Ashtead Group plc

Good day and welcome to the Ashtead Group PLC Q3 analyst call. Please note this call is being recorded and for the duration of the call, your lines will be in listen only. You will have the opportunity to ask questions. This can be done by pressing a star 1 on your telephone keypad to register your question. If you require assistance at any point, please press star 0 and you'll be connected to an operator. I will now hand over to Brendan Horgan, CEO. Please go ahead.

Thank you for that introduction and overview and good morning everyone and welcome to the ASHRAE group Q3 results call. I'm speaking from our field support office in South Carolina and joining on the line from our London office are Michael Pratt and Will Shaw. Before getting into the slides, I'd like to speak to our team members throughout the business to thank them for their ever impressive dedication and engagement to and with one another. and of course for our customers. Without the culture their efforts and actions create, we would not be in the envious position to deliver another set of great results as we are indeed today. But above all, I'd like to recognize and show appreciation for the team's ongoing commitment to safety, safety for themselves, for their coworkers, our customers, and the members of the communities we serve. It's with a mindset of ongoing improvement We are in the early rollout period of what we're calling Engage for Life Amplified, taking a program which has become part of the organization's muscle memory and doubling down. So thank you in advance for your engagement in Amplified. In the meantime, keep leading positively and safely out there, and as I always say, stay focused on people, people, people, customer, customer, customer. With that, let's move on to the highlights on slide three. Our performance picks up where we left off in December at the time of our Q2 results. The ongoing momentum across the group produced another record Q3 and nine months performance with continued strong demand in our end markets and obvious signs of structural progression within the market and our industry. We now have three months greater clarity from current demand levels present in the business paired with the needs, backlogs, and future project expectations we are gathering from our customers, and relevant and market-forecasted strength, all of which continues to support our view of ongoing structural gains in a strong end market throughout 2023 and beyond. As I said in December, these conditions are incredibly favorable for our business. In the nine months, group rental revenues increased 25%, while the U.S. improved 27%. These revenue gains are the primary drivers between PBT and EPS growth of 28% and 30%, respectively. During the period, we continued to advance our Sunbelt 3.0 strategic growth plan, doing so by executing on all our capital allocation priorities, beginning with $2.6 billion in capex, which fueled our existing locations and greenfield additions with new rental fleet and delivery vehicles. We expanded our North American footprint by 120 locations, 51 through Greenfield openings and 69 via bolt-on acquisition. We invested a further $970 million in bolt-on acquisitions in the nine months and returned $240 million to shareholders through buybacks. Despite these levels of capital investment, acquisition, and returns to shareholders, we remain near the bottom of our net debt to EBITDA leverage range at 1.6 times. These activities demonstrate our confidence in the ongoing health of our end markets and the fundamental strength in our cash generating growth model. With this performance and outlook, we now expect full year results to be ahead of our previous expectations. Let's move on to our outlook slide four. Recognizing the performance and momentum in the business, we increase our full year rental revenue growth guidance versus last year as follows. The US increases to a range of 23 to 25% growth. Canada remains in the range of 22 to 25% growth. And we're now expecting a modest amount of growth in the UK. We've lifted and narrowed the gross capex range to 3.3 to 3.7 billion, an uplift of 100 million to the previous top end in US rental fleet, indicating strength in demand and our ability to gain greater share from manufacturers. Free cash flow guidance remains unchanged at $300 million. And on that note, I'll hand it over to Michael, who will cover the financials in more detail.

Michael? Thanks, Brendan, and good morning. The group's results for the nine months are shown on slide six. It was another strong quarter, and hence nine months, with good momentum across the business. This momentum drove strong growth in the US and Canada, while UK rental revenue grew despite all the Department of Health testing sites being demobilized in the first quarter. As a result, group rental revenue increased 25% on a constant currency basis. This growth was delivered with strong margins, an EBITDA margin of 46% and an operating profit margin of 28%. As a result, adjusted pre-tax profit increased 28% to $1,778,000,000 and adjusted earnings per share were 304 cents. Turning now to the businesses, slide seven shows the performance in the US. Rental revenue for the nine months was 27% higher than last year at $5.7 billion. This has been driven by a combination of volume and rate improvement in what continues to be a favorable demand and supply environment. The strong activity and favorable rate environment have enabled us to pass through the inflation we've seen in our cost base, both in general as well as in the direct cost related to ancillary revenues such as fuel, transportation, and erection and dismantling, which are growing at a higher rate than pure rental. In addition, we continue to open Greenfields, adding 47 in the period, and complement our footprint through bolt-on acquisitions, adding 49 locations in the US. Inherently, in the early phase of their development, Greenfields and bolt-ons are lower margin than our more mature stores. As expected, drop-through has improved as we've progressed through the year, and with third quarter drop through of 54%, drop through for the nine months was 49%, contributing to an EBITDA margin of 49% for the nine months. This drove a 34% increase in operating profits to $1,890,000,000 at a 31% margin, while ROI was 27%. Turning now to Canada on slide eight. Rental revenue was 25% higher than a year ago at $524,000,000. The original Canadian business goes from strength to strength, taking advantage of its increasing scale and breadth of product offering as we expand our specialty businesses and build out our clusters in that market. The level of bolt activity, particularly the McFarland's and Flager acquisitions, which have a higher proportion of lower margin sales revenue than our business, has been a drag on margins. This impact will reduce in the future as we reduce the level of outside sales of these businesses. Our lighting, grip, and lens business has recovered from the market disruption seen in the earlier part of this year, but that impact remains a drag on margins. As a result, Canada delivered an EBITDA margin of 42% and generated an operating profit of $131 million at a 22% margin, while ROI is 19%. Turning now to slide 9, UK rental revenue was 4% higher than a year ago at £424 million. This growth is despite the significant reduction in work for the Department of Health as we completed the demobilization of the testing sites during the first quarter. As a result, the Department of Health accounts for only 66% of total revenue for the period compared with 32% a year ago. The core business continues to perform well with rental revenue 20% higher than a year ago. However, the inflationary environment combined with the scale of the logistical challenge in not completing the testing site demobilization within three months, but also then getting the large volume of returning fleet back out on rent, and a significant increase in demand over the summer, particularly in the returning events market, contributed to some operational inefficiencies, which impacted margins negatively. The principal driver of the decrease in operating costs is a reduction in the work for the Department of Health. offset by the additional cost referred to earlier. These factors contributed to an EBITDA margin of 29% and an operating profit margin of 11%. As a result, UK operating profit was £55 million for nine months and ROI was 10%. Slide 10 sets out the group's cash flows for the nine months and the last 12 months. Despite increased replacement expenditure and significant growth capital expenditure, this has all been funded from the cash flow of the business while still generating free cash flow of $295 million. Slide 11 updates our debt and leverage position at the end of January. Our overall debt level increased in the nine months as we allocated capital in accordance with our policy, spending $933 million on acquisitions and returning $293 million to shareholders through our final dividend for 2022 and $256 million through buybacks. As a result, leverage was 1.6 times, excluding the impact of ARAFA 16, towards the lower end of our target range. Our expectation continues to be that we'll operate within our target leverage range of one and a half to two times net debt to EBITDA, but most likely in the lower half of that range, as we continue to deploy capital in accordance with our capital allocation policy. Turning now to slide 12, one of the five actionable components of Sunbelt 3.0 is dynamic capital allocation. An integral part of this is a strong balance sheet which gives us a competitive advantage and positions as well as we take advantage of the structural growth opportunities available in our markets. We access the debt markets in August and again in January in order to strengthen our balance sheet position further and ensure we have appropriate financial flexibility to take advantage of these opportunities. We issued two lots of $750 million 10-year investment grade notes at around 5.5%. Following the note issues, our deficits are committed for an average of six years at a weighted average cost of 5%. And with that, I'll hand back to Brendan.

Thanks, Michael. We'll now move on to some operational and end market detail, beginning with slide 14. Our strong U.S. growth continued through the third quarter, with General Tool growing 21% in the quarter and 22% in the nine months. Specialty posted another exceptional quarter of 31% growth and 33% year-to-date. The strength of this performance was once again broad, extending through every single geographic region and specialty business line. Consistent with our update in December, the supply and demand equation remains incredibly favorable. This effect continues to contribute to market share gains in record levels of time utilization throughout the business. This ongoing reality which now has sustained for nearly two years, clearly evidences the step change and structural change we are witnessing, meaning, first, that rental penetration is deepening before our very eyes, and secondly, those benefiting from this increased rental penetration are indeed the very few larger, more experienced, more capable rental companies who can position themselves to be there for this increasing customer base and therefore realizing a larger share of what is, without question, a larger and growing market. Importantly, we've continued to progress rental rates through the quarter, and it is our expectation that there will be ongoing industry rate progression as we enter the next financial year. Let's take a closer look at our specialty business performance on slide 15. The year-on-year rental revenue movement illustrated herein demonstrates the ongoing and compounding growth across all specialty business lines. Total U.S. specialty rental revenues increased 33% in the nine months. This continues to tangibly demonstrate the structural shift our customers are making from ownership to rental as we provide a more trusted and more reliable alternative to ownership. Our specialty business lines principally service non-construction markets and therefore act as a good proxy for the strength of this incredibly large end market. However, as non-residential construction remains our largest single end market, we have our normal outlook for U.S. construction on slide 16. Now, I covered... this in detail with the happier results, including additional commentary on the impact of mega projects and detailed summation into the three legislative acts, infrastructure bill, the chips and science act and the inflation reduction act. I therefore won't go into too much detail today. The key points to mention are that construction starts on the top left of the slide and the Dodge momentum index on the bottom left remain at or near record levels. This is fueling the latest Dodge put in place forecast, as shown on the top right of the slide, amounting to an increase in non-residential and non-building construction of $450 billion between 2023 and 2026 when compared to what we shared with you in just December. The 2023 forecast alone increased by 13% or $135 billion. This continues to illustrate our supposition that the non-residential cycle has been considerably delinked from the residential cycle as a result of years of change in construction composition, reshoring, and larger than ever before seen federal government spending acts, all giving rise to an era of megaprojects. When you put all this together, we continue to believe that current activity levels will result in a strong demand market for years to come, which we are poised to benefit from. Let's now turn to our business units outside of the U.S., and we'll do that by beginning with Canada on slide 17. Our business in Canada continues to expand and perform well as the power of our brand strengthens and customers recognize the growing breadth of product and services offered. This growth is coming from existing general tool and specialty businesses, complemented by well-placed additions of greenfield openings and bolt-on acquisitions. These conditions are not dissimilar to the U.S. in terms of activity, demand, and the supply environment, and thus we're experiencing equally strong performance from a utilization and rate improvement standpoint. Turning to Sunbelt UK on slide 18. The UK business is continuing to execute well in what was always going to be a transitional year as we exited the work supporting the Department of Health COVID testing sites. As highlighted in December, the team did a great job redeploying this fleet and indeed increasing rental revenue year over year, which indicates a combination of share gains and a reassuring level of end market activity. There's a real momentum in the UK business as it makes increasing progress in markets such as facility maintenance and further develops its specialty offering in areas like power and the new lighting and grid business, all emphasizing the unique cross-selling capabilities in the U.K. throughout our unmatched product and services portfolio, all now under the Sunbelt Rentals brand. An ongoing area of focus for the U.K. business is to advance rental rates and the associated fees we charge to provide our market-leading service. We bring great value to our customers, and in the inflationary period we've experienced over the last year, and indeed ongoing, increasing our rates as there's more work to be done. Turning now to slide 19, you'll see our normal Sunbelt 3.0 scorecard. I've covered the main points within the highlight slide, so I won't dwell on this other than to say we're very much ahead of pace and have every confidence we'll over deliver. I'll reserve the time now and instead add color in conjunction with our full year results in June. Turning to slide 20. As touched on in the outlook slide, for the current fiscal year, we have moderately lifted and narrowed the gross capex range to 3.5 to 3.7 billion. This is an uplift of 100 million on the top end in U.S. rental fleet. All other capex figures remain the same in the current fiscal year. As usual, with Q3 results, we set out our initial guidance for next fiscal year, which increases the midpoint of our current year U.S. rental fleet capex by nearly 20%, to a range of $3 to $3.3 billion. This increase should enable U.S. mid-teens rental revenue growth next year and continue to fuel our growth plans incumbent in Sunbelt 3.0. This investment further demonstrates our confidence in the current and forecasted demand environment, competitive positioning, the strong relationship we have with our key suppliers, and our business model in general. Let's conclude on slide 21. This has been a very good nine months of growth and ongoing momentum in our business and our addressable markets. It's also been a period that has added further clarity to the strength of our end markets and very likely to yield in calendar years 2023, 2024, and beyond. This increased end market clarity came in part from the passing and improved understanding of the Chips in Science and Inflation Reduction Acts, another three months of robust project starts, and increased non-residential construction forecasts. These actualities add to what was already a plentiful level of end market activity flush with day-to-day MRO, small to mid-sized projects, and the very present and growing mega project landscape. The trifecta of market dynamics, as we've called it, supply constraints, inflation, and skilled trade scarcity remain very real. The ongoing presence of these come with operational challenges, however, are outweighed by the secular benefits to our business. Resulting in the increased pace of rental penetration and considerable market share gains for select businesses in our industry who possess the scale, experience, equipment purchasing influence, and financial strength. Our business is positioned to win in this reality. This update should demonstrate once again the strength of our financial performance and the execution of Sunbelt 3.0 well ahead of our planned pace. So, for these reasons, and coming from a position of ongoing strength, improved trading, and positive outlook. We look to the future with confidence in executing on our well-known and understood strategic growth plan, which will strengthen our business for years to come. And with that, we'll be happy to take questions.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, it's star 2. But again, please press star one to ask a question over the phone. We will take the first question from Robert Wertheimer from Mellius Research. Please go ahead.

Hi, thanks. Good morning, everybody. Brendan, you made pretty positive comments, obviously, on the environment and the mega project team and so forth and how you're seeing benefits. Do you have any Thoughts on whether you want to quantify market share tailwind? Is that already visible in some of the projects that have been bid already? And just what kind of thoughts you have on what this really does for your three-year revenue outlook? Does it just solidify it or does it lean it up? And then secondly, just ROIC and margin as the market shifts to larger projects. You think about what your normal drop-through is. Is there a headwind or a tailwind to that over the next few years from those bigger projects?

Yeah, thanks, Rob. I'll start with the second there. When we look at our business overall, and then we, of course, break it down with megaprojects, and as I'm sure you're aware, there are phases to these megaprojects. You'll have that big load-in period that is not just capital intensive, but you're bringing all this fleet in, you're staffing it appropriately, you're working with the customer to assure that your levels of services are what we're both going to expect. over the course of the project. So in the early sort of months and quarters, so to speak, it's a bit of a drag. But when you get to the crest of these mega projects, it's the opposite effect. You're going to have all of the metrics that we would look at, dollar utilization, which is a combination, of course, of time and rate and flow through given the really fixed cost nature of that business that you get the synergies from. when you're on site in many instances. So it's going to be better than the norm. And then, of course, it will tail down as time goes by. But, I mean, all in all, we think it's best just to characterize it as a wash. You know, it's what we will progress through. In terms of the first part of your question, you know, around these and what we put into not so much guidance, if you will, for the next couple of years, but I think the key to it really is it just adds, extra confidence when you look at those as a, for instance, those put-in-place forecasts that I covered that go out through, you know, 2026, 2027, because the very nature of these megaprojects, again, as you know, they're longer duration. And what we've been seeing, whether we look at the megaprojects that are, you know, the more driven ordinarily, or if we look at those that are coming by way of acts, so if you take, for instance, the IRAs, We have the energy piece, which we're all familiar with, ranging from solar to wind, et cetera, which is all working its way through, and we're seeing increased activity in that. But we're also seeing really increased activity in these EV projects. So, you know, that ranges from underway, you know, actual projects where we are on site and have a high degree of share, to projects where just last week, for instance, 60 miles from where I'm sitting today, We see the announcement of another brand new EV plant in Scout, which I'm sure you're familiar with. But all in all, when you look at it, and I think part of your question there was touching on market share, if you will, we like to just use a sort of rounding figure, so to speak, to say, you know, if our market share in the total North American rental space is kind of you know, 13% or so, we think it's a minimum of double of that on these mega projects. I hope that answers your question, Rob.

That's perfect. Thank you so much. Thank you.

The next question comes from Andrew Wilson from J.P. Morgan.

Hi, good morning, Andrew. Thanks for taking my question. If I take them one by one, if that's okay, hopefully I'll be quick. You usually help us with, I guess, comments on the early Q4 trading. So I guess I just wanted to check in on what that looked like.

Yeah, it's continued in a similar vein. What you will recall is that we did make a number of acquisitions in sort of the February timeframe last year. rental revenue growth compared with what we've got on there, sort of in that 18, 19% range for February, which is consistent with the guidance we've given for the full year.

Thank you. Switching across, I wanted to ask a little bit about the CapEx guide in the context of equipment availability. And I guess one of the concerns that we certainly get, or we hear a lot about from investors, is just a lot of equipment coming into the market. Clearly, as you've outlined, the growth profile looks very good. But in terms of, you know, do we worry about an oversupply? Can you give us some help in terms of how to think about that with regard? Obviously, we see the very strong numbers that you're talking about in terms of CapEx growth rates. Can you talk about availability of equipment in the market generally? And then if there's any difference for you guys, I'm assuming that you're doing better. But if you could give us some sort of idea of how much better in terms of getting hold of those equipments and where the kind of the bottlenecks are versus I guess, prior quarters when we talked about those problems in terms of getting hold of kits?

Yeah, Andrew, that is a very important question. I couldn't have asked it better myself. First of all, let's not let the guidance we've given illustrate or demonstrate in any way, shape, or form that what we're seeing is an end to the supply constraint environment. That is not the case. Lead times remain historically long. with the OEM base that principally services the rental industry. This is a result of choreography, working far further out with our OEMs to secure build slots. I mean, as I've said many times, if you talk to any manufacturer worth their salt, so to speak, two things matter to them in circumstances like this, but frankly, at any point in time, that is visibility and some degree of assurance And that's the difference that a company like Sunbelt brings to them. Furthermore, your question on, you know, should there be concern that we are overwhelming the inventory, so to speak, in the overall North American market? That is absolutely not the case. As a matter of fact, if you look at the largest component parts of the equipment that fuels the rental industry, those products which are deepest rental penetrated, Aerial Work Platform, telehandlers as an example, if you take all of the manufacturers worldwide and deliveries into North America from those, in those three categories of booms, telehandlers, and scissor lifts, the amount landed in 2022 is still below what was the peak level in 2018. And that's after having to make up for a suppressed 19, a deeply suppressed 19. 2020, a 2021 that had not yet come close to 2018. So that just demonstrates the overall supply constraint that is still present. So what that really tells you grand scheme takeaway is this supply constraints and lead times remain a challenge. Overall, the manufacturers are not past previous peak levels of production. But the biggest piece is what you're seeing, this is structural change in front of our very eyes. And by that I mean it is simply the bigger, more astute, rental participants are getting a far larger share of a less production from a piece count standpoint. I hope that answers that clearly.

Yeah, no, very, very, very helpful. It's actually my final question is to some degree linked to that comment, but also the comment you made around mega projects and the market share and previous, I guess, comments we've made around the difference between in terms of technology and inventory management. But I'm just wondering if we've still seen a pickup in terms of your bulk on M&A. And I'm just wondering if, or if the pipeline is becoming easier or you're getting more potential targets coming to you, given that it just feels that the shape of the market moves further to the big players and away from the smaller players. And almost like the rational thought process then would be that the smaller players are perhaps more likely to want to find an exit than they were previously. I just wondered if that's, we attribute any of the acceleration involved in a minute to that, or is it just simply that you have the capacity to do that? You want to go and do that?

No, I mean, it's not just capacity, you know, um, uh, you know, a acquisition requires a buyer of course, but also requires a willing seller. Um, but I think when you, you're at your, your, uh, assumption assumption is correct here. You know, it is going to gravitate more and more to the big, And if you think about, again, this trifecta, I call it, of market dynamics that we're experiencing, supply constraints, inflation, skilled trade scarcity, it makes for difficult operating environments for some of the independents that are out there. And when you look at our ground game that we have that is present out in the business, in many cases they are previous owners who have stayed on with Sunbelt. but speak with their friends and colleagues in various parts of the markets that we service. And we have a very telegraph Greenfield opening program, of course. And if there is a replacement for a geography we want to be in, then we make the phone call and we have a cup of coffee and talk about what they want to do at that juncture. Because in a way, we're either going to open a greenfield or acquire, do a small bolt-on deal. And that certainly encourages. But when you look at the backdrop of the other market dynamics that they're dealing with, I think it does bring a rise to a larger overall landscape, if you will, of bolt-on M&A. And you've seen that. So it's not a step change. We're going to be about the same in total as we were Last fiscal year, I think last fiscal year was $1.3 billion in bolt-ons, and we won't be far off from that this fiscal year. But rest assured, there is a long, long career's worth left of doing bolt-ons in the U.S. with an excess of kind of 3,000 little one or two location rental businesses across North America.

That's really helpful. Thank you very much.

We will now take questions. The next question from Annalise Vermeulen from Morgan Stanley.

Hi, good morning, Brendan and Michael. Thank you for taking my question. I have a couple as well. So firstly, thinking about your organic growth and specifically the 19% for the first nine months, you've clearly talked a lot about megaprojects and the opportunity you're seeing there. Could you comment a little bit on some of your smaller customers? I'm just wondering, of the growth that you're seeing, how much of that is coming from mega projects? Or are you still seeing relatively good demand from your smaller customers as well, given some of the macro backdrop? And then secondly, on wages, we hear from other businesses with U.S. exposure that we seem to be heading past the worst of the U.S. wage inflation part. I'm just wondering if you're seeing that among your employee base as well and Perhaps you could comment on how much you've raised wages so far this year and what are your expectations for that for the year ahead. And then just lastly on the CapEx guide for 2024, how should we think about growth versus replacement? Again, I'm just wondering whether... there's a higher level of replacement to be done in the coming months given the much higher than usual utilization you've seen over the last couple of years and whether, therefore, more equipment needs replacing. Thank you.

Sure, Annalise. Thanks for those. First of all, the commentary around mega versus SMEs, the short answer is they're both strong. You still have out there um you know this this uh rental penetration aspect that we talk about so if you look at uh you know our specialty business for instance that is servicing this mro market facility maintenance remediation etc it's still plentiful in terms of ownership in that arena and with these market dynamics again that's going to influence a step change in rental penetration that we think continues to progress even as these challenges dissipate. But if you just think about the level of activity in kind of any town, North America, let's just call it, you know, you still have small contractors out there that are very busy. That is a broad range. Now, certainly as things progress in a larger overall portion of the put-in-place construction environment, gravitates to megaprojects, which it will, but what we've not seen yet is the others subsiding or getting smaller, rather just proportionally the mega's contributing more and as I said before, we will see that grow. So it's still just strong across the board. And don't underestimate, again, the lack of supply that is available in the sort of traditional dealership network. If you want to buy a new skid steer loader or mini excavator, et cetera, new fleets just not available on demand to buy. It's quite a lead time. In terms of wages, you know, I think that that commentary is reasonable, say if we've sort of gotten past the worst, so to speak. But I still think you have to break it down between skilled trade and let's just call it white collar. If you look at the skilled trade environment, drivers, mechanics, scaffold builders, E&D crews, et cetera, I think it's still quite meaningful. I think we are making the term, but as you may recall, our timing of the year in terms of merit, base wages, is in the May-June timeframe, so we're in the throes of budget as we speak, but I would sort of pencil in something that would be mid-single digits as it relates to that. But when it comes to the, think about it as SG&A, if you will, that's gonna be more moderate, certainly, than what we've seen in recent years. In terms of CapEx for fiscal year 24, I think you've asked a great question in terms of what's that look like, growth versus replacement. I guess easiest if we just refer to that slide 20 and you combine actually the US and Canada and let's just talk about rental fleet. So if you take that midpoint, you're at about $3 billion, $450 million in rental fleet capex and that's going to be circa 40% growth. The replacement component certainly grows as you would expect and as you would have modeled when you go back seven, eight years and understanding the postponement to a degree of some of our maintenance capex just given lack of availability. And just for a frame of reference, that would compare to current year being more like 50-50, so 50% growth, 50% replacement. Does that answer your question, Annalise?

Yeah, that's very clear. Thank you very much.

The next question comes from Suhasini Varanasi from Goldman Sachs.

Hi, good morning. Thank you for taking my questions. Just a couple for me, please. When you think about the level of growth that the CapEx Outlook can support for FY24, can you maybe give us some color on how you see the components on pricing and volume evolving? I'm guessing pricing probably normalizes a bit of the tougher comps, and effectively it's volume growth that's supporting your CapEx and Growth Outlook for 24. And relating to that, Can you give us an update on the average length of time that customers rent equipment? Has it continued to increase year over year, and is that one of the reasons behind the level of confidence for the CapEx and Growth Outlook outside of the megaprojects and rental penetration?

Sure. You broke up there a bit, so I'll do my best, but let me know if I've missed anything. Your second one, in terms of average rental duration, We don't quote that specifically, but I will confirm that that duration is getting longer. And that's not something that we're experiencing just this year. That's been really years long in the making. And with the added proportion, if you will, of megaprojects, that's only going to continue to elongate. I wasn't sure if your pricing and volume was related to CapEx or – Revenue guidance. Say again, sorry? Revenue guidance. In terms of next year's guidance of mid-teens, it's just that for now. We're just in the budgeting season. We expect, as I said, rental rates to progress through the year, so we won't get into the component parts of that in particular this early. But if you look at the nine months gone by thus far in the U.S. So if I were to refer to slide 14, revenues grew 25%. That's going to be about 19% organic and 6% by way of the bolt-on activity that we've experienced. So if you break down that 19% organic, you're going to be kind of 8% rate, 11% volume. Does that answer your question?

Yes, thank you.

Thank you.

We will now take the next question from Neil Tyler from Redburn.

Good morning. Thank you. A couple left, please. Just, I mean, I suppose following on from the previous question, as we think to the mix of CAPEX for FY24, it looks as if, I think if I'm doing the maths broadly correctly, that the average OEC will grow by low double digits in 24. is that, within that, are you anticipating any sort of easing back on time utilization perhaps to relieve any strain in the business, or do you think time utilization can stay where it is? And then another question on rate is the second question. As you think about rates as they stand, not just in the UK business where you've been very explicit they need to go up, but more broadly, In the context of OEC cost and the ceiling that this creates in the rent versus buy equation, how far below that ceiling do you think you are currently versus, say, pre-pandemic?

I'm going to start with that last one in terms of rent versus buy. And frankly, Michael answers this best, usually, which is this has gone past a kind of financial decision of renting versus owning, it's far more an operational decision. I often say the easiest part of equipment ownership is the buying of it. So the day that you buy it is the easiest part. It is the apparatus that is built around ownership that gets increasingly complex, particularly in this ever-evolving environment of technology, electrification, etc., So I don't even want to venture a guess on what is ceiling parental penetration. Let's just say we're a long way away from it. I think your math is just fine in terms of average OEC. Of course, it will depend on precise timing of landings and disposals as we go through next year. But your commentary on time utilization is reasonable. I mean, We would have had a budget in the current fiscal year to have time utilization go back about 100 basis points, and we were surprised it stayed consistent with what it was a year ago. Frankly, we would like it to go back a bit if for no other reason than we can gain more share during this inflection period that we've been going through. As it relates to rate, as I've said, really, I think there's no more color to give at this point other than, one, as you've seen in our results for the nine months and in the quarter, rates continue to progress. They are very strong, and we see ongoing momentum. And two, as we enter next fiscal year, we very much expect that we will see another year of rate progression. To what level is that? time will tell.

Thank you very much. Thanks, Brendan.

Yeah, thanks, Neil.

We will now take the next question from Arnaud Lehman from Bank of America.

Thank you. Good morning, gentlemen. I have two questions, please. The first one is on the market share outlook. I think you said in the last couple of years that you had an unfair share of the new supply from the manufacturers. Would you expect that to normalize? I appreciate the supply is still constrained, but I guess it's less constrained than it was. And that should mean that the smaller rental companies should get a bit more equipment than they did get in the last years. So is there a risk or a potential for the smaller peers to recover some market shares relative to Sunbelt? in the next 12 months and therefore for Ashtead to give back a little bit of market share. I guess that's my first question. And secondly, on the CapEx guidance, and obviously it's a big number, it's growing year on year. Is there any change in mix of equipment that you're ordering? For example, do you need bigger machines for large infrastructure projects? relative to what you're used to, or is it a pretty steady mix? Thank you.

Yeah, thanks, Arnaud. First of all, that market share outlook you talked about, let me go to the sort of bigger picture before getting into the minutiae relating to your question kind of in the next year. What's become clearer than ever before is our belief that this rental industry progresses to where, you know, two or three have plus 50% market share. So significant growth in an ever-growing market for a whole host of reasons, which perhaps we'll get into in more detail at a capital markets day. When it comes to when these supply constraints do ease and lead times improve, which they will, you know, does that create opportunity for, you know, the smaller independents to gain back some of the share in which they've shed? Yeah, but it's going to be a while. First things first, you have to replace the fleet that has aged far longer than what they would have ever wanted, just given their lack of availability. But, you know, I think you have to, again, then understand just the the level of service and the difference that the likes of us and a select few others out there are able to deliver to the customers. But this sort of environment will not last forever. But there is another question that you've got to probably look into a bit. I'm not going to give you an answer, but just pose it, which is when do manufacturers actually add capacity? Forget about getting back to 2018 levels. but further add capacity. That doesn't happen overnight. That requires building of manufacturing facilities, et cetera. And we're just not seeing an awful lot of that. When it comes to your question around mix, there's always nuance that you referred to. And this is something we have dealt with for years and years based on project landscapes. So yes, with infrastructure out there and these mega projects, Are we buying a bit more larger-end, ground-engaging product? Yes, but we have been doing so. Are we seeing a bit more of our CapEx spend going into electrical storage units in some ways, shape, or form, augmenting the diesel generator space? Yes. Are we seeing overall more into this electrification environment? Yes, we are, but I would just say it's more, that's just, those are table stakes and that's ordinary course for what we do.

That's very clear. Thank you very much. Thank you.

The next question comes from Charlie Campbell from Liberum.

Yeah, morning. Thanks very much for taking the question. I've got a couple. Just to ask sort of an earlier question, maybe in a slightly different way. In the U.S., you've reported a dollar utilization number of about 61%. I'm just wondering if that can really go any further or whether there are kind of physical limits to that in terms of thinking about our model going forward. And the second question, just on slide 38 in your speciality markets, the power and HVAC category is one of the largest. And I just sort of wondered why that's in the speciality category rather than general. I would have thought kind of things like power were part of the general business rather than speciality. So perhaps that's a mistake on my part, and just maybe to understand what's in that category. Thank you very much.

Yeah, speaking from the dollar utilization point, if you go way back, so if you go back pre the financial crisis, so I'm going back to the mid-early 2000s, then we were higher than that. We were sort of mid to high 60s as a dollar utilization. But I think, again, I think you've got to take all of this in the round in terms of what has happened since then. It has declined and then it has started to improve again. And part of that is us sharing the benefits of our increased scale, et cetera, with the customer and making rental more attractive to that customer. So it enhances the attractiveness vis-a-vis purchasing brand new equipment. And as we always say, our North Star in all of this is increased rental penetration. In terms of where dollar utilization is at the moment, if you think about it, we have We've gone through a number of years pre-pandemic where there was very little in the way of fleet inflation. So as we progress year over year now, we are replacing fleet from seven or eight years ago, and there is some fleet inflation. So we'll need to continue to drive rate to offset that incremental fleet inflation that we'll experience year by year. So can dollar utilization go a little bit higher? Yes, it probably can, but it's also a balance of how do we increase the overall share of the pie of equipment, the rental penetration that we get, so there'll be a balance to it. I'm not going to put a figure on it, but yes, could it go a little bit higher? Yes, it could, but it's also a balance with rental penetration.

Thanks very much. Charlie, in terms of power and HVAC, I say this with a smile on my face, but you have offended a great number of people in the organization in our Power HVAC business line. But no, I understand. But look, when you think of Power HVAC, that's a rather broad umbrella, sure, a 20-kilowatt. diesel generator that hooks up to a job site trailer, that's pretty standard fare. However, that's not what our power and HVAC business does. They will parallel or link together 10 1.5 megawatt diesel generators that each have a 2,300 horsepower diesel engine, which is about 18 feet long. And the fuel burn for each and every one of those would be somewhere in the 1,000 gallons of fuel in eight hours' time. So it is a critical supply to a very precise solution. Same thing goes for the HVAC piece. When you think about dehumidification, you know, if you have, you know, which oftentimes happens 15 hours thousand CFM desiccant dehumidifiers, 10 of which are required on a project, and you are managing not only the power supply too, but the airflow and ambient temperature and relative humidity points and levels of drying a project that is 150,000 CFM of desiccant dehumidification. So rest assured, and I just scratched the surface because there you have just understood all of my expertise in power and HVAC. but it is something that is, without question, a very specialized product, but most importantly, applications that are needing specialized solutions.

Thanks very much. Thank you.

Thanks. The next question comes from Alan Wells from Jefferies.

Hey, good morning, guys. A couple for me, and apologies, I dropped off the call, so if you've answered these, just say so, and I can go back to the transcript, but The capex guidance for next year, if you look at the kind of sunbelt rental kind of 20% increase, 600 million year on year at the midpoint, how much of that is kind of baked in as price inflation equipment versus kind of volume? That's the first question, please. And then second question, I noticed there was a big step up in 3Q and growth in power HVAC and climate control. Is there anything behind that? Again, it sounded like you were talking about that on the last question, so apologies if that's the repeat as well. And then finally, just on the buyback program, I noticed that that spend eased off a little bit in the third quarter. Just any kind of comments on how to think about the timing of the remaining part of the 500 million buyback program as well. Thank you.

Sure. I think the best way to look at CapEx when it comes to what is inflation, a lot will depend on the age of the fleet for the particular categories in which you're disposing. but I would just use a figure of kind of 2% to 3% per year that you have over the course of the life of an asset in terms of inflation. And when you touch on those specialty areas that you have, there are three things. One, there is rental penetration. Two, there is share. And then three, which I appreciate is probably a combination of the first two, When certain businesses in our specialty lineup, like you referenced climate control, and I would reference the same for flooring, when they reach a certain size, there's something, for lack of a better word, magical or powerful about their ability to then compound from that point. Because once they truly become... or have the makings of a real national footprint, it's when we get to go after and pursue a totally different addition in terms of type of customer, whereas we have gone past that mark of literally being a better alternative than ownership and a more reliable alternative than ownership, as we've mentioned before. And the third one around buybacks. Yeah, I mean, you've seen it tail down a bit. And frankly, you know, when we look at our capital allocation priorities, they're crystal clear. First things first, we want to buy a new rental fleet for existing locations, followed very closely by buying new rental fleet for greenfield locations. And then we have our interest to add accretive bolt-on M&A. Again, with that firepower and cash generation from the business. Then we get on to, of course, our progressive dividend. And then that sort of, you know, mass figure that comes out of it afterwards is buybacks. Obviously, we have a robust pipeline when it comes to both now CapEx and Bolton M&A. And our, as you've heard Michael state a number of times, our desire at this juncture is to be in the bottom half of the leverage range. And that's just one of the component parts in which we use to assess. We will revisit our buyback program in April, as we always would do. And you can expect to hear from us following that revisit.

Cheers, guys. Thank you very much.

Thanks, Alan.

We will now take the next question from Carl Green from ORBC. Please go ahead.

Yeah, thanks very much. Just a couple from me. Firstly, Michael, I think you mentioned that the ancillary revenues were still growing ahead of rental-only revenue growth in the third quarter. Can you quantify that and just remind me what they were growing at in Q2 as well? And I think possibly more importantly then, how you would expect those ancillary revenues to track going into fiscal 24? That's my first question. And then secondly, sort of a more general question, you saw very good improvement in the first nine months. in US ROI. Just any extra comments you can make around any differences between GT and specialty? I mean, particularly specialty, just thinking about some of those businesses being less mature, but then some of them becoming, you know, getting scale and, you know, how that's playing out just in terms of some of those ROI dynamics. Thanks very much.

In terms of, and I haven't got the figures immediately hand, but if you think in terms of the way ancillaries are, the reason that they're growing more quickly, predominantly, as we would say, if you think where fuel costs have been, which then feeds into transportation costs, you think about the people costs in erection, dismantling, and then also the fuel costs for both for our own fleet, but also then that we would sell to customers as well. You can sort of back into the numbers if you take place through the press release where we talk about pure rental revenue growth and total rental revenue growth, so you can work out the delta that's going on there. As we move into next year, and Brendan's probably almost better to comment on it, but fuel prices are starting to come down and tapering off. So if you compare next year, will you have sort of a, from a revenue growth perspective, and we've talked about this previously, from a revenue growth perspective, it will be a little bit of a drag. So I suspect my pure rental revenues will grow more quickly than total rental revenues next year. But also when that happens, it also aids a drop through because just as it's a drag on drop through when revenues increase, it's sort of a slight aid to drop through when it decreases. But it will depend on where fuel prices end up during the course of next year. That was the first question. So what was the second question? Or is Brandon, were you again?

I think it was RRI between specialty and gen rents, Michael.

Oh, right. Okay. So yeah, we talked about it quite a bit. So the thing with R, well, I think there's two things. I'll come to RRI in a second. Margins on specialty businesses tend to be lower. than for the general rents business, but ROI is then significantly higher and markedly so. Now, there's a whole range. So it's highest in those more mature businesses or the larger businesses that the banks have developed their scale. So if you take the climate control, power and HVAC, and our flooring business, but it's sort of lower in those more, if you take the... The ground protection business that we have and the trans-shoring business is within the early stage of their development. It's a little bit lower. But now generally specialty ROIs are probably five to ten percentage points higher than general tool.

I would just add there the reason for that in many ways is just it's less D in the EBITDA. So they're higher dollar utilization businesses. They just have a lower D. Therefore, EBITDA levels are going to be a bit lower. But as Michael rightfully said, there is then inherent in that a higher return on capital investment.

Yeah, I think we did refer to that. They're less capital intensive. Yeah. Yeah. Yeah. Perfect. Thanks, guys.

We will now take the last question from Raoul Chopra from HSBC.

Hello. Good morning. I have three questions quickly. I think in the earlier comment, you mentioned about progression in EV projects. Could you just give us some more dynamics around the return on basically ROE and mix on EV projects and where the share of mixes in the fleet? The second thing is on the drop-through margins of 54%. You had strong drop-through margins in Q3. I appreciate it's a bit early, but maybe any sense of where you think the drop-through margin should be for 24%. And my final question is on the discount rate. I think historically, from every has given the scale, had 10% discount from OEMs given the scale. In the current supply constraint environment, could you give a sense of are we still seeing those discounts in those equipment purchase? Thank you.

Sure. EV products, it's really, it's everywhere. Everyone is trying to figure out how can you in some way, shape, or form augment or replace in some instances fossil fuel burning engines. So whether it is JCB who's doing a great job in terms of advancing electric and the lighter telehandler environment, also doing work when it relates to hydrogen. If you look at the work that a GLG would be doing in terms of creating even more efficient electric products that exist today and then augmenting again their fossil fuel burning engines that power some of their machines. You know, there's some low hanging fruit there to transition into EV. And then, of course, you have what we refer to internally as ESS, you know, energy or electricity storage systems that, again, will in some cases be freestanding, in some cases, augment a diesel engine or diesel generator that is next to them. So it's really just across the board. It's become just part of what we do and what our product development teams do in partnering with our OEMs. Yes, drop through in Q3, I think the best way I would answer that is that's what Michael's been saying. Michael, you know, he said, look, you're going to see improved fall through as we go through the year. It's going to look something like mid-50 for Q3, and that's what you saw. When it comes to FY24, again, I've said we've not completed our budgets, but, you know, we would expect to fall through in the 50s next fiscal year, and we'll give a bit more color on that when we get around to June. And in terms of discounts, you know, our delta remains as it was. We have a favorable position with our OEMs. and our OEMs get the benefit of the visibility where they can improve, if you will, their supply chain pricing, et cetera, whereas we hope they get near equal margin overall given the telegraphy nature of how we procure. I hope that answered all your questions. Thank you so much. Cheers.

As there are no further questions, I will hand back over to Mr. Horgan for closing remarks.

Great. Well, thank you all for your time this morning, and we look forward to seeing you at the four-year results, where we'll see you in person, actually, at the NUMIS office in early June. Thank you, Operator.

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.