Sunbelt Rentals Holdings Inc (SUNB) Q3 2023 Earnings Report, Transcript and Summary

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. [Operator Instructions] 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 Ashtead 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 co-workers, 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. And 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 3. 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 end 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 1.6x. 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 4. Recognizing the performance and momentum in the business, we increased our full year rental revenue growth guidance versus last year as follows: the U.S. 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 U.K. We've lifted and narrowed the gross CapEx range to $3.3 billion to $3.7 billion, an uplift of $100 million to the previous top end in U.S. 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 6. It was another strong quarter and hence, nine months with good momentum across the business. This momentum drove strong growth in the U.S. and Canada, while U.K. 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 and EBITDA margin of 46% and an operating profit margin of 28%. As a result, adjusted pre-tax profit increased 28% to $1,778 million, and adjusted earnings per share were $3.04. Turning now to the businesses. Slide 7 shows the performance in the U.S. 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 U.S. Inherently, in the early phase of their development, greenfields and bolt-ons are lower margins than our more mature stores. As expected, drop-through has improved as we 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 profit to $1.890 billion at a 31% margin, while ROI was 27%. Turning now to Canada on Slide 8. Rental revenue was 25% higher than a year ago at C$524 million. 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-on activity, particularly MacFarlands and Flagro 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 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. U.K. 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 60 -- 6% 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 challenging not completing the testing site demobilization within three months, but also then getting the large volume of fleet -- 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 efficiencies, which impacted margins negatively. The principal driver of the decrease in operating costs is the reduction in the work for the Department of Health, offset by the additional costs referred to earlier. These factors contributed to an EBITDA margin of 29% and an operating profit margin of 11%. As a result, U.K. operating profit was £55 million for the 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 in acquisitions and returning $293 million to shareholders through our final dividend for 2022 and $256 million through buybacks. As a result, leverage was 1.6x, excluding the impact of IFRS 16 towards the lower end of our target range. Our expectation continues to be that we'll operate within our target leverage range of 1.5x to 2x 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 us well as we take advantage of the structural growth opportunities available in our markets. We accessed the debt markets in August and then 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 notes issues, our debt facilities 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 and 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. 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 ownership. Further, 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 half-year 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 nonbuilding 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 mega projects. When you put all of 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 U.K. on Slide 18. The U.K. 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 U.K. business as it makes increasing progress in markets such as facility maintenance and further develop its specialty offering in areas like power and the new lighting and grip 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 [indiscernible] there is 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 billion to $3.7 billion. This is an uplift of $100 million on the top end in U.S. rental fleet. All the 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 billion 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 and Science and Inflation Reduction Acts, another three months of robust project starts, and increased non-residential construction forecast. These actualities add to what is -- what was already a plentiful level of end market activity, flushed with day-to-day MRO, small to midsize 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. [Operator Instructions] We will take the first question from Robert Wertheimer from Melius Research. Please go ahead.

Hi. Thanks, and 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 tailwinds? 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? Or does it lean it up? And then, secondly, just ROIC and margin as the market shifts to larger projects, do 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?

Yes. 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 mega projects and as I'm sure you're aware, there are phases to these mega projects. So, 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 a -- 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. It's what we will progress through. In terms of the first part of your question, 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, for instance, put in place forecast that I covered that go out through 2026, 2027, because the very nature of these mega projects, again, as you know, they're longer duration. And what we've been seeing, whether we look at the mega projects that are more driven ordinarily or if we look at those that are coming by way of AXA. If you take, for instance, the IRA, 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 that range is from underway, actual projects where we are on site and have a high degree of share to projects where just last week, as 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 sort of rounding figures, so to speak, to say, if our market share in the total North American rental space is kind of 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.

Good morning, Andrew.

Hi, thanks for taking my question. If I take 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.

Yes. 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. So, rental revenue growth compared with what we've got on there, sort of in that 18%, 19% range for February, which is a long -- 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 -- 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 all those equipment and where the kind of the bottlenecks are versus, I guess, prior quarters when we talked about those problems in terms of getting all those kits.

Yes, 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 as 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, is there -- should there be a concern that we are overwhelming the inventory, so to speak, in the overall North America 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 happening to make up for a suppressed '19, a deeply suppressed 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 a structural change between our -- 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.

Yes. No, very helpful. And touching 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 you've made around the difference between [Technical Difficulty] in terms of technology and inventory management. But I'm just wondering if we've still seen a pickup in terms of your bolt-on M&A. And I'm just wondering if -- or if the pipeline is becoming easier? Or are you getting more potential targets coming to you, given that it just feels that the share 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 would attribute any of the acceleration in bolt-on M&A, too, that? Or is it just simply that you have the capacity to do that, you want to undo that?

No, I mean it's not just capacity. An acquisition requires a buyer, of course, but also requires a willing seller. But I think when you -- your assumption is correct here. 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 that 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 careers 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 the next question from Annelies Vermeulen from Morgan Stanley.

Hi, good morning, Brandon 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 mega projects 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. 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 high 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, Annelies. 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, this rental penetration aspect that we talk about. So, if you look at our Specialty business, for instance, that is servicing this MRO market, facility maintenance remediation, et cetera. 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 still have small contractors out there that are very busy, that is a broad range. Now certainly, as things progress and a larger overall portion of the put in place construction environment gravitates to mega projects, which it will. But what we've not seen yet is the others subsiding or getting smaller, rather just proportionally the mega is 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 skidsteer 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, I think that commentary is reasonable, say, 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. When it comes to the, think about it as SG&A, if you will, that's going to be more moderate, certainly than what we've seen in recent years. In terms of CapEx for the -- for fiscal year '24, I think you've asked a great question in terms of what that looked like growth versus replacement. I guess, easiest if we just refer to that Slide 20 and you combine actually the U.S. and Canada, and let's just talk about rental fleet. So, if you take that midpoint, you're at about $3.450 billion in rental fleet CapEx, and that's going to be circa 40% growth. So, 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 frame of reference, that would compare to current year being more like 50-50, so 50% growth, 50% replacement. Does that answer your question, Annelies?

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

Thank you.

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 FY '24, 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 mega projects 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, mega projects, that's only going to continue to elongate. I wasn't sure if your pricing and volume was related to CapEx or revenue guidance. So, I -- say again, sorry.

The revenue guidance.

Revenue guidance. Look, we gave -- well, let's -- 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.

Yes, good morning. Thank you. A couple of there, please. Just -- I mean, I suppose following on from the previous question, as we think to the mix of CapEx for FY '24, it looks as if, I think if I'm doing the math 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 U.K. 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?

Sure. 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, et cetera. So I don't even want to venture a guess on what is ceiling for rental penetration. Let's just say we're a long way away from it. When you -- 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, then 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.

Thanks very much. Thanks Brandon.

Yes. Thanks, Neil.

We will now take the next question from Arnaud Lehmann 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 a non-fair 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.

Yes. Thanks, Arnaud. The -- 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 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 more detail at a Capital Markets Day. When it comes to when these supply constraints do ease and lead times improve, which they will, does that create opportunity for the smaller independents to gain back some of the share in which they've shed? Yes, 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 have to -- yes, I think you have to, again, then understand just 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 it will -- 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, look, there's always nuance that you referred to. And this is something we have dealt with for years and years based on project landscape. So yes, with infrastructure out there and these mega projects, are we buying a bit more larger and 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.

Good morning. Thanks so 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 just in terms of thinking about our model going forward? And the second question, just on Slide 38 in your specialty market, the power and HVAC category is one of the largest. And I just sort of wondered why that's in the specialty category rather than general? I would have thought kind of things like power were part of the general business rather than specialty. So, perhaps some mistake on my part and just maybe to understand what's in that category. Thank you very much.

Yes. Speaking from a dollar utilization point, if you go way back, so if you go back pre the financial crisis, 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 -- so what has happened since then, it has declined and then it has started to improve again. 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, i.e., the rental penetration that we get, so there'll be a balance to it. So, 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.

In terms of -- 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 and our power and HVAC business line. [Multiple Speakers]. No, I understand. But look, they are -- when you think of power and 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 have -- 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, if you have -- which oftentimes happens, 15,000 CFM desk dehumidification, 10 of which are required on a project. And you are managing not only the power supply to, but the airflow and ambient temperature and relative humidity points and levels of drying a project that is 150,000 CFM with desk dehumidification. So, rest assured, and I just scratch 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 Allen Wells from Jefferies.

Hey, good morning, guys. A couple from me, and apologies, I dropped off the call if you've answered this, just say so and I can go back to 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 into price inflation on 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 on growth in power, HVAC and climate control. Is there anything behind that? Again, it sounds like you were talking about it 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, you just have -- 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 had 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. Yes, I mean, you've seen it tail down a bit. And frankly, when we look at our capital allocation priorities, they are 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 mass figure that comes out of it afterwards is buybacks. Obviously, we have a robust pipeline when it comes to both now CapEx and bolt-on 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 used 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.

Thank you very much.

Thanks, Allen.

We will now take the next question from Karl Green from RBC. Please go ahead.

Yes, 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 U.S. 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 -- getting scale and how that's playing out just in terms of some of those ROI dynamics? Thanks very much.

In terms of -- I haven't got the things immediately handy, 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 cost in erection dismantling and then also the fuel costs 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 Page 3 of the press release where we talk about pure rental revenue growth and the total rental revenue growth, so you can work out the delta that's going on there. As we move into next year, and Brendan is probably always better to comment on that, but fuel prices are starting to come down and tapering off. So, if you compare your 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 -- our 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 obviously, it will depend on where fuel prices end up during the course of next year. That was the first question. Sorry, what was the second question? Or is Brendan mute again?

It was ROI between Specialty and Gen Rents, Michael?

ROI. Okay. So yes, we talk about it quite a bit. So, the thing with our -- well, I think there's two things. I'll come to ROI in a second. Margins on Specialty businesses are 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 bank did out their scale. So, if you take the climate control, power and HVAC and our flooring business and -- but it's sort of lower in those more -- if you take the ground protection business that we have and the [shoring] (ph) business as we do in the early stage of their development, it's a little bit low. But now generally Specialty ROIs are probably 5 to 10 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 -- they have a lower D. Therefore, EBITDA levels are going to be a bit lower. But as Michael rightly said, there has been inherent in that a higher return on capital investment.

Yes. Right, we did refer they're less capital intensive.

Yes. Prefect. Thanks, guys.

We will now take the last question from Rahul 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 ROI dynamics 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 do you think the drop-through margin should be for '24? And my final question is on the discount rate. I think historically, from memory, Ashtead has given that scale had 10% discount from OEMs given its scale. In the current supply constraint environment, could you give us 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 in the lighter telehandler environment, also doing work when it relates to hydrogen. If you look at the work that JLG 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, there's some low-hanging fruit there to transition into EV. And then, of course, you have what we refer to internally as ESS, energy or electricity storage systems, that, again, will, in some cases, be freestanding and 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 has been saying. Michael, 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 FY '24. Again, I've said we've not completed our budgets. But we would expect to fall through in the 50%s next fiscal year, and we'll give a bit more color on that when we get around to June. And in terms of discounts, 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 telegraphing nature of how we procure. I hope that answered all your questions.

Thank you so much. Yes.

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 full 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.