterling also caused the level of reported dead to rise. At January 31, our leverage ratio was 1.7 times well within our target range. And before I hand back over to Jeff, I’ll draw your attention to important step we took in the third quarter to ensure that our debt package remains well structured and flexible thereby enabling us to further benefit from end market opportunity. We took advantage of favorable financial market conditions and increased the size of our ABL facility from $2.6 million to $3.1 billion. The facility remains committed on the same terms through July 2020, and borrowing availability therefore at the end of third quarter was $1.3 billion with an additional $1.5 billion of suppressed availability. So, in short, a good deal for us. We now have more access to additional low-cost capital. That concludes my comments, and so I’ll hand it back to Geoff.

Thanks Suzanne. So let's look at Sunbelt in a bit more detail, starting on Page 13. As you can see we continue to see the same trends that we have in the recent quarters in both general tool and our specialty business, we continue to see significant volume growth with fleet on rent being up 18% and 11% respectively, 15% if you exclude oil and gas. The market continues to be supportive and we continue to benefit from structural change as customers increasingly rely on the flexibility of rental. This change continues to manifest itself in longer rental periods, more fleet on rent, and lower transactional cost, but it does come with lower yields as highlighted here in the negative 3%. So a number of historical reference points are becoming blurred with the evolution of our market. However, the important thing is that we continue to grow profitably with strong incremental margins and we'll cover this more detail in the coming slides. Page 14 highlights that these shifts in the mix of business are reflected in our physical utilization, which remains very strong despite our significant fleet investment in the drag of Greenfields and bolt-ons. As you can see, it is at historical highs for this time of the year in both general tool and specialty. As this is probably better highlighted by the extra granularity shown here on Page 15 starting with our same source. The benefit of these longer rental periods is our customers increasingly rely on as highlighted in the physical utilization of 72%. The fact that the low yields are compensated for by lower transactional cost is also reflected in the strong drop through of 64%, well above our overall EBITDA margins of 50%. Whilst the drag to some of our same-store metrics or Greenfields and bolt-ons continue to deliver good growth in returns and remain an important element of our 2021 strategic plans. The oil and gas will have a really small proportion of our revenue and year-to-date remains a significant negative as you can see. So as it’s hardly a needle-mover at this stage, it is worth noting that January showed 25% year-on-year revenue growth. These improving trends have carried on in February and early March. And recent commentary confirms that some of our peers are also seeing improving trends and I view this as another positive for the broader markets. In October, we laid out our 2021 plant and growth to 900 locations and $5 billion to $5.5 billion in rental revenue. And as you can see on Page 16, we have made good progress with 58 new locations in the first nine months of the year with a good mix of general tool and specialty locations. This continues to be delivered through the combination of both Greenfields and Bolt-ons. So the plan is really good momentum in its first year and we have an exciting pipeline with further opportunities. Turning to Page 17, before we get into our CapEx planning, I thought it would be useful to look at our guidance for growth at Sunbelt in the context of Project 2021 plan because this is how we look at our growth. We expect the market to grow by 3% to 4%. This has reminded with most forecast on reflects current activity levels. It does not include any benefit of future infrastructure, military, or tax initiatives. As we said in October, we expect all mature stores and recently opened stores to grow at around 1.5 times the market. So, we expect meaningful share gains once again. And this would indicate that growth from these stores to be in the range of 4% to 6%. We would expect 3% to 4% growth to come from Greenfields stores and a further 2% to 3% to come from bolt-ons. Adding this all up, obviously, gives us a strong growth in the range of 9% to 13%. On a broader outlook, we remain comfortable with our 2021 guidance, the five years of double-digit compound growth. Our strong margins and balance sheet mean that at this level of growth will be achieved whilst remaining well within and potentially below our target leverage range. Given our view that the cycle is likely elongated by current policy proposals in the U.S., we do not need to be towards the lower end of our leverage range at this stage, and it is therefore cleanly the potential of further investments in-line with our capital allocation priorities to further enhance shareholder returns, and will give more guidance on this at the year-end. Therefore on page 18 we take our customary first look at the CapEx needed to support these growth plans with the usual caveat of Q4 of next year is still a long way up. Well there’s lots of potential to US initiatives at the moment that could materially change our views of ultra years. So our Q4 forecast feels even more of a place hold at the unusual. We will update our forecasts as the year unfolds and we get greater clarity. So just touching first on the current year, CapEx is expected to be broadly in line with the range we gave in December. The Sunbelt replacement CapEx will be a bit higher as we adjust our fleets of the bolt-ons but also take advantage of some very strong second hand markets an attractive replacement pricing. For next year our CapEx reflects our strong markets, but also the benefit of our second half spend where we will get the full year benefit. So, the support of 7% to 10% organic growth highlighted on the previous slide, we will only need $600 million and $850 million growth fleet. With another our low replacement year, similar to this one, our total spend is likely to be in the $1 billion to $1.3 million range. So, as I have highlighted we anticipate good growth, but also strong cash generation, which will provide us with the range of options. In line with the 2021 plan, we will again be opening 60 new locations by way of Greenfields and Bolt-ons and estimated Greenfields are included in the capital guidance. However, there will always be some trade-off between fleets and bolt-on spends. So it is possible that higher or lower M&A spends will also impact the final CapEx number. So moving on to A-Plants on Page 19, again our strategy is working as we continue to gain share. Volume was up 22% in the third quarter and yield was negative 3%. But it is a somewhat distorted by the Hewden's asset purchase. Physical utilization has improved throughout the year and is now trending higher than last year. Given the late addition of the Hewden's assets it’s quite an achievement and reflects the momentum in the business. The keys you can see on Page 20 has been to grow profitably, as we explained in the Q2 results there has been a significant demand of bolt-on activity in the year with the associated cost and disruption, which has impacted short-term margin improvements. As we integrate our newly acquired assets and leave behind the one-off costs, I remain confident that margins will continue to improve and set new highs. On Page 21, we had A-Plant CapEx plans for 2017 and 2018 and therefore also give our consolidated group guidance. A-Plant’s CapEx guidance for the current year has increased significantly since December and now reflects the Hewden's asset purchases. There have been other bolt-ons in the second half of this year, which will also contribute to next year's growth. Therefore A-Plant’s CapEx will likely be lower as we fully integrate these opportunities and deliver the anticipated margin improvements. However, the full-year impact of this year’s spend together with what is planned in 2017 and 2018 will generate revenue growth and the double-digits to mid-teen range for 2017 and 2018, so another exciting year ahead for A-Plants. So to summarize on Page 22, well there has been lots of background noise about both our geographies in recent months. Cutting through the speculation, we remain exactly where we thought we would be. End markets are supportive and we continue to benefit from ongoing structural change and significant share gains. This is exactly the environment we’ve built into our 2021 plan and therefore our plans remain valid. We still believe that the likelihood is that infrastructure investment and other initiatives such as business tax and military expenditure would help the outer years and elongate the cycle. However, we have not as yet built this into a planning and in any event there will be little short term impact. We believe this is a sensible approach as our model is flexible enough to react when necessary. Our margins and strong balance sheet provide the opportunity to continue to implement our strategy in growth and diversification, but we now have a well proven track record. Growth has been delivered predominantly through organic investments, but is also supplemented by bolt-on acquisitions where we continue to have a good pipeline. Therefore, we have today reaffirmed our long-term double-digit growth plans, critically at this level of growth; we will be very cash generative, which will provide a wide range of investment opportunities to further enhance shareholder returns. Our capital allocation priorities will remain unchanged and we will continue to grow responsibly maintaining leverage within our stated range. So, both divisions continue to perform well. We expect full-year results to be in-line with our expectations and the board continues to look to the medium term with confidence. And so with that, I will hand over to you to moderate the Q&A.

Thank you. [Operator Instructions] Our first question is over to the line of Chris Gallagher, JPMorgan. Please do go ahead. Your line is open.

Good morning. A couple of questions.

Good morning.

The first, around yield, can we talk a little bit, splitting that out between rate and mix, what you are seeing through the quarter? And then, a second one just on drop through and going forward, you’ve mentioned some of the one-off that impacted that, but are you seeing any underlying cost increases and how do you think drop through moves as we go forward from here?

Chris, I am delighted you asked that question. We have put in two brand new slides in the appendices, if nobody would have asked this question I wouldn’t have been able to use it. The whole concept of - we have been wrestling with getting this message across about what’s happening to our markets, how we getting all this extra volume, and how has the yields are currently going down - if you have got strong physical utilization great volume growth, why aren’t the yields going up, so in an attempt to try and explain all of this, there is a couple of extra pages in there on Page 26 and Page 27. So, Page 26 shows what’s happening with rates if you freeze the mix of our business. So it is the same customer base, same fleet, and same rental periods, which is very, very important. So, broadly this is how everybody else does it, or pretty much everybody else does it via ARA and what we did was we sent our data off to Rouse to say do it the way the ARA, do it and let’s just come up with a fewer rate number and this is the chart that came back. So you can see, now what’s been happening over the last 12 months or so is roughly or broadly flat we get of the month we go down and those. If you look at over the history since 2010, what does it tell you, it says look, all way of the peaks we had in 2014 when oil and gas was storming ahead, yes we are. Are we a long way of them? No we are not, and rates currently are fairly stable. I think what’s interesting when you look at that flat period is, that looks good but there is pros and cons of that flat line. What it says is look we have got a weak start to last summer, so we didn't get last year's summer balance, which was disappointing, what’s really encouraging is rates haven't come down at all during the winter. And actually, if you would have really over optimistic, which I don't recommend you all, including the winter period, they had slight, very, very gently over the last two months. We’ve had two months of mini-SQL and rates improvement. So our yield as we walk through the year has not been raised and we can talk about this slide and what’s happened in various periods probably for the rest of this call. What has changed and what continues to change is what we have seen on Page 17, Page 27. And what we try to do because to talk about it is abstract in the ground gets a bit complicated, we have picked the product as an example, which we have picked many times before, which is this rough terrain forklift, and we're showing you what the rates are for daily, weekly, and monthly rates; and therefore if you have got a 100% physical utilization on those what the months will lead to revenue will be, of course you would never get 100% utilization on monthly, but on daily, but nonetheless it helps through what is happening. And then what you can see is, how the mix of our business has changed through 2015, 2016, and 17. So this is a nine-month to date percentages. So you can see that in financial year 2015, 67.5% of our business was monthly and then financially 2017, it is 70%. Those shifts in just rental periods are the equivalent of the minus 3% yield. And in particular in December, because it was kind of a weird month, we’ve had a very warm winter with the exception of December, which was very, very cold, monthly got off to 72%. And so if that’s lack of daily contracts when the weather is particularly bad and that growth in this whole business for the longer rental piece it’s that mix effect which is having the impact on our yield calculation and of course these longer rental periods come with much of the quantities of fleets and much lower transactional cost and that’s why our margins are improving even though the yield's is negative. We're at the stage now where the market is strong. People are taking big quantum’s of equipment for very long periods of time. So now within that monthly line the average rental period is 70 days now that’s so not only are more contract monthly, the average length of those contracts is longer which again further enhances our ability to drive lower transactional cost. So that’s the trade-off and that’s the difference between rates and yields. So did that help?

That's very helpful. Thank you very much for the effort.

Okay.

We are now off the line of...

No, no, hold on a second. There was a second question which was structured. Be careful with. We see this every single year and nobody takes any notice of us every single year, which is drop through will be somewhere between, if you look at all the past years somewhere between 58% and 61%. It will be between 58% and 61% this year, we said it in the first quarter when drop through was high, drop through varies, if you have a very high drop through in it, the previous quarter, you will have a very low drop through in the following year. Just because events might change, you might have different numbers of billing days and different in different quarters. So, we will deliver 59%, 60% drop through again for the full year, this year as we have been throughout the year, but we will have the range of quarters. Last year, I think the range went from - we had a quarter of 75% in the quarter of 52%. And certainly we did that in the year before and we are going to have that did this year. So the trends are more about the structure of the quarters than they are about anything actually that’s inherently changing in the business. They are all the one-off elements if you have high bolt-on activity nor the one-off cost, but in overall terms nothing has changed in the drop-through other than the shape of the quarters.

Okay.

Josh over to you.

Hi good morning everyone. My first question is on the EBIT margins, so those were down in Q3 and flat on a nine month basis. I just wonder what your targets are regarding EBIT margin and when what you think it can start to improve. And then my second question is on the Greenfields, I just wondered if you are noting any changes in the growth or profitability trends of the Greenfields that you are opening now versus the Greenfields that you're opening three years ago.

Yes, I mean obviously the big difference between EBITDA and EBIT is depreciation and it’s all about our investing in the business. I believe that EBIT margins will flatten and begin to improve as we go through next year. So again I think a lot of this is timing at this point. In terms of Greenfield, any faster, I can't say I have looked at any great detail through the course of the quarter. There's nothing stood out that says it any faster. I don't believe there’s any reason why it should be materially faster. I mean as we said many times now we kind of get to breakeven and it’s around 4 to 6 months mark now which is great, but no we haven't seen, I don't think we have seen anything particular any different with the Greenfields and in terms EBIT, I think it is purely a timing thing around fleet investment and depreciation.

Okay. That’s very helpful, thank you.

We are no off the line of Emily Roberts of Deutsche Bank. Please go ahead. Your line is open.

Hi, good morning. It’s Emily from Deutsche Bank. Couple from me. First question, on your return on investment looking towards 2018 and with your lower replacement CapEx, could you give us an idea of your expectations for how the return on investment might trend and specifically when do you expect it to start to increase again? Second question will be on wage and whether you are seeing material wage inflation in the US and if you could please quantify that for us? Thank you.

Sure. It’s a good question. I mean we've talked about this before Emily. Yes, I mean the biggest inhibitor to our ROI has been the denominator, which is the age of our fleet as it’s been natural yield and therefore as the fleet ages obviously the denominator in the all calculation starts to ease, and with lower replacement cost you will see, or when you have time to get into the detail of the press release you will see our fleet is now gently ageing as you would expect with a lower replacement expense, getting back to more normalized level of around 30 months. Then that would have a positive effect on the ROI. Have I, we are in the middle of doing the budgets at the moment. Have we modeled precisely when that turns it into positive or when this would stop going negative? I think it stopped growing negative about now, when it actually turns into positive. The problem with the ROI is a 12-month rolling calculation. So it takes 12-months, but you are absolutely right that as we have lower replacement cost and as we age the fleet that will resolve the ROI issue and the ROI will continue to improve. I can't say we sat and model precisely when yet. In terms of wage inflation, yes that’s exactly the same as, I think we were seeing this long before everybody else, which was trying to find the mechanics, try and find the driver because they are very, very hard to find. We once again will have a range of wage awards, we just had our rental, board meeting, only where I’m looking just looking at Suzanne's pay award for the next year wages. But the likes of me Suzanne and anybody with a white-collar job is going to get a significantly lower pay award than anybody who's a driver or a mechanic and does a blue-collar job. So, I would guess all range of awards will be in 1% or 2%, 5% range and I think we will probably average out somewhere between 3% and 4% which is broadly where we have been panning out over the course of the last couple of years. So the key will be to continue to drive operational efficiencies. Actually hope people may not have, but if people do have the press release in front of them and we are understanding how this operational efficiency will compensate for these sort of increases and why our margins are growing up. I think you see very, very clearly in the last page of the press release, which shows you the stat numbers and the number of rental stores. So if you look at Sunbelt's, we've added a number of - we've added 58 more rental stores and yet we’ve only added 130 more staff. But we added 427 staffs into the Greenfield and bolt-on new locations. So if you think about it, our same stores, which experienced 11% volume growth are achieving that 11% volume growth with 300 fewer people. So, I mean that is where we gained to come back to this how technology is driving efficiency, how those longer rental periods are allowing us to do more with the same or less. So, I think, yes we will see some wage inflation, but if we continue which we have done for a number of years now we continue to benefit from these efficiency improvements that’s why we are confident that our margins will continue to grow.

Thanks, that’s very helpful. If I may ask one more question. One more question. I would like an update from you on what you are seeing in the tier 4 space and whether you are competitive to starting to increase the rates for the tier 4 equipment, please? Thanks.

Look, there's no such things as a tier 4 rate. There is just rates. Because most people don't - it is a good question, I hate to be optimistic at this time of the year based on the set of Q3 numbers because winter can be affected by warm-up events. If I wanted to be optimistic, we are trying to be sensible, we have very high level of utilization along with the results of my peers sort of do they. Second-hand the pricing equipment in February at the Ritchie Brothers auction was phenomenally strong. The product categories which we have, it was 5% to 10% increase year-on-year, which is really strong. We’ve had two months in the middle of winter of sequential rate improvement. So is the overall volume and oil and gas is coming back and so people who are kind of came into the stage, they didn't really know will see great opportunities to go back into the space that they didn't know well. All of those things opt to be gently positive for ways. So my expectation for that range of asset we are looking at earlier is that will go down and the question is, will go up by how much, but that doesn't even want of negative yields because of mix, but I think rates is likely to be flat and more likely positive next year. And some of that’s because people are buying tier 4 engine and have to pass it on of course, but more of it is just to do around generally improved business confidence levels in North America at the moment.

That's helpful. Thank you.

We are now off the line of David Phillips of Redburn. Please go ahead. Your line is open.

My question was about rates, just been answered. I will turn it back. Thank you.

Okay.

Okay. In that case we will pop over to Jefferies and just Justin Jordan. Please go ahead.

Thanks, good morning everyone. I have got a question regarding CapEx/financial headroom. So, really, I'm talking about Slide 10 and 11, I just don't have the exact numbers just on your initial 2018 or fiscal 2018 CapEx that go into 1.3. I am struggling to get you anywhere near 1.5 to 2 times net EBITDA, as you - you probably are going to be substantially below it and potentially have 1 billion plus Sterling of headroom, if you were to get anywhere near two times net of EBITDA. I’m sort of kind of understand what sort of flexibility have you got potentially for more M&A or increased CapEx or increased buyback going forward, it seems like you’ve got quite a lot of flexibility, can you just talk us through what you might do with that?

Yes it is a good question Justin. We have been talking about reaching this stage in the cycle now for a long time. Once upon a time I put out a chart showing moderate in growth and I took it out because everybody said I was calling the end of the cycle, but I think as an industry where we're going to double-digit growth for multiple years, I think all of the initiatives in America are not going to suddenly make this year is significantly better. We will find caution people on that, but we do think it makes the cycle much longer. That being the case we're probably more comfortable to be towards the middle and upper end of our leverage range, then if we thought the cycle was shorter. And you can all do your math, yes you will probably not a million miles off, but if we were prepared to go off to the top end of the range then we have about £1 billion to spend and we deliberately when you get the get to transferred to what we’ve said, although you can't hang on every word as beautifully as crafted, but what we said is we are more comfortable of going towards the upper end of the range, given our views on the elongation of the cycle and we will use our capital allocation priorities to determine what happens to that sort. If it is a big infrastructure plant, it is extra volume because of taxation the first thing we will do with the CapEx guidance which will be Q4 CapEx guidance for 2018 and 2019 will likely go up. So that will be use of some of the cash. I think there will be a potential for a little more both on M&A in the coming 12 months. We said, we have to listen to us we have said it twice in the script as probably through which is, we do have an exciting pipeline of opportunities. I think there is every chance that within the taxation changes things happen which make it more advantages for private owners to sell business with changes in capital gains and inherent back that could well be the case, which could provide us with a list of high-quality opportunities, which we clearly have the firms to spend money on subject to them meeting all of our criteria. And what we've always said is that I think for a business with the length of grow, I would say this of course, but for the growth and margins that we have we do not trade at a expenses multiple relative to what it would cost us to buy your business of a fraction of the standard of our business, therefore relative to M&A we will always look to share buybacks and we have always seen share buybacks as a long term part of our capital allocation priority. But yes these levels of growth in terms of top line growth and operating profit that’s clearly a lot of flexibility to further enhance shareholder returns from our more bolt-ons or more share buybacks and we will utilize that flexibility. It makes no sense with the strength of our balance sheet with having all of the assets on the other side of the balance sheet and where we are in the cycle we do not want to grow way, way below. We're not going to spend money for the sake of it, but strategically we are not trying to take leveraged at the lower.

Great, thank you. Just one quick follow-up, it couldn't be a rental call right now unless as someone mentioned the word Trump, so just on that, I'm not going to talk about infrastructure, but I’m just curious about potential tax changes whether it’s corporate tax or changes in how people think about bonus appreciation, is there anything that you would see in the horizon that might change the structure on of the rental adversely? As you see.

We have the benefit of having a US taxpayer on the call, so I’ll let Suzanne answered that question.

It is a good question Justin. And I think with respect to the tax changes and specifically depreciation, which you enquired about, I mean look bonus depreciation in some form between a 50% bonus rate and 100% bonus rate has been in place for around about 10 years and it clearly has had a very limited effect on when people choose to buy equipment. I’m not going to say that there is never a person affected by that, but in the round as we talk to people, people in our business by equipment when they need equipment to serve their customers or when it becomes so aged, it needs to be replaced and as we said many times, many of the smaller independent operators with whom we compete, typically are leveraged adverse, they really don't have any debt and we know that by having bought so many of the small bolt-ons over the year. So certainly they are unlikely to go out and make an equipment purchase just on the basis of bonus depreciation. So we really just don't see that having a material effect when you look at some of the larger players in the rental industry meaning, we will see what happens, I mean a plan - there is a lot of talk about it, but nothing has really been put forward to Congress to really have a debate about and move towards action, but certainly we are watching closely and would be very pleased to see some from the businesses perspective, some change in the corporate tax rate and the numbers that have been talked about are corporate rates, stepping down from 35% to perhaps something in the 15% to 20% range. Whatever the step down is, it is certainly something that will be, cash positive for us and has stepped down in the rate would also have a benefit of allowing us to reduce the deferred tax balance on our balance sheet. So, we really see more of the effect from that standpoint changes in the corporate rate then really whether or not people buy equipment based on bonus depreciation.

Great, thank you.

We'll now go to Jane Sparrow at Barclays. Please go ahead. Your line is open.

Just a couple of questions please, the 300 people that you’ve taken out of existing Sunbelt locations to deliver these efficiencies, is this coming from natural attrition or is it actively laying people off and if it’s the latter how does that sort of ongoing efficiency impact on morale generally within the business speaking of someone who worked in an industry where always laying people off every year, does they want us from around? And then secondly on the UK performance, if you stripped out Hewden, what does the UK look like on a fleet on rent and yield basis for the third quarter please?

I can answer the first question. I'm looking desperately Suzanne, how much we have done the calculations for the second question. We have made nobody redundant in North America. Within that population of drivers and mechanics we do have high staff turnover and we just take advantage of that. Also what we are able to do of course is some of those people are being used to staff the new locations. So net-net we’re up 100, so we can move people around. So clearly our HR function and staff morale is significantly higher than in the whole industry Jane.

Probably not the high bar, but yes.

Clearly not a high bar. And just to reassure you that is like the final acquisition on the bottom of the [indiscernible] it’s got nothing to do with anybody in North London, it’s a very, very successful management team who will be around next season.

I will take your word for it.

Anyway, it seems like we will take out the numbers without Hewden's. We just kind of, because we didn't buy depots, the fleets just went into our fleets. So, I’m sure Suzanne could pull something up, I don't know what to do.

We will do that and I’ll come back to you after the call Jane, but certainly the yield would have been improved had that not been in.

Thank you very much.

We now go to George Gregory of Exane. Please go ahead. Your line is open

Good morning everyone. Three from me, please. Geoff you already elaborated a bit on the sort of yield utilization dynamics, but just specifically on the nine month trend on the general tools business in Sunbelt with yields down three and the physical utilization down one, can you just explain what were the fact that’s - was that all mix because I guess you would have expected utilization to maybe get better a bit or am I misunderstanding something?

No, not at all. Probably if you go to Page 14, George it is the best place to start and actually then also remember what I said about the rate slide in, what we were talking earlier to Chris' question, look we are down 1% year-to-date, but the issue was, we were well down between July and September. Remember what I said was that we just didn't guess is some more pop in our way, so if you look at that rates chart on Page 26, what’s unusual about it, if you compare it with the previous chart - still things are unusual, we didn't get some pop on behalf and had the winter to decline. The reason why we didn't get the summer pop was we did have a slightly soggy July and August. Now, some of that was self-inflicted. I would argue you brought in little bit too much fleet saw the same in the market, so we created - the physical utilization was soggy in the summer. If you now look at it, as you can see between December and February than physical utilization is very high. Remember you are comparing three best years we have ever had in terms of physical utilization here. So, where we are right now and, actually, if you carry that on into its current day gets a little bit better, it gets little bit better too, with its strong levels of physical utilization and lo and beholds rate is fine. So, yet we have, on a year-to-date basis it’s pretty much down to that July, August period, currently you know volume of fleet on rent is strong and physical utilization is strong and as a consequence rate has helped up - has held up a little bit better, does that help?

Helps, very much so. And secondly, just on the same stores staff reductions you referenced, I am not sure if there is a way to measure this, I'm guessing probably not, but do you have any sense of how much of that is being facilitated by mix and how much has been driven by your technology efficiency gains?

No it is a good question. We're just able to do more and then of course a lot of these things are ongoing small incremental improvements. Those I’ll be guessing. I really truly don’t know.

No, I thought as much. And finally just on the second-hand auction values you mentioned second-hand market price has been pretty attractive, just wondering would you be expecting that to pick up given the general optimism across the market and any factors beyond sort of latency or does the lag impact the oil and gas dragging that back?

No, I think it’s a reflection of the fact that it is, a couple of things firstly. Like there is some right [indiscernible] with us also do some analysis on it. Two things were marked about the - three things were marked about the most recent auctions. The stuff that was being sold was old and it was junk, which means people are holding onto their fleet. I am out by a bit and so I can’t quite remember. The 73-ish percent of the business was going to US customers when typically it’s around 50%, and the rates, for our product types and again this is where I remember I always get agitated by the right member which was a way to index the revenue, but our product categories - the increases where somewhere between 5% and 10%. It is got nothing to do with oil and gas because our product's ongoing there, and oil and gas has picked up very, very slowly. Through the quarter our members where, I think we were minus 3% year-on-year in December, in November, we were plus 9% in December. We were plus 25% in January. So with January really turned up that's going to affect the February auction. And without getting over everybody overexcited except the statistics. In February, you always have year-on-year revenues were 40%. I mean, we have [indiscernible] it is our timing report of our business, but what it will do is, we need to keep our physical utilization high and some of those will come and play it in our sandbox poorly will go back to the sandbox later. Again it is going to be a huge difference north, but the overall environment for rates in my opinion is purely better than what it was same time last year. And if we don't get that summer softness, and we don't mix with ourselves by all the [indiscernible] too early in the summer, which is probably in fairness what we did last summer than that should all help.

So your point on the replacement values is that you think they might slowly catch up the net effect?

Yes.

Okay. Thanks.

And George, I will just add one point to that. In the event you were certainly, I know others on the call do track this statistics, we typically when we talk about these values give the statistics of our sales proceeds as a percentage of the original cost of equipment sold and some people find that useful since it is a measure that can be tracked over time when it relates to our product categories. And Geoff talked about the strong auction value being up 5% to 10% in our product categories. That was in February. So, really it’s not therefore reflected in the numbers I’m about to give, which are for the nine months ended January 31, so our proceeds as a percentage of what we see sold in January this year 41% last year, just a tiny bit under 40. So, improvement throughout the nine-month and indeed in the third quarter itself.

I mean that is why our replacement CapEx is a little bit high. Even before February auctions, there was just some great feel. And particularly around, some packages around telehandlers; and then, JCB have a fantastic new telehandler and I can buy it, effectively, at the sterling price. So a combination of very, very strong second-hand pricing and some very good attractive dollar pricing for a package of telehandlers. We're going to team in late. I mean, I think this package of telehandlers by the time you adjust for currency you will be the same cost today as the cost seven years ago, and therefore again all of these things start to see through into ROI. The key to our ROI is managing the denominator. We get higher physical utilization slightly older fleet and take advantage of these deals that was sort of ROI.

Thanks very much.

We'll now go over to the line of Hector Forsythe with Stifel. Please go ahead. Your line is open.

Hi. Good morning guys. Very quick tactical one here. Can you just give us the - on the current tax rate regime, your expectations for the cash tax rate relative to the accounting tax rate both for this year and next year and what you might see this into the future?

Yes, absolutely Hector. For this year and for next year, we expect the effective tax rate, the P&L rate as we sometimes call it to be 34%. For the cash tax rate for this current year, we expect that to be about 5% and as we’ve been signaling for some time, we will have fully utilized at the end of this year our net operating loss carry forwards. So we anticipate a rise in the cash tax rate for 2018 to about 30%. Now obviously that is prior to anything that - on the changes to the tax code that may come out of the America. So, we should keep our feet on the ground obviously and wait to see what comes out from that, but if the, just as a bit of information, if the federal tax rate is reduced to either 15% or 20% then our accounting effective rate is going to be somewhere in the low 20s. So that will make a significant difference here from the P&L and standpoint we’ve already talked about the cash earlier.

Absolutely. Sorry, on the ABL extension as well, is there any additional cost that you would factor in?

No. Any cost of that change was de minimis and there certainly isn't any change in the interest rate going forward, so there’s really nothing to factor in.

Fantastic. Thank you very much.

We now go to the line of David Phillips of Redburn. Please go ahead.

Hi there. Can you hear okay?

Yes, we can.

Sorry, I switched to mobile. Just a follow up for me, have you had to think about how much CapEx you have been into branches next year to oil over rate, potentially take advantage of or be very potentially high growth recovery.

Yes it is a good question. The oil and gas guys are asking for fleet right now. And we are right in the middle of budget. I think it’s meaningful from the sense that there has always been debates on what’s the impact of, and this increased rig count, it has clearly been across the bottom and we have got that. We are not surprising and saying, well this is great. We are giving some small CapEx but we are also taking advantage of a bit of re-tent. I was talking to the guys in oil and gas on Friday, I think they just put an extra $10 million of feet on rent by re-rent, which means we rented from another rental company and hand it out because before we commit to the expenditure whilst we test the market. So, yes, I would-they are fully confident of very significant rate improvement and very significant volume improvement, but that effects from oil and gas, so you would expect that the things like our job is to moderate that enthusiasm to some degree of reality, but it’s early days, this chart has been horrendous over the past two years of year-on-year declines, am I expecting it to show significant year-on-year increases in the coming year, yes I am, but there will be a big percentage of the small number. The greater benefit from this will be around the edges around our ability to get rates up in those geographies in our more traditional markets. Hello, have you gone David?

No, he is still out. I just muted line because there was quite a bit of background noise. David, your line is unmated again.

No, that’s very clear, thank you.

Okay. Thanks David.

Okay, we now go to Chris Gallagher at JPMorgan. Please go ahead. Your line is open.

Sorry. Just one more. You are obviously talking about the strong second-hand option, what’s your view on fleet inflation going into 2018?

Yes, it’s a good question. We have a lot of meetings with, I mean obviously anybody, anything, which is, any component or any products that are coming from outside the US is benefiting and in the fact that it is cheaper. Then there is rate inflation. So in the rounds, it is pretty good. We've also - I think we talked about this in the past, we've had an initiative for some time now, whether we have been challenging people to get those year-on-year and cost reductions with a combination of just better buying, but also better specifications of equipment. I mean an interesting development is the rental industry just gets bigger and bigger. The others undoubtedly rental site product that doesn't need all of the bells and whistles that some of our suppliers could on product. So, I would have said, this year we were down about 3% or 4%, we will end up being the year in terms of inflation, so the negative inflation. This year I would have said we would be negative minus 1% to flat, would be my guess. Because there is going to be some inflation because of things like, anything which is like a US added value, so many of the costs are going to be high. Having said that most of our suppliers are in what they call with the donors. On what the donors [ph], like we have a faithful day a year ago where we try to extend the replacement cost and got it horribly wrong in the share price reacted accordingly from a terrible presentation. But our manufacturers have exactly the same issue. Because we have got next year, we will have more replacement cost on the year after will be lower replacement cost. And that’s true across the whole of the industry. So, they know they have got very, very low volumes. So they are desperate for volume, we are the fastest-growing rental company in the world and therefore we get very good deals. So, I certainly wouldn't expect any inflation. The question is, the extent to which we will get a deflation.

Great. Thank you very much.

Before we go to Andrew Farnell with Morgan Stanley [Operator Instructions]. Andrew, over to you.

Good morning everyone. Just on Slide 13, can you just talk about why specialty yields were down 3%?

Again, I know we banged on this, about this before. The biggest single issue remains heat. We had a marginally better heating season than last year during the course of December, I was in New York in February and it was 70. So the value is the biggest single reason. Also, in fairness, oil and gas, there is a slight balancing between what's in oil and gas and what’s in heat as well, because oil and gas seems to take a awful lot of heat. So heating revenues in particularly have been very, very low over the last two years. So, to wrap up, that’s pretty much it.

Okay, thanks. And then just on the longer rental periods. You’ve talked about obviously the impact on rate yields, is the marginal equivalent to short-term rental?

That’s a really good question. We're going to have to get better at tracking this. There are so many different products and so many different types of level contracts, to try and say, well this was - if you go back to that slide on Page 27, if you look at the range in rates then clearly if all you get is 30 days rental at those very low rates, the chances are it does, the lower transactional costs does not compensate for the daily. However, if you are going to get as we have now sites where they have 1000 units on average for a year than there is an unbelievably profitable piece of work. So a lot it decides. Actually there is a good example came to mind from last week, there is a very famous entertainment location based in Orlando, where - we're not allowed to use the name, where three years ago we won the onsite location, the onsite provision of the equipment to this magical business. Last week, we were awarded an extension for three years of that contract. And, absolutely fantastic, we won their supplier of the year award, something we're very, very proud about. When we started that business three years ago we had $14 million of fleet on rent on in that one location and last Wednesday, when we got notified of all of this, we had $36 million. So, we have more than more than doubled the volume of that business. The rates in that location are amongst the lowest in the country, so that growth in that volume will have negatively contributed towards our yield number. But I can tell you because we're doing just more volume from an onsite location, the profit center contribution of that business has grown immeasurably, so it is now a very, very profitable location, a natural trade off. Trying to say, well, this is the number of days in putting a hard and fast rule for what is the trade off because difficult - because of just sort of, have you got an onsite, have you not got onsite, how many products you are making, it’s all just, a lot of it has to come down to commercial instinct. If you take it in the rounds, and you look at our margin progression we are getting a lot more right than we are getting wrong.

Yes. So, if I'm hearing you right, if you move one piece of equipment it doesn’t offset the yield, but the 1000 does, but do you know what the breakeven point would be?

That’s again for, for how long a period? For 30 days, so it depends on the quantum of equipment, the mix of equipment, and the rental period length.

Okay. That’s helpful. Thanks.

Okay. As that was the final question on today's call, Geoff, can I pass it back to you for any closing comments.

Well, those of you who are heading off to the Aggreko presentation, have fun. We will be listening to that one carefully, too. Once again thanks for all of your time and we look forward to giving you a further update at year end.

Thank you.

Thank you. Bye.

This now concludes today's call. Thank you very much for attending and you may now disconnect your lines.