Ashtead Group plc

Hello, and welcome to the Ashland Group PLC Q1 results analyst call. I'll shortly be handing you over to Brendan Horgan and Alex Pease, who will take you through today's presentation. There'll be an opportunity to ask questions after the presentation. For now, over to Brendan Horgan and Alex Pease of Ashland Group PLC. Please go ahead.

Great. Thank you, operator. Good morning. Thank you for joining, and welcome to the Ashland Group Q1 results presentation. I'm speaking to you this morning from our support office in Fort Mill, South Carolina, where I'm joined by Alex Pease and Kevin Powers, with Will Shaw on the line from London. Given it's the first quarter, we'll keep this relatively brief. You'll see we've updated the presentation format a bit, as we do from time to time, but as usual, I'll start with safety on slide four. To begin, I'd like to address our Sunbelt team members listening in, specifically recognizing their leadership. the health and safety of our people, our customers, and the members of the communities we serve. In particular, I'd like to acknowledge our professional drivers. We're on the road every day and lead from the front in our obsession with Engage for Life and our obsession with customers. They drive over 1 million miles while performing over 30,000 deliveries and pick us every single day. We know that the more we drive, our exposure increases, I'd like to recognize this team for not only delivering on our promise to our customers, but also doing it safely. Just as we invest in our fleet, we also invest in the safety of our people and our communities, and illustrated herein you can see the significant improvement in rear-ending events. Our efforts are delivering results, not only in the performance of the business, which we will discuss, but more importantly in the safety of our people. So, to our drivers, thank you. Thank you for all your efforts and your ongoing commitment to engage for life. Turning now to slide five. Key messages you'll hear from Alex and me today are the following. First, this is a solid set of results with our expectations with group revenue growth of 2.4%. Second, the strength of free cash flow after CapEx investment in fleet and business expansions demonstrating that through the cycle, free cash flow power of the business at our scale and margin. Third, while our key construction and markets remain mixed, we are seeing clear signs of positive momentum in many of our internal and external leading indicators, such as quotes, reservations, and planning momentum. More on these later. Mega project activity continues to be strong, and we're winning share across our regional and national strategic customers. Fourth, We continue to deliver against the five actionable components of our Sunbelt 4.0 strategy with growing momentum every day. Fifth, we're confident in reaffirming four-year guidance for rental revenue growth and CapEx while increasing it for free cash flow. And finally, the work to move the primary listing to the New York Stock Exchange in March 2026 is on track. And as part of this process, we're planning an investor day in New York shortly following our listing I hope to see you there in person. We'll, of course, be sending out a save the date shortly. Moving on to the financial highlights of the first quarter on slide six. Group rental revenues were up 2.4%, consistent with the 0% to 4% guides we gave in June. I mentioned some leading indicators a moment ago, so let me expand. We actively track leading indicators such as quotes, reservations, daily new contract activity, and continuing contracts, as a way to measure the health of our pipeline. And all these indicators are trending positively and favorable to what we experienced a year ago this time. While it's too soon for these leading indicators to form certainty, we're cautiously optimistic that these trends in our business will continue and our early signs of the local non-residential portion of our end markets recover. As when they do, we'll experience accelerated momentum and improved results. Group-adjusted EBITDA was flat at $1.3 billion, and EBITDA margins at 46% reflected the mixed effect of higher ancillary revenue, primarily related to the power and HVAC business, as well as the proactive repositioning of our fleet to drive utilization and unlock pockets of growth. Increased repair costs also represent a headwind to margin as a larger portion of the fleet comes out of warranty coverage as we expected. From a capital allocation standpoint and in line with our Sunbelt 4.0 priorities, we invested $532 million in CapEx, focused on a mix of replacement and growth. Free cash flow was $514 million, which apart from the COVID-impacted fiscal year 2021, is a record for the quarter, and demonstrating the resilience of our business while we continue to invest in growth. This strong free cash flow generation is supporting the current $1.5 billion buyback program, we are on track to complete in the current fiscal year, in addition to repaying $90 million in long-term borrowings in the quarter. Moving on to our segmental performance on slide seven, revenue growth for North America General Tool was 1% in the quarter, reflecting positive volume momentum and resilient rates in end markets, which continue to be mixed. As expected, we continue to be in a moderated, local, non-residential construction market through the first quarter. part by the ongoing strength of the mega project landscape and the broader non-construction markets. During the quarter, we repositioned rental fleet as we focused on improving time utilization across General Tool with good results. As expected, specialty performed well, growth of 5%, despite the drag from oil and gas and the film and TV business in Canada, both of which were not previously reported in specialty and were down in the quarter. The specialty segment strength was led by the power and HVAC business, which grew double digits as we continued to provide a wider scope of value-added services to our customers. On a cost and currency basis, U.K. rental revenue was down 2%, reflecting the ongoing challenges in the U.K. markets. This slide shows fleet-on-rent for North America over the last four fiscal years, and you can clearly see that our efforts to drive growth existing fleet has resulted in improved time utilization. While this has come with temporarily higher transportation costs, it's the right tradeoff to make for the business as it will support a more constructive rate environment and improve ROI over time. It also demonstrates our disciplined and flexible capital allocation approach. On the next couple of slides, we'll cover the activities and outlook for the North American construction and market. On slide nine, we've set out the main lead indicators for the construction sector. Dodge Stars, Dodge Momentum Index, the Architectural Billing Index, and the Fed Funds Rate. The outlook for construction growth continues to be underpinned by megaprojects and infrastructure work, which remains strong, and many cases are gaining further momentum. We've made great progress in megaproject wins in the quarter, with a growing funnel of future projects and advancing market share with our strategic customers, both regional and national. This clearly demonstrates the cross-selling prowess across the specialty and general to businesses, as well as the advantage of Sunbelt's significant breadth and depth of products, solutions, and expertise. Combined with technology platform that is able to deliver efficiencies and value in a range of complex applications. As it relates to our local non-residential market, we remain in a moderated environment. However, in addition to the previously mentioned internal leading indicators, quotes, reservations, and activity, where we are seeing positive trends, I'd like to call your attention to the Dodge Momentum Index in the bottom left of the slide. This index represents non-residential projects excluding manufacturing that are below $500 million and entering the planning phase for the first time. This is therefore highly representative of future velocity in what we refer to as the local non-residential market. This clearly indicates strong demand and development, and we are confident that the strengthening and planning activity across our non-residential construction and markets will lead to an increase in starts, likely within a period of 12 to 24 months. So, while clearly a positive leading indicator, it will take some time for this planning to translate into project starts. However, when it does, we are poised to benefit. On slide 10, you can see how the STARS forecast translated to the latest Dodge put in place figures. It's worth flagging that Dodge have now increased their 2026 forecast for growth in construction, excluding residential, from 2% to 4% in their June report, reflecting some of the more positive lead indicators we're now seeing. It's also important to note that these numbers are significantly influenced by the strength of megaprojects, which affect our large strategic customers as opposed to the SME portion of our customer base. Before I hand it over to Alex, I'll just touch on our Sunbelt 4.0 strategic plan on slide 11. We're now five quarters into a 20-quarter plan, and as I detailed in June, our teams have been laser-focused on advancing each of the five actionable components, which are customer, growth, performance, sustainability, and investment. While I'm not going to give you a further detailed progress report today, I will say that our clarity and mission throughout the organization is certain and our momentum is building. We'll share more details as we progress throughout the year and in particular during our upcoming investor day. With that, I'll hand it over to Alex to cover the financials in more detail. Thanks, Brendan, and good morning, Timothy.

Starting with the first quarter results for the group on slide 13, group total The EBITDA margin and EBITDA margin were 46% and 24% respectively. The slight drop in margins reflects a number of factors, including the higher level of ancillary revenue, most notably E&B work in our power business, which is typically at a lower level of margin. An increased level of internal repair costs, which we anticipated, and an expected increased cost of repositioning the fleet to higher growth markets, driving improved time utilization and ongoing rates. After an interest expense of $131 million, reflecting lower average debt levels, adjusted pre-tax profit was 4% lower than last year at $552 million. As explained previously, we're adjusting for non-recurring items associated with the move of the group's primary listing to the U.S. in the quarter. Adjusted earnings per share were 95.3 cents, and ROI on a trailing 12-month basis was 14%. Slide 14 illustrates group revenue and EBITDA progression over the last five years, and in the first quarter, highlighting the significant track record of growth over a range of economic conditions. Turning now to the individual segments and starting with general tools. Slide 15 shows the performance for our North American general tools. Rental revenue for the quarter grew by 1% to $1.5 billion, driven by improved volume, time utilization, and stable rates. As I explained previously, margins were impacted in the period primarily by investments in replenishing the fleet for growth, as well as higher internal repair costs largely related to warranty of the coverage. EBITDA was $871 million at a strong 53% margin. Operating margins were 32% and ROI was 20%. Turning now to North American specialty on slide 16. Rental revenue was 5% higher than the first quarter last year at $854 million as the non-construction market continues to be strong, particularly in power and HVAC and climate control. primarily impacted by the inclusion of both film and TV and oil and gas, which were not included in the results prior to our resegmentation. Margins especially were flat with EBITDA margin of 48% and an operating margin of 33% as mixed related to high ancillary revenue impacted margin as well as the higher internal repair costs. These headwinds were offset by continued strength and rate and will pay dividends in the back half of the year. ROI was 31%, again, clearly demonstrating the higher returns achievable in the specialty business. Turning now to the U.K. on slide 17, and please note that all of these numbers are in U.S. dollars. U.K. rental revenue was 4% higher than a year ago at $212 million. The U.K. business delivered an EBITDA margin of 25% and generated an operating profit of $16 million at a 7% margin, and ROI was 6%. In line with the 4.0 strategy, we continue to focus on improving the business's operational efficiency and long-term sustainable returns through a broad range of efforts, including footprint realignment, targeted asset sales, and GMA disciplines. Across our North American segments, we've shown the resilience of our business and return to growth and significant cash flow generation while continuing to invest for the future. While our U.K. business continues to be challenged, Our discipline operating model, robust transformation plans, and strong execution gives us a high level of confidence for the future. Combined, our results clearly demonstrate the full power of Sunbelt and the strength of our Sunbelt for auto strategy. Slide 18 illustrates the flexibility and agility of our capital allocation framework. When markets are experiencing the transitory headwinds we have experienced recently, we manage our capital budget to support strong utilization and rate discipline. When markets are more robust, we accelerate capital spending to capture growth and market share. In all cases, we generate significant free cash flow in excess of our investments, which we return to shareholders in the form of dividends, debt repayment, and share buybacks. You see this clearly in fiscal years 2021 and 2025, when we generated around $1.8 billion of free cash flow in both years. And as you can see, we have started the year strongly with over $500 million generated in the first quarter. over three times the level generated in the first quarter of last year. And we're well on track to deliver record-free cash flow generation this year. Slide 19 updates our debt and leverage position at the end of July. We reduced external borrowings by $91 million in the quarter, in addition to the $523 million reduction in borrowings last year. We also returned $332 million through share buybacks at an average price of just over $45 million. As a result, excluded lease liabilities leveraged was 1.6 times net debt to EBITDA, well within our stated range of between one to two times net debt to EBITDA. We expect to be in the 1.5 to 1.6 range at the end of April, including the impact from the share buyback program, but not including any potential impact of M&A activity. While we're speaking of M&A, we have a robust pipeline, which we continue to develop, and generates margins and returns in line with our capital allocation expectations. Turning now to slide 20 and our latest guidance for revenue, capital expenditure, and free cash flow for fiscal year 2026. Our guidance for group rental revenue growth is unchanged at between flat and plus 4%, reflecting the ongoing dynamics in some of our end markets. The plan for gross capital expenditure is unchanged in the range of 1.8%, to $2.2 billion. Finally, we expect free cash flow to be between $2.2 and $2.5 billion, which is an increase of $200 million over June's guidance and reflects the expected cash tax benefit from the reintroduction of 100% bonus depreciation based on our current CapEx plans. And so with that, I'll hand it back to Brendan to close us out.

Great. Thanks, Alex. Before we sum it up, I'll just touch on capital allocation. During the quarter, we've made good progress on our Sunbelt 4.0 execution. As part of this, we've continued to invest in the business. During the quarter, we invested $530 million in CapEx. We opened 10 greenfields in North America, of which six were general tool and four specialty, with a clear line of sight to achieve 60 greenfields in the full year. We invested $20 million on two bolt-on acquisitions. The M&A pipeline, as Alex just referred to, remains robust. and we expect to acquire additional businesses as we progress through the year. We'll pay the final dividend of 72 cents per share on September 10th, following its approval at yesterday's AGM. This amounts to $306 million. Finally, we return a further $330 million through share buybacks and expect to complete our $1.5 billion program by the end of this fiscal year. All this is consistent with our long-held policy, and we'll continue to allocate capital on this basis throughout 4.0. Turning to slide 22, and in summary, there are two primary takeaways one should gather from our update today. One, the quarter resulted in exactly what we expected in revenue growth, improving utilization, free cash flow, and advancing our 4.0 plan, leading us to reiterate our revenue and CapEx guidance while increasing it for free cash flow. And two, we're experiencing positive leading indicators in our internal business activity levels and pipeline, coupled with an encouraging indication of market demand statistics. And with that, we will open the call for Q&A. So back to you, operator.

Thanks very much, Mr. Horgan. Ladies and gentlemen, if you wish to ask a question, please press star 1 on your telephone keypad. That is star 1 on your telephone keypad if you do wish to ask an audio question. If you wish to recharge your question, please press star two. And also, please limit yourselves to two questions each. Our very first question today is coming from Anneliese Vermeuren of Morgan Stanley. Please go ahead.

Hi, good morning, Brendan. Morning, Alex. Yeah, two questions, please. So just on your margin expectations for the rest of the year, I think your margins improved in Q4 thanks to some of those cost controls you spoke about previously. But clearly, we're a little bit under pressure this quarter due to the factors you mentioned on ancillaries, fleet repositioning, repairs, et cetera. So should that continue through the remaining quarters? Or was Q1 a bit of a one-off in that regard? And do you have further plans offsetting cost control factors for the remaining three quarters? And then secondly, on your free cash guide upgrade, just wondering if you had any plans at this stage for that cash, either in terms of deleveraging, more buyback. You mentioned you plan to acquire additional businesses through the year. So within that, could you perhaps comment on the M&A environment in terms of valuations, willingness to sell, et cetera? Thank you.

Sure, Annaleigh, thanks so much for the question. And I'll sort of kick us off and then hand it over to Brendan, particularly on the M&A point. So, first, you know, I would not characterize our margins as being under pressure. I think they were, you know, extremely strong in a fairly moderate growth environment. And so, as I mentioned in the prepared remarks, they were impacted by a number of things that were very deliberate in terms of how we run the business. And the first was that higher internal repair cost that I mentioned. And this is driven, if you look back two and three years ago, you'll see that we spent the order of $4 billion of CapEx in those years. And in the last year, we did about $2.5 billion. This year, we'll do about $2 billion. And so as you see those big slugs of capital age, you'll see the warranty just as expected roll off because warranty is typically covered for and that's just a function of the timing of our capital investment. The second issue that impacted margins was this higher repositioning of fleet. And, again, that's very, very deliberate. We are repositioning fleet to really increase time utilization that has a positive impact on rate that allows us to capture growth without investing more in CapEx. And so, again, that was a very deliberate and positive move that will pay dividends as we get into the back half of the year. Then the last issue was really around mix. And so we pointed to higher ancillary revenue, particularly in our power and HVAC business, where there's high, you know, E&D expense at positive margin but lower margin than sort of the core true rental business. And then, again, this repositioning of fleet in the general tool business. So all of the margin headwinds were sort of within our control, deliberate, and positioning us for strength as we get into the back half of the year. We're obviously always extremely focused on cost control. There's no difference. That's the actionable component of Sunbelt 3.0, the third tier. But I just want to make sure nobody misinterprets the slight margin compression as ourselves for growth and margin expansion as the market recovers. As it relates to Free Cash Flow Guide, we upgraded it by about $200 million. This is directly related to the Big Beautiful Bill and the reimplementation of the accelerated you know, EBITDA growth. In terms of our plans for that pre-cash flow, as I would have mentioned, you know, we are always maintaining a robust pipeline for M&A activity. We have a very flexible capital allocation framework, so we're online to complete our $1.5 billion share buyback program before the end of the fiscal year. We are supporting a robust dividend, and as the market recovers, we'll Again, increase our capital, our CapEx expectations to capture those pockets of growth. And with that, I'll probably turn it over to Brendan to comment a little bit more on the M&A activity because I know that's an area of interest.

Great. Morning, Emily. The business development team has been busy. As we've mentioned several times, there's a strong pipeline, and that remains the case. We have a few businesses under LOI that will complete in the quarter for a little bit over $100 million, and I expect that to actually gain as we progress through the year. To your point or question on, you know, from a multiple standpoint in terms of what expectations are, you know, I'd say that that pressure, if you will, is abating. There are actually a lot of buyers out there at the moment, for I think all the reasons everyone understands. So we're positioned quite well. But really, in the end, you know, this is not a race for M&A. Rather, buying businesses that just fit. They fit our strategic rationale. They fit in our Sunbelt 4.0 plans between specialty and general tool. But certainly that pipeline is strong.

Thank you both very much. Just to double-check on the margins, those fleet repositioning costs and so on, is that something that will continue in Q2, or have you done the bulk of that kind of in Q1?

Look, we always are repositioning our fleet. And, you know, as megaproject activity increases, we'll be positioning fleet, you know, to take advantage of those opportunities. As projects ramp down, we obviously take the fleet off of those projects. things that makes our business, you know, such an interesting environment to operate in. And we can take advantage of our scale because we do have that nationwide footprint. So we'll always be repositioning our fleet. What's a little bit anomalous about this quarter is that we are really focused on that time utilization. and making sure we're unlocking these pockets of growth in the markets where it exists. So, you know, look, as the market recovers, will that subside somewhat? Of course, yes, it will. Will we ever stop repositioning our fleet proactively?

Probably not. If I could just reinforce, Alex mentioned the performance actionable component. You know, our expectations of progressing margins over the course of 4.0 – very much remain intact. We have a playbook in order to do it. At the full year, we would have highlighted some of those actions around you know, envelopes, as we call them, market logistics operations and market service operations, and we continue to progress that throughout the quarter. I'll just remind really everyone, it's not linear in terms of that progress from the starting point to the ending point. We made good progress in market and progression over the course of last fiscal year, and we will certainly return to that as we progress through 4.0.

Very clear. Thank you both very much.

Thank you for your questions, ma'am. We'll now move to Suhasini Varanasi of Goldman Sachs. Please go ahead. Your line is open.

Hi. Good morning. Thank you for taking my questions. Just a bit from me, please. Your commentary on leading indicators and business momentum seemed to suggest that maybe the August trading environment was a bit better than last year. Would you say that was true? And is it possible to give some color on how August trading was? And then second one, just to go back to the point on the margins that Annalisa asked, sorry about that. Is it possible to quantify the impact of the repair costs, the ancillary revenues, the positioning of fleet? Just so that we can understand if there was any lumpiness in that particular quarter, should we think about any of them unwinding in Q2? Thank you.

Sure. August trading is in line with what we expected, very similar to what we would have seen in Q1. And just on your point there, I think it's worth turning to slide nine for those of you that have the deck in front of you. And this references, of course, the external indicators. We talked about the internal leading indicators in our business, which is really activity, activity in quoting, activity in reservations. daily contract transactional activity, which we're seeing this, you know, strength in that pipeline or indicators. And then when you look at that Dodge Momentum Index in the bottom left, just to reiterate what that actually interprets. So these are projects that Dodge accounts for that are entering the planning phase But these are projects under $500 million in total starts value and excluding manufacturing. So this really is a good barometer of that local non-res construction market that we've been talking to for a period of time now. So these are positive signs not to be confused with. We're still in – a moderated non-res construction environment. That shifts, if you will, from what was moderating to being positioned where we are. The positivity in all that is these good signs, but also when you look back to, say, 2022, 2023, those years where we saw far more robust starts activity, and this funnel is shaping up to demonstrate the beginnings of that. But again, a reminder, as 12 to 24 months on average before you actually see these playing the projects progress to starts?

Yeah, and so I'll take the margin question just because I seem to be on a roll. So on the IRR cost, year over year it was about $30 million higher. And if you think about the warranty coverage of that big slug of fleet that I mentioned, if you were to look last year, about 39% of the fleet And that's the 13 percentage points that I mentioned. And again, if you look on slide 30 of the results presentation in the appendix, you'll see quite clearly in years 2023 and 2024, those are the two big slugs of capital years that we're referring to. And it'll make sense to you when you understand that these warranties typically last around around two years and generally speaking about one percent of our fleet uh one percent of our total oec is uh comes back to us in terms of the warranty coverage so um so that that the total number if you want to put a quantum around it is about 30 million dollars year over year that uh that change in warranty expenses about 18 million of the 30 million so it explains about half or just over half of the uh the higher IRR. If you look at the fleet repositioning cost, that's higher year over year by about $5 million or so. And again, that will mitigate as the overall non-residential construction market begins to improve. But again, that's positioning ourselves for improved margin in the future. And then the last point that I think should be obvious, but as you all work through your into next year, it's normal in any business to give merit improvements around this time of year. So you did see salary and wages increase by about 3%, which I think is in line with, again, anyone else in any other industry. And obviously in a growth environment where you're growing by about 2.4% and your salaries and wages are increasing by about 3%, that's going to have an impact on margin as we you know, continue to progress rate and unlock these pockets of growth, that will mitigate. And then the last point that Brendan mentioned, which I don't want anybody to lose sight of, is the progression of that third actionable component of Sunbelt 4.0. We mentioned last year at the year end that we had four sites that had been active in the MLOs, these market logistics centers, for a full year. We're generating significant double-digit improvements in outside hauler expense. That number at year end was around 60 million that have been implemented. That continues to progress. And this year we're on track to deliver or to implement more than 30 of those locations. So we're gaining scale in terms of that body of work. And then, you know, in a really exciting development this week, or I'm sorry, just last week, we went live with our market service operations. So this is really optimizing our our repair and maintenance spending, again, leveraging that clustered economic strategy in the markets where we really have scale. And so that's, you know, just gone live, and that will deliver huge benefits in terms of our overall repair and maintenance costs. So really appreciate all the questions.

Thank you for the color. And, Brendan, just a quick follow-up, please. Was there any comment that you would like to make on current trade in August, please?

The comment I made was it's very similar to Q1.

Thank you. Thank you very much.

Thank you. That's your questions, ma'am. Next question will be coming from Will Kirkness of Bernstein. Please go ahead. Thanks very much.

So first question just on utilization. I wondered if you could give us some help on how much headroom you have there before you might need to start looking at when to switch on the CapEx a bit more. And then linked to that, I suppose, rates. Should we think of rental rates as flat here or maybe a touch higher? Thank you.

Yeah, well, on utilization, you know, it's very much by category. You know, there is a bit of headroom. in certain product categories, but we're also quite hoppy, if you will, in some others. as we're constantly working to maximize the fleet that we have invested in and the fleet positioning. Not only the repositioning, which Alex has talked about in so much detail, of existing fleet, but also just managing the landings that were planned throughout the year. So what was planned to go into a certain metro area is very agile, so to speak, and can go to the next metro area easily. that is experiencing ever more demand so we've got a bit of headroom there compared to our uh you know almost if you will anomalous levels of high time utilization we had such significant supply constraint in terms of when we will increase the dial as it relates to increasing capex well that just comes down what demand is. So we're doing it as we go through the year, whether it's a mega project win or it is a market that is exceeding our thresholds for time utilization, which allows for ongoing order capture. We move that and we'll see what things look like at the half year as it relates to CapEx, and we'll give you an update at that point in time. I think your assessment of They are strong, the strength in terms of resilience. We continue to see discipline across the industry, particularly when it comes to CAPEX levels and fleet landings, as well as dispositions. And that's all remarkably healthy. You know, we progress sort of steady as it goes in the specialty business. And in the general tool business, I would describe that as you have, which is flat but also very resilient. And as we continue to sort of inch up time utilization, I think we will see that return and be a real characteristic of growth of ours, akin to what we would have put out there with Sunbelt 4.0 in terms of our strategy on pricing. I hope that answers your questions, Will.

Yeah.

Okay.

Thanks. Thank you very much, sir. Next question is coming from Rob Wertheimer of Medias Research. Please go ahead.

Hi, I'm here if I could. The first is just I wonder if you could talk about your ongoing experience in megaprojects, you know, with the color around market share, you know, capture rates, and then profitability on those projects. And then second, I'll just ask it now. I think Alex mentioned kind of market service areas. I wonder if you could kind of just expand on what that is, what kept you from doing it before, and how much potential it holds. Thank you.

Yeah, thanks, Rob. Good morning. I'm going to start with your second. You know, around the question is why didn't we do that earlier? You'll remember, of course, the sort of chronology of strategic growth plans we had. We had Project 2021. We had Project 3.0. All very much pointed to increasing our density and creating what we define as these clustered markets. And it's really at that point when you have the ability to not only form the scale but also for that level of density in a marketplace where it makes sense. Long, long ago, we would have done market field service that we would have put in place in all these areas. And now, a combination of that density, but also the technology that's in place. If you take, for instance, our VDOT system, which is sort of VDOT 3.0, which was a total remake over that period of time, which builds automatically the manifest for dispatch, et cetera, and allows us to do it at the market level. Alex also touched on this market service operations, which is the next step from a market field service overall. Whereas we are allocating, if you will, repairs based on shop and technician availability, aligning larger repairs with technicians, level three, et cetera. So that's making great progress. All of you would know and would have seen over the years, Brad Ball presents. So Brad and the OPEX team are leading that charge. And as we've stated very clearly, we'll have over 30 of those in full play. by year end. So not only are we working on there the overall efficiency in the business, but we're also bringing better service to our customers overall. As it relates to megaprojects, we can quite comfortably characterize our ongoing momentum from last year. So in the quarter as a for instance, we would have been awarded nine megaprojects. And, you know, our batting rate on that, so to speak, is really high. You know, it's the typical cast of larger, more sophisticated, more capable, with good resumes, so to speak, and having completed and participated in projects at scale and complexity. So we continue to feel remarkably good about our overall share there. We stated that it's at least two times our overall market share, and that comfortably remains the case. So not only a good quarter in wins, but also a continually good environment in terms of adds to the overall pipeline. I'd also add a lot of diversity in these megaprojects. Lots of headlines around data centers, and sure, there are lots of data centers that are entering planning or entering that funnel or even beginning to do. But there's a lot else out there, whether it be FABs, it be LNG, or it be sporting arenas or stadiums. It is a flush market of megaprojects.

You know, Ron, maybe a couple of additive points I'd just make first on the whole MSA, MLO. I just think from more of a sort of industrial commodity, if you will, to a true service business. And it demonstrates the scale of Sunbelt that just can't be replicated. And it's on the back of the technology investments, on the back of the Sunbelt 3.0 strategy, and it's really implementing everything that we described back in powerhouse. So I really just think it's the continued transformation of the company to this business service. value to our customers. Second, on the megaprojects, just to sort of dimensionalize it, because I think, you know, a lot of times in these sessions, people tend to think of megaprojects as data centers. And so I'm just looking at our funnel here. Of the 832 projects that we're involved in, 64 are data centers. So, you know, it's a very broad and diverse pipeline. Around 400 of those are listed in the other category. Around 200 of those are in the infrastructure domain. So it's just a very, very diverse funnel. You know, as we sit here today, that total project counts around 830. If I look out into 2026 to 2028, that project count grows from 830 to 1,053, representing around $1.4 trillion. in potential project value. So, it just really is a dynamic growing and diverse landscape of projects, which are a huge tailwind for growth as we look forward.

Thank you. Thank you.

Next question.

Next question coming in from James Rose of Barclays. Please go ahead, sir.

Thank you, and good morning. I've got two, please. Firstly, can you update us on how tariffs are impacting the business? And then secondly, I see you've won the contract for the Olympics. Any color you can provide on that bid would be much appreciated, and congratulations.

Yeah, thanks, James. First, on the tier piece, and Alex will add some color here as well, the key point for where we are today, our agreements with our OEMs are intact, and the current year spending, therefore, from a CapEx standpoint is protected. I think if you set aside tariffs, our starting point for our negotiations for next year, for those that aren't multi-year agreements, would actually be flat to down. And we will deal with tariffs as they come. These are obviously a moving target, it seems, from week to week. But overall, there are some other puts and takes around tariffs.

Yeah, look, I'll just – and obviously, Brendan will talk about the Olympics, which is hugely exciting and, again, another demonstration of the power of Sunbelt and, you know, something that only we can provide to this market. But back on tariffs, you know, look, this year, as Brendan mentioned, it won't have any impact. All of our agreements are in place, and so it's not a headwind for this year at all. As we look forward, we'll work with our OEM suppliers to mitigate the impact. We're an importer of record on only about 20% of our fleet. So relative to others, we are much more highly domestically oriented, which mitigates this impact right out of the gate. So you have opportunities to work with suppliers to help manage their cost structure, but it doesn't have a direct impact on us. If I were to dimensionalize it, You know, we put it in the range of, call it between $50 million of potential headwind at the low end to $200 million at the high end. You know, obviously, as Brendan mentioned, that changes, you know, almost daily, certainly weekly. Last point I'll mention is we do have about $17 billion of OEC here domestically in this market. We have massive flexibility in terms of what we can do with that, whether it's becomes looking to remanufacturing as options for how we mitigate the impact of tariffs, extending the life of that fleet to get through any sort of transitory headwinds. So we have huge amounts of flexibility. And as tariffs impact markets, that pushes more people towards rental because they can't have the advantages of scale with suppliers the way that we do. And so I wouldn't say You know, we're happy about the tariff environment, but we're certainly a net beneficiary relative to others in the market. So, Brendan, why don't you comment on the Olympics? So, James, for the rest of the audience listening, James is picking up clearly on a press release that we put out yesterday about 1 p.m. Eastern time in conjunction with the LA 28 Committee.

But, yeah, Los Angeles 2028 Olympic Summer Games. It's a great win for the team. They've been working on this for two years or longer. We didn't speak to it in our prepared remarks as we're still nearly three years out, but we'll get to scale, revenue, capital execution, et cetera, in due course. The big picture really is, since this was asked, you know, our selection or win here represents the breadth, depth, scale of solutions and the supporting technology in terms of what the team presented to the body that was making this decision. Just to be clear, we are the official rental equipment solutions partner, and that's actually across our general tool equipment, powering, ground protection, fencing, scaffold. I'm sure I'm missing something there. But to be awarded something as significant as this, you have to have a clear track record about it. Thinking back to a previous question around megaproject success, and so much of it comes down to your resume and our ability to demonstrate our delivery of solutions on complex and large-scale events and projects while doing it safely – is really what led to this overall result. And, you know, it was a pleasure working with that LA 2028 committee who is laser-focused on delivering a great, great, great game. So, yeah, we're pleased to have had that win, and I'm sure that we'll cover a bit more of that when it comes to our investor day in March. Great.

Thank you.

Thanks very much. Thank you, James. We'll now move to Katie Fleischer of KeyBank Capital Markets. Please go ahead, ma'am.

Hey, good morning. Sorry to be the dead horse here on the margins, but just any detail that you can give on progression within specialty and general tool through the remainder of the year and if we should expect any significant changes from this quarter's levels. And then turning to the local accounts, when you think about the green shoots that you've seen there so far, Do you think that's mainly driven by the clarity on tariffs, interest rates, any color there on what you think is making those customers a bit more confident and what you think they need to see in the future to really start that recovery?

Yeah, so I'll hit the margin point, and then Brendan will obviously talk about market conditions. So, you know, on margin, I think the real driver of margin progression over the balance of years, you know, will likely be – the progression of rate as well as utilization. And so we mentioned a lot, you know, we're really driving improved time utilization, you know, and that will support rate progression over time. I think, you know, if you think about modeling out the balance of the year, We would not want to take, you know, our PVT of $550 million and multiply it by four. That wouldn't be appropriate. You know, for a number of reasons, obviously there's seasonality in there. But don't forget, we did have $100 million of hurricane-related revenue last year. versus Q3. That was $60 million in Q2 and about $40 million in Q3. So, you know, so as, you know, we look out at the balance of the year, I think it's reasonable to expect that margins will continue to look similar to how they looked this quarter. And as market conditions recover, you know, obviously we'll see the benefits of that scale and leverage on the fixed costs. So, Brendan, why don't you hit on the market conditions?

Yeah, Katie, I think in many ways you answered your question. The key really is, and this is, you know, this has not been a demand issue as it relates to local non-res. it really has been uncertainty. And the way we view it is there's three legs to it. First, there was the interest rate environment or the cost of borrowing. And we've gone from where we were to clearly being in a period of easing, what the velocity of that will be. I'm sure we'll be in June, September 17th when we hear from the Fed. However, I think it's clear out there that we're in this easing environment and we'll see how that progresses. The second, which was quite important, was actually the tax legislation or the so-called big beautiful bill. Now we have clarity with tax rates extended, both business and the personal, and very importantly, the bonus depreciation element. And then the third leg, I think, to it all is the tariff environment. And up until this point, certainly, I think most would say the damage, so to speak, is not as bad as what has been feared. So as we see those easing, and I think you see that translate into that Dodge Momentum Index, you know, it's quite different between where it is today and where it was at the end of last calendar year. So from December of 2024 to where we are today, it is 36% more in terms of what's in that momentum index. And if you exclude the small fractions of data centers that are in that below $500 million range, you're still plus 26%. So that just underpins the level of demand that's out there, and we look forward to seeing those projects and planning progress to start.

All right. Great. Thank you.

Thank you, Katie. Next question will be coming from Rory McKenzie of UBS. Please go ahead.

Hi, everyone. It's Rory here. Two questions on margins. No, I'm kidding. They're about rental rates, the other topic. Within the group average rates being stable, are there any reasons or products that you saw achieve good increases or any that came under pressure? And then secondly, within Sunbelt 4.0, I know you were budgeting for kind of annual rate increases over the planned cycle. Can you talk about if you think that's still feasible? Especially if, Brenton, I think you could just commented, you were looking to OEMs for fleet costs to be flatter down. So maybe can you talk about how we think about pricing power into any recovery, your customers' affordability if cost increases, and maybe some of those points to discuss, please.

First on rates, as I said, specialty is steady as it goes. So in our specialty business where it is so clear we're providing overall solutions, and as we see this business continue to reflect more and more, the hallmarks of a business services company will do the same. General tool, there are no particular geographies to speak to or even product categories. It's just been a bit more benign. In no way, shape, or form are we suggesting that. We won't regain momentum as it relates to rates. And again, let me just make the point, the rate environment is strong. And if you can track how rates have performed in the business over the last 18 or 24 months, when there was lower time utilization in the overall industry, It is in stark contrast to what we would have experienced in other cycles. So nothing to call out as it relates to products specifically or regions. And, you know, very much what we would have laid out as our internal working plan as it relates to our ability to pass on inflationary pressures after we actually drive the efficiencies as best we can through the organization. to our customers ultimately with some small margin is very much a focus and we have all the confidence that we will achieve that.

Okay, thank you. Thank you, sir. We'll now move to Alan Wells of Jefferies. Please go ahead, sir.

Good morning, gentlemen. Just a couple from me. One, just a clarifying comment just about rates and repair costs and how these trend. So my understanding is that because of the requisitioning, you saw a bit of an improvement in time utilization this quarter sequentially. But obviously, if I look at the general tool rate environment, it's stable now versus improving, which you said in coffee. So it looks like a deterioration. So rates haven't followed utilization up at least this quarter. Can you just confirm that? And then on the repair costs, This looks like it should be a multi-year event, multi-year headwind, right? Because your capex steps up again in 24 versus 23. So obviously there's a need for... Just understand those dynamics is the first question. And then secondly, just on reference, is it possible that you can provide the specialty growth if you adjust out the oil and gas in the film business? And as I look at the kind of the direct comparison there, if power and HVAC and climate saw double-digit growth, I mean, my understanding is that makes up the biggest portion of your specialty business. So what are the areas of real weakness outside oil and gas and film that are dragging that specialty growth from double-digit down to the price of oil?

Yeah, there's no areas of real weakness in specialty. There are, you know, when you look across it, you have double-digit growth, as I think in a prepared remark he would have talked about, power and HVAC. We also have strength in, you know, fencing, temporary structure, ground protection. You know, there's a significance there. film and TV and oil and gas, and the upstream oil and gas, but also industrial heating, which is very much tied to that piece of the market. So that's really all that it is from a headman standpoint. We don't have the statistics exactly on us in terms of what that would be, absent the previously mentioned aspects. On the rate piece that you talk about, You know, your characterization is fine, but rates are not digressing in the general tool business. As you, you know, progress time utilization, as we have done throughout the quarter, you know, we've just hit that point. Part of that will come down to mix. whereas we have a larger portion of our revenue today coming from these megaprojects and larger strategic customers. Not to be confused with those rates themselves not progressing, because those rates indeed will progress year on year. They just make up a larger piece of it. So it is a quarter that we've gone through while maintaining it. rates and also seen some sequential movements later in the quarter in general tool, which is positive. So again, we just reiterate our confidence and our ability to progress rates over time.

And Alan, I'll hit the maintenance cost point. So your observation is correct that we do have those two big years of around $4 billion in CapEx that will continue to have this trend. But let's come back So, again, that third actionable component of Sunbelt 4.0 and the implementation of the MSOs, which we talked about in leveraging our clustered economics. So, that will mitigate the impact of this, you know, phenomena of increased IRR. And I think Brendan talked at length about that in answering the prior question. You know, that also leverages the scarcity of IRR. skilled labor as we can leverage those tier three technicians more effectively. So, you know, there's just a lot of goodness that comes out of the overall 4.0 strategy, that third actual component, and then the scale that we have relative to others as we leverage those cluster economics. So, you know, you should see that mitigate over time, but you're right. The phenomena of having less weight on warranty will continue as we age those big those big slot years.

Okay, thank you. Thank you, Alan. Ladies and gentlemen, we have time for only one more question, and the last question today will be coming from Carl Rainsford of Barenburg. Please go ahead, sir.

Hi, yeah, good morning to you both, and thanks very much for the colour in your answers. It's been very useful. Two from me, please, if I may. The first, going back to both on rates, really. Would you be able to quantify the sort of general time lag roughly between time utilization improvements and the pricing improvement, if that has sort of happened in the past, the similar dynamics, the first one? And the second one, just on megaprojects, could you briefly explain the contract dynamics when those projects are multi-year? So, for instance, do you get a fixed rate step-up year on year, or is it more sort of dynamic than that? Thank you.

So the first thing, really, what we have experienced, as you would have heard over the last couple of years, is a decoupling in many ways between time utilization and rental rates. It was well covered throughout the industry of industry-level time utilization down over the last couple of years, and we've seen a resurgence in that more recently. And over that couple of years, we progressed rates well over that period of time. I'll remind you of, you know, the three years of 8, 8, and 6% rate improvement that we would have spoken to and then 2 and a bit or 3% last year. So during the time of that abatement really just demonstrates that decoupling between time utilization and From a mega project or a large strategic customer, the short answer is it varies. From time to time, we'll have a multi-year agreement, and we'll have pricing that will be based on certain cost indexes. And from a mega project standpoint, similarly, most often there's an annual allowance for a price increase over the course of a Generally speaking, those have that, which is why I made the point earlier, though, there is this mixed impact overall from a pricing standpoint, not to be confused that those individual customers don't have or we don't have the allowance within those agreements to increase rates as we go year in and year out.

Okay. Thank you very much, Brendan.

Thank you. Thank you, Carl.

Thanks, Carl.

As we have no further questions, I turn the call back over to your hosts for any additional or closing remarks. Thank you.

Great. Well, again, thank you all for joining this morning, and we look forward to speaking again at the half year. Have a great day.

Thank you. Ladies and gentlemen, that will conclude today's conference. Thank you for your attendance. You may disconnect.