Ashtead Group PLC

LSE:AHT

Earnings Call Analysis

Strong Start with Steady Growth and Strategic Expansions

Ashtead Group reports a robust start to the year, with group rental revenue increasing by 7% and total revenue up 2%. The U.S. rental revenue grew by 6%. The company's EBITDA reached a record $1.3 billion with an EBITDA margin of 47%. Following strategic investments, including $855 million in CapEx and expansion in North America, Ashtead maintains a debt-to-EBITDA leverage of 1.7x. The company reaffirms its full-year guidance, expecting U.S. rental revenue growth of 4% to 7%, and emphasizes continued positive performance in Canada and the UK. Adjusted pre-tax profit stands at $573 million with EPS at $0.97.

Strong Revenue Growth and Strategic Expansion

In the recent earnings call, Ashtead Group plc reported commendable revenue growth, driven by strategic initiatives and market expansion. The group rental revenue rose by 7% on a constant currency basis, evidencing the continued demand for their services. Specifically, the U.S. rental revenue grew by 6%, reflecting healthy end markets and improved rates. Total revenue increased by 1%, slightly tempered by lower levels of used equipment sales【4:0†source】. The overall confidence in the market was further underscored by investments in 33 new locations in North America, fueled by a capital expenditure (CapEx) of $855 million【4:1†source】.

Operational Efficiency and Profit Margins

Ashtead Group has demonstrated strong operational efficiency with healthy profit margins. The group's EBITDA margin stood at 47%, and the operating profit margin was 26%. In the U.S., the EBITDA margin improved to 49%, driven by the Sunbelt 4.0 strategy, which focuses on leveraging infrastructure and improving cost efficiencies【4:2†source】. Despite a 22% rise in interest expenses to $144 million, the adjusted pre-tax profit was $573 million, 7% lower than the previous year. The adjusted earnings per share for the quarter were $0.97【4:0†source】.

Geographic Performance Highlights

Each geographic segment showed robust performance. In Canada, rental revenue surged by 21%, aided by the recovery of the Film & TV business. The Canadian operations delivered an EBITDA margin of 43%【4:2†source】. Similarly, in the U.K., rental revenue increased by 6% to GBP 160 million with an EBITDA margin of 29%【4:4†source】. This growth aligns with their Sunbelt 4.0 strategy, focusing on operational efficiency and sustainable long-term returns. The U.K. segment strives for further progress in rental rates, aiming to enhance operational efficiency and market share【4:4†source】.

Future Guidance and Strategic Outlook

Ashtead Group reaffirmed their future guidance, projecting U.S. rental revenue growth in the range of 4% to 7%, Canadian growth between 15% to 19%, and U.K. growth from 3% to 6%【4:4†source】. Their capital expenditure is expected to be at the lower end of the $3 billion to $3.3 billion range, with free cash flow of at least $1.2 billion【4:4†source】. The emphasis remains on maintaining disciplined investment while ensuring the agility to respond to market dynamics. The group's strategic initiatives under Sunbelt 4.0 aim to extract long-term benefits through volume gains, pricing progression, and improved return on investment, fostering a solid financial foundation for the future【4:7†source】【4:0†source】.

Market Dynamics and Construction Outlook

The construction market outlook remains positive, supported by megaprojects that are increasingly contributing to the rental revenue. Despite some softening in the local and regional commercial construction space due to higher interest rates, Ashtead anticipates that potential interest rate reductions by the Federal Reserve could rejuvenate this sector【4:3†source】. The ongoing structural progression within the industry is expected to sustain the demand for Ashtead’s rental services, driven by deglobalization, manufacturing modernization, and infrastructure projects【4:3†source】.

Leadership Transition and Future Optimism

The call also addressed leadership changes, with CFO Michael Pratt's planned retirement in 2025 and the appointment of Alex Pease as CFO designate. This transition is expected to be smooth, ensuring continuity in the company's financial strategy and operations【4:7†source】【4:15†source】. Overall, Ashtead Group remains optimistic about the future, emphasizing their solid market position, strategic initiatives, and the fundamental strength of their cash-generating growth model【4:7†source】.

Earnings Call Transcript 2025-Q1

[Operator]

Hello, and welcome to the analyst call for Ashtead Group plc Q1 results. I will shortly be handing you over to Brendan Horgan and Michael Pratt, who will take you through today's presentation. [Operator Instructions] So now over to Brendan Horgan and Michael Pratt at Ashtead Group plc.

[Brendan Horgan, executive]

Thank you, operator, and good morning, everyone, and welcome to the Ashtead Group Q1 results presentation. I'm speaking this morning from our U.S. support office, and I'm joined on the line by Michael Pratt and Will Shaw in London. It's not been long since we saw many of you in Atlanta and then in June following our full year results. And so this morning will be a light touch with a brief update on our progress.

Turning to Slide 3. I'd like to start this morning by addressing our Sunbelt team members and recognize their engagement, learning, enthusiasm and ernie focus in executing on our Sunbelt 4.0 plan. Beyond the clear and actionable plans surrounding the five primary elements of 4.0, customer, growth, performance, sustainability and investment, there are the foundational elements, which are people, platform and innovation. The team has leaned into their strengths of people and culture to not only make early advancements within each actionable component, but also the health and safety of our people, our customers and the members of the communities we serve.

This is demonstrated by following our best-ever safety performance year, which we've shared as last year with another record quarter in the very same leading and lagging measures the team delivered on last year. This further emphasizes our cultural mindset surrounding safety. It is not one of reaching a destination, rather achieving milestones. As is the case with many things, complacency is the ultimate threat. So to our team, thank you. Thank you. Thank you for your efforts in the first quarter and your ongoing commitment to Engage for Life.

Moving into the slides. Let's begin with the highlights for the quarter on Slide 4. Strong revenue growth continued in the quarter with group rental revenue and total revenue up 7% and 2%, respectively, while U.S. rental revenue improved by 6% and total revenue by 1%. Group EBITDA improved 5% to a record $1.3 billion. And as expected, lower used equipment sales and increases in depreciation and interest cost on a larger fleet resulted in adjusted PBT of $573 million and EPS of $0.97. From a capital allocation standpoint, and in accordance with our priorities, we invested $855 million in CapEx, which fueled existing location replacement and fleet growth and greenfield openings.

We expanded our North America footprint by 33 locations, by 22 greenfield openings and a further 11 through two bolt-on acquisitions, costing a combined $53 million. Following these investments, our debt-to-EBITDA leverage is 1.7x, which is towards the middle of our new long-term range of 1 to 2x. These results and investment activities demonstrate our confidence in the ongoing health of our end markets, and the fundamental strength in our cash-generating growth model. And accordingly, we expect full year results in line with our June guidance. On that note, I'll hand it over to Michael, who will cover the financials and outlook.

[Michael Pratt, executive]

Thanks, Brendan, and good morning. The group's results for the first quarter are shown on Slide 6. We've had a good first quarter with trading in line with our expectations when we announced our full year results in June. Group rental revenue increased 7% on a constant currency basis. This growth was delivered with strong margins and EBITDA margin of 47% and an operating profit margin of 26%. After an interest expense of $144 million, which increased 22% compared with this time last year, reflecting principally higher absolute debt levels, adjusted pretax profit was 7% lower than last year at $573 million. Adjusted earnings per share were $0.974 for the quarter.

Turning now to the businesses. Slide 7 shows the performance in the U.S. Rental revenue for the quarter grew by 6% over the last year, which, in turn, was up 16% on the prior year. This has been driven by a combination of volume and rate improvement in overall healthy end markets. The total revenue increase of 1% reflects lower levels of used equipment sales than last year when we took advantage of improving fleet deliveries and strong secondhand markets to catch up on deferred disposals. The third actual component is Sunbelt 4.0's performance as we look to leverage the infrastructure and scale we developed during 3.0 and improve margins. This, combined with our focus on the cost base and lower scaffold, erection and dismantling revenue, contributed to drop-through for the quarter of 69% and an EBITDA margin of 49%. Reflecting the impact of gains, $42 million lower than a year ago due to lower used equipment sales and the high depreciation charge on a larger fleet, operating profit was $669 million at a 29% margin and ROI was a healthy 22%.

Turning now to Canada on Slide 8. Rental revenue was 21% higher than a year ago at $222 million aided by the recovery of the Film & TV business. The major part of our Canadian business is performing in a manner similar to the U.S. with rental revenue up 16%, driven by volume and rate improvement as it takes advantage of its increasing scale and breadth of product offering. Following settlement of the strikes in the North American Film & TV industry, activity levels in our Film & TV business have recovered although they are yet to reach pre-strike levels. This contributed to an EBITDA margin of 43% and an operating profit of $46 million at a 19% margin while ROI is 11%.

Turning now to Slide 9. U.K. rental revenue was 6% higher than a year ago at GBP 160 million. In line with the 4.0 strategy, the focus in the U.K. remains on delivering operational efficiency and long-term sustainable returns in the business. While we continue to make progress on rental rates, these need to progress further. As a result, the U.K. business delivered an EBITDA margin of 29% and generated an operating profit of GBP 18 million at a 9% margin and ROI was 7%.

Slide 10 updates our debt position at the end of July. The increase in debt in the quarter relates principally to lease liabilities with external borrowings declining slightly. As a result, excluding these lease liabilities, leverage was 1.7x net debt to EBITDA. Our expectation continues to be that we'll operate within our new target leverage range of 1 to 2x net debt to EBITDA, but most likely towards the middle of that range.

Turning now to Slide 11 and our guidance for revenue, capital expenditure and free cash flow for this year. We're reaffirming the guidance we gave in June with U.S. rental revenue growth in the 4% to 7% range, 15% to 19% rental revenue growth in Canada, aided by the recovery of the Film & TV business and 3% to 6% rental revenue growth in the U.K. From a capital expenditure standpoint, our range of $3 billion to $3.3 billion is unchanged, although as we sit here today, we believe we'll be around the bottom end of this range. Based on this unchanged guidance, we expect free cash flow of at least $1.2 billion with the big variable being where we land on capital expenditure. And with that, I'll hand back to Brendan.

[Brendan Horgan, executive]

Thank you, Michael. We'll now move on to some operational detail, beginning with the U.S. on Slide 13. U.S. business delivered good rental only revenue growth in the quarter of 7%. Specialty performed strongly, up 17% in the quarter with general tool up 3%. Consistent with what we have said previously, and others in the industry have been noting, time utilization was lower than in Q1 last year. There is capacity to better utilize fleet as we progress through this year, and we are managing our CapEx plans accordingly. Importantly, rental rates have continued to progress year-on-year. Doing so, despite utilization movement I just mentioned, this is again affirmation of the ongoing good rate discipline in the industry as a result of the ever clear structural progression we've experienced over the years.

Moving on Slide 14, we'll cover the outlook for our largest end market, which is, of course, construction. Consistent with our usual reporting of construction activity and forecast, this slide leaves out the latest Dodge figures and starts, momentum and put in place. Due to the timing of the results, the put-in-place figures on the top right have not changed since our last presentation in June. We'll be getting the updated figures from Dodge in the next week or so. But based on the latest sneak peak we've seen for construction starts, we don't expect significant changes from what you see here today.

The outlook for construction growth continues to be underpinned by megaprojects, which are representing an increasing proportion of our rental revenue. As we covered quite extensively during our full year results and subsequent shareholder engagement, there's an ongoing softening within the local run of the mill, as we call it, commercial construction space as the effects of a prolonged higher interest rate environment weighs on local and regional developers. This, of course, impacts some of the small, mid- and regional-sized contractors. If as has been forecast, the Fed starts to move interest rates downwards at the September meeting, then hopefully, this will start to reenergize this area of the construction market, and we'll begin to see some of the planning progress to permitting.

Overall, the construction environment looks to be positive as we progress into 2025 and beyond. The megaproject landscape, which we've covered in great detail in April and again in June, continues to demonstrate progress in both starts and in planning. You can reference the data in the appendix Slide 27. Unsurprisingly, the latest data has slightly more starts in the fiscal year '25 to '27 period than illustrated on the slide. This megaproject landscape reality, driven by deglobalization, manufacturing modernization, technology and infrastructure is here to stay for quite some time to come.

Moving on to Canada on Slide 15. Our business in Canada continues to deliver good growth with rental revenue in the quarter of 21%, coming from existing General Tool and Specialty locations as well as greenfields and bolt-ons. And as is the case in the U.S., rental rates continued to progress in the quarter, which we expect to continue to be the case moving forward. As Michael mentioned, activity in the Film & TV business has recovered following the strikes last year, although it's still lagging the pre-strike levels we experienced. We are operating on the basis, this is the new normal for the time being. Our focus in Canada, which is embedded in our 4.0 plan is to continue to increase our addressable markets beyond construction, as we've done so well over the years in the U.S. The runway for growth, improved density, market diversification and margin remain significant.

Turning to the U.K. on Slide 16. The U.K. delivered good rental revenue growth of 6%, driven by market share gains in an end market which continues to favor our unique positioning through the industry's broadest offering of General Tool and Specialty products, which is unmatched. The Sunbelt 4.0 plan for the U.K. will lead to an ever more diverse customer base and increased TAM, while bringing greater focus and discipline on the necessary levers and actions to deliver acceptable and sustainable levels of ROI and free cash flow. This business has transformed in recent years. And as I previously said, Sunbelt 4.0 is designed to add the final piece to the transformation.

Now before I turn to the summary slide, I'd like to come on the announcement we made this morning in conjunction with our results of Michael's intention to retire in September 2025 and the joining of Alex Pease as CFO designate. I could go on and on about the many contributions Michael has made to the success of our business and what a pleasure it has been to partner with him over the years. However, Michael is not packing up just yet and therefore, there'll be plenty of time to do that down the road. Michael will be very much here and engaged in a manner we've all been so accustomed to, and you'll get to see him again, tie and all during our half year roadshow. I'm most pleased, however, we have the opportunity to ensure a smooth transition between Michael and Alex and look forward to Alex' joining in early October to learn our business while also transitioning the CFO responsibilities.

So let's summarize on Slide 17. We've had a strong start to the year. We are well positioned for the future as we embark on the execution of Sunbelt 4.0 through which we will extract the benefits of the well-documented and ongoing structural progression present in our business and our industry. We will deliver strong performance through volume gains, pricing progression, margin improvement and strong return on investment, resulting in an ever stronger financial position through earnings growth, strong free cash flow and operational and capital allocation optionality, greater than at any point in our company's history. For these reasons, we look to the future with confidence and full year results are in line with our expectations. And with that, we'll turn it to the operator to give instructions for Q&A.

[Operator]

[Operator Instructions] And our first question comes from Annelies Vermeulen from Morgan Stanley.

[Annelies Vermeulen, analyst]

Many congratulations on your retirement, Michael. I have three questions, please. So firstly, could you give an update on the scaffolding customer, if there's any timing or any sort of update on the resolution and the timing of that if you have any visibility? Then secondly, on the drop-through, which is very good in the first quarter, could you share your thoughts on that, your expectations for the full year and how you expect that to progress through the quarters? And then lastly, on Canada, you've mentioned you assume the new -- this is the new normal for Film & TV work. I'm just wondering, does that leave you with excess fleet in Canada? I assume some of the equipment can be redeployed to other end markets. But I also imagine there's some Film & TV specific equipment. So how are you managing that?

[Brendan Horgan, executive]

Great. Thanks, Annelies. I'll do 1 and 3 and turn 2 to Michael. As it relates to the project where the customer was in Chapter 11, and there was a contract dispute between contractor and owner, we've seen a lot of progress there, specifically around a settlement that was reached between customer and project owner, which resulted -- that was all in keeping with the courts, so to speak, in terms of the approval of that. So we are feeling increasingly confident when it comes to the full collections of that. However, this no doubt has delayed and slowed project. So as we would have said in June, we're expecting significantly less revenue from that project over the course of the year.

And Annelies, you would have seen that, actually you heard that from Michael when he was talking about lower scaffolding, erection and dismantle revenues. But this is one that's just going to play out over the course of the year. Our team's done a really good job engaging throughout this, and we're working on relationships with the new contractors that will take on that project, when, not as or not if, but when that product really ramps back up again and we'll keep you updated as we move through the quarters or move through the year.

As it relates to Canada, and you of course, are speaking about the Film & TV business where we're saying this is just -- we're viewing this as the new normal. And by that, we certainly talking about how we invest in the business, but really how we build the infrastructure or how we level off the infrastructure in that business, which the team has done a good job dealing with the ups and downs that we've experienced in that from pre-COVID to through COVID to through an actors' and writers' strike to make sure that we keep that adequate or to the level that matches well the overall activity.

To your question on, do we have too much fleet then? We're building -- when it comes to the fleet that we support those sets, et cetera with, that's a lot of the Specialty and General Tool equipment, and what you'll see there really is how we moderate CapEx related to what we invest in Canada and that's how we're proceeding there. But I think, first of all, it's positive in terms of the industry is up and running. We're doing really, really well when it comes to share, and we're still synergizing in terms of cross-selling, but we're just taking it all sort of at its present level. Michael, do you want to touch on drop-through?

[Michael Pratt, executive]

Yes on drop through, yes, it was a good quarter for drop through. There's always some ebb and flow as to what happened last year, what happened this year. But when you take into the -- and it's all -- building on what we said at 4.0 in terms of leveraging the cost base, but also paying particular focus to the cost base. And as I touched on, we've benefited from this lower level of E&D revenue, which has a lower level of cost associated with it. So as we look forward to the rest of the year, we would now expect drop-through will start with a 6% rather than a 5% most likely. I'm not going to guarantee you 69% for the year, but I will say you should start with a 6% rather than a 5%.

[Operator]

Our next question comes from Lush Mahendrarajah from JPMorgan.

[Lushanthan Mahendrarajah, analyst]

My congratulations on your upcoming retirement. And a couple from me, please. The first just on local construction. I guess is that sort of playing out how you anticipated or sort of how you guide with the full year results? Or is it sort of worse since then? And then, I guess, tied to that, some of your sort of smaller competitors, you don't quite have the benefit of megaprojects and perhaps Specialty, like are they being a bit more irrational around pricing on some of those local contracts? And so that's the first question. And then the second one is just on that drop-through again. I appreciate it's going to be higher this year for a number of factors. But when that E&D does come back, would we need to think of drop-through below 50%? Or can that sustain sort of above 50-type percent going forward when that comes back as well?

[Brendan Horgan, executive]

Sure. To your question around local construction, I think the best way to characterize it is we're just seeing a continuing trend. This has been quarters now that we've seen. And the way that happens, of course, is you're in a very active period from the starts that would have previously begun. And as you work through and you see some of those projects come to an end, there are simply less of those sort of projects going into the funnel. The important thing, though, around your question, what are the smaller independent rental houses doing? Are they staying disciplined in price?

I would say this, they are continuing to keep a watch why, on what, we, and I'll say we, in terms of the larger competitors out there are doing. And I think what you're seeing in that across the board is ongoing discipline and ongoing progression. One really key point that maybe you didn't raise in the question, but it's worth adding is what we're seeing is they are moderating CapEx. And that's the important thing when it comes to the overall fleet balance that's out in the marketplace, and we're seeing that across the board when you tune into the OEMs who largely supply this industry.

Michael may clean me up here a bit on drop-through, if he'd like. But I just want to make sure -- I mean, certainly, E&D will ebb and flow. It's not going to change so much so as you go below 50%, as you would have alluded to or asked a question around. But I want to make sure we're not missing the point here in terms of Sunbelt 4.0 and the third actionable component, which was performance. And that's not only performance in terms of -- for our customers, but it's talking about operational efficiencies that we're working to put into the business but also a discipline on leveraging our cost base and, in particular, our SG&A. So what you're seeing is actually the second quarter in a row, Q4 and Q1, where we're seeing that come through in the P&L, and we would expect that to continue.

[Michael Pratt, executive]

Yes. No, all I would add is on what we said in 4.0, if you go to the slide at the back, I forgot what the slide number was, but we talked about the 4.0 drop-through in the mid-50s. And so you'll always have a degree of nuance quarter-over-quarter, et cetera. But it's more -- when scaffold and E&D has gone up in the past, we've called it out as being a drag. It's just particularly marked and we thought really it was a big drop off is the honest answer because work on this project basically just stopped. So normally, it's more gradual. So you'll always see some impact of the ebbs and flows, but it is more exaggerated this time around.

[Operator]

And our next question comes from Suhasini Varanasi from Goldman Sachs.

[Suhasini Varanasi, analyst]

Just a couple for me, please. You've mentioned that you've had lower utilization on the larger fleet in this set of results. Can you maybe talk about the need to balance CapEx to now get the utilization up through the rest of the year? What are your plans on this? Will you be modifying your CapEx guidance, for example? Second one is, maybe could you just talk about the quarter. You had mentioned at the time of the full year results, how trends were in May maybe if you could comment on June, July, August and how you see the next quarter versus second half of fiscal '25?

[Brendan Horgan, executive]

Sure. The utilization and therefore, fleet size and, and therefore, CapEx, all of that's a balance. What we're trying to do is we're trying to match our fleet and our fleet availability with present demand and what we see as future demand. And given all of the discussion that we've had around that local run-of-the-mill commercial construction, that's also balanced by the megaproject work. So what you see in action today is you will have had a fleet plan for the year and you want to make sure that you keep agility in that.

So as some of the local branches, so to speak, have a bit less demand when it comes to what CapEx needs that they will have, you're able to actually be agile, as I said, and direct that more towards fueling these megaprojects. So that fleet is remarkably fungible. And as you're doing all that, you're balancing the availability that you're looking to extract a bit better time utilization, which we know we're capable of doing as we progress through this year. And it's all finding that equilibrium because remember, not too long ago, we were coming off of what was a anomalous sort of high of time utilization when we had both strong demand, and we had constraint in the supply chain.

So certainly, as we progress through the year, we'll have a better feel for what CapEx looks like from a full year standpoint when we come on to December. But as Michael would have said this morning in his prepared remarks, we expect CapEx as we sit here today to be at the bottom end of the range that we've put out there for rental fleet. To your next question in terms of how trading is, we've obviously just completed August and August looks a lot like Q1 did. So that's why we're keeping our guidance where we are in terms of rental revenue for the U.S. and the broader group. And we'll have, obviously, a more current view when we get to December for the half year.

[Operator]

We will now move to our next question from Rory McKenzie from UBS.

[Rory Mckenzie, analyst]

It's Rory. Two questions, please. Firstly, on average rental rates, it sounds like they're still up low single digits compared to last year and continue to progress. Can you just talk more about the range of that across your businesses? For example, what's that within Specialties, the local general tool business and megaprojects and any regions that stand out one way or another? And then secondly, rather than focusing on drop-through, I wanted to ask a question about the cost base and the cost savings. I think that apart from the pandemic, this is the first time since 2010 you've been reducing headcount. I think Page 27 shows that U.S. headcount is now down about 7% from the January peak. So can you talk more about where and how you've been doing that, that rightsizing within -- in the business and what the outlook is over the rest of this year?

[Brendan Horgan, executive]

Yes, sure. Rory, First, on average rates, yes, we're seeing rates progress, and we don't quote the exact number. You would have heard what we were targeting for the year while you were in Atlanta, and we remain vigilant on moving the needle throughout our entire network. So whether that be Specialty or GT, they're going to be quite similar. Geographically, there's nothing to really point out in terms of one region that's moving versus another not so much. It's really across the board.

The important thing there is, as I said, when it comes to various types of customers, you get to your larger strategic, more contract-based customers, if you will, and you have a larger proportion of those that will have pricing that will be on an annual basis. And obviously, when we get into October, November, December, you're going through those negotiations, and we're looking to set the pricing higher based on the inputs that we've shared. And we'll continue to do that throughout the year. So there's no real standout there to speak of. Simply our ongoing vigilance. And we have all of the reasons to do that when it comes to cost of labor, when it comes to the inherent inflation from a replacement CapEx standpoint, albeit we're seeing year-on-year pricing from an OEM standpoint, flat.

So moving on to drop through and cost savings, and you point out on heads. Remember, there's one part in there, which, of course, is E&D, which is a rather large number. You're talking about several hundred on one project alone, so that will play into that. And otherwise, again, I'll go back to our performance actionable component, not just in Q1, but what we had begun putting into place before we would have launched externally Sunbelt 4.0. As we've increased, and we did more so than at any point in our history, the density of our markets, we have the opportunity to synergize.

So if we were to take field service technicians as an example. As we progress and have more locations, once upon a time, we would have needed two field service techs per location. And when all of a sudden, you have 14 locations in one market, you do not need 28 field service techs. You might be able to do it with 16 field service techs. So what you're seeing is, is the manifestation of that and you're seeing the individual branches working within a market to synergize and leverage that overall headcount. And that's what you're seeing in the figures.

[Operator]

Our next question comes from Arnaud Lehmann from Bank of America.

[Arnaud Lehmann, analyst]

I have three, if that's okay. Firstly, it's very strong Specialty in the quarter. Was there any support from the hurricanes? Have you seen a busy or a quieter hurricane season so far? The second question is on used equipment sales. We knew it would come down, but I think it came down a bit more than I expected in the first quarter. Maybe could we have a guidance for the full year? Or is Q1 a good indication of what to expect going forward? And lastly, obviously, congratulations, Michael, for his upcoming retirement. Could you give us a bit of color on the selection of Alex Pease as the new CFO? Did you consider -- did you and the Board consider internal options? And considering Alex will be, I believe, based in the U.S., does that change anything in terms of the organization?

[Brendan Horgan, executive]

Specialty business, there would be some slight benefit to, in particular, our Power & HVAC business which is up plus 20% year-to-date. But it is certainly not a remarkable shot in the arm there. Yes, it was rather active but not quite the sort of hurricane that would have left the prolonged level of response. Certainly, across the board, when we look at the hurricane activity thus far this year, it would be a net neutral at best, just given the type of storms that we experienced and really the longer-than-usual rain and soggy weather that would have gone across most of the, let's just say, mid-Atlantic states, along the Eastern seaboard and even into the Northeast. But nonetheless, we'll see what happens from a response standpoint, but nothing notable there.

Used equipment sales, I think your characterization is reasonable. What we've seen is we've seen really now the full normalization from a secondhand value standpoint. Michael would have pointed out, gains on the year -- I'm sorry, gains year-on-year for the quarter were circa $45 million less. We were anticipating lower gains in the year overall. Perhaps, it's a -- perhaps it would be -- it's about what we would have expected for the first quarter. We'll see what we guide to when we get to the half year as we experience a bit more of that. But again, just a normalization. Furthermore, I would say, the team, the business would have really, as Michael would have also said, took advantage even through Q4. So we have disposed of a bit more toward the end of Q4 as we were looking to extract premium value, so to speak, but nothing really to point out there, not at least at this juncture.

Moving on to Michael's coming retirement and what we considered in terms of his replacement. Sure, we would have gone through the internal candidates, so to speak, that we had. But in the end, after casting a quite hardy net into the marketplace to see what the availability was, we came across Alex. I think you'll find Alex is remarkably experienced. We like a lot of things about Alex, obviously, and look forward to his joining and as I said, giving him the opportunity to learn the business while we work through a very well choreographed succession.

To your suggestion or question around should we be thinking anything more based on having a U.S.-based CFO, I think in any circumstance, one could envision our next CFO replacing Michael, with all of his incumbent experience and understanding of this business, in no shape or no -- I can't imagine a situation whereas our next CFO would not be based right here next to our executive team in the U.S. So no one should read any further into that than simply if this were 2 years ago or even 5 years ago for that matter, we would have more than likely landed right where we are.

[Operator]

Our next question comes from Neil Tyler from Redburn Atlantic.

[Neil Tyler, analyst]

Two from me, please. Firstly, sticking with the CapEx question. If you take the sort of midpoint of your rental revenue guidance and the low end of the CapEx guidance, I think you end up with sort of OEC value growth of about 3.5% and volume growth or perhaps 2%. Does that take you by the end of this fiscal year to a sort of time utilization situation that you're comfortable with sort of back on an even keel? Or do you think scope through the 4.0 remainder time frame to push time utilization back up further than that point?

And then second question on the growth components and sort of -- and trying to sort of tease out megaprojects as on -- or those you are currently active on. Obviously, we've heard that some that have broken ground are making sort of slower progress than expected and presumably some that started in 2021, '22 are tailing off a bit. So on those projects that you're currently working on, I appreciate this is sort of difficult to bundle all together, but are they still able to deliver a net positive revenue contribution over the coming 12 months? Or do you need new starts for this megaproject piece of the revenue pie to grow from here?

[Brendan Horgan, executive]

Let's -- we'll start with the second there. Certainly, you have some projects that were marquee projects that are beginning to wind down, and we're seeing fleet on rent in those projects. Depending on the project, some will have $10 million in OEC, and they've gone to $5 million, and some would have had $120 million in OEC or original equipment cost as we abbreviate that by that will go down -- that have gone down to $50 million-$60 million, $60 million-$70 million. And over the course of Q2, Q3, we'll see those continue to come down. While at the same time, as we would have talked quite a bit about in April and again in June, we've had more recent wins.

And you are right when you characterize -- and it's hard to just generalize what happens with these megaprojects. Some megaprojects break ground and get ramped up quite quickly, particularly when you get to the smaller end data centers as an example. But certainly when you get into these larger projects like these fabs that we're experiencing that we're loading into now, they are going to have a bit slower start and it's going to be more of that slope we would have described many times where it takes 4 or 5 quarters from breaking ground to get to your kind of max output on that project, which then lasts for quite a long time because the common threads we're seeing is these projects, there are a lot in the hopper.

As I would have said in my prepared remarks, there are more projects and more value if we refer to as a, for instance, Slide 27 in the pack, you have seen that 501 projects for $759 billion in value or cost between this current fiscal year and fiscal year '27, so that 3-year window. And today, that looks more like $850 billion and 600 and a few projects that are coming into that hopper. So it is something that will move in that manner. But overall, I think the key to it is megaprojects will make up a larger proportion of our revenues as we do progress through next -- this year. But as we go into next year, I think we see quite a few more of these coming online. But all in all, that's all baked into what we've given from a guidance standpoint.

Moving on to the CapEx question, and really what you're getting to is utilization. Yes, I think your characterization of that is correct. When we get toward the end of this year, we would expect to see that -- us extract some upside in time utilization. But another way to look at that or characterize it is really what we've been going through as a result of coming off of those anomalous highs in time utilization and the inflation in the replacement in growth CapEx, we've seen for some time now the depreciation growth outstripping revenue growth. And I think really, that's one way of looking at all of that. And we would expect, as we get to kind of Q4, we'll again be in the position of revenue outpacing depreciation. And in a way, that's what we're looking for. I hope that answers what your questions were.

[Operator]

With this, we're going to move to our next question from Karl Green from RBC.

[Karl Green, analyst]

A couple of questions from me. Just on the comments you made about the rate discipline amongst the smaller and midsized players, and obviously, they keep an eye on what you're doing as you've already said. I mean just thinking about squaring the circle where there's clearly high inventories in some of the auction channels, and that's -- they are clearing at lower prices at the moment. So that at the moment is finding a home. Is kind of the balancing part of that equation, the fact that actually ownership is slightly picking up.

Because I think some of the rails that you're data is suggesting there a lot of the equipment is actually staying in the U.S. rather than going overseas as was the case in sort of previous downturn. So is that the right way to think about it? Would be the first question. And then the second question then relatedly, just going back to that very high drop-through of 69%. Just in terms of the delta between, say, the mid-50s and that 69%, is it fair to say that the vast majority came from that lower E&D revenue base? Or was it the fact that you have these other dynamics there going on in terms of basing cost, headcount management there?

[Brendan Horgan, executive]

Yes, I'll take the first, and Michael can take the second. What you're alluding to there around rate is the structural progression. So yes, we will continue to see rental take share from ownership. And that is what we have seen, and that is what we will continue to see. I think the key really from an understanding standpoint when it comes to rate and the discipline that we see in the industry using the inputs that we would have shared so clearly in April when we were together in Atlanta is really the decoupling of the notion that secondhand values are influencing what rental rates are doing. For a long time, that was a heavy focus and when we would see any sort of softening in secondhand values, you would see that corresponding softening either in the pace of growth of rates or in absolute whereas rates would go backwards. .

And this isn't a new Q1 phenomenon. We've been seeing actually secondhand values come down for the last 5, 6 quarters from what was the cycle peak, so to speak, if you will. So there's not all that much to be taken as -- or to be read into there. Yes, we know Richie very well, of course. There's a bit more of the fleet that's being sold that is staying within the U.S. but there's still quite a lot that does leave the shores of the U.S. and go elsewhere in the world. But either way, we have a perfectly liquid secondhand market for used equipment and the values will ebb and flow based on demand of buying that secondhand equipment, but it doesn't feed into what we are expecting or looking to garner when it comes to progressing rental rates. Do you want to talk drop through, Michael?

[Michael Pratt, executive]

Yes. I guess the upside is a combination of all of those factors. I would say the E&D piece is maybe about 1/3 of it or maybe just over. But the rest of it is, again, focus on the cost base and leveraging the cost base.

[Karl Green, analyst]

Okay. Great. And just a follow-up on the first question then. So can you give a kind of vague indication as to what sort of percentage of OEC you're seeing on your used equipment sales just year-on-year, how that's trended, just to give us a sense as to the normalization, as you called it?

[Michael Pratt, executive]

Yes. If you go back in time, we've always talked about sort of mid- to high 30s as a percentage of OEC. And over the past few years, it's been in excess of 40% of OEC. And we're back into that sort of mid- to high range for a 30% of OEC.

[Operator]

We will now move to our next question from Allen Wells from Jefferies.

[Allen Wells, analyst]

Just two for me, most of mine have been asked. In terms of the U.S. rental growth, obviously, we've seen that slight sequential slowdown into the fourth quarter. The guidance is 4% to 7%. Can you just talk a little bit about how you, at least at this stage in the year, see the shape of growth through the rest of the year? Like I guess most people would have expected to see a general easing in terms of the trends, but also mindful of easing comps as we move through the year and actually, the fact that the organic growth number that you printed was broadly stable. That's my first question.

[Michael Pratt, executive]

Sorry, I'm happy talking and Will pointed, I was on mute. So given where we were, and given what our guidance is, you would expect it to be slightly slower in the second half or next 9 months and in the first or else, our guidance will be slightly different. So we're at 6%, which, yes, towards the end, we still expect to be somewhere in that range of 4% to 7%. So I don't -- and given that range, you're not going to see big variances quarter-over-quarter. Clearly, the one thing that might include is if there are events. And particularly, at these lower levels, if you're growing 20% a year an event is probably on a growth rate is not significant, whereas if you're growing at somewhere between 4% and 7%, there happen to be 2 or 3 events then it might have more of an impact on that. But as we've said before, we're not planning on that. So you'd expect something sort of a moderating profile as you go through the year.

[Allen Wells, analyst]

Okay. And then just a quick kind of follow-up on rate as well. Obviously, you guys talked about it, it's still progressing. But could you maybe just talk about how that looks sequentially, just directionally? Are you still seeing -- I guess we are still seeing inflation in the cost base but inflation is probably lower than it was a quarter or 2 ago. So is the rate environment still slightly easing as you move through, even if it's still progressing positively? Just the industry data seems to suggest that I see, but I just wonder what you guys are seeing internally.

[Brendan Horgan, executive]

Yes. I mean it is progressing. It is progressing not quite as quickly as it would have in years past. And when you think about that overall inflation environment, when inflation is being printed and it's being discussed the way that it was, it does make it a tad bit easier to have those discussions with the customers, which is why, again I'll draw back to the inputs that we covered. Our pricing formula to the business in Atlanta where some of you were spectators, that's precisely why we're going at it that way. So what you read or taken in across the industry, I think, is a reasonable characterization and we would expect it to continue to progress about the same as we go through the year, while we set our sights on what is more important, and that is the ongoing rental rate progression that can match or deliver a bit better than overall inflation.

[Operator]

We will move now to our next question from Will Kirkness from Bernstein.

[William Kirkness, analyst]

Just two briefly. Just wondered if you could cut that General Tool plus 3% anyway to give us a bit more color. It sounds like it might be sort of mostly rate. So just if you could break that down a little bit by regions or kind of segments. And then secondly just on the U.K., I think you said for a while that rates are really progressing where you'd like them to be. I just wondered what the impediment is and what kind of the -- what actions you can take there?

[Brendan Horgan, executive]

Well, on the second when it comes to U.K., it's just what the industry lacks there is the -- that element of structural progression, which is so put in place here. And that's the -- that's one part of the limiting factor. The other part of the limiting factor was the 6 inches of space between the 2 years on the human head. And that part, we are pushing more and more and we're seeing progress in rates in the U.K. And the team, which is leading that effort is doing good. So we would expect that to continue. When it comes to the U.S., I mean, look Will, you're asking us to report specifically on what our rental rates are, and we won't do that.

In terms of regional color, we have 11 regions in the U.S. And we have nine that are up year-on-year in rental revenue. We have one that is flat, and we have one that's back ever so slightly, which is the upper Midwest. So really, what that demonstrates is it demonstrates strength throughout the geography. And in Canada, it would be up across the board. And then, of course, our Specialty business, we see a big range there. We'll see our flooring business that will be up low single digits. And we'll see climate, Power & HVAC up really nicely, and we'll see little businesses that are just getting started like our fencing business that's up almost 400% year-on-year as we're extracting the benefits of the greenfield opening campaign that we would have had over the course of 3.0. But overall, the environment is doing what we would have largely expected.

[Operator]

[Operator Instructions] And our next question comes from Mark Howson from Dowgate Capital.

[Mark Howson, analyst]

Just briefly on -- a couple of questions, on bolt-on acquisitions. Obviously, we focus very much on CapEx and well, that's rolling out yourself and the industry. Have you found the prices of bolt-ons probably just a bit too much about at this point in the cycle, something that you might want to do when things are -- if things do become tougher, it's easier to pick things up? And that -- or is that a reflection of that? Or is it just a question of something else?

[Brendan Horgan, executive]

I think it's really more -- I mean, let me be clear, there is no shortage of available M&A to do in our industry. We still have thousands of independent rental companies in the U.S. and Canada that are entertaining, selling. If you sort of put a level on that compared to prior periods, it still remains high. What you're seeing is, is that we are pushing back a bit when it comes to the value of some of these bolt-ons. We all would have been taught or learned over the course of our careers that as interest rates get higher, private deals sell at lower multiples. And that isn't exactly what was happening over this period of higher interest rates. So we're drawing a bit of a line in the sand. And the good part with all of that is, we're not losing out on opportunity because so many of the deals we do, as you know, are shorter tap.

In other words, they're not being run through a process with a broker. So we have lots of deals, if you will, on the burner that we are testing and feeling and we'll buy them when we'd like to. But overall, I don't think there's all that much to read into that. Your question would kind of imply as times get tougher, there may be more availability. It just all depends on what we say or what you would say or what circumstance you would paint in terms of times get tougher. When you actually go through a period of slowing, you have a lot of independents who will rather wait until they can repair their P&L a bit and entertain a sale then. But either way, still, there is a flush landscape of M&A and we're just being disciplined buyers.

[Mark Howson, analyst]

Okay. And just a couple of things for me to finish off. Just on the election front, you've seen much difference between what Kamala Harris' view on things like the Inflation Reduction Act and Infrastructure Act versus Biden? Have you seen a difference in Trump and it was drill baby drill, but are you seeing anything between Harris and Biden in terms of how the outlook might change?

[Brendan Horgan, executive]

No, I think I mean, overall, I mean, if you think about -- whether you think about their positions on tax or their positions on investment in infrastructure, it's really still very much Biden and Harris, meaning together in terms of how they are portraying what they believe and most importantly now, what Harris would put forth. But either way, I -- we will be consistent with what we've said, which is what we, of course, believe to be the case, whichever direction you go, the core fundamentals of our business and the core fundamentals of structural progression will continue. It is -- I would characterize it as remarkably unlikely that any of the sort of trifecta of acts, whether that be infrastructure, it be chips and science or it be IRA have any demonstrable change as a result of the same in essence administration or a change in administration.

One thing I would have talked quite a bit about during the full year roadshow is, once upon a time, you'll remember, most of us would have learned that the most powerful person in the U.S. isn't necessarily the President, but rather the Chair of the Federal Reserve. And I would say at this particular juncture, that might be a reasonably good default because so much when it comes to overall activity levels, come down to what do we see from a cost of borrowing or interest rate environment. So time will tell when it comes to the election, but we don't expect much one way or the other.

[Mark Howson, analyst]

Finally for me, just so well done to Michael. You've done an excellent job over the years. So thank you very much.

[Operator]

And we will now take our last question today from Kathy Fleischer from KeyBanc Capital Markets.

[Katie Fleischer, analyst]

Just one question for me. You talked about the normalizing environment in the Film & TV business and how you're thinking about that as the new normal going forward. Just wondering if that changes your thoughts on that business in general or the Canadian market if you see any sort of shift in strategy going forward to adjust to this new normalizing environment?

[Brendan Horgan, executive]

No change in strategy just running the business as we should paired with what that market's availability is. So no change whatsoever.

[Operator]

With this, I'd like to hand the call back over to Brendan for any additional or closing remarks. Over to you, sir.

[Brendan Horgan, executive]

Great. Thank you all for joining this morning, and we look forward to speaking with you as -- along our half year results in December. Have a great day.

[Operator]

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