Ashtead Group PLC

LSE:AHT

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to this Ashtead Group plc Quarter 1 Results. I will shortly be handing you over to their Chief Executive, Brendan Horgan; and their Finance Director, Michael Pratt. Before I do so, can I remind you that this call is being recorded. [Operator Instructions] I'm now delighted to introduce Brendan Horgan. Please begin your presentation.

[Brendan Horgan, CEO & Executive Director]

Good morning, and thank you for joining the Ashtead Group Quarter 1 Results Call. I'm speaking from our field support office in South Carolina, and joining me on the line from our London office are Michael Pratt and Will Shaw. Before getting into the quarter 1 highlights, I'd like to take this opportunity to extend my thanks and appreciation to our team members across the group. Throughout the quarter and indeed, since the beginning of COVID-19's impact on our professional and personal lives, our team members have adapted in a manner that makes me incredibly proud. As you, of course, know, we're in a business that readies, delivers, maintains and services tangible assets. In most cases, these acts cannot be done remotely. And as such, our leading value of safety has taken on a definition perhaps few could have imagined a short time ago. It is in this spirit that I share with you our progress on safeguarding Sunbelt's own essential service providers as well as our customers and the members of the communities we serve. Our team members are taking the same principles they've learned through our Engage for Life initiative that I've previously shared with you and are applying them to minimize COVID exposure by adopting new work practices like social distancing, equipment disinfecting, curbside service and the proper use of PPE. While doing all of this, our Q1 safety results are on track to outperform last year, which was, I'll remind you, a record safety year. Finally, I'd like to -- the specific mention of appreciation to our SH&E and operational leadership teams who worked expeditiously to equip, train and update processes, which supported these results. Moving now to quarter 1 highlights on Slide 3. Our performance in the quarter very much picks up where we left off in June at the time of our full year results, continuing to build on the sequential momentum we were experiencing at the time. Our theme of extreme focus on all our stakeholders remains, and I think you will have gathered in the quarter's results, we can once again state that we have come through for our people, our customers, our investors and our communities. The performance during this period gives us a glimpse into the increasingly diverse business we have worked to build over the years, demonstrating the strength of our model, not only in good times but importantly, through the more challenging times of the cycle. This work I referenced has been part of our very intentional strategy, born as we exited the great financial crisis. This strategy set course on 3 key themes: one, diversify our business into broader end markets to be less reliant on construction; two, strengthen the balance sheet to fund and support our growth model and put us in a position of strength to take longer-term decisions, particularly during more difficult times in the cycle like we are in now; and finally, invest in technology and system improvements to make us more nimble. Through this work and our results leading up to this period, we had confidence in our model and the strength of our balance sheet to support longer-term view decision-making early in the crisis that we believe contributed to a performance that has clearly yielded market share gains. While we are now 6 months into a market disrupted in an unprecedented manner, thus far, we have performed well. And although there is bound to be chop on the horizon and time will tell what the year ahead brings, we are in a market that we believe has a clear path for ongoing structural change opportunities, which we are well placed to benefit from. Our revenue performance and ongoing actions taken, such as disciplined CapEx management and operating cost reductions delivered an individual quarter record free cash flow of GBP 447 million, contributing to reducing our debt and lowering leverage to 1.8x net debt to EBITDA, now in the middle of our long-term range. I'm happy to report that following a COVID-related pause in our greenfield program, we've resumed with 3 openings in July, and we'll speak to our full year greenfield plan in the slides to come. The quarter results in conjunction with the strength of our business model and balance sheet, put us in a position to look to the medium term with confidence and the remainder of the year as one of ongoing strong cash generation and strengthening our market position. And as we turn to Slide 4, I'll add some specificity to our outlook. Different than our -- in our more ordinary times' approach to guidance, you'll see we've attempted to help by adding clarity through framing our best estimate of year-on-year revenue change by business unit as well as group level CapEx and free cash flow. Beginning with rental revenue in their respective currency, we anticipate the U.S. to be in the minus 5% to minus 9% range, Canada to be broadly flat and the U.K. also to be broadly flat. From a CapEx standpoint, our range is consistent with our June guidance of circa GBP 500 million, resulting in free cash flow worthy of highlighting in excess of GBP 1 billion. The group figures use the exchange rates noted on the slide. We can all agree this is anything but an ordinary year. And as such, we've employed this approach for the time being. We will update this for the balance of the year and take a view on what is most appropriate thereafter. On that note, I'll now hand it over to Michael to cover the financials in more detail. Michael?

[Michael Richard Pratt]

Thanks, Brendan, and good morning. The group's results for the first quarter are shown on Slide 6, and it's been a strong performance in challenging circumstances. Group rental revenue declined 8% on a constant currency basis. This revenue decline had a negative impact on margins, reflecting in part, our decision not to make any team members redundant as a result of COVID-19; not to take advantage of any government support programs; and use the opportunities presented by lower activity levels to ensure our fleet was serviced, well maintained and rent ready in advance of the recovery in activity. This contributed to a still healthy EBITDA margin of 46%. With an operating profit margin of 22%, underlying pretax profit was GBP 208 million, and earnings per share were 34.7p for the quarter. Turning now to the businesses and following the rebranding in the U.K., I will just refer to performance by geography. Slide 7 shows the performance in the U.S. Rental and related revenue for quarter the was 8% lower than last year at $1.2 billion. As we discussed in June, we took a number of actions to manage our cost base, including a hiring freeze and reducing discretionary staff costs, use of third-party freight haulers and other operating expenses, consistent with reduced activity levels. However, a significant part of our cost base is our people, and we took an early decision not to lay off anyone as a result of COVID-19 or reduce pay levels. This enabled us to maintain customer service levels and prepare for markets reopening. As a result, drop-through of rental revenue to EBITDA for the quarter was 74%. While this approach has had a negative impact on margins, I think you will agree, our approach has been more than vindicated by our market outperformance as we take share. Margins were also affected adversely by used equipment sales. While secondhand values remained strong overall, our proceeds were affected by both the type of assets we sold and the sales channel selected for disposal. We disposed of old oil and gas assets, which typically have a hard life, and sales were predominantly through the auction channel, which results in lower realizations. This is a 1% to 2% drag on margins. Despite these factors, the EBITDA margin was still healthy at 48%. Operating profit was $324 million at a 25% margin and ROI was 19%. Turning now to Canada on Slide 8. Rental and related revenue was 3% lower than a year ago on a reported basis of $74 million. On a more comparable basis, excluding the impact of William F. White acquired in December, rental revenue was 11% lower than a year ago. The Whites business was our most severely effective business by the pandemic. It had performed strongly since acquisition, but in March, it ground to a halt as all film and TV production stopped and is only now just about to restart. As a result, it contributed virtually no revenue in the quarter, but we retained all the team members and the infrastructure of the business. This resulted in a loss for the Whites business of $11 million in the quarter, which impacted Canadian margins adversely. The legacy Canadian business, excluding Whites, maintained its EBITDA margin at 40% and generated an operating profit of $11 million at a 13% margin. This good performance demonstrates strong cost discipline in what is still an immature business, which does not yet have the benefit of well-developed clusters or the depth and breadth of our full range of specialty businesses. Turning now to Slide 9. U.K. rental and related revenue was 10% lower than a year ago at GBP 99 million. This was a strong performance as the breadth of our product offering and commitment of our team members enabled us to support all our customers and more and provide essential support in the response to COVID-19. The cost base reflects not only our continued investment in the operational infrastructure of the business as part of Project Unify, but also our decision not to lay any one-off nor utilize the government's coronavirus job retention scheme. These factors resulted in an EBITDA margin of 29% and an operating profit margin of 7%. As a result, U.K. operating profit was GBP 8 million for the quarter. Slide 10 sets out the group's cash flows for the quarter and the last 12 months. This slide again tells a powerful story and demonstrates the strength of our business model. We have maintained a strong focus on working capital management, particularly the collection of receivables, which has resulted in cash flow from operations of GBP 543 million for the quarter, the same as in this period last year. This, combined with the decisive action we took to reduce capital expenditure in the current environment, resulted in record free cash flow for the quarter of GBP 447 million, more than we generated in the whole of our second best-ever year for cash flow generation in 2018. As a result, we have generated GBP 1.1 billion of free cash flow in the last 12 months, and that is after GBP 1.3 billion of capital expenditure. It is this cash flow dynamic within the business that gives us confidence to expect free cash flow generation this year in excess of GBP 1 billion compared with last year's GBP 792 million. Slide 11 updates our debt and leverage position at the end of July. We used the cash generated in the quarter to reduce debt and leverage, which at 1.8x, excluding the impact of IFRS 16, was in the middle of our target range. As we have said on many occasions, a strong balance sheet gives us a competitive advantage and positions us well for the medium term. This balance sheet strength and the strong cash flow has enabled us to reduce leverage from 1.9x in April despite the severe economic shock from the pandemic. Furthermore, we have continued to invest in the business, whether that be through retaining our people or returning to greenfield openings, enabling us to outperform the market and take market share. Our debt serves are committed for an average of 6 years at a weighted average cost of 4%. Both our leverage and well-invested fleet continue to provide a high degree of flexibility and security and enable the business to be on the front foot despite these more uncertain times. And with that, I'll hand back to Brendan.

[Brendan Horgan, CEO & Executive Director]

Thank you, Michael. We'll now move on to some operational and end market detail beginning on Slide 13. As I indicated in the highlights and as illustrated here within the top left table, the sequential momentum continued throughout the quarter and into August. Our Q1 rental revenue on a billings per day basis came in 8% lower than last year, with general tool lagging by 9% and our specialty business delivering another strong growth performance of 6%. And in more recent detail, we've achieved a nice improvement in August actual rental revenue, with general tool improving to minus 7% and specialty contributing a powerful 18% year-on-year growth. It is clear the performance in general tool and specialty have outperformed the market, highlighting both the diverse end markets our business now addresses and the uniquely powerful cross-selling capability our model delivers. Doing so while exercising discipline in rate and consistent with the experience in Q4, rates again remained sequentially flat through this period, continuing the trend we seem to be experiencing throughout the industry. It is worth noting some particulars within these general tool and specialty business results. Although our general tool fleet on rent volumes are back to pre-COVID levels, they remain suppressed in the southern states where higher COVID rates permeate, and the events, tourism and convention are historically notable parts of the business. The specialty growth rate movement from the 9% to 10% range through Q4 to 6% in Q1 was a result of a large multiyear scaffold project in a Gulf Coast liquid natural gas plant coming to a planned conclusion with significant year-on-year impact on the quarter. Into August, our specialty business units, including climate control, flooring, power and HVAC, pump and shoring were hitting stride with growth rates ranging from 12% to 25%. In the end of the month, we experienced an increase through our participation and the preparation and response efforts surrounding Hurricane Laura, which made landfall in Louisiana, August 27 and the efforts remain active through today. This hurricane response-related revenue should not overshadow what would have been already impressive 13% year-on-year specialty revenue growth absent the Hurricane Laura effect. As usual, we'll add more detail by specialty business unit as part of our half year update. Turning now to Slide 14, we'll review the latest forecasted activity levels within the broad U.S. construction market as well as industry forecast through 2023. Dodge starts and put-in-place data on the left of the slide demonstrates the steep decline in construction starts from March, amounting to a roughly full year impact of 15%, which leads to a put-in-place forecast decline of 7% for 2020, very similar to the update shared in June and into a largely flat 2021 that builds through 2023. In all, these forecasts have not changed much and seem to be settling in after the forecast and the very early COVID days. As I always point out, these forecasts are not our own rather a collection of the best available market data. And our team stays in constant discussion with firms like Dodge to understand their views and gain granular insight, both geographically and particular construction component trends. Beyond the level of precision in the forecast, perhaps we are most comfortable stating that anything like this creates a likely period of rental penetration gains when business will be increasingly looking for optionality between shorter-term OpEx and longer-term capital commitments. This applies to contractors in the construction space, but also very much applies to the procurement departments and operators in the sizable nonconstruction market, which I'll remind you makes up more than half our revenues. Moving on now to our business in Canada on Slide 15. Despite the COVID-driven setback in the business, our clear strategy to employ a cluster approach with a mix of specialty businesses is proving to create resiliency in our Canadian markets as well. Fleet on rent has returned to last year's levels. And Sunbelt has momentum in Canada, which positions us well for growth into the future. Within our lighting, grip and studio rental business, William F. White, which as Michael covered, experienced nearly 100% revenue declines. We are recognizing sequential increases at this stage and anticipate year-on-year revenue growth to return in the second half. This forecasted sharp recovery is driven by the highest demand for content the market has ever experienced as a result of the unparalleled content consumption over the last several months. The key to this for William F. White is our relative positioning in the market. Other businesses in this space were forced to near shutter, including furloughs and lack of customer engagement. Our team, however, has been in constant communication and collaboration with content production customers providing detailed rental solutions to deliver a safe and effective return to production. Finally, I'll remind you of the great opportunity for Sunbelt Rentals Canada at large to cross-sell into this space and provide a broad range of aerial work platform, power, climate control, air quality, et cetera. Our runway for growth remains strong in Canada. Turning now to Sunbelt UK on Slide 16. Before I get into current trading, I'll remind you of the central aspect behind the rebranding of our U.K. business. For years, we operated in a disparate nature, meaning specifically, we did not leverage the broad lineup of specialist products and services incumbent in the business. Core to Project Unify, culminating if you will in the rebranding under the Sunbelt Rentals umbrella, was the very idea and design to leverage our great portfolio to cross-sell into a broad and diverse segment of the market. The results illustrated herein are due in part to the work leading up to the COVID period and indeed, the great efforts the team deployed to outperform the market in a manner so convincing. Our fleet on rent levels are now back to prior year through a combination of market share gains and COVID response efforts, achieved through earlier mentioned cross-selling and unification efforts. An important thing to consider when taking in what is only a small period of time thus far is the step change and stature of the business today in the eyes of customers and the broader service sector. This will be an interesting year to watch unfold for Sunbelt UK. I think it's safe to say, if our guidance ends up being generally correct and the business is broadly flat year-on-year in a rental market that is forecasted to be lower by 25%, it will have gained significant share. In no way though are we portraying our mission to improve this business is complete. We're in the early stages of forging our path to sustainable, long-term results and returns. At this early stage, we feel our heading is correct, however, there remains work to be done and our leadership team in the U.K. is engaged, encouraged and in place to execute. Before moving on from the U.K., let's take a quick look at the COVID-19 response efforts on Slide 17, which I think illustrate well, the nature of our capabilities. Through last week, Sunbelt UK materially participated in standing up 124 testing centers, comprised of over 100,000 individual assets throughout the U.K. This work was not a deliver and drop-off order, rather a complete solution to include design, project management, logistics, delivery, installation and ongoing service. In total, more than 450 of our team members worked -- they combined 40,000 hours to pull this off. We do not know of any other rental company capable of this in the market. This work will not go unrecognized internally or externally. I know our team members are very proud to have participated in coming to the aid of the communities they live and work during a time of real need. Turning now to Slide 18. Our capital allocation priorities remain unchanged. We've been investing rental fleet CapEx in specific areas of need, notably in relation to our COVID response efforts and inside of our specialty business in general. This disciplined focus remains important as we manage the supply side of the market, both in terms of landing and disposals. I'm very pleased to have opened a few greenfields in the quarter, and our team is now back underway on path to open 25 to 30 greenfields in the year, 75% of which will be specialty businesses. Consistent with our last update, we've not closed on or entered into agreement to add any bolt-ons. Our business development team continues to assess opportunities, and will act when the opportunity fits our strategy and aligns from a capital allocation and leverage perspective. Our final dividend announced with full year results will be paid in the coming days and the resumption of our buyback program remains in review in respect to timing. So to bring things to a conclusion on Slide 19. In this market backdrop, the business has performed well, demonstrating the effectiveness of our model throughout our geographies, delivering resilient performance, highlighting further the strength in our specialty business and long runway for overall growth and structural change ahead. And finally, look at the cash generation which will serve us well now and into the future. Overall, these items put us in a position to look to the medium term with confidence and the remainder of the year is one of continued strong cash generation and strengthening market position. So with that, operator, we'll now open the lines for Q&A.

[Operator]

[Operator Instructions] Our first question, we'll take from the line of Will Kirkness from Jefferies.

[William Kirkness, Equity Analyst]

Three for me, please. Firstly, I just wondered if you could talk about physical utilization, what that -- where it is, and then maybe where it needs to be to see more CapEx go into the business.Secondly, just looking at Slide 13, trying to look at fleet on rent versus that sort of minus 8% for Q1, obviously, it's unannotated. But is that delta -- does that explain at all -- you said rates are flat, so just wondering if there's anything on mix we need to consider.And finally, on asset sales that happened this quarter. Is there anything else of materiality that we should expect further through the year?

[Brendan Horgan, CEO & Executive Director]

Yes. Thanks, Will. Let me start with your last, which is disposals. I was very clear at our full year when we said, "Hey, we're going to sell some fleet as we manage supply." And I think it's a very important thing to get across. If you look at overall, our actions and I would say the discipline in the industry among the leaders when it comes to managing that supply -- and of course, it's more than just the landings, it's also the disposals, as I would have just referenced. And in terms of overall values, you would have heard Michael speak to that. They are remarkably the same by channel. So really, that is just a channel phenomenon, if you will. The physical utilization, it's to a degree, depicted on Slide 13. Certainly, there is some capacity that remains. So although we are nearing last year's fleet on rent levels, we do have a degree of more fleet than we would have had a year ago. So there is some room there. We have stuck with our CapEx guidance for the time being. Certainly, we'll take a view on that as we go through the rest of the year and give another update on that half year. In terms of rate, it is just as you would see. There is absolutely -- this has remained flat through this period. So this March through August, our rates sequentially are flat. The degree, if you will -- your question is sort of around yield, particularly when you look at that specialty fleet on rent on the bottom right of Slide 13. Although we saw the plus 6% in Q1 for specialty when compared to that 9%, 10% we saw in February and March, as I pointed out, the scaffold project, keep in mind, because if you look at that yellow and green line there year-on-year, the delta really remain the same February all the way through July. The only difference would have been that scaffold project I mentioned. And obviously, there's not much equipment cost, if you will, in scaffold rentals. So it's a relatively low fleet on rent. Hence, you don't see that. So I hope that answers your question.

[Operator]

And the next question is from Robert Wertheimer from Melius Research.

[Robert Cameron Wertheimer]

Let's see, I had 2 questions really. One is on expense management, and I appreciate your decision not to cut pay or people and stay focused on people. The question is really, did you get all that you can out of outside haulage or rent or any outside repair you might do or whatever? Is there any more room to kind of cut that back at a lot of changes happening in a very short period of time? And then can you describe maybe the variable part of your pay, selling, your commissions or whatever and whether that's similar to the industry or whether perhaps it's more or less and just the flex as we eventually see revenues come back? I don't know how much pay flex down, I guess basically. So that's my expense question.

[Brendan Horgan, CEO & Executive Director]

Yes. Sure, Rob, early morning for you. The -- first of all, from an expense management standpoint, let me say it this way. First of all, in the quarter, so very early on in this, you're going to have a relatively high fall-through with these revenue declines. We will see as the year goes on, a bit of improvement in that. So certainly, we have a number of areas on the expense lines that we have seen improve rather significantly. We have seen, to your point, outside hauler reduced significantly other operating expenses. And certainly, from a commission standpoint, our commission, yes, it's variable, and it has more than anything to do with the revenue generated by sales representative. So their commissions would be down year-on-year. But with the rate component staying strong as it has, that lever, if you will, in the commission plan has stayed pretty flat. So you're not going to see some of those things that perhaps you would in different scenarios. Again, when we went through this and we made those decisions to retain our staff, I will remind you however, we did put a hiring freeze in place, so there has been some attrition from which, from a cost standpoint, we have benefited from. But here we are virtually back to where we were a year ago in terms of volumes, and as I said then, you'll see that expense come through. It's really when you think about -- I think back to a note you put out shortly after our full year results, and really just highlighting overall, a degree of structural change. And that you were speaking, I think, more to the big getting bigger in a way when we're talking about technology, but also processes. And processes, sure, things like curbside pickup, which we stood up in weeks, not months. And our processes around cleaning, sanitizing equipment, et cetera. But further, being able to direct the large sales force to opportunities and make the touches when others out there are reeling rather than being agile as we were was very, very much core to our focus. So that was a bit off your question, but I thought I would comment on that.

[Robert Cameron Wertheimer]

No, no, that's very interesting. And I did -- if I can sneak in the second one, I wanted to ask about that a little bit. There's obviously a structural change in the industry, a long-standing trend, rent versus buy, people do it more. I just wanted to ask really what your experience is in the shorter term. So maybe over time, you gain rent versus buy and category penetration, all sorts of stuff. But is there a material sort of shift or a meaningful any way shift, rent versus buy now? And then just your comments on customer retention and what you just talked about as you go through this, and I'll stop there.

[Brendan Horgan, CEO & Executive Director]

Yes, you got it. The -- I think when it comes to what have we seen in the short term, I've talked -- we've talked for years about the nonconstruction aspect of our business in terms of maintenance, repair and operations. And we have certainly seen an amplification of that, if you will, in spaces surrounding distribution, utilities, telecom. So I do think we're seeing a very early movement in terms of rental penetration in that space. We have talked for quite some time about -- you look at our customer composition we have -- our top 10 customers make up about 3% of our overall revenue. And if I look at our top 10, 2 of the top 10 would be construction. And the balance would be things like get maintenance, repair and operations around distribution centers, which I've mentioned, renewables, municipalities. And I think in all of those areas, we're seeing a demonstrable change in their early habits surrounding rental versus ownership.

[Operator]

We will now take our next question from the line of Rajesh Kumar, HSBC.

[Rajesh Kumar, Analyst]

Can you give us some color on when you're discussing with the, OEM what type of assets you think you would invest over the next 2 or 3 years based on what you have learned so far in the pandemic in the sense you've got quite a large depletion CapEx budget ahead of you in the next 3 years? And you must have given some thought to where you might deploy or want to deploy that capital.

[Brendan Horgan, CEO & Executive Director]

Yes. Sure, Rajesh. First of all, the OEMs, let's just start with specialty. We continue to invest in specialty. We will continue to do that going forward, not only in our existing locations, which are demonstrating such powerful growth, but also in our greenfield program. You'll recall a slide we've referred to often, which today is in the appendix on Slide 24, that speaks to the fleet profile, specifically in the U.S. And again, if you look at the years that we're in today, as it relates to what years of spend we would be replacing, they're still on the relatively small side compared to what we would have spent in the more recent years. But when you look at some of the larger categories like telehandlers, let's just say; through all of this, telehandlers have remained incredibly well utilized. They're utilized, yes, from a construction standpoint, from the ongoing aspect of construction, but also in our further deployment from a response standpoint, whether that response be COVID-related or it be wildfire-related out West or the hurricane that we've experienced in Louisiana. So the key to it all is our ongoing diversifying of our end markets and introducing products to a broader set of applications beyond that of construction. So our products, really, by category are holding very strong from a time utilization standpoint, with the exception of a few product categories that we have some capacity therein, which I had mentioned earlier. So really, at this stage, not all that big of a change in terms of what we are discussing with our OEMs in terms of pipelines specific to replacement.

[Rajesh Kumar, Analyst]

Understood. But, say, if we are looking 3 years out, would you argue that there would be more specialty in the mix in terms of the type of CapEx you put in rather than nonresidential construction, especially given the outlook on nonres, Dodge and others have highlighted for the next 18 months or so?

[Brendan Horgan, CEO & Executive Director]

Yes. Well it depends if you're talking 18 months or 3 years, I guess. So when you look 3 years, we're -- from a construction forecast standpoint, we're back to where we were in 2019. But in terms of overall makeup of the business, you're going to see more of the same. You're going to see a specialty business that is growing at a pace faster than that of the gen rents business. However, the gen rents business continues to perform strong and will continue to perform strong into the future because of the overall market in which it addresses. So regardless of the segment, what we're seeing is this -- I mentioned it in the opening, if you will, this uniquely powerful cross-selling capability that our business has. So regardless of the segment, take a business like our ground protection business that is very, very tied to live events. And even that business has performed well because we've been able to cross-sell it into other sectors. If we look at some of our -- some of our specialty business lines, like, for instance, scaffold. Our scaffold business has performed remarkably well, notwithstanding, of course, the big gas project that I mentioned coming down. Still, the business was 3%, 4% off year-on-year in the month. The reason why I say that is because if we were to compare that to other, let's just say, stand-alone scaffold businesses, they definitely would not have performed as well because we're able to adapt, we're able to be agile to point those businesses into directions with this cross-selling that definitely creates a big differentiating factor during times like this, and that will continue to happen in the future.

[Michael Richard Pratt]

Right, Rajesh, as you think about that, as you think about going forward, obviously, in 2, 3 years' time, clearly, a chunk of our CapEx is replacement, and replacement will be predominantly general tool. Because you're going back 7 or 8 years and our special businesses were not quite distinct. So it's not quite -- more of the growth will be biased towards specialty, but there's still a big sort of replacement, which is more the legacy -- the historical business mix.

[Operator]

And our next question is from the line of Allen Wells from Exane BNP Paribas.

[Allen David Wells, Research Analyst]

Just 3 very quick ones for me. Can I just touch back on the comments you made on rate? I think you stated that rates were pretty consistent through recent months. My understanding is you typically would have seen a little bit of a seasonal improvement over the summer months broadly. So am I right thinking on an underlying level, sort of rates are actually slightly down a little bit? And is there anything to sort of think about as we go into the winter period? It sounds like you're pretty comfortable with them, but is there a bit of pressure we could see there? That's my first question.

[Brendan Horgan, CEO & Executive Director]

Yes, sure. The -- you're right about rates. Certainly, this would be a season where you would generally see a bit of sequential improvement in rate. We're seeing flat. I think anyone looking back a year ago who was asked the question, if we were to go through something like what we did, would we be pleased with flat rates? And the answer would be yes. The other thing I'd point out there, as I did in the opening, we're seeing -- this is not just at Sunbelt. We're seeing this across our reported peers. So yes, I'm pretty optimistic about rate. I am pretty optimistic of our very, very recent wins. And in some cases, those have increases from a rate standpoint. What will happen in the winter? Time will tell. I think if you look at that discipline from a rate standpoint and also what I pointed out earlier about supply, there is a meaningful amount of fleet that has left the rental industry in a relatively short period of time through disposals. So that balance is pretty good. So yes, I am pretty optimistic about rate as we work our way through the balance of this fiscal year.

[Allen David Wells, Research Analyst]

Great. And then can I just follow up with 2 quick ones. On the specialty side, obviously, solid growth [ performance ]. Could you provide any granularity on -- are there any particular verticals there that were doing a lot of the heavy lifting? Any of it that's standing out, flooring, power, climate control, when you think granular there, you could add? And then just on the regional variations, you highlighted that the southern states were a little bit weak, obviously, for the reasons you stated there. But rest of the country, all sort of similar? Or anything you'd pull out between East and West Coast or the central area? Just looking for any regional things that we should we be thinking about as well.

[Brendan Horgan, CEO & Executive Director]

Yes, it's remarkably similar. Usually, when you go through significant impacts economically, you see some rather large variability. And generally, we don't. We have some markets that we were under penetrated, particularly out West, it still continued to grow well. I guess the one notable would be the areas that are most affected from oil and gas. So if you look at the downstream geographies like Texas, Louisiana, all along that Gulf Coast would be a notable. Exactly what you would expect, the same thing we would have seen back in 2015. Yes, the southern states, what I really mean by that is just in terms of their -- they sort of got back to where we were and have just sort of stayed about there given the COVID resurgence. So not a tremendous amount of color, but hey, we are called Sunbelt after all, so some of these southern states do impact us. In terms of specialty, you said it. You named a number of the divisions. It's not that this growth of 18% in August is on the shoulders of any one. If I look at our climate control business, up 18% in the quarter. I look at examples like flooring that are also double digits. Our power and HVAC business is really, really doing incredibly well, not just because of hurricane, but doing great, great work and great wins around ongoing facility work. So in other words, not construction. If you look at places like distribution centers, if you look at -- particularly in California, or I should say specifically in California, one of the big utility providers there has put in place something called public safety power shutoff, which requires quite a bit of generators deployed in that, where the business is doing incredibly well. But really, that specialty piece that I've pointed out a few times, it's that maintenance, repair and operations of the geographies that we serve. And that, of course, includes response. So really, that business across the board is doing well.

[Operator]

And for our next question, we'll go to the line of Steven Goulden from Deutsche Bank.

[Steven James Goulden, Research Analyst]

So I just wanted to ask on the -- firstly, on the greenfield guidance. So I think you said 25 to 30, you're looking to open. I just wondered, what are your thoughts on that in terms of the capital intensity of those businesses? And obviously, within the roughly GBP 500 million gross CapEx guidance, a growing portion of that will be replacement CapEx. So how does that kind of link in with your growth CapEx assumption within that number? And then lastly, on the cash flow statement in the notes. I noticed that increase in trade and other receivables have obviously been cash consumptive, yet obviously, rental revenues down 8%. Can you give us any color on the state of your receivables, whether or not you've seen any kind of issues with customers not being able to pay or what's kind of driving that? That's it.

[Brendan Horgan, CEO & Executive Director]

Sure. Thanks, Steve. I'll do the first and turn the second to Michael. Yes, the greenfields is 25 to 30. First of all, they will be, as I said, 75% specialty. So these are businesses, whether it be climate or flooring and air quality, which we're going to amplify our expansion in those businesses during this period for a whole host of reasons, not least of which is just demand, we are realizing that in some of the markets we are in. Perhaps 1 or 2 wasn't enough. So we will go from 1 to 2 or we will go from 2 to 3 in order to further penetrate that market and to drive, very importantly here, rental penetration from ownership. There -- yes, there's replacement element of CapEx and there's this growth element, but let me be clear about something, which is we spend where we need. So if we have an asset that is up in its life, if you will, useful rental life for replacement, but there's no demand for it, we'll sell that asset. And if we have a need elsewhere, we will invest elsewhere. So in this particular fiscal year, I wouldn't get too caught up in the interplay between growth and replacement. I would just look at it as we're spending where there's a need.

[Michael Richard Pratt]

And then picking up on the receivables point. Generally speaking, and you'll have seen from the cash flow, in general, we've had good collections through the first quarter. I assume what we have seen, if you take some of the older receivables, so almost some of the pre-COVID ones, which are now aging out, there's been a slight drift out in terms of that aging profile, which we sort of expected. You'll recall, we took out a sizable provision in the fourth quarter to, in part, in anticipation of that and mitigation of that. So I would say, as we sit here today, there is still -- I'd say there's a bit of an age and that all the stuff. But generally speaking, collections have probably been slightly better than we thought it would be at this stage.

[Operator]

And our next question is from the line of Tom Burlton from Berenberg.

[Thomas Edward Burlton]

I've just got 2 more, if that's okay. First, on the guidance, just as said, just a little bit more, the 5% to 9% down. Given I guess what we saw in Q1 and the strong August performance is minus 7% and maybe a bit better on an underlying basis and thinking that there may be still a bit of a hurricane benefit in that perhaps still to come in September for Q2, given you didn't have much of an impact at all last year. I would have been -- I would have thought then that sort of guidance implies no sequential improvement at all in H2, maybe even a bit worse. Just thinking about the question earlier about the absence of sort of the normal seasonal uplift in rate and the fact you didn't see that on this occasion. Are you, to any extent, sort of almost preparing within your guidance any margin for a bit of rate pressure? Or how should I otherwise think about that sort of seeming conservatism within the guidance? And then the second one, just on competition. I think this has been a pretty attractive market overall and I think you guys have shown better than anyone else just how good a market it can be and how much money can be made in the rental business. It looks like others are sort of taking notes, just thinking of the announcement of the news recently that Lowe's have sort of begun rolling out their dedicated equipment rental depos. Just think about what the competitive environment is looking like for you guys more broadly. And specifically, with that example, it sounds like they're talking about renting more and more slightly larger customers. And if I look at their sort of fleet mix, a bit more that sort of overlaps with a bit of your specialty areas in flooring, climate control, power, et cetera. Just broadly on the sort of overall competitive environment here, what are you seeing in terms of sort of potential market share changes, et cetera, and indeed, potential for more price competition, et cetera?

[Brendan Horgan, CEO & Executive Director]

Yes, sure. I think I just jotted down 3 in that. So I will start with the guidance. Could it be viewed as conservative? Sure, it could be. We -- we're trading well, but let's face it, we're going into a winter season, and I'm not talking about from an end market standpoint in terms of any variability in future planning around construction or the overall economy moving, more so what does COVID look like this winter. So that's why I think you'll see an era of conservatism in that. No implications there of rates. So no, we're not implying in any way, shape or form that there is some concern that rates may go back in any meaningful way over that period of time. So it is purely just that. And keep in mind, when you're looking at August, yes, we have printed minus 3% in the U.S. for August. Notwithstanding Hurricane Laura, that would have been minus 5%, 6%. So perhaps quite -- not quite as significant there that you see on paper. In terms of competition, the headline is this when it comes to Lowe's or anyone else like that. And that is the theme of rental. It's rental versus ownership. You have a business in Lowe's that this is tool rental we're talking about, so tool rental which has a very low rental penetration rate. Clearly, they are seeing some demand for that through their sort of search engine data that they have, and they're looking to bring that to their customers. I wouldn't go so far as to say, larger customers, perhaps they may delineate between a consumer or a DIY versus a "pro." So certainly, they're looking to bring in more pros. Look, Lowe's is right around the corner from us. We share a headquarter town. We know them well. We're very friendly with them. We're pleased to have seen their first opening. This is no competitive threat whatsoever. This is a broader theme of a share in economy in the form of tool rental, which we will be material participants in.

[Operator]

And the next question we've got is from Arnaud Lehmann of Bank of America.

[Arnaud Lehmann]

Maybe 3 from my side. So firstly, just on the U.S. rental revenue looking down 8% in Q1. Would you mind giving us a split between rates, organic growth and if there was any residual effect from past acquisitions? Secondly, as mentioned, indeed, your U.S. guidance looks a little bit cautious. But on the other hand, considering U.K. and Canada were down about 10% in the first quarter, actually a broadly flat guidance for the full year looks a little bit optimistic. You explained a bit about the U.K. already, but would you mind coming back on these two, why you think you can actually grow the business in the coming 3 quarters? And lastly, would you mind giving us your best bet on the outcome of the U.S. elections and what you think would be implication for your business in both scenarios?

[Brendan Horgan, CEO & Executive Director]

Sure. U.S. elections, I'm not in the business of betting on what happens on November 3. More importantly, I think when it comes to our business, we're indifferent. We'll see what happens. If you look at things like implications on tax, of course, there could be a degree of consequence there. If you look at things like countering that, if you will, around infrastructure, there's a reasonably good glimpse into if we were to have a democratic administration and also all of Congress, I would look to that moving forward at that $1.5 trillion infrastructure proposal. You might see something like that go through. If it remains, it remains. And I think unilaterally, we have a business that is incredibly agile and has great momentum in spaces that we've talked so much about today. So time will tell. It will be an interesting several weeks between now and November 3, I'm sure. As it relates to the U.K. and Canada, I guess you could call that a little optimistic. But keep in mind, look at the U.K. business, look at where we are now in the early throes of Q2 and when you start to think about year-on-year comps for this Q4, I think you can get your mind around where we are. So clearly, there is some momentum in that business. we wouldn't have printed it as being flat otherwise. So we feel, frankly, strong about that. In Canada, again, they're back to where they were. That is the one that has a degree of acquisition impact there. So you'll recall, we would have added the William F. White business in December. And there will be -- we believe we will see that business return materially well and get back to year-on-year growth in the second half of the year. So that will, of course, contribute to Canada overall being flat. In the U.S. business, as it relates to rate, as we've said, rate's flat. So with -- obviously, there would be a degree of year-on-year decline there given this would be the season where we would ordinarily have been improving sequentially. Very, very little in terms of acquisitions. So when you look at these figures, they are increasingly like-for-like. You'll notice when you look on Slide 13 again, we would have layered in the King business in July. So if you look at that gap or delta increasing year-on-year, that little spike would have been in July, on the date that we would have acquired the King business. But after that, there really wasn't much more of anything meaningful. I hope that answers your questions.

[Operator]

Our next question is from the line of Andrew Wilson of JPMorgan.

[Andrew J. Wilson, Analyst]

Just a couple of quick ones. Just on the competitive backdrop. I'm interested in, obviously, being very clear with how you've approached this downturn in terms of protecting, I guess, capabilities for longer term. I'm just very interested as to the degree in which your competitors have either done the same thing or taken a different approach. And I'm kind of thinking about the smaller and midsized guys rather than obviously, the bigger guys where we get, I guess, similar visibility as we do with yourselves. But just interested if there's a general comment you can make around sort of how these smaller guys have reacted to this downturn.

[Brendan Horgan, CEO & Executive Director]

Yes. Well I was going to go right to -- well there's a big difference between the real leaders in the industry and the rest. So on that point, it's been really wide ranging. First of all, when you look at some of these smaller competitors, they didn't have the ability to sort of react in the way that we did, whether that be things that I've mentioned earlier like curbside or the ability to cross-sell by way of utilizing our data and utilizing the broad range of specialist businesses that we had. And certainly, their actions will have been what you would expect. So we would have seen certainly some reduction in force. We would have seen quite a few independents actually that would have been closed for some period of time in some of the markets that would have had more extreme COVID-related shutdowns like New York City, Boston, San Francisco. We would have seen them just, full stop, closed for a period of time. Definitely, from a CapEx standpoint, what we're hearing from the OEMs, their CapEx would have gone to nearly 0. So there is a big, big differentiation between what the big were able to do through this and the small, to your point. I think it's worth mentioning the U.K. in this regard as well our ability to retain the workforce there. Look, as I mentioned with the COVID response, if you furlough all of your people, it's pretty hard to get 450 of your team members to go do setups like they did and invest 40,000 hours in that. I would say there is a extraordinarily stark contrast between the decisions that we've taken as a business as it relates to the U.K. versus what some others were forced to do, again, just not having that ability to be agile. And that team in the U.K. has been extraordinarily agile. So I hope that addresses what you're looking for, Andrew.

[Andrew J. Wilson, Analyst]

Yes. That's perfect. And I just have a quick follow-up for Michael. Just with -- just thinking about the drop-through. And obviously, it was high this quarter for reasons that we know. Just sort of, I guess looking for a little bit of help in terms of, I guess, sequentially, kind of Q3, Q4. But also, when would we expect it to normalize to the levels, I guess, we saw pretty consistently in recent years? I appreciate there are a lot of moving parts, but just how you're thinking about them, I guess, would be helpful as well.

[Michael Richard Pratt]

Yes. Well I think for the year as a whole, we're sort of expecting it to be sort of around the level it is. So it's in that 70%, 75% range in the U.S. given, as I say, we are retaining our people. We are looking to incentivize our people. So it's not that we talk about not [ homemade ] pay cuts, et cetera, but also we have been paying bonuses and incentives to drive the right behaviors and drive the top line so that the revenue impact or that you'll find in those end markets, so the revenue impact is less. So we expect to see something similar for the rest of the year. And also, with all that, whilst we have been -- we're conscious of cost, but we're also continuing to invest. So whether it be the greenfield opening program, et cetera, which initially, you don't have as much revenue, but you do have the cost that goes with that, so that's also embedded into that. Our investment in technology, IT, et cetera, we're not reining back on any that expense during the course of what we're going through. So that all sort of impact on to margins. Then once you -- as we then sort of return back to growth, you would expect to see some form of -- well I guess the reality, in absolute terms, you expect a lower number because as you're growing is revenue for the falling through as opposed to on the decline -- where in decline, you want a low number. But you get a lower number on the increase. And that will -- again, it will depend a little bit on the pace at which you do come out. We've got utilization where we've got capacity to build up. But also, we backed the fleet on rent levels ahead of where we were pre-COVID. But in the U.S., for example, we've got 500 fewer people. So there will be demand that come with that as well. So once we get back to revenue growth, you'd expect to return into sort of more of that sort of 50-ish high 40s, 50 mark that we've talked about in the past, but you've got to go through an inflection point. Certainly, with your marginal growth, you'll get some very strange numbers on drop-through when you're flipping between slightly down and slightly up. But we would expect to return to that once we get back to a growth pattern that's consistent with the past.

[Operator]

We'll now take a question from the line of David Raso of Evercore ISI.

[David Michael Raso, Senior MD & Head of Industrial Research Team]

For your U.S. business, I'm trying to get a glimpse into your calendar '21 trends. Can you provide, in any way you'd like to define it, what you are currently seeing in your, say, current project backlog, business backlog for calendar '21 activity, maybe comparing that versus a year ago at this time, a backlog looking into 2020? And I know it's -- the mix business change can alter a little bit the visibility looking out a year, and obviously, it's a unique time. But just trying to get some sense of level set what you're seeing today for, say, next spring/summer versus this time last year looking into '20?

[Brendan Horgan, CEO & Executive Director]

Yes. Sure, David. First, let me reminds you in our business, roughly 70% of the business that we write or the rentals that we will deliver today, we got those orders in the last 24 hours. So there is -- that is an element of rental, which, frankly, is a good element of rental, hence, the need for it overall. But just maybe -- how about some color on projects in general? So when we look at things that are starting in general, we look at the forecast overall in terms of the seeming sensibility of what that may look like into 2021. And then I think something worth mentioning is when we look at the pace of projects entering bidding and how that's sort of been variable over that period of time.So first of all, we've seen a number of starts through this period, most notably in May, June and July. We have some technology campus/headquarters that have just begun, so that's certainly a positive sign. Distribution centers, a number of distribution centers that have just begun, data centers, that continue to be let and started, and that is in the very recent weeks. There's an infrastructure out there that comes to mind like the Federal Way Link out in Seattle, which is $1.5 billion project, that started on time. You go to places like New York City and you see Javits center is back on. Big, big battery plant that's in Ohio, that's $2.5 billion or so that started on time and continues to gain momentum. So I'm just giving off top-of-mind sort of anecdotes, if you will. Those are strong things. Then you have to ask yourself, well, what's been delayed or canceled? And there's lots of notes that are circulated about this, but I can tell you from on-the-ground standpoint, you get a lot more of the previous, which I've just covered, than you do some of the cancellations. What's canceling or deferring? I think what you would expect. Orange County Convention Center put off their start. I would have done the same thing. Broward Convention put off their start. There's a cruise line headquarters that was postponed. That should be of no surprise. So I think -- my point is it's the sort of things you would expect to happen. If you look at the forecast into 2021 overall, here we are, another 3 months gone by, and the forecast look largely the same. So if I look into 2021, the breakdown between res and nonres, the manufacturing components of that, I think they all seem pretty sensible right now. One we don't talk much about is projects entering bid, which I had referenced in the initial response to your question. We saw a big lag year-over-year during that March, April, May period. And now here we are in August, and the number of projects entering bid that are above a certain size start are right back to where they were. So I think we're seeing some encouraging things. So perhaps not the sort of detail you were looking for in terms of backlogs. It's just not something that we report on and I don't want to get into the habit of doing that. I think the color perhaps helps.

[Operator]

The next question we have is from Joe O'Dea, Vertical Research Partners.

[Joseph John O'Dea, Partner]

Brendan, I wanted to go back to a comment you made as you were saying, that the rate was actually up on some of those wins. And I think historically, even the large rental companies have been considered not really large enough to drive price that ultimately, you can see some of the fragmentation still sort of leading on price. But I was hoping you could give a little bit more color on those project wins. Are they just larger projects with fewer competitors? Or what exactly you're seeing from your ability to service these customers that helps drive rate up in this kind of environment, in some of those instances?

[Brendan Horgan, CEO & Executive Director]

Yes. I sure will. What I -- what came to mind when you're asking that question about rate -- and there's a difference there between these long-term contract wins or project wins and just the transactional nature of the business. Over the last kind of early July through today, I have visited about 13 or 14 of our markets all through the U.S. I can't quite travel to Canada yet or the U.K. So spent a lot of time out in the field. And in those markets, about 70 locations I visited. And what we're hearing straight from the people that are interacting with customers every day is we're there for them. So I think of a conversation with a young sales rep who's about 1.5 years into the job in Baltimore, Maryland. And I asked him if you get 10 calls in a day, how many of those calls that a customer is inquiring about something, on this first call, does it start with a request about availability and end with an actual reservation, which included you giving a rate? And he said to me, 9 out of 10 calls. In other words, 9 out of 10 times, the customer called him to ask for something. And while he's got his app in his hand, he confirms with the customer availability, sends them the confirmation immediately, and he gets that deal. Rate was not even a factor. The customer was looking for reliability, and that's what we were bringing them. So on the transactional aspect, that's exactly what we're seeing. It's business as usual. We're there for our customers. And in an environment like that, you can do just fine with rate. On the larger contract wins, look, if we're bidding a -- whether be that cell phone battery plant, I mentioned in Ohio or a data center in Tennessee, it's only a couple of us that are capable of really providing what the customer is looking for. In no way, shape or form are we going to a customer with something that is not a win-win. We want to bring a win-win for our customers, but we're going into it eyes wide open. This is -- these are big capital commitment projects, and the level of sophistication and expertise they're looking for, only a couple are capable of doing. And we go in with pricing that will be a win for us as well as a win for them. So I hope that adds a bit of color to your question.

[Michael Richard Pratt]

And Brendan, the only other point I'll make on that as well, that's a conversation around construction. It's less than 50% of our business. So the conversations you go and have with other nonresidential construction customers, it's about the service level, et cetera. Rate is -- yes, it's a piece of it, but it's not a debate as to who else can provide service to those customers. There are very few and even less so than in the construction space if you're dealing with some of the large, nonresidential customers that we're dealing with.

[Brendan Horgan, CEO & Executive Director]

Not resi, non resi construction.

[Michael Richard Pratt]

Sorry, non resi -- yes, non resi construction or nonconstruction customers.

[Joseph John O'Dea, Partner]

I appreciate those details. And then just one on capital deployment and sort of the time line to getting more comfortable with share repo and just broadening out the deployment.

[Brendan Horgan, CEO & Executive Director]

Yes. Just as we said, look, that is -- purely from a timing perspective, I think one of the things you will have gathered from Michael's slides was not only the power of the free cash flow, but looking in just 3 months' time, going from 1.9x levered to what is printed as 1.8, but it's 1.77. So it's about as close to the middle of the range as you can get. And we will continue to have the capability in terms of cash generation. So nothing to say in quarter 1 in terms of giving guidance on when precisely that may be. But when it comes to our capital allocation priority, I think you should follow that from the top to the bottom. It was very important for us to mention that we have begun, again, our greenfield program. So our first priority, we can check off. We have been investing in our same stores as demand necessitates the need. We've now begun our greenfield program as well. And beyond that, our capital allocation strategy will cascade as prescribed. So more to come on that, I'm certain, at the half year.

[Operator]

Our next question is from Dan Hobden of Credit Suisse.

[Daniel James Hobden, Research Analyst]

Just one from me. It picks up on a question from earlier where you mentioned about the competition rates, maybe some of the smaller peers. If I look at your growth rates, they're quite strong compared to your larger peers as well. I was just wondering, what's driving this level of outperformance even against the bigger peers. Is it your digital offering, the shape of your business, the growth of specialty? Is there any color you can provide on that at all?

[Brendan Horgan, CEO & Executive Director]

Yes. I probably would want to dwell less on the outperformance you point out. This is -- the results that we are experiencing today are a culmination of a decades-long, strategic heading that we have been deploying on a very consistent basis to increase the density of our clusters, to diversify our end markets through a mix of general tool and specialty. And I mentioned our uniquely powerful capabilities from a cross-selling standpoint, and I think that is one of the differentiating factors. And I think we have a uniquely engaged team across the business, that feels as though our early indication of focus on all of our stakeholders, they were one of them. And I think that when you have that level of engagement and morale, coupled with a business model like we have that has such opportunity for ongoing growth. Michael rightfully just spoke to these areas that are beyond construction, whether it be municipality or telecom or utility, et cetera, there are just vast opportunities out there. And I think we've been reasonably agile through this, and I think that speaks for our outperformance.

[Operator]

That was our final question on today's call. I will now hand the call back to Brendan for closing comments.

[Brendan Horgan, CEO & Executive Director]

Great. Thank you. Really no prepared closing comments. We appreciate all of you dialing in this morning, and we look forward to giving you an update in December after our half year. Thank you, and have a great day.

[Operator]

Lovely. This now concludes today's call. Thank you all for joining. You may disconnect your lines.