Ashtead Group PLC

LSE:AHT

Earnings Call Transcript 2022-Q1

[Operator]

Hello, and welcome to the Ashtead Group plc Q1 Trading Update Analyst Call. My name is Brika, and I'll be today's call operator. I will shortly be handing you over to Brendan Horgan and Michael Pratt, who will take you through today's presentation. There will be an opportunity for Q&A later in the call. For now, over to Brendan Horgan at Ashtead Group. .

[Brendan Horgan, CEO & Executive Director]

Thank you, operator. Good morning, everyone, and welcome to the Ashtead Group Quarter 1 results presentation. I'm speaking from our field support office in South Carolina, joining on the line from our London office as usual are Michael Pratt and Will Shaw. Before getting into the quarter highlights, I'll take this opportunity to speak directly to our Sunbelt team who are listening live this morning or a replay a bit later in the morning, of course, for our North American colleagues. Despite the many ongoing distractions and challenges present in the environment, our teams throughout the U.S., Canada and U.K. have not wavered in their resolve to put our leading value of safety at the forefront of all we do. This determination led to another period of improved and record safety metrics across the group. For this ongoing safety progression and their all-around remarkable efforts, I extend my thanks and appreciation to our devoted team members across all geographies and disciplines who have come through safely and consistently for our customers, our communities, our investors and, indeed, for themselves and their colleagues. So to team Sunbelt, thank you. Let's now move to the slides and cover Q1 highlights beginning on Slide 3. As you'll see, we had a very good quarter, with strong activity levels across the group. Trading was well ahead of last year's pandemic-affected levels, as you would have expected. However, now significantly better than 2019 pre-pandemic levels. This leading performance again demonstrates the strength of our model and more recently, execution throughout the pandemic, serving us well in the current period and importantly, putting us in an enviable position to deliver even further growth. Our strategic growth plan, Sunbelt 3.0 launched in April is off to a strong start. Adding 29 locations in North America in the first quarter, 22 by way of greenfield openings and 7 through relatively small bolt-on acquisitions. $104 million was allocated toward our share buyback program in the quarter. And after these activities, our leverage ended the period at 1.3x net debt to EBITDA. At the risk of stealing a highlight from Michael's slides, I'm extraordinarily pleased to flag our successful debut in the investment-grade debt market, improving further our balance sheet and competitive positioning. These highlights, which we will cover in more detail on the slides to come, put us in a position to expect full year results ahead of our previous expectations. Moving now to Slide 4. I noted a strong start to Sunbelt 3.0. And although only 1 quarter into a 3-year plan, I'm pleased to demonstrate early progress in all 5 actionable components. Illustrated here, you will pick up some of the specifics related to each of these. I covered on the previous slide, our growth in greenfields and bolt-ons. 29 locations is a heck of a quarterly pace out of the gates. And I will note that 2/3 of the bolt-on investment in the quarter on specialty, in our power and HVAC business. These location additions amounted to advancing 2 additional top 100 U.S. markets to cluster status. So we now have 33 of these markets clustered on our way toward the 49 detailed in Sunbelt 3.0. Our technology team working closely with our sales and operational excellence teams have taken real steps in advancing our technology platform and ecosystem to deliver even better on our availability, reliability and ease mantra. Our sustainability team are following our road map to deliver on the carbon reduction commitments incumbent in the plan. This coincides with the heightened level of consultation be insult in this regard, from a mix of our customers and manufacturers who we are engaging with and working together to deliver near-term solutions while collectively collaborating on more mid- to long-term actions to achieve their own reduction targets. Examples of these customers range from leading technology firms to live event promoters to construction companies, all focused on achieving their own sustainability targets or those of their customers. Important to understand, it is these customers turning to Sunbelt to aid their own reduction targets as they recognize us as of a scale, capability and understanding to be partners in innovation with manufacturers and customers alike. We are not a spectator in this journey, and we'll add more color to this important component of our growth plan as part of our half year results in December. And finally, from a cultural perspective, our plans and actions have been rolled out to all of our team members. They understand our growth and development plans and their requisite roles. We're taking advantage of a strength in this regard. Our culture is strong, and therefore, all the more important that we continue to invest in the strength through ongoing training and engagement all of which are incredibly important to maintain and even improve buy-in levels, which world-class service businesses require. I'll now turn to Slide 5 to update our full fiscal year guidance. Recognizing the significant and broad momentum in the business from Q4 and throughout Q1 and levels of demand, better-than-targeted rent rate progress, pace of our greenfield openings and bolt-on performance, we're increasing our full year revenue guidance. In the U.S., we're now anticipating full year rental revenue growth of 13% to 16%. Canada increases to 25% to 30%, and the U.K. improves to 9% to 12%. Therefore, we now anticipate group rental revenues to grow 13% to 16% for the year. These levels of demand will be supported by gross CapEx of USD 2 billion to USD 2.3 billion, an increase of $100 million on the bottom and the top of the previous range. Despite this additional investment, we're increasing the bottom end of our free cash flow range to $900 million and up to $1.1 billion. And with that, I'll now hand it over to Michael to cover the financials in more detail. Michael?

[Michael Richard Pratt, CFO & Director]

Thanks, Brendan, and good morning. The group's results for the first quarter as shown on Slide 7. And as you can see, they're present in U.S. dollars. We announced with our full year results in June, our move to reporting in U.S. dollars from the start of this year, and so this is our first set of results presented in dollars. As a result, some of the figures may be unfamiliar, both to you and me. As Brendan said, we had a strong quarter with the momentum we saw in Q4 last year, continuing through the first quarter and into the second quarter of this year. As a result, group rental revenue increased 22% on a constant currency basis against COVID affected comparatives. However, in terms of our ongoing growth path, a more important is rental revenue up 12% on a constant currency basis when compared with the first quarter of 2019, '20. This revenue improvement had a positive impact on margins, resulting in an EBITDA margin of 46% and operating profit margin of 27%. As a result, adjusted pretax profit was $437 million and adjusted earnings per share was $0.715 for the quarter. Turning now to the businesses. Slide 8 shows the performance in the U.S. Rental and related revenue for the quarter was 17% higher than last year at $1.37 billion and 7% ahead of the same period in 2019. This has been driven by volume predominantly, although a favorable demand and supply environment has enabled us to deliver healthy rate improvements since March, which Brendan will comment on further. As we discuss with our full year results, a number of the costs have come back into the business as activity levels have increased, and we've seen inflationary pressures in the cost base, particularly related to wages for skilled trades. These factors combined to give an EBITDA margin of 50%, while operating profit was $432 million at a 29% margin and ROI improved to 22%. Turning now to Canada on Slide 9. Rental and related revenue was 79% higher than a year ago at $132 million. This growth rate reflects the depressed comparatives last year, particularly in the Lighting, Grip and Studio business, William F. White, which contributed virtually no revenue in Q1 last year, but has returned to record activity levels since production restarted in August and September last year. This, combined with a strong performance from the legacy Canadian business as lockdown eased enabled Canada to deliver an EBITDA margin of 45% and generating an operating profit of $35 million at a 23% margin. ROI improved to 21% with an increasing contribution from the Lighting, Grip and Studio business. Turning now to Slide 10. U.K. rental-related revenue was 36% higher than a year ago at GBP 134 million. While the business continues to benefit from our support for the Department of Health in its COVID-19 response, the core business is performing strongly and is benefiting from the investment in the operational infrastructure of the business and the reshaping of the operating footprint. The work for the Department of Health accounts for around 34% of revenue for the quarter. The 47% increase in operating costs reflects the cost of servicing the work for the Department of Health, increased activity levels within the business and ongoing investment in the operational infrastructure. These factors resulted in an EBITDA margin of 33% and an operating profit margin of 17%. As a result, U.K. operating profit was GBP 31 million for the quarter and ROI was 14%. Slide 11 sets out the group's cash flows for the quarter and the last 12 months. And we won't dwell on this slide for long, but it does illustrate the significant change we have seen in the business over the last 10 years. As we came out of the last downturn and spent on growth capital expenditure, we were free cash flow negative. In contrast, this year, as we returned to significant growth capital expenditure in the quarter, this has been funded from the cash flow of the business while still generating free cash flow for the quarter of $420 million. Slide 12 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 1.3x, excluding the impact of IFRS 16, is slightly below our target range. Our expectation continues to be that we will operate within our target leverage range of 1.5 to 2x net debt to EBITDA, but most likely in the lower half of that range. We have a good pipeline of bolt-on opportunities, and so would not expect to remain at 1.3x as we go forward. As we've said on many occasions, a strong balance sheet gives us competitive advantage and positions us well as we take advantage of the structural growth opportunities available in our markets. Therefore, as shown on Slide 13, we recently took advantage of good debt markets in order to further strengthen our balance sheet position, extending our debt maturities and reducing our cost of debt. Specifically, we accomplished 2 things: First, we entered the investment-grade debt market through a dual trans notes issue of $1.3 billion at an average cost of just over 2%, which we used to refinance $1.2 billion of existing notes with an average cost of 4.7%. This results in an annual interest saving of around $30 million. Secondly, we increased the size of our ABL facility to $4.5 billion and extended its maturity to August 2026 on similar terms and conditions. The redemption of the old notes will give rise to nonrecurring charges of $47 million in the second quarter related to the core premium and write-off of deferred financing costs. Following this refinancing, our debt facilities are committed for an average of almost 7 years at a weighted average cost of 3%. And with that, I'll hand back to Brendan.

[Brendan Horgan, CEO & Executive Director]

Thanks, Michael. We'll now move on to some operational and end market detail, beginning with Slide 15. In our U.S. business, we made further gains coming off the strong momentum achieved in the fourth quarter. Our General Tool business delivered another strong sequential improvement and outpaced last year's Q1 by 14%. The Specialty business continued its remarkable advance with a 22% increase on last year's already strong Q1. The strength in this performance is geographically broad and throughout all of our specialty business lines. The current supply and demand equation is as tight as I've experienced it in my 25-year career. This dynamic, coupled with our market share gains, has led to current record levels of utilization across the vast majority of our operating regions and specialty business lines. Further, our industry, like any other is experienced an inflation, ranging from whole goods to services to wages. When you combine these supply and demand circumstances, inflation realities and focus on delivering leading service to our customers, you should be able to do it while increasing rental rates. We've done just that. Our sequential and year-on-year rate improvement has been very good. Although outside of the quarter, we have flagged in the last bullet on the slide, the demand stemming from Hurricane Ida, which made landfall in Louisiana on August 29. Our emergency response team was in full support mode for several days leading up to landfall and remain very active to point our services throughout the broad geography impacted by Ida's path. As we turn to Slide 16, I'll cover the ordinary set of construction and rental industry forecast. As usual, I'll remind you that construction, while our largest market is less than half of our business. However, it remains a meaningful desirable and important part of our end market, so I'll cover it in some detail. Construction starts are definitely recovering, and we now expect them to reach pre-COVID levels in 2021 and continue to grow through 2025. The forecast has improved from the prior update, which did not anticipate starts to reach pandemic levels until 2022 -- pre-pandemic levels, pardon me. These starts and put in place figures are supported by residential construction, which continues to show strength. And although the remaining nonresidential component from a put in place standpoint remains forecasted to decline in 2021 before returning to pre-COVID levels in 2023, there is a noticeable increased activity in our markets in the non-res space, particularly around warehouse data center distribution. If we look closer at the warehouse space through the lens of Dodge data and analytics, the 2021 forecast for warehouse construction as an example, saw a marked increase from the second to the third quarter forecast based on a very strong 2021 calendar quarter -- second quarter actual. This resulted in the strongest quarter for warehouse construction on record. This is an example of a segment of the market that is hot and we expect it to continue to be so. Equally, this is a space Sunbelt is incredibly well positioned to benefit from. The current activity levels we're experiencing in the business aligns with the positive Dodge Momentum Index and strong ABI figures. Importantly, we can say the same for our business in nonconstruction segments, such as MRO, emergency response and the return to live events, although we are experiencing some on-again, off-again realities in the latter. The industry forecast remains unchanged from our last update, yet remains positive and draws an obvious indication of structural momentum existing in the industry. Overall, these are signs of a strong end market. Turning now to our business units outside of the U.S., beginning with Sunbelt Canada on Slide 17. Michael covered the financials, which amounted to our best quarter from a margin and returns perspective, as this business continues to gain ground and benefit from its relatively newly found scale. This is coinciding with market restrictions easing and not dissimilar supply and demand characteristics we are experiencing in the U.S. Our cluster model and Sunbelt 3.0 plan is progressing in Canada, leading to a diverse customer base and significant cross-selling opportunities. Our Specialty business advancement continues to take shape, led by our Lighting, Grip and Studio business, William F. White, which is benefiting from the operational and financial support that comes with being part of Sunbelt and the exemplary customer service and engagement in a market that shows no signs of slowing demand for content in the exciting over-the-top streaming space. These facts are combining to ongoing record levels of performance and revenue growth and financial metrics for this business. We posted a relatively short video on our website, giving a good overview of our Lighting, Grip and Studio business that I think you will find a worthwhile watch. Back to the broader Sunbelt Canada business. With similar supply constraints and inflationary conditions present in the U.S., we're leveraging the same technology enabled dynamic pricing systems and have been able to improve rates at a similarly impressive clip in Canada. Things are going well in Canada, and our runway for growth remains long. Moving on to Sunbelt U.K. on Slide 18. As covered in our full year results presentation, the business has been executing well and carries great momentum in the early stages of Sunbelt 3.0, demonstrating with trading in the quarter significantly ahead of the pandemic impact in 2020, but also notably ahead of 2019. The support surrounding the COVID testing sites has admittedly gone on longer than we previously expected. And I think we could all agree longer than we would have hoped. Lacking any definitive timetable for demobilization, we will assume these stay in place for the better part of the remaining fiscal year and therefore, contributed to our earlier increase in revenue guidance. Beyond the testing sites, we're incredibly well suited to benefit from end market segments of strength such as infrastructure, repair, maintenance and improvement and the return of live events. We're gaining wins in these areas with an incredibly broad group of customers servicing equally broad end markets. These wins are a result of the improved cross-selling and operational advancements, very much at the center of our 3.0 plan such as OpEx and regional operating centers. Finally, and consistent with what the business is experiencing in North America, supply constraints, inflation, et cetera. We are experiencing subtle yet notable sequential and year-on-year rate improvements, something that is far overdue in our business and the broader industry in the U.K. We're happy to be leading the way in this regard as a recognition of our unique lineup of products and relentless focus on customer service. Moving on to our fleet plan for the year on Slide 19. With very little change from our June guidance. We're increasing our lower and upper end of the U.S. rental fleet CapEx by $100 million and leaving the remaining component parts unchanged. Accordingly, our full year gross CapEx range is USD 2 billion to USD 2.3 billion, with proceeds from used equipment sales, reducing the gross plan by $400 million. Given the supply constraints we've addressed throughout this update we will certainly flex or delay disposals as necessary while constantly monitoring availability and demand. This leads into capital allocation on Slide 20. Throughout the quarter, we've invested $551 million in existing location and greenfield fleet additions and a further $123 million in bolt-ons. We returned USD 104 million or GBP 75 million to shareholders through buybacks in the quarter as part of our 2 financial year plan of up to GBP 1 billion. So to conclude, let's turn to Slide 21. This has been a good quarter across all our geographies. The momentum is real and all signs indicate good market conditions, which we are well positioned to benefit from. Sunbelt 3.0 is fully launched. The road map is clear. And we are advancing each of the actionable components. Most tangible is executing to add 29 locations in the first quarter of a full 3-year plan calling for an addition of 298 greenfields. This will be augmented and indeed added to with what is a robust pipeline of strategic bolt-on opportunities. Our balance sheet has never been stronger or more efficient having improved both our fixed and variable debt positions. For these reasons, and coming from a position of increased strength and improved trading and outlook, we look to the future with great confidence and expect business to perform ahead of our previous expectations. And with that, we'll now turn the call over to questions. Back to you, operator.

[Operator]

[Operator Instructions] We have the first question on the phone line from Annelies Vermeulen from Morgan Stanley.

[Annelies Judith Godelieve Vermeulen, Research Analyst]

Just 3 for me, please. So firstly, it's early in your fiscal or your financial year to be upgrading CapEx spend. I'm just wondering to what extent going forward, we think about the upcoming quarters, would that CapEx spend be constrained by availability of equipment? And then if you'd want to spend more money, but the product isn't there to buy. And those supply constraints that you've talked about, is that something you're seeing across both General Tool and Specialty? Or are there certain parts of the OEM pipelines that are particularly in demand. Then secondly, just on the improving returns that you've reported across the business. Clearly, you're coming off sort of a lower base at this point last year because of the pandemic. But again, if we think about those improvements in returns, would you say that's almost entirely due to the improved on many cases, record utilization across the business? Or is there other parts of that, that we should think about? And then perhaps just lastly, on the greenfields, which, as you pointed out, are running ahead already of your 3-year plan. I think when we spoke previously, you said that a lot of that would probably be weighted towards the latter 2 years. And clearly, some of it has been pulled forward. So if you could talk a little bit around what's driving that, whether you're seeing better availability of sites or just wanting to capitalize on the strong volume environment as we are today.

[Brendan Horgan, CEO & Executive Director]

Thanks, Annelies. I'll try to keep up with the 3 of those. First of all, around your points on an early upgrade on CapEx and the suggestions around supply constraints. They are significant, and it's across our General Tool and Specialty manufacturers. But I think you have to think through this, we look at it through the lens of what that means for Sunbelt and what that means for the most part, the balance of the industry. When you look at what's happening today, we have great flexibility in terms of coping with some of these supply constraints, most notably that would be that which we were going to replace and therefore, disposed. We just wait a bit to dispose of that as our products have come in. I think I can say confidently, we have received thus far, our a very -- our -- more than our ordinary bite size of production that has entered the market in North America and the U.K. in terms of our ability to get that due to our long and strong partnerships with our OEM base that's in place. But the other thing to add to all of that really is, it's times like this. I've said before, this particular cycle that we've gone through, if you will. It's -- this is not an inflection point. This is an inflection period. And these supply constraints are present today, and we think they will be for quite some time to come. It's also worth noting that we are working with our OEM partners very diligently to secure build slots. And here I say, get our unfair share in the next year and then thereafter when it comes to working through periods like this. And we're very able to do that because we have Sunbelt 3.0. We have a 3-year strategic growth plan. We know precisely what our replacement needs will be, and we also know what our growth plans are. So we'll do just fine and I can't not add to this. Of course, this is something that is a tailwind from a structural change standpoint. Number one, this will be an increase in terms of rental penetration. And number two, the bigger businesses like Sunbelt will benefit as a result of this unique period that we're in relating to supply constraints. Sorry for the long-winded answer on that one. Yes, returns, you mentioned utilization. I would also add rate to that. I said, and you would have heard the words come across pretty strongly. I think they're covered in the slides. Rate progress has been strong in the quarter, but there's also the scale component. We should be improving on a like-for-like basis, if you will, in terms of improving on margins. And yes, we had easy comps, if you will, on last year when you start to look at things compared to previous peaks, if you will, there's still a bit of work to be done there, but you should expect just that. As we highlighted in our rollout of Sunbelt 3.0, we have significant investment going in the business, not least of which would be our expansion in terms of pace, which leads me to -- I think it was your third question around greenfields. Yes, we opened 22 in the quarter. So if you were to annualize that, that's probably about what we would have expected in the first year. The team has a great road map, good momentum, and that was not a flash in the pan, if you will, in the quarter, we had strong momentum in that regard in terms of Q4 as well. So we didn't just sort of hold up and wait for greenfields to be open from Q4 to Q1. So I would expect that you'll see a robust pace continuing as we find the facilities that we want in the markets that we want, we'll open them. We don't get too caught up in what precisely we said in terms of the phasing of those greenfields over the course of 3 years. I hope that answers your questions, Annelies.

[Operator]

We now have the next question from Karl Green of RBC.

[Karl Green, Analyst]

Annelies has actually asked the substance of one of my first questions. But I suppose just following on from the supply bottlenecks. Are you noticing any difference between general versus specialty equipment in terms of stuff you'd like to get your hands on, which is perhaps a little bit more difficult. I appreciate you've been very clear you're at the -- at the front of the queue here, but any kind of nuance there between general and specialty? And then secondly, completely unrelated, just in terms of the U.K. performance, I'm just sort of backing out the numbers. It looks like there was again very strong levels of new equipment merchandising consumable sales in Q1, which is consistent with the kind of dynamics you've seen in Q4. Just going forward, just thinking about that potentially unwinding because presumably that is related to the Department of Health. What sort of margin dynamics might we see associated with that on an unwind? Is it going to be positive, negative? Just some help there would be great.

[Brendan Horgan, CEO & Executive Director]

Great. Thanks, Karl. I'll have Michael answer the second, but I'll touch on your first. I could get into some really nitty gritty things and point to, for instance, power generation happens to be one of the more difficult pinch points from a supply constraint standpoint. So that, of course, would affect our specialty business, whereas on the other end of the spectrum, things like our portable air conditioning units, we have much more control over that, if you will. So it's relatively easy for us. Now our team is listening to me say that, and they will say it's not quite as easy as I'm making out. But the point is we're landing the gear that we need in that regard. And then across the General Tool business, ranging from aerial to ground engaging to small tools, it's really just across the board. When lead times were markedly shorter than what they are today. So I would say, generally speaking, it is broad. Michael, do you want to touch on the margin effect around the NHS consumables?

[Michael Richard Pratt, CFO & Director]

Yes. It's sales of stuff, et cetera. So in broad terms, we'd expect sort of similar the margin rate when we go back on the ongoing level to be not dissimilar from where it has been historically and where it is at the moment.

[Operator]

We now have a question from Rahul Chopra from HSBC.

[Rahul Chopra, Research Analyst]

I have 3 questions, if I may. First, I think you have upgraded your guidance. So maybe could you give us a sense of how much the upgrade is due to rental assumptions and how much is due to underlying volume assumptions? Secondly, you're talking about there has been deferral of disposals. So once the market comes back, so I just wanted to understand what is the catch-up deferral you would probably do next year in terms of delta increases, we should think about it? And what should it mean to your age? And finally, in terms of the market share, I would assume that the market share gains are also due to some of the supply chain constraints that smaller peers are having. So just wanted to understand what is the delta market increase you're taking from smaller peers? And then what it really means to an activity given the constraints they are facing?

[Brendan Horgan, CEO & Executive Director]

Sure. I'm going to start actually with your third question in terms of share gains given supply constraints, and you hit on a very important point. In times like this, he or she who has fleet wins. He or she who has fleet that is coupled with extraordinary service wins even more. So yes, when you have the fleet of our size and the flexibility between the disposals, the landings and geographically where our fleet is positioned, you're going to win share, and that's exactly what we're doing. In terms of the disposals, what this might look like next year, I wouldn't -- well, first of all, we don't know yet that we won't dispose of all we had planned already this year. We may dispose depending on what happens from a utilization demand standpoint throughout the winter months, we may dispose of the majority or all of that fleet, time will tell. Our plan was to dispose of $800 million or $900 million, if I'm using the U.S. as an example, fleet that was going to be replaced this year. Some of that we are indeed actioning today and we have throughout the first quarter it all comes down to conditions. So if the fleet is in a condition that we think it doesn't live up to Sunbelt Rental standards, then we sell the assets into very strong markets, which I think are going to continue for quite some time from a secondhand value standpoint. And then next year's fleet planning will be really more of the same. So we will go through the same process we do, what assets are past that point where we would consider them up to our standard, as I said. So in terms of how that affects a weighted age, I would just say it doesn't matter. So is our fleet age a bit older than it would have been because we have a tranche of fleet that otherwise we would have been selling, yes. But as I mentioned before, the fleet is in good enough condition which meets our standards, and therefore, it just doesn't matter. We have a nice range of new to somewhat older. In terms of guidance, I guess the best way to look at that would be if you look at our previous guidance of 6% to 9% and our new guidance of 13% to 16%. So if you take the midpoint of 7.5% and 14.5%, you have a 7% delta. Everyone -- well, some may recall on this call at full year, we talked about sort of the revenue drivers surrounding that 6% to 9%, but let's just use that midpoint, as I said. And we would have talked about rate. We were anticipating to be able to improve rates in our guidance of 2% for the year, meaning from April 30 through -- I'm sorry, from May 1 through April 30, our rates would be 2% better at the end of the year. Therefore, the average rate would have been 1%. We are moving that to what we would anticipate an average rate improvement for the year to be 3%. So that's far more in line with, but probably a bit better than that target. I would have mentioned a 5% rate improvement from May 1 through April 30. From an activity so it's -- I'm sorry, 2 points different. So you go from what was 1% to now 3%, so that's 2% of your 7%. Then if you look at the overall activity, demand, utilization, et cetera, that would be 3% of the 7% better than what we would have expected at the outturn of the year. And then we have 2% there for a greenfield pace and bolt-on performance. So if you take the extra 2% for rate, the extra 3% for activity and demand and the extra 2% for bolt-ons, you get 7%, and that's sort of the guide from midpoint to midpoint. Rahul, I hope that answers your questions.

[Rahul Chopra, Research Analyst]

That's very helpful. And just finally, sorry to touch upon. So you said that it's moving from 1% to 3%, and you penciled in 5%. So I mean, if I'm glad to take an optimistic view. So why -- so what really makes the delta between 3% and 5%? What will -- what conditions might have to change?

[Brendan Horgan, CEO & Executive Director]

Well, keep in mind, the 3% I referenced is the average for the year, okay? So if you -- very simply, if we would have had early on, if we would -- let's just say our absolute rate was 100 at May 1, and we raised our rates over the course of the year to 102 by April 30, you're going to average 1% better. Now what I'm saying is that we will take it from 100 to 106. And therefore, we would average on the year 3% better. So I'm not backing down at all our target. If asked the question about how are we progressing with that internal target, which was not guidance nor was it forecast? My answer is well ahead of targeted pace. So I'm very comfortable in us achieving on average a 3% rate increase for the year. I hope that clarifies.

[Rahul Chopra, Research Analyst]

Yes. Understood some 2% delta probably for next year, at least to start with. That's the way to look at?

[Brendan Horgan, CEO & Executive Director]

I trust your math.

[Operator]

We now have a question from Arnaud Lehmann from Bank of America.

[Arnaud Lehmann]

2 or 3 on my side, please. Firstly, I remember at your Capital Markets Day, you were talking of the drop-through rate that you might have expected to be a bit lower for fiscal '22, I think, in the 40s, then moving back up to the 50s, is it something that you think you can improve now considering the good surprise on rental rates. That's my first question. My second question is on -- you mentioned in the slide and in your introduction, the impact from Hurricane Ida especially for the Specialty business. Could you give us a bit of color of how you are able to supply the equipment for this considering that the supply was already tight, I guess, before the hurricane. And maybe on the -- just back on the kind of tight market and supply disruption. Could you comment on truck drivers, whether you've had any issues moving the equipment around where it's needed or you've managed to deal with logistics.

[Brendan Horgan, CEO & Executive Director]

Sure. I think your characterization, Arnaud, of drop-through is exactly what we said. We're seeing 40s this year. We're not going to change from that after a first quarter of what you've seen here. Let's not forget about inflation. Inflation is real and therefore, that will have some impact on it, not to mention some of the one-off effects that we have just given a year-on-year basis. So I think we are very comfortable to stick with the guidance, if you will, that we set out in 3.0 of progressively better fall-through as the investments that we're making early on in the strategic growth plan begin to pay dividends as we move through the 3 years. Hurricane Ida, that's a good way of looking at it. And you are right. I mentioned earlier, supply constraints around power generation. If we have more, we would indeed have more on rent. Ida was a tragic storm. And if you get your mind around some of the things, of course, the sort of detail that people like me look at if you compare Ida to what we would have experienced back with Katrina, just from a utility poles that were down to put in perspective, Katrina, if my numbers are right, there were 17,000 utility poles in 2005 that were disrupted or knock down. And with Ida, you have greater than 30,000. So there's certainly a massive demand in terms of power I'd like to think we're getting a very nice share of that response work. And it's a very wide path. We're servicing from Manhattan all the way to the bayous of Louisiana. Also worth mentioning, we happen to do in the quarter, 2 of our acquisitions, which you would have heard me say, 2/3 of the expense in those or investment in those bolt-ons was power and HVAC businesses. We bought a business called National Drying Technologies, NDT they're better known as in the marketplace and rest assured, NDT is busy drying out there, and they also have quite a bit of power, which is employed and then also a special event service rental business, which is most of their fleet is power generation. So things like that do help. But I suppose anyone in our industry who has generators in their fleet I would expect them to be on rent or they're missing something, and I'm sure I can speak for our peers out there that they're doing just that.Your question around the workforce in general is a great one. That is a very difficult part of the business these days as we all know there are labor shortages out there, particularly in skilled trade. You'll remember, we made very early decisions in terms of increasing wages, which I'm incredibly happy that we did. I think there's more of that to come. So I would just say it this way, we're managing. Are we hiring drivers? Yes. So if you know any, send them our way, but we are managing between and mostly with our own trucks and our own drivers. And of course, we do have to utilize outside haulers a bit more than we would like during times like this or not, but we do manage.

[Operator]

We now have a question from Will Kirkness of Jefferies.

[William Kirkness, Equity Analyst]

3 questions, please. The first one, just wondered if you could help us with the U.S. rental revenue growth in August. Secondly, just looking at that CapEx uplift. I just wonder if that's volume or it also inflation in that sorry, you already mentioned, I may have missed it. And then linked to inflation, you talk about I think in Q4, you said there's about a 6% wage increase that went to. I just wondered if anything more of that nature has happened. And then finally, just looking at the U.S. growth rate for the first quarter, I thought the comp got about 8 percentage points easier. So that looks to be all of the uplift that we've seen in the first quarter year-on-year growth versus the fourth quarter year-on-year growth. But I would have thought it would have been some sequential improvement, especially given the rate environment. So I'm sure I was missing something.

[Brendan Horgan, CEO & Executive Director]

Yes. Thanks, Will. I'll defer the fourth there to Michael when we get to that. August, our billings per basis were up 15 in the U.S. The CapEx question that you have in terms of inflation, if you remember early in the -- early in the year -- I'm sorry, at the onset of the year, we would have talked about inflation for all of that $800 million to $900 million, I would have mentioned earlier. In terms of our replacement CapEx that we were replacing that. It was about 3% more than what we would have bought that fleet before on average 8 years ago. So that was based on our then pricing. I do expect that we will or I know that we have received some degree of price increase from some of our suppliers most are putting those in place in January of 2022. Some did it a bit earlier. So that kind of 3% will move up a bit but not much. But rest assured, inflation when it comes to whole goods or our rental assets we indeed will confront in the year or years to come, which is going to happen. And frankly, it's just fine. And I think we will very much be able to pass that through when it comes to our discipline around rental rates in our systems to be able to do that rather quickly. Speaking of inflation, you mentioned wages. And yes, we were talking about our skilled trade workforce. So we did a 2% raise in October of last year, a 6% raise in June of this year. There's been no more of that in the current period. But I do anticipate that we will have preemptive and proactive wage increases as we move forward. Will that be in this or not? I don't know yet. But at a minimum, it will be a year from when we did it in June. So that will continue, but we are very happy in that investment. We're very happy to have a very strong skilled trade workforce out there. It's a bit like fleet. He or she who also has drivers, mechanics, equipment rental specialists, cargo technicians also win in times like these. I hope that answers the first 3, Will, and I'll turn your fourth to Michael.

[Michael Richard Pratt, CFO & Director]

Yes. And when you look at the, I guess, the cadence Will, in Q4, we had good momentum in Q4. And as we've moved through into Q1 rates have started to pick up, it takes you a little while for that to happen. So actually, there's probably more of the rate increases towards the end of quarter, the beginning of the quarter. So from a quarter perspective, there's a piece of rate in there, but it's not an enormous amount of rates. So I think what you will find is there is a pickup between Q4 and Q1, but actually momentum in Q4, the back end of Q4 was quite good.

[Brendan Horgan, CEO & Executive Director]

Operator, any further questions?

[Operator]

We have a question from Dominic Edridge from Deutsche Bank.

[Dominic Edridge, Research Analyst]

Just 3 for me. Firstly, can you just clarify how far you are away from where you might regard the ceiling on your physical asset utilization. And I suppose on the back of that, should we be thinking that rate is really going to be the key driver of revenue growth in the short term, given -- as you've alluded to, there's constraints on fleet growth. The second one is can you just talk a little bit more about what you're doing on revenue and rates sort of both at the branch level and also sort of top down? Can you say what sort of behavior aspects have changed from what the branches are doing? And maybe also, can you just break out maybe what's happening between, is it mainly in the spot business that you're getting this traction? What's happening where contracts are rolling over. And just also on the back of that, do you have -- can you give any indication of the percentage of your revenue on contracts that come to an end this year and maybe next year as well? And then the last question was just on the back of, obviously, what I've asked been talking about on workforce. Could you just talk about your voluntary workforce attrition. I think last year it was about 14% in the U.S. Has that sort of changed significantly over the last few months?

[Brendan Horgan, CEO & Executive Director]

Sure, Dominic. Your point on ceiling around time utilization, I would hesitate to call it a ceiling. We have certain regions where I would say, if we look at our Baltimore, Washington market, for instance, they've done an extraordinary job, and they have set new records across all of Sunbelt in terms of time utilization in the quarter. Josh Johnson is our VP up there and just done a remarkable job. So when I look at that and I look at as I would have mentioned, if you look at our regions, 12 of our 14 regions in the U.S. and both of our regions in Canada are in the month of August were at their best ever August time utilization. So I look at the delta between what some of those regions operate compared to that region. I mentioned in that Baltimore, Washington, Philadelphia area, and we know that we could be a bit better. But yes, you're right in terms of, we don't have the capacity we had when we look at the difference between where we were last year during this pandemic. So we'll continue to synthesize those, if you will, and our operational platform and our advancement of clusters will lend to that. So not a perfectly black and white answer, if you will, but I think you'll get the feel for that. So yes, rate is important, and you should be getting rate. But I would just go back to that bridge I mentioned before, that 7% from midpoint to midpoint, we're expecting 2% of that upgrade, if you will, in guidance to come from rate. We are expecting 3% to come from activity, so that's going to come from additional fleet and time utilization. So it's pretty evenly split. In terms of our rate progress we've made, short answer would be, and Will is online, and he would attest the fact I'm not good at short answers. But we do -- we're seeing rate improvement across all of our customer types. Of course, you get a very quick hit on your spot customers, and you would have heard from a colleague of ours, John Washburn, during the Capital Markets Day presentation, and he would have talked about our dynamic pricing system. This is real-time and in color example of how strong that system is. Our ability to increase rates as we've been able to. Our sequential improvement in rates from May 1 through the end of August was our best ever 4 months absent only that same 4-month period in 2011. And of course, the period before that would have had a 20% decline in rates and the period before this, we had no decline in rates. Spot customers very early wins. But when you look at our, let's just call them enterprise sort of accounts, and that's going to be in the 30% to 35% makeup of our overall revenues. One of the reasons why we're so bullish is many of those pricing agreements come to term, December 31. And rest assured, you'll see rate improvements with those customers as well. So this is going to be across the board. And again, it's one of the reasons why we're very comfortable with the momentum going through the rest of the year. And finally, on your attrition point, overall, it's not dissimilar to what you pointed out in terms of what you would have read from our accounts turnover in the year with some notable challenges around some of the skilled trade. Although we've done what we've done, we've experienced a bit of a tick up, but still far below what I would call broader industry norm. So if you look at trucking turnover, our trucking turnover would be remarkably low, let's just call it, circa 20 or a bit below that in terms of drivers' turnover. And if you look at that across the industry of trucking and hauling, it's going to be 100% overall turnover. So it is difficult. As I mentioned before, we are hiring, and we're onboarding great careers at Sunbelt, but it is a challenging area for sure, and I can't not mention to that. Remember, those are structural change agents. That will drive further rental penetration. These things, albeit complex in terms of how we run our business, they are advantageous to increase in rental penetration and the big getting bigger.

[Operator]

We have a final question on the phone line from Robert Wertheimer from Melius Research.

[Robert Cameron Wertheimer]

And my question is a little bit similar to last one. And please correct me if I'm mischaracterizing, but it seems like in 2018, on time utilization, you started to sort of bump up against the limits to how far you could -- how far you could push it. And I'm just curious on operations. You mentioned question, Brendan, on Chronos, maybe if you see material changes yet and how far you can push whether market by market or otherwise on that limit.

[Brendan Horgan, CEO & Executive Director]

Yes, sure. Thanks, Rob. The -- well, as I mentioned, I think the best way to really answer that is when we look at 12 of our 14 regions being higher than they've ever been before in time utilization in the month of August, not dissimilar to what we would have experienced across the regions in quarter 1. So we don't set our standard versus where we were last year Q1 because that wouldn't lead into our business performing the way that we would expect our business to perform. So we still have -- if I just had to answer it, I would say we have a couple of points at our current stage of time utilization that we could improve. When we look at some of our markets that are albeit at their high levels, they're not quite meeting the mark. When you think about it more longer term, which I think makes the most sense and you look at the maturation of our clusters. There's no question there is a correlation between those clusters that are more mature than others that can achieve higher time utilization levels simply because with scale, you'll get benefits with scale, you'll get efficiencies with scale, you have an even further ability to say yes. And of course, when it comes to our overall technology platform, ranging from our systems like VDOS to Chronos when it comes to that sourcing engine that you're familiar with, of course, there's no question about it that those markets that are deeper in the exercise of that. I wouldn't say adoption so much because it's adopted are certainly performing better. The region that I keep talking about in that area, Washington, Baltimore, Philadelphia et cetera, it's worth pointing out was the pilot market for Chronos. So they are the most adept at operating on those systems, and therefore, breaking all the records that we have in the business in terms of time utilization. I fully expect our markets like New York City, the Carolinas, Florida, Texas, where we have our deepest penetration, our deepest clusters to be able to match those levels of time utilization. So it's that entire ecosystem that will continue to drive improvements like that.

[Operator]

We have no further questions. So we'll hand it back to Brendan and Michael for some closing remarks.

[Brendan Horgan, CEO & Executive Director]

Great. Thank you all for taking the time this morning, and we look forward to speaking to all of you at our half year results in December. Thank you.

[Operator]

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