Ashtead Group PLC

LSE:AHT

Earnings Call Transcript 2019-Q4

[Brendan Horgan, CEO & Executive Director]

Good morning. And welcome to those who are joining via the webcast and, of course, all of you with us today.Along with Michael Pratt, I will be covering the full year results for Ashtead Group. And after I touch on some of the highlights, Michael will walk us through the financial detail of our operating units and overall Ashtead. And before we turn it over to Michael, of course, I will touch on some of the highlights around our business and the markets as we see them today.So let's begin with the highlights slide, Slide 3.We delivered a strong fourth quarter contributing to another very successful year, during which our revenue growth furthered our market share gains with strong profit margins and cash generation. Our profit before tax, which eclipsed GBP 1 billion for the first time, enabled us to invest in all components of our capital allocation policy with a nice spread between existing store investments, new greenfield openings, bolt M&A and returns to our shareholders through dividends and our largest year of share buybacks thus far. These results demonstrate great progress with our 2021 plans. And as we move closer to fully delivering on this 5-year plan, it's certainly worth highlighting that we've done so within our targeted leverage range of 1.5 to 2x.I'm also pleased to announce our proposed final dividend of 33.5p, which will make for a full year dividend of 40p which is an increase of 21% over last year.These results were achieved in end markets that remain very strong and through the continued execution of our well-shared strategy, which of course would not be possible were it not for the dedicated team of professionals we have in the U.S., the U.K. and Canada. And as such, I'd like to thank them and recognize their dedication and leadership, particularly as it relates to their engagement day in and day out and their relentless commitment to our core value of the safety and well-being of our team members, our customers and the members of the communities in which we serve.So before I dig into the detail, I'll hand it over to Michael to cover the financial results.

[Michael Richard Pratt]

Thanks, Brendan. And good morning.The group's results for the year ended April 2019 are shown on Slide 5. And as Brendan said, it's been another good year.Group rental revenue increased 18% on a constant currency basis, driven by strong growth in the U.S. and in Canada. Margins were consistent year-over-year with an EBITDA margin of 47% and an operating profit margin of 28%. This is an excellent performance considering the fact that we opened 74 greenfields and added 72 further locations through 24 acquisitions. The businesses we acquire are generally low-margin businesses which bring with them the [ attendant ] costs of integration and acquisition.As a result, underlying pretax profit increased 17% at constant exchange rates to GBP 1.1 billion, while earnings per share increased 33% to 174p. Earnings per share benefited from the lower U.S. tax rate, which resulted in an effective tax rate of 25% for the year compared with 32% a year ago, and also the lower share count from the share buyback program.Turning now to the businesses.Slide 6 shows Sunbelt US results. Rental-related revenue was up 19% as Sunbelt continued to benefit from generally strong end markets and, to a lesser degree, the impact of the cleanup activities following Hurricanes Florence and Michael. EBITDA margin and operating profit margins were healthy at 49% and 31%, respectively. These reflect a strong operating performance in a year where we've added 123 locations through openings and acquisitions. This drove a 20% improvement in operating profit to $1.55 billion.Turning now to Sunbelt Canada. Slide 7 illustrates how the scale of our operations in Canada have been transformed by the acquisition of CRS a year ago and, to a lesser extent, Voisin's this year. As a result, year-over-year comparisons are not particularly meaningful. In absolute terms, Canada generated $344 million in revenue and $55 million in operating profit. In a period of rapid growth, the key is to balance growth with profitability, and Canada has achieved this with an EBITDA margin of 36% and operating profit margin of 16%. We expect to see continued margin improvement this year and beyond, with EBITDA and operating profit margins moving towards 40% and 20%, respectively.Turning now to the U.K. on Slide 8. A-Plant's rental-related revenue grew 3% in the year. The U.K. market remains relatively flat, with a degree of uncertainty in the outlook. Good drop-through maintained EBITDA margin at 35% for the year, and the operating profit margin was 13%. As a result, operating profit was GBP 62 million. And in the fourth quarter, we took a charge for pension fund equalization following the Lloyds case; and a fleet impairment charge as we look to reshape the fleet and get rid of underutilized assets, as Brendan will comment on later.Turning to -- now to Slide 9 and our cash flows.Our strong margin resulted in cash flow from operations of just over GBP 2 billion, up 17% on the prior year. Ours is an inherently profitable, cash-generative business. And it's this cash flow that gives us significant operational and financial flexibility [ to enable us to ] enhance shareholder value through our capital allocation framework. The cash flow was more than sufficient to fund our replacement and our growth CapEx and still resulting in GBP 368 million of free cash flow.Consistent with our capital allocation framework, we invested GBP 1.7 billion in capital expenditure to grow the fleet in a strong U.S. market and take market share. We spent GBP 591 million on bolt-on M&A as we broadened our specialty businesses and enhanced our geographic footprint. We continued to buy back shares, spending GBP 460 million in the year and a total of GBP 675 million under the program we announced in December 2017.Slide 10, 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 the end of April, our leverage ratio was 1.8x, in the middle of our target range of 1.5 to 2x net debt-to-EBITDA. Our debt has a weighted average maturity of 6 years and a weighted average interest cost of less than 5%. We also continued to maintain a wide margin between our net debt and the secondhand value of our well-invested fleet, which was GBP 1.7 billion at the end of April.What I like about our debt profile -- debt is its profile. It's got a smooth, extended profile through to 2027 with no large individual refinancing needs. As we've highlighted before, this, combined with an attractive fleet profile which Brendan will touch on later, provides us with a high degree of financial flexibility as we anticipate continued earnings growth and strong free cash flow generation. This supports our plans for 2021 and beyond.Turning now to Slide 11 and a slightly more esoteric topic of IFRS 16 and lease accounting. IFRS 16 is applicable for our financial year ending April 2020, so our first set of results will be those for Q1 in September, which will utilize IFRS 16. While its adoption [ didn't have ] a significant impact on the financial statement, it's important just to stress that obviously it doesn't change the economics on any lease transactions. It doesn't change our cash flows. It doesn't change our business plan, and it doesn't change our capital allocation policy. We're going to use a modified retrospective transition approach whereby we'll recognize a right to buy -- right-of-use asset which will equal the discounted liability of -- the lease liability on transition. And we won't bother restating historical figures.I think it's worth just spending a moment on what this lease liability represents. Historically, we've had to disclose our minimum lease commitments, minimum lease obligation, which at the end of April was around about GBP 500 million. Under IFRS 16, the lease liability has to take account of the lessee's option to extend leases where it's quite likely or more certain -- more likely than not that they're going to do that. As you'll have heard us say many times, a key competitive advantage of this business is the platform that we have built and our ability to leverage that platform. A key element of that platform is the bricks and mortar from which we operate from. Thus, when we enter into a new lease, we invariably expect to extend or take up those options as and when they arise. The typical leases we enter into are often a 10-year initial term followed by 2- or 3-, 5-year extensions, so therefore, in a clause with IFRS 16, we have -- included those renewal options in our liability, which gives a liability on transition of around about GBP 900 million.Turning now to Slide 12 to provide a bit more color on the impact on our financial statements. The adoption of IFRS 16, it'll increase our reported leverage by 0.3 to 0.4x. So on this basis, if you take the position at the end of April, then we -- instead of 1.8x, we'd have been at 2.1x net debt-to-EBITDA. So on that basis, we are going to amend our target leverage range to 1.9x to 2.4x to reflect that change. However, as we go forward, we will continue to report on both a pre- and a post-IFRS 16 basis so that people can get their minds around the new world.So looking forward to the current year '19, '20. So if we compare the current year with a pre-IFRS 16 basis, we expect at the moment, our best estimates are that EBITDA will go up by around about GBP 100 million. Operating profit will go up around about GBP 15 million, and underlying profit before tax will go down by about GBP 30 million. This reduction in profit arises from the fact that -- the front-end loading of the lease expense under IFRS 16 compared with the old standards. However, the important thing is in total the overall expense remains the same as the cash payments and over the life of the lease is no different from what it was before. It is just timing. At this stage, these are the best estimates. There's an inherent uncertainty with this because of our pace of growth. We're going to add another 80 locations this year. We're going to renegotiate a number of our existing leases to extend those terms, and so that will impact on ultimately where we end up.So I just think it's worth reminding you again once more that obviously, the application, it doesn't change our cash payments. It doesn't change the business plan, and it doesn't change the capital allocation policy.And with that, I'll hand over for more interesting topics to Brendan.

[Brendan Horgan, CEO & Executive Director]

Thank you, Michael.And now that you are all fully up to speed on this exhilarating topic of IFRS 16, albeit necessary, I am going to move on to some operational color, beginning with Slide 14.So as you see here, Sunbelt US has delivered rental revenue growth of 22% in the fourth quarter, making 20% for the full year. The organic growth held strong at 15%. And as we would have expected, throughout the year, we saw the ramp-up of the bolt-ons, which contributed an additional 7% in the quarter. This growth is a result of the continued execution of our 2021 plan as well as support of market dynamics, as I'll cover over the next several slides. Our outlook for the 2019, 2020 fiscal year is once again modeled around our 2021 plans while taking into account our current momentum and the bolt-on activity levels that we're experiencing today, so as such, our outlook anticipates another year of strong growth.As we move to Slide 15, you'll see the utilization and rate environment is very strong. And as a result, we posted another quarter of positive KPIs and equally strong profit margins and ROI. Within these measures, specifically utilization, rate and margin, there can be noise as a result of our growth in greenfields, bolt-ons and hurricane comps. It's important to fully understand the strength of this performance, and to do so, we should look a bit closer at our recent expansion.Moving to Slide 16, you'll see the last 2 years have been a successful and busy period of our plan. The team has executed well adding 185 locations in the U.S., with a nice balance between specialty and general tool. To me this demonstrates the reliability of our greenfield program to target, identify and execute openings while selectively augmenting our plan with bolt-on acquisitions. These additions are strategic to the build-out of our platform and, as you will see, have advanced another 14 markets to meet our internal definition of a clustered market. As impressive as this advancement in clusters may be, it's important to note that we have yet to reach this mark of cluster in 76 of our 100 U.S. markets. Our runway for growth remains very long. This collection of location additions deserves an even closer look, so as we turn to Slide 17, you'll see just that.On the left side of the slide is an updated organization of our locations grouped into 3 cohorts by age of opening or addition. The groupings cascade from our more mature cohorts to those added over the last 2 years. The margins flow just as you would expect. The mature stores are consistently producing 39% operating profit margins, while the next 5-year cohort has improved 700 basis points in margin in just over the last 3 years. This demonstrates well the operational leverage opportunity inherent in our maturing locations.Finally, if you look to that, our newest arrival class, if you will, of the 185 locations: That produced an impressive 29% in operating profit margin. This last group, which on average are locations less than 1 year old, is further highlighted on the right-hand side of the slide. That 29% margin that I mentioned translates into $147 million in operating profit. It's in this context that it's important to point out that, as profitable as these new locations are, they do operate at lower margins and KPI levels and thus are a drag on our commonly followed metrics, specifically, again as you'll see here, utilization and rate. For these new locations, they are lower by 9% and 6%, respectively, when compared to the other, more mature cohorts shown here. This should demonstrate well the obvious underlying improvement in both of these metrics. In fact, without drag effects like this, our underlying rate improvement year-on-year is a positive 2%.As we move to Slide 18. We've set out to illustrate that our growth is not just coming from our aggressive expansion, rather a combination of our same store, greenfield and bolt-ons. Throughout all of the geographies and sectors that we serve, we're experiencing growth. Our strategy and execution has delivered growth rates significantly higher than the overall market. And I think it's really important to point out that our same-stores alone are growing at an impressive 2x that the rate of the market. Worth highlighting, of course, is the powerful 30% growth rate in our specialty business, which continues to outpace our overall growth in a segment with a clear and a long path forward for continued growth. I think this demonstrates well 2 things about our specialty business. One, we're in the early stages of structural change, with rental penetration still very low. It's not very different at all. As a matter of fact, it's very similar to the track that we've seen present throughout the last several years in our general equipment business. It's only earlier. And two, the fact that this growth is not tied to construction and will as such be far less cyclical regardless of end market conditions. Remember the majority of our specialty business is borne from everyday maintenance, repair and operations of the markets we serve; and thus remains essential to our ongoing growth strategy. Through our focused growth, we are creating reliable alternatives to ownership that previously did not exist. At a total U.S. performance level, we do believe our platform and strategy is part of our successful growth. However, it also demonstrates very strong end market conditions, which is a good segue to take a closer look at some market indicators on Slide 19.So here we have our usual lineup of macroeconomic, end market and industry forecasts and statistics. We are only 15 weeks removed from our Q3 results, and what we're seeing in today's market and these forecasts remain strong. As I said in early March and can comfortably say again today, there is no debating the fact that, on the ground in our markets, it is busy out there. So the markets are strong and the various external forecasts favor a view of continued strength. Furthermore, and I think it's very important to point out, our managers and sales reps on the ground have constant and considerable communication with our broad customer base, including commercial and industrial construction contractors, developers, event and convention businesses as well as the many large and small participants in the MRO and "square footage under roof" space that we participate in daily. The feedback gathered from these customers on their current and anticipated activity levels remains very strong.Of course, there's no one market indicator or forecast that tells the full story or that should be overreacted to. What we are seeing today remains a broad set of internal and external data pointing to a continued period of stronger activity levels, but given the level of attention and discussion around market conditions, specifically construction, we thought it would make sense to look in a little bit more detail as we move to Slide 20.To begin this slide. I think a challenge in the financial markets as it relates to understanding Ashtead and trying to pick the cycle is that the attention is too much and too often on when the construction markets may turn rather than to what extent they may turn. Let me add some perspective. On the top left of the slide, you'll see a history of the U.S. construction market all the way from 1990 through today. Although we've had a rather long recovery, it's been in the form of modest progression; and as a result, we are still well below the prior peaks of 2006, 2000 and 1990 on an adjusted dollar basis. Moving to the top right of the slide, you'll see Dodge's latest put-in-place construction forecast through 2023. Their forecast for 2019 supports what we're seeing on the ground, as we'll have another year of construction market growth. In 2020 and in 2021, they have forecasted a slowing of 1% and 2%, respectively, followed by growth years again in 2022 and 2023. The key here is to look at the levels. If these Dodge forecasts are broadly correct, 2021 would be the forecasted trough, which would be the same size in absolute terms as the year 2018 was. This year, we just finished and during which had our best results to date, producing over GBP 1 billion in PBT. At forecast levels like this, there is every likelihood we would continue to grow right through that cycle and, of course, beyond the 2021, as indicated here.Clearly, at some point, there will be construction markets that take a turn. However, it's important to understand the degree in which they may turn, as we've just covered; and in which our business has lessened its reliance on construction as we diversify into other end markets, as demonstrated by our continued growth in the MRO space and further evidenced by the strong specialty growth you've seen in our results.So moving on to some business outside of the U.S., we'll begin with Sunbelt Canada. Another year of progress as we continued to build out our recently established scale in Canada. The 13 additions in the year were a mix of general tool and specialty locations designed to develop the cluster model and broaden the customer end markets that we serve, a result that all of our locations will benefit from. Remember, when we look at Canada, this is a business that started with a small 6 million -- a 6-location, $15 million revenue business in November of 2014; and has grown to a $350 million revenue business over a relatively short period of time. The Sunbelt brand is now very much a part of the Canadian rental landscape, all in a market with years of exciting growth opportunity remaining for us.Shifting to our U.K. market, Slide 22 gives a little more color on our A-Plant business. Throughout the year, we realized softening volume as the market came off near-peak levels, but the business maintained strong time utilization. As I covered in the Q3 results, there seems to be a bit of an oversupply in the U.K. market. And as a result, we've built our plan accordingly, which for us can be addressed relatively quickly due to our fleet age profile and flexibility inherent within our maintenance CapEx. Given these developments, I think it's worth taking a bit closer look at A-Plant.Slide 23 is a reminder of our U.K. market coverage, which is comprised of well-positioned general tool locations and a broad set of specialty businesses. A-Plant has a long-standing presence in the U.K. higher market and, as you can see, is clearly well positioned. With the forecasts indicating a flattish market and some relatively uncertain times in the U.K., we thought it important to leverage the scale and flexibility of the business. Specifically, we're focused on delivering ever-improving customer service through this network I've just covered, together with realizing the benefits of operational leverage. With this focus, we anticipate not only improving our ROI but benefiting from the cash-generative properties in our business, particularly enhanced in times of CapEx moderation.So speaking of CapEx, let's turn to Slide 24 to review the CapEx plan from an overall group perspective. And as you'll see here, little has changed since our Q3 update.Sunbelt US will have a modest increase from a replacement CapEx perspective as the investment from 7 or 8 years ago comes to fruition from a replacement standpoint. And our growth CapEx levels are very similar to what we had in the year that we're presenting now as market demands, as we've said, remain very high. Although the early CapEx guidance for Canada indicates a bit less spend, don't forget a substantial portion of FY '19's spend has been follow-on investment related to the bolt-on activity of the last 2 years. This is in no way signaling a lack of enthusiasm for our early build-out of the Canadian market. Rather, we do not have bolt-ons in the pipeline to the scale or to the degree in which we did a year ago and hence have indicated this investment.Consistent also with what I've just covered for A-Plant, we will focus on delivering on our priorities and utilize the flexibility inherent in the replacement CapEx. And thus, our growth CapEx plan for the year is 0, as I've indicated, but similar to my comments on Canada, this in no way is signaling our lack of commitment to the A-Plant business, rather prudently managing the market. And importantly, we will demonstrate over time the powerful impact of well-executed CapEx replacement investment.As we've said for some time now, these plans are not set in stone and can change according to prevailing market conditions. We place relatively small orders on relatively small lead times, and we can utilize an incredible level of flexibility as a result of our overall fleet makeup. And specific to that, let's take a closer look. On Slide 25, you'll see for the first time we're sharing our fleet age profile for the Sunbelt US business. Over many years of investment in our growth strategy and conscious fleet planning, we've achieved a profile which puts us in an incredibly good position, one that has its obvious procurement benefits as a result of the high level of predictability as we look over the years, but perhaps most important is the inherent flexibility this brings us in any market circumstance. It's with this outlook predictability and flexibility that gives us such confidence in our ongoing opportunities from a capital allocation standpoint, as I'll cover specifically on Slide 26.The order of our capital allocation priorities remain unchanged. We've invested GBP 1.6 billion in existing location fleet and greenfield openings; and a further GBP 622 million in bolt-ons, in total adding 146 locations group-wide for the year. We've completed GBP 675 million of share buybacks under the 18-month program that we launched back in December of 2017, as of today's results. This ongoing policy has returned GBP 1.1 billion to our shareholders over the last 3 years as we continue with our previously announced buyback of a minimum of GBP 500 million during this fiscal year.Moving on to our final slide.I hope your takeaway from this set of results and our update today are clear. However, in summary I'd like to emphasize some key points. This is a great set of results delivering another year of profitable growth in end markets that remain strong. The runway for growth in our business is long. We will continue to take advantage of the ongoing structural changes and, importantly, continue our progress of diversifying our end markets beyond construction in all of our business lines but notably through the continued strong growth of our specialty businesses. As a result of these factors and our significant cash generation and strong balance sheet, we will execute according to our capital allocation plan, delivering an anticipated 15% to 20% EPS growth in our fiscal year '19, '20, all while remaining inside our targeted leverage range.And as -- and finally, as a result of these points, I'm happy to report that the Board looks to the medium term with confidence.And with that, we'll turn over to Q&A.Will?

[William Kirkness, Equity Analyst]

It's Will Kirkness from Jefferies. I've got a couple of questions, please. Firstly, on drop-through. So drop-through for North America as a whole improved year-on-year for the full year and for the fourth quarter. How should we think about that in outlook terms, as there's a few puts and takes? I guess you've got embedded [ maturity within ] those '18, '19 sites you've opened. And you've got further sites to come. Canada margins should improve. I'm just wondering how we should think about that.

[Brendan Horgan, CEO & Executive Director]

Yes. Well, I mean I think you've almost answered the question. So if you look at fall-through, as it would be of course in the results themselves, you'll see fall-through dampened a bit in the U.S. Q4 but a better way given some of the one-offs we would have gone through last year, Q4, as it related to some of our acquisitions in Canada. I think it's probably better for the year to look at North American fall-through. So as you rightly pointed out, North American fall-through was better year-on-year fiscal year '19 v fiscal year '18. And importantly, Q4 fall-through in North American so I think, it was 45%, 46% this year -- I'm sorry, last -- this year v 42%, 43% for the quarter. So the quarter fall-through is improving. And again, when you talk about 185 locations, 123 of those would have been in the current year, as I said, less than 1 year old. They're actually 10 months. So 10 months on average. So they're going to have an obvious drag effect from a fall-through standpoint. In terms of looking forward, I would look forward more as what we've done year in and year out with fall-throughs in the 50s.

[William Kirkness, Equity Analyst]

Okay. And then the second one, just about the growth outlook. Given the level of CapEx where you're starting the year, it'd be interesting to get May's growth, Brendan, if that's okay. That organic growth outlook of 9% to 12% looks pretty conservative.

[Brendan Horgan, CEO & Executive Director]

Yes. Well, May was 19%, so we did have growth. I think it's, look, specific to our outlook. Look, we've given the outlook in terms of existing locations or organic. We've tweaked down just a bit the bolt-on piece, which is simply just a matter of having less more material deals in the hopper as we sit here today, but I want to touch on your point here, if I can, in terms of runway. So maybe more prospective more so than just this 1 year, as I pointed out. So as we said or as I said previously, only 24 of the top 100 U.S. markets are at a cluster status today. I think oftentimes in this, in terms of when we are looking at what the growth opportunities are, we just do the straight math. So if you look at the top 25, for instance, here, you'll see that our internal definition through years and years of practice at this would say that we should have more than 15 locations, but what happens when you're doing the math is everyone might just plot 16 in that top 25. They might plot 11 in the 26 to 50 and they come up with a location count number, but in reality when we think of our runway, let's look at it that like this: Minneapolis, Minnesota, for instance, is the 25th largest DMA in the U.S. And there's about 4 million people there, and the put in place and population would kind of follow one another. So in Minneapolis we would say we would need about 16 locations, then if you go to New York City or L.A., which would have populations of about, say, 20 million in New York and about 14 million in L.A. -- so you can say we would need about 45 locations. Now what I -- and certainly you could sit here today and say we're a bit on the conservative end from an outlook standpoint, but I guess I would just go to last year and say we probably were a bit as well then.

[Rajesh Kumar, Analyst]

Yes, Rajesh Kumar from HSBC. When you look at the Dodge Momentum Index or the outlook which you've highlighted, your growth plans seem unfazed by a potential slowdown in the end market. Which segments of your end market do you think may be impacted by that and where you need to be a bit more cautious? Or is it something you're not giving a lot of credibility given what the interest rate discussions in the U.S. might be?

[Brendan Horgan, CEO & Executive Director]

Yes. Well, I mean, look, I think, first of all, in general we use a combination of our internal feedback that we're hearing from our customers and the best possible external forecast that we can find, okay? So I think we would generally agree that Dodge is the most focused from a construction end market standpoint that's out there. So when we do look at forecasts like this and we look at '20 and we look at '21, look, geographically will there be pockets? Well, we monitor that every day, anyway, so it's really no different than anything else. If we have a part of Florida -- if Orlando, Florida is softening a bit, we won't put as much investment into Orlando, Florida, but that will not alter our views for San Francisco, California where we may have 2.5% share. But I think, again as I put it in the actual results here, everyone, I think, would agree the focus externally has been more on when will a construction downturn come rather than to what extent. So using the forecast that we do have available to us, I'll make it very clear again: We would expect, if this forecast is about right -- it won't be precise, but if it's about right, we think there's every likelihood we grow right through it.

[Rajesh Kumar, Analyst]

Okay. That's helpful. And the second one is you've very helpfully shown the mix of your fleet by the year you bought it. And given your 7 to 8 years of holding period, you will have more replacement and disposals coming through in the coming years. Are you worried about impairments of the carrying value of assets at all?

[Brendan Horgan, CEO & Executive Director]

No. Look, we monitor, as you can imagine, from a borrowing base standpoint. We monitor all these. We look at the third party. The key in all of this is the flexibility. So if we look at this even distribution, which has been years and years of hard work to get to a point of this level of flexibility, but let's just say for conversation sake the year here indicated of 2014. So that year is about $1 billion of fleet that would be due for replacement. What do we do with it? So let's just say we're going through -- that would coincide with that minus 1% or minus 2% year, right? We see what the market curtails. Keep in mind minus 1%, minus 2%. I would bet most in this room couldn't tell the difference in the end market of construction if the construction market were off by minus 1% or minus 2%. We could at a very granular basis at a very specific market level, but beyond that, you couldn't really. But the point is -- really, to answer your question, is the flexibility inherent in that. I don't need to sell it. If I -- if we want to sell it and the end markets were okay, we will sell it. If we want to use -- the key I think on this one is, as we say, flexibility to turn replacement into growth. I like to say it like this: We have growth CapEx embedded in our replacement that is disguised as replacement. So said another way, if things are a bit slower, as I said, in Orlando, Florida and there are 10 telehandlers for replacement in Orlando, Florida off of that year, we may indeed decide to replace 5 of them, but we don't need the other 5. It doesn't mean we won't buy 5. We may bring 5 to San Francisco, to use my point that I said earlier. So embedded in this is extraordinary flexibility which is incredibly rare in our space.

[Rajesh Kumar, Analyst]

So the impairment we have this time has no bearing with this replacement...

[Brendan Horgan, CEO & Executive Director]

Oh, you mean the impairment with A-Plant?

[Rajesh Kumar, Analyst]

Yes.

[Brendan Horgan, CEO & Executive Director]

No, no, no. Look, we had a -- let's put it in perspective, first of all. So we're talking about a total 4 million Q4 charge, most of which was pensions. And we had 1 billion -- 1 million and a bit in impairment for assets as we took a decision to sell about $30 million or $40 million worth of our assets in Q4 -- GBP 30 million or GBP 40 million, pardon me. So no, we -- there's no correlation there whatsoever.

[Rajesh Kumar, Analyst]

And the U.S. market is firm in terms of the residual values compared to your company...

[Brendan Horgan, CEO & Executive Director]

Yes.

[Michael Richard Pratt]

[ Yes, as is in ] U.K. market, if you just -- so the specific assets which are underutilized, we could hang onto them, but why hang onto them? You're better off getting the cash, improve that cash flow and spend it somewhere else. Back to Brendan's point on the U.S. in terms of fleet: Yes, we've got a number in there for CapEx for A-Plant, but what you'll find there is we'll be selling underutilized asset. So you're actually -- by selling underutilized assets, you don't change the revenue-earning potential of those assets but actually then buy stuff where there is growth, so actually you then grow the revenues. So it's just a switch between the 2. So there's nothing to read across from the 2.

[Brendan Horgan, CEO & Executive Director]

They're getting around with the mics.

[Jane Linsdey Sparrow, Director]

Jane Sparrow from Barclays. Just on rate and utilization. I know you sort of helpfully put those charts in every quarter, but -- and people like to talk about them, but internally how do you think about those metrics? Because obviously they look quite different for specialty versus general tool and also a drag from greenfields. Are they things you sort of actively manage? Or are they really just outputs rather than inputs?

[Brendan Horgan, CEO & Executive Director]

Yes, well, first of all, I'll say John Washburn is here today. So you have more -- even more specific questions about rate, you can get to him there in the back. But both is the real answer. So certainly, we manage rate internally. We manage the flow of fleet. We manage the overall metrics, but you're right in pointing out both rate and time utilization as it relates to specialty. Look, I mean, over time in reality, and it's why we will have come on to the slide highlighting the 185 locations that we've added, they're less-relevant metrics, right? So obviously with the drag effect that I mentioned of the 185 but also the specialty business. So the specialty business from a time utilization standpoint will definitely operate at a lower time utilization. Interestingly enough, this morning, as I was -- as we were waiting to get started here, just outside of the London exchange, there was a janitorial crew doing all of the ground cleaning of the pavers that are just outside of us here. And they were using all of the flooring, sweeping and scrubbing products, which is a new division for us. We've just had it open for 3 years. And over 3 years, we have a $90 million fleet of sweepers and scrubbers. We're on a run rate of doing $70 million a year in revenue. We have 32% ROI for the year that just ended, and our time utilization is 48%. So what's time utilization have to do with it? So in the end, both rates and utilization, they just don't mean maybe what they once did.

[Jane Linsdey Sparrow, Director]

And then just a second one, on you may not wish to discuss in too much detail but in terms of sort of mixture of rate and profitability by customer type. If there is a downturn in nonresi, is it fair to assume that, because that's got higher rental penetration as a sector, that's a more competitive end market in terms of profitability by customer?

[Brendan Horgan, CEO & Executive Director]

The key is the range. The -- if you look at last time around, which is a rather draconian look, but if you look at a market like that, where we made the mistake through internal controls and the way that we pull the levers which today John will pull differently going forward is we got competitive on the big projects, which believe me we will do again, we do today. In our rate mix today we have very aggressive pricing in different subsets, but we lowered the rates across the board because we didn't have the tools and -- that we have embedded in our business today. So today, if it was that contractor I just mentioned that was outside this morning, they're going to pay exactly what they did last time because it's 1% of their overall OpEx, whereas on the other big projects, whether it be some of the data centers we talk about or the distribution centers that we talk about or some of the long-term industrial contracts, perhaps we see those get a bit more competitive. But overall, I think you'll see a very, very different outcome. We've got a couple on the right here.

[George Nicholas Gregory, Research Analyst]

It's George Gregory from Exane BNP Paribas. I've got 3, please. Firstly, just on the revenue contribution in '19, '20 from the deals you've already done; and also the annualization of the 123 and 80 planned. What would those 2 components give you in terms of U.S. rental revenue growth as you currently see it? That's for Mike...

[Brendan Horgan, CEO & Executive Director]

Again, you're talking about the 20 year, the...

[George Nicholas Gregory, Research Analyst]

This is the year we're looking into, so fiscal '19, '20, so April '20. What would you get from the M&A you've already done, the [ 589 ] or whatever it was in the...

[Brendan Horgan, CEO & Executive Director]

Yes. So about half of the outlook.

[Michael Richard Pratt]

Well, that's why we say low teens. And then as I said before, it might be of low teens is 12% to 13%. So that sort of 12% to 13% range reflects what we've got, the acquisition we've done to date. So last year's acquisitions and the growth in fleet last year, if you roll that through with our fleet plans for this year. And the fleet plans for this year include the greenfields we're talking about. The only thing they don't include is what extra M&A we may do.

[George Nicholas Gregory, Research Analyst]

Surely, that -- would it not give you a bit more than [ to 3, Mike? I mean you've just spent [ $589 million ] on deals...

[Michael Richard Pratt]

But it's also timing when they come through the in -- when they've come through in the year. So it's around about that number.

[George Nicholas Gregory, Research Analyst]

Okay, okay. And second question, just looking at the CapEx program. If we compare the disposals to the replacement CapEx, is the -- it looks to me like the implied disposal value is perhaps a little lower than it was in 2019. Is there anything behind that? Is it conservatism?

[Brendan Horgan, CEO & Executive Director]

Do you mean the secondhand values?

[George Nicholas Gregory, Research Analyst]

Just if I look at the disposal proceeds versus the replacement CapEx, the implied disposal value looks a bit low.

[Michael Richard Pratt]

Yes. You -- as you would expect with all of this stuff, there'll be a degree of caution in our view. What -- the secondhand values are still strong. There had been -- Q4 secondhand values were not much different from the rest of the year, so we're not seeing any real change in secondhand values at the moment.

[George Nicholas Gregory, Research Analyst]

And then just one for Brendan, online penetration. Where are we in terms utilization of your e-commerce platform? Are you seeing any of -- any uptake increase? And how do you see that kind of phasing over the coming years, please?

[Brendan Horgan, CEO & Executive Director]

Look, I mean it's -- yes is -- the answer is we continue to see momentum in that both by way of our customers ordering directly on our mobile apps and on the website, certainly an increase in traffic of our own sales force in particular using that as a avenue. We see that as a huge opportunity going forward. A bit more of the same as we move through this year, but I will tell you, and from a next Capital Markets Day standpoint which will be spring of 2020, I think you'll find it will be a rather large topic.

[Steven James Goulden, Research Analyst]

Steve Goulden from Deutsche. Three questions, if I may. So firstly, on the replacement CapEx. As you replace the old cohorts, what's the price inflation of the kit and within that factoring in recent tariffs, et cetera? Second question: So obviously we've sort of done this to death somewhat, but in terms of what the financials look like into a slowing U.S. construction cycle, obviously you say that in a mild downturn you can move kits around. You can add to areas that are less weak than others, et cetera, but clearly obviously utilization rate is very high. Pricing is relatively strong. There will be some impacts. And so the return on investment of that incremental new kit will, we assume, be lower than is currently the case in a mild downturn. Now if the downturn is worse than you expect, how would you cope with that? What levers have you got to pull to minimize the damage [ potentially ]?

[Brendan Horgan, CEO & Executive Director]

Yes. So yes, look, I'll, we'll come back to inflation. The painting the sort of recession, again are we talking more like a 2002, 2003 for us as we lag? Or are we talking more a 2006, 2007 or 2008, 2009 really more for us? Don't forget how different the business has become. So here we have a business that is more than half nonconstruction. And the part that we're talking about specifically around MRO, I would argue, doesn't change much at all. It may be hard to get your minds around, but in terms of the events we do, those events go on. We just finished doing the Super Bowl draft week. Super Bowl draft week is going to happen either way, and I would argue that the pricing with that event customer is not going to change at all. In general, if we see the sort of end market forecast that is in the forecast that we've just covered with you -- or end markets that are in the forecast we've just covered with you, again I don't think we see much at all. The key is really what are the levers. So the levers would be, remember, we could run the business at an even higher time utilization if we so choose. It's not every plan where you add 185 locations in 2 years. A big 60% of those are greenfields that are carrying a 9% lower time utilization. So you have those various levers to pull. And I think, again as you'll see, what we've been exercising in terms of changing what our end markets are will have the biggest implications and impact on that. And remember again, I'll say, we -- every day, we're pulling these levers that we talk about in various nooks and crannies of our business.

[Steven James Goulden, Research Analyst]

Okay, final one, if I may, just on the IFRS 16. So the new 1.9x to 2.4x, is that going to be the new comfort level over the medium term post IFRS...

[Brendan Horgan, CEO & Executive Director]

Yes. Before -- Michael will address it specifically, but the key is it's no change.

[Steven James Goulden, Research Analyst]

Right. And I think -- so you just pointed to the opening of 80 stores over the next year, which again would have upfront lease recognition at a high level. So is that going to have an incremental impact on the balance sheet...

[Michael Richard Pratt]

We believe we'll be within the 0.3x to 0.4x, so in terms of the impact on leverage, which is hence why we've gone to 2.4x at the top end and we've gone to 1.9x at the lower end. Because we think stuff will be coming off and you'll be adding new stuff. So we'll -- obviously we'll continue to track it, but we don't know what pace we'll grow at in the future. But we believe that's where we should be.

[Steven John Woolf, Analyst]

Steve Woolf with Numis. Just to sort of go back to that point. What proportion of the business was nonconstruction in 2008, 2010? And any sort of other areas you'd point to? Like obviously MRO was virtually nothing, but if you'd go through to, say, some of the specialty business, which I'm pretty sure are also very new, just other bits on how you've changed through that. So particularly on nonconstruction...

[Brendan Horgan, CEO & Executive Director]

Yes, well, you'll see, as we say -- so let's just call that proxy 2007, 2008, with at the time 55% of our business was construction as you can see today. If anything, I would say that, given the way that we are so good at compiling this today, the construction element may even have been a bit higher than what we say here for 2007, but the specialty businesses around MRO and our broader focuses, the key there is let's think about the definition of specialty. The definition of specialty is different, specialty is probably a terrible term for it overall, other than maybe the return on investment that they make would be quite special, but in general remember it is products and services that previously did not have a reliable alternative to ownership. So they're very, very early in their rental penetration. I mean a number of our specialty businesses are in the low single digits of overall rental penetration, and what we're seeing now is the climb in all that and the progression. And the vast majority of that specialty business is specifically in nonconstruction market. So it doesn't take much to model out. If you just think about the growth that we've shown here: If you look at our general tool business, which remember, as we grow specialty and more of this MRO, even our general tool businesses are far less construction. But if general tool is growing at 16% and specialty is growing at 30%, you'll see that 54%-46% composition that we put on the slide continue to change over time.

[Arnaud Lehmann]

Arnaud Lehmann, Bank of America. Maybe just to follow up on the last one, plus a couple more, if I may. Do -- if we see this sort of low single-digit decline in construction, would you actually expect that the rental penetration could accelerate, considering everybody will assume maybe things will get worse? Maybe there is lower visibility on the business outlook, so that could be actually an incremental growth driver rather than necessarily a drag on your volume. As obviously things turn drastically, it may be a different story, but is a mild construction downturn actually potentially a positive for you? That's my first question. Secondly, just [ a bit to prices ]: There's no increase in your central costs. If anything, it's actually going down. That may be currencies, but shouldn't we start to see, as you grow 20% a year, maybe another 10%, 15% or something next year? And then also the clusters are becoming larger, at least some of them. Should we start to see more central costs, more SG&A in the system? As that -- my second question. And lastly, many reports about lots of rain in May, Mississippi floods, also rains in the western part of the U.S. Is that a positive or negative for you, or indifferent?

[Brendan Horgan, CEO & Executive Director]

I'll start with your May because it's an easy -- May was up 19% year-on-year in the U.S. So strong, but you're right, soggy. Would it be -- would we better without it? We would be better without it. So I suppose that doesn't help me at all with Will in terms of our outlook, but you have heard some others talk about it. But nonetheless, it's strong. I'm really glad you asked your first question, which is around rental penetration when we go through a cycle. I think, look, it may be odd because we may be one of the -- one of a very small sampling that would say let's get on with it, like let's get on with some sort of construction slowdown or economic downturn. Because we will demonstrate some of the key attributes as to what we've been building this business on all along. And yes, over a period of time when you do go through some sort of downturn again, it will not only reinforce the rental penetration, but it will propel it again. So over time, what you really see is you see it's almost stairstepping in terms of how penetration changes over time. And there's always that upward trajectory coming right out of a recession. The difference with this time is you didn't see it abate at all. So you saw continue to kind of trickle up and, of course, our specialty business significantly move forward, so yes, I think that will be more an accelerant to the rental penetration or structural change in that regard than not.And on central costs, where did we have here? I think, first of all, you can see it going from 5 to 6. So certainly, you're seeing the investment that we should be making, but you're also seeing the operational leverage that should be present in our business. Some of you, I'm sure, will go back to a previous slide that would have had a 2017 in there for a -- '18, rather, for a Capital Markets Day that we did in the spring in New York in 2018. And that central figure would have actually been [ 7 ]. So I think you're seeing both our willingness to invest in some of the platforms that will really truly power this business that we've been working on and building, but you also see the operational leverage and gearing come through.

[Michael Richard Pratt]

And I guess, the other point here in terms of what are we actually spending, that's 6% of the revenue number...

[Brendan Horgan, CEO & Executive Director]

It's a big number.

[Michael Richard Pratt]

But is 40 -- I haven't got the track record in front of me, 40% or 50% higher than it was back in 2016. So it's not that we're not spending in that area. It's just you've got a lot more revenue as well.

[Charlie Campbell, Housebuilding Analyst]

It's Charlie Campbell at Liberum. [indiscernible] first Slide 25, that's really useful, the fleet profile. So the U.S. fleet looks to be on average about 3 years old. If you put a break on CapEx including the kind of fleet that ages, as we think about downturns and so on, what's the kind of optimal age for the fleet? At what point does it get old and you have to kind of keep spending on replacement? And how long a holiday could you have in a downturn...

[Brendan Horgan, CEO & Executive Director]

Yes, well, I think the key -- one of the problems with fleet age has to do with the [ weighting ]. So you remember, very early on, it was just math. When you're growing at the rate we're growing and you're entering 1 billion, 1.25 billion, 1.5 billion, it has a big effect. In the end, given this composition that we'll have, look, we could go to 40, 48 months because in the end, if you have 7 or 8 years and you have a well-distributed banding, it's just -- then it's math, it's right in the middle. And so it's not a matter of what you're at. We have a lot of leverage, I guess, is the short answer to your question in terms of where did that go. We don't anticipate that, but it is a tool that we have at our disposal. But we have -- it's a matter of the mix. From a customer's perspective, it's not so much getting a brand-new piece of equipment or a 1-year old or a 3-year old or an 8-year old. The problem you run into is when you deliver them 10 and they're all 8, right? So it's a matter of having a nice -- a mix for the customer to have overall. And we have really high standards. So in terms of what the product is, look, there are machines that we keep for 8 years. There are machines we keep for 14 years. A 2-megawatt diesel generator, the age doesn't really matter. It's all a matter of electricity.

[Michael Richard Pratt]

But all -- a lot of that comes back to when we talk about operational and financial flexibility by where we are on leverage, where we are on the fleet age. And it just gives you that optionality when you go through it because, if you go in any of these mild downturns that we've talked about, you will still be spending on fleet. So you -- and even you can be replacing all these chunks as they fall due, but the reality of it is, if it's in Florida, it's probably you're not spending as much because you might be shrinking the fleet a little bit in Florida. But out in California, to use that example, you'd be growing. So you would still be looking to spend that money. You won't necessarily be aging the fleet. Now if you have a Armageddon type of downturn, then you might take a different view, but with the flexibility we've got in where we are on leverage, where we've got the fleet profile, then we have plenty of choices when we encounter that situation.

[Andrew J. Wilson, Analyst]

It's Andy Wilson from JPMorgan. A couple, to start, on competition. And I guess it's a little bit of a question in terms of how much visibility you get from this, but if you -- kind of if you look at the logic behind expanding in specialty and appreciating how broad that is, are you seeing more of your competitors trying to do more in that space? Because if they're not, I'm not really sure why they wouldn't be. Maybe you can help me on that. And then I guess -- secondly and again a question on visibility, I guess, you can see is that in terms of the technology platform that you guys have. And obviously your biggest competitor has a similar thing, from what I understand. Are you seeing more of the -- I guess, the smaller guys developing similar offerings? Or is it just that they're kind of hamstrung by not being able to spend as much on that part of the business?

[Brendan Horgan, CEO & Executive Director]

Yes, your last question, first. Look, it is us and basically one other who have the ability to invest. As Mike said, that 6% is a big number when you take into account the size that it's going against. There is nothing to even -- it's -- nothing even worth mentioning as it relates to the littles and middles, if you will, having access to any sort of the technology like we have today.Your question is a good one, on specialty, and part of it was you don't understand why others wouldn't. You have to start with you have to actually have the ability to invest from a CapEx standpoint and a platform standpoint. And I have this general belief in business that in business you're either growing or shrinking. There's kind of no way to just stay in the middle. And there is one other who I think does a really good job in investing in their specialty business. We take a slightly different view in some of our more seedlings that we've seen grow from concept and design to actual $200 million, $300 million, $400 million businesses. It's easier said than done. More importantly, from a independent -- when you get a bit further down the list, right? So when you get into RER 20, RER 25 or RER 100. Over the years, we've seen that it gets to be a slippery slope for them when they either leave the geography that they're good at and understand the customers or when they branch off into too many things. It seems easy to start a pump business. I can tell you, over 23 years, it's not. So that's a big difference. So scale and the platform is so much -- it wasn't exactly your question, but I should point out the 185 locations we've added over the last 2 years would be RER rental company in North America number 8. So when you have a platform that you can actually invest in, you can leverage, you can play off of the platform that John and Brad and the team have built over years, it really, really is powerful in terms of the results.

[Andrew J. Wilson, Analyst]

And maybe a second question, I guess, unrelated but just thinking about the M&A guidance that you've given for this year of the kind of 2%, 3%. And not obsessing about the 2% to 3% at all, but just in terms of thinking more broadly about capital allocation between kind of organic and M&A and buybacks or returns, it seems you made a kind of quick comment around there was less in the pipeline or less attractive maybe or big enough in the pipeline. Can you just give us a -- kind of a bit more around that? I mean, is that, that you are literally just seeing less things at the right price that are interesting and therefore buybacks become much more interesting at this kind of share price? Or just a bit more on kind of -- or if I'm reading too much into it, then that's fine as well.

[Brendan Horgan, CEO & Executive Director]

I think it's a fair question. First of all, let me be perfectly clear. There is a very long careers worth of bolt-on M&A. So there's no -- there's not like we're running out of shoulder taps or potential, but we buy good businesses and we buy good businesses with good relationships. More often than not, they are -- Brad, who's here today, has sparked up so many of those conversations that we have with owners. So it's a timing thing. So there are good-quality assets out there that over time we will put in. Just so happens to be here we are in June and our coffers aren't quite as full. Now from a capital allocation standpoint, we spent GBP 622 million in M&A in the year just ended. That's our largest-ever M&A year since we bought NationsRent in 2006. We don't expect it to be. Unless something comes up that we're not engaged with today, we don't expect anything to be. And yes, we've talked about our GBP 500 million in buybacks that we'll continue, but also at the multiples we are today we wouldn't hesitate at all in terms of increasing that as we have more free cash flow.Okay? Well, thank you all very much.