Ashtead Group PLC

LSE:AHT

Earnings Call Transcript 2020-Q2

[Brendan Horgan, CEO & Executive Director]

Okay. We'll go ahead and get started. Good morning, everyone, and welcome to Ashtead Group Results Presentation for the Half Ending October 31. I'm joined by Michael Pratt, and together, we will cover our first half financial and operational performance. Before we get into the slides, I'd like to take this opportunity to thank our teams throughout the U.S., the U.K. and Canada for their dedication and engagement particularly around our leading value and priority, which is the safety of our team members, our customers and the members of the communities that we serve. It is in this context I'm pleased to recognize the outstanding efforts which delivered a reduction in the number of work-related injuries. Through the half year, we experienced a 13% reduction in lost time injuries. This is over a period when we had more hours worked, which in our business means more loading and unloading, more miles driven, more scaffold built, all of this making this key safety metric all the more meaningful. Our commitment to advancing the safety and well-being of our employees, our customers and the communities that we serve never ends, and it is for this that I'm grateful to the team's outstanding efforts. So let's turn to the highlights on Slide 3. We've enjoyed another strong first half of revenue and profit growth. The strength in our performance is a result of our ongoing operational excellence, strength in our North American end markets and the important structural change opportunities which remain very much present within our business. Our strong cash generation and ongoing balance sheet strength enabled us to execute on all of our capital allocation priorities. In the first half, we have invested in existing location CapEx, greenfield openings, key bolt-on acquisitions and returns to our shareholders through GBP 250 million in share buybacks, all achieved while remaining inside our long-term leverage range. I'm also pleased to announce a 10% increase to our interim dividend. With this strong set of results and positive market outlook, we continue to look to medium term with confidence. So before I get into some of the operational detail and some added color on the markets that we cover, I'll hand it over to Michael to cover the financial results.

[Michael Richard Pratt]

Thanks, Brendan, and good morning. The group's results for the half year are shown on Slide 5, and as Brendan said, it's been another strong performance. As I did in the first quarter, I've presented the figures on both a pre- and post-IFRS 16 basis, I'm actually only going to comment on the pre-IFRS 16 basis given that they are comparable to the prior year. The group's rental revenue increased 13% on a constant currency basis. The EBITDA margin was strong at 48%, all while opening 31 greenfields and completing 11 acquisitions in the period. With an operating profit margin of 30%, underlying pretax profit increased to GBP 705 million while earnings per share increased 11%, benefiting from both the profit improvement and the share buyback program. So turning now to the businesses. Slide 6 shows Sunbelt's first half results in the U.S. Rental-related revenue was up 15%. This is a good performance when you set it against 2 prior years which were impacted significantly by hurricane activity. In contrast, this year, the hurricane season was far quieter even to the extent that it was a small drag to our results. The EBITDA margin was strong at 50%, although it does reflect some pressure from the relatively lower rate of growth and the drag effect of the significant number of new greenfields and bolt-ons that we completed over the last couple of years. This contributed to the drop-through rate of 48% for rental revenue through to EBITDA. Operating profit grew 11% and was 400 -- $940 million at a 33% margin and an ROI of 23%. Turning now to Sunbelt in Canada on Slide 7. Rental-related revenue growth of 19% included some benefit from acquisitions during -- over the last year or so. Organic growth remained healthy or was a healthy 10%. This generated EBITDA of $80 million and operating profit of $40 million at margins of 40% and 20%. The Canadian business is performing as we expected and is benefiting from last year's fleet investment. And as we put that fleet to work, it's increasingly improving the performance. Turning now to Slide 8. A-Plant's rental-related revenue was down slightly at GBP 218 million. The small increase in total revenue reflects the higher level of used equipment sales as we de-fleet underutilized and lower-returning assets, consistent with the plan that we outlined in June. The market in the U.K. remains relatively flat and competitive. So this environment, combined with small losses on the de-fleet compared with gains on sale a year ago and the cost of realigning the business, has contributed to weaker margins with an EBITDA margin of 32% and operating profit margin of 12%. As a result, A-Plant's operating profit for the period was GBP 30 million. Brendan will comment further on our progress against the operational plan for A-Plant. Slide 9 sets out the group's cash flows for the first half year. The strong margins we discussed earlier produced cash flow from operations of GBP 1.2 billion, giving us substantial flexibility to enhance shareholder value within our capital allocation framework. This free cash flow was more than sufficient to fund both replacement and growth capital expenditure in what is the seasonally higher spend period. We invested GBP 937 million as we grew the fleet in the strong U.S. market and continued to take market share. In addition, we spent GBP 246 million on bolt-on M&A as we broadened our specialty businesses and enhanced the geographic footprint and GBP 250 million on our share buyback program. Slide 10 updates our debt and leverage position at the end of October. As expected, net debt increased in the period as we continue to invest in fleet and bolt-on acquisitions and continue the buyback program. In addition, the adoption of IFRS 16 added GBP 883 million to debt on May 1. Leverage was in our target range at 1.9x on a constant currency basis excluding IFRS 16 and 2.2x if you include IFRS 16. Both our leverage and well-invested fleet continued to provide a high degree of flexibility and stability in support of our strategy. As we've said on many occasions, a strong balance sheet gives us competitive advantage and positions us well for the medium term. As shown on Slide 11, in November, we took advantage of good debt markets to strengthen that position further. We issued $600 million of both 4% and 4.25% notes and used the proceeds to redeem the $500 million of 5.625% notes due in 2024 and pay down an element of the ABL facility. This provides us with more capital for a longer period of time at a lower average cost and, importantly, with a very smooth maturity profile. Our debt facilities are committed for an average of 6 years at a weighted average cost of 4%. And with that, I'll hand it back to Brendan.

[Brendan Horgan, CEO & Executive Director]

Thank you, Michael. We'll now move on to an operational update. So beginning on Slide 13, you'll see Sunbelt U.S. delivered 12% rental revenue growth in the second quarter, contributing to 15% growth in the half. This was led by strong organic growth of 10% and 5% from bolt-ons. This is an impressive place -- pace, rather, in isolation and even more so on top of the 19% growth we experienced last year in Q1 and in Q2. This growth demonstrates we are clearly gaining share as we outpaced the market by 3x through realizing the benefit from the ongoing clustering activities our greenfield and bolt-on program deliver and the positive underlying demand environments that we operate in. Although this level of growth is strong in its own right, underlying is even stronger as we were absent hurricane activity in the current period, which, of course, was a contributor last year. So let's move on to Slide 14 and take a look at some of that detail. The table highlights the pure rental hurricane benefits in last year's Q2 against a nonexistent revenue contribution hurricane season in the current year. The underlying growth of 14% per trade would, of course, contribute exclusively to our organic growth revenues. As we documented well in the past, what may seem like relatively small revenue figures in any single period, they can have a disproportionate impact on key short-term metrics such as rate, margin and fall-through against just the comparable periods. It's worth reminding you this hurricane impact on comparable metrics will continue into Q3 at similar levels as we have experienced here in Q2. Taking this into account and as such, you will see the demand environment remains strong, expressed here by our healthy rate levels, which continue to yield year-over-year improvement absent the direct hurricane period itself. To further illustrate strength in demand, let's turn to Slide 15. Here, you'll see the utilization remains strong on a fleet 18% larger than a year ago. Our general tool utilization was at or near peak levels achieved over the last 3 years with just the short-lived exception of direct hurricane period comps in each of the years shown. Our specialty business, which has enjoyed exceptional growth over the last several years, has recorded utilization levels better than 2 of the last 3 years, which again is only below periods with direct hurricane comparisons. We are incredibly happy to deliver 22% increase in specialty business fleet on rent, again demonstrating very strong growth characteristics. In both instances, these are strong utilization levels in absolute, although particularly strong when you consider our organic growth strategy of greenfield and bolt-on additions, which we'll cover in more detail as we move to Slide 16. We continue to make good progress on our 2021 plan, adding 44 locations in the half, spread between specialty and general tool and once again being led by our greenfield program and, where appropriate, augmented by our key bolt-ons. Over the last 10 quarters, we've added 229 locations in the U.S., with more than 60% of these being specialty. This is a powerful demonstration of our experience and our success in executing a consistent and targeted expansion. These businesses individually and collectively are highly profitable, driving momentum through all of Sunbelt. While the logic and success of these additions should be clear enough on their own, we do have to point out that they are, of course, not as mature as the balance of our business and, as such, have a drag effect on some of the commonly followed metrics that we have outlined on the slide. This expansion approach is unique to our growth strategy. And as you would expect, we have a very clear pipeline of greenfields in place for the remainder of our 2021 campaign. Moving on to Slide 17, we share more detail of the growth in the first half between general tool and specialty. Our general tool revenue growth is weighted toward organic investment, delivering a growth rate double that of the market pace. In fact, we continue to generate healthy general tool revenue growth in all of our operating geographies. Our specialty business growth was achieved through a mix of organic and bolt-on investment, delivering an impressive 23% revenue growth, a rate 4x that of the market. These specialty segments service predominantly nonconstruction end markets, which will be far less cyclical in any end market conditions. Remember, the majority of our specialty business is born from everyday maintenance, repair, operations and events of the markets that we serve and is also central to our strategy. Pay special attention to the individual specialty segment growth rates shown along the bottom of the slide. With growth rates like this, 2 things should be abundantly clear: one, there are obvious structural change elements present when growth is so significantly higher than any related end market indicator; and two, we are in the very early stages of growth in some of these exciting specialty segments. These 2 points have become a reality as our specialty business platform has created a reliable alternative to ownership for these products which previously just did not exist. It's important to understand it's not just about specialty or just about general tool individually, rather it's the link between these 2 divisions within our business. Over time, the cross-selling dynamics specialty introduces from an end market standpoint expands the application opportunities for our broad general tool product range. This is difficult to replicate and delivers some form of an annuity effect. This element of mix is also a key part of our strategy. The results in both divisions demonstrate strength in our end markets and the capabilities our platform has to continue to produce growth. We are planning on going into much more detail in the specialty part of our business in the coming Capital Markets Day that we've announced in April in Washington, D.C. Slide 18 sets out the usual relevant U.S. construction forecast and figures. These remain broadly unchanged from what we reported in September. The construction starts forecasted by Dodge on the top left of the slide is the driving factor in their latest put in place construction forecast on the top right. Consistent with our previous updates, you'll see modest forecasted downturn in construction centered around calendar year 2021. This latest forecast is now calling for total put in place construction of plus 1% in 2020 and minus 4% in 2021. This compares to what we would have previously shared, which was minus 1% and minus 2%, respectively, in the previous versions. So our base case for construction element of our business is that the end market is flattish in calendar year 2020 with a modest reduction in activity levels in 2021. And as you would expect, this will be in our thinking as we start to build our CapEx plans for next fiscal year. As we wrap up 29 -- 2019, construction activity levels in 2020 calendar year are incredibly clear, and our confidence is bolstered having recently been awarded a number of new large, multiyear projects. This is consistent with the feedback from our customers who continue to indicate broad strength in current activity and in their very own backlogs. Let me be clear, you should not mistake a construction slowing at these forecasted levels as an indication of a weak construction market. These forecasted levels still indicate strong construction markets at an absolute level. If these construction forecasts are broadly correct, which to us feel sensible, we believe these conditions will actually be beneficial to Sunbelt. Although growth rates particularly in our general tool division may slow, we will continue to stay busy and we will gain share. While doing so, we will benefit from the increased cash generation we will certainly deliver in these circumstances. Let's stay on end markets, but let's shift away from construction and look at the other big, big part of the market that we increasingly service. Remember that 50% -- greater than 50% of our business revolves around everyday operations, maintenance, repair and events in the geographic markets that we service. These markets continue to be strong and are showing no signs of dampening. This is a very large space that is growing as we, over time, again create a reliable alternative to ownership through our larger-than-ever platform, our clustered market model and our specialty business development. On this slide, we've attempted to put forth examples to illustrate the vast size and range of the addressable market, which employs a significant portion of our specialty business, product and, increasingly, our general tool products. It is in these markets where we participate in, as you'll see the examples on the slide: remediation and restoration; climate control; event products and services; temporary and emergency power; cleaning and janitorial equipment rentals, and this list goes on, all with ample cross-selling of our mainstream general equipment products in applications outside of construction. These markets are in the early stages of rental penetration as Sunbelt are providing these customers with a flexible option to their previous CapEx obligations we're giving them options for OpEx, which today, increasingly so, is an option many, many of our customers want. Moving on to Slide 20 and out of the U.S. We'll begin with Sunbelt Canada on the slide. This has been another 6 months of good progress in our Canadian business where our team are very focused on delivering great service to our ever-growing customer base. We delivered rental revenue growth of 19% in the half. The organic component alone, of which was 10%, is an awesome 5x that of the pace of the market, clearly demonstrating the efforts of our unique clustering strategy in what is still a relatively new market for Sunbelt Rentals. The end market forecast remains strong, and our priority of developing our clusters through the inclusion of our specialty business further diversifying our end markets remains our primary emphasis. With this in mind, we were pleased to complete the acquisition of William F. White on December 2, which is worthy of a closer look on Slide 21. White is a Canada -- is Canada's premier rental provider of production set and on-site equipment, services and studio facilities to the motion picture, digital media and television industries. The growing demand for media content worldwide deliver -- driven, sorry, largely by the growth of streaming services like Netflix, Amazon Prime and Apple TV+ makes this an exciting growth end market. Sunbelt has been renting several of our core products including aerial work platform, light towers and generators to the film and television studios both in the U.S. and Canada for many years. The acquisition of Whites gives us access to broader and more specialized rental equipment including lighting, grip and cameras as well as 7 state-of-the-art production studios in Vancouver and Toronto. In total, Whites operates out of 13 locations across Canada and has 475 employees. This acquisition will provide significant opportunities both to cross-sell our existing product range in Canada and develop our offering to this exciting end market in the U.S. I'd like to take this opportunity to thank the Whites leadership team for their professional and passionate engagement through this process. Although I can't recognize each individually, at least not in this forum, it is this group of senior leaders who helped realize Paul Bronfman's vision and drive as the owner through creating a culture of focusing on the success of their people and the success of their customers. This will certainly be a combination of 2 very aligned cultures, and I'm happy to report that the entire leadership team is staying on to be part of the exciting growth that is sure to come. Turning now to the U.K. on Slide 22. As we clearly laid out as part of our full year and our quarter 1 results, the current year is one of a refocusing for the A-Plant business. The team has been busy building and implementing an internal program we've called Project Unify. This effort is focused on leveraging our platform to deliver long-term and sustainable results. Part of this effort, of course, has been to rightsize our fleet to meet the current and near-term market forecast. Although there are short-term negative impacts to operating margin, as Michael will have covered in his opening, we're producing significant increases in free cash flow as we said we would and are confident to come in comfortably above GBP 100 million for the full year. We are focused and we are committed to the U.K. business and our U.K. colleagues. And ultimately, we are fully determined to deliver market-leading margins and returns, and I can tell you I see no reason why this can't be achieved. The U.K. market itself remains challenging and forecasted to be largely flat. There are, however, some positive signs of ongoing and new infrastructure projects that will serve as an underpin to the end market, all of which our products at A-Plant, our services and coverage are well suited to take full advantage of. Clear progress is being made with Project Unify. And as I've mentioned last time we were together, the A-Plant leadership team will be part of our Capital Markets Day in April 2020, and you'll hear from the leadership team as -- their longer-term strategies and the overall shape of that business. So as we turn to Slide 23, we can see what all of this means from a CapEx perspective. The overall group guidance remains at GBP 1.4 billion to GBP 1.6 billion of gross CapEx for the year, and we've left the CapEx ranges within this unchanged. However, given our current expectations for a flattish U.S. construction market in 2020, we're now planning for U.S. CapEx to come in toward the lower end of its range. In Canada, given the first half spend and demand, we're likely to be towards the top of the range for the full year. And in the U.K., as you would expect and given the market conditions, we will be toward the bottom end of the range. Turning now to capital allocation on Slide 24. Our priorities remain exactly as they were. We've invested GBP 1 billion in existing location fleet in greenfield openings and a further GBP 231 million on bolt-ons in the half. We've increased the interim dividend by 10%. So after all of this and subject to remaining within our 1.5 to 2x leverage, we allocate the balance to share buybacks. In this respect, we've completed GBP 250 million on buybacks in the first half and are on track to complete a minimum of GBP 500 million for the full year. So in conclusion, our first half performance was strong. End markets in -- our end markets are strong and absolute, and we will continue to be primary benefactors of the structural change components present in our business. Our runway for growth is long. Leveraging the market dynamics presented today, we will continue to execute on our clear strategy, all while entering a period of growth that will yield increased cash flow with which we will deploy within the framework of our equally clear capital allocation strategy. As a result of these points, we continue to look to the medium term with confidence. And with that, we'll open up for questions. We've got a microphone coming around. Rory, why don't you just go ahead and...

[Rory Edward McKenzie, European Support Services Analyst]

It's Rory McKenzie from UBS. With the slower U.S. general tool growth you see in your base case in the next 2 years, you'll maybe moderate CapEx and get cash flow. But you also mentioned you plan to take more market share in that environment. So can you comment on in the market that's been investing for quite a long cycle, what would you expect for competition and pricing in that kind of world where growth is slowing across that market? Maybe that one first, and I've got 2 on specialty.

[Brendan Horgan, CEO & Executive Director]

Yes. So I mean, look, I think it's a good way of looking at things. So yes, we've indicated a moderation to the CapEx given the guidance that I've just given. I will remind you, however, if we do see strengthening demand, it's why we kept the range where it was and we could spend more. Here's how I see it. If we look at the construction forecast, so if we go back to this slide, and as I've said, if this construction end market is about that, so what it really means is 2020, 2021 and 2022, it's about -- it's kind of benign. It's levels that it is, which, again, it is an incredibly strong level, so there will be very strong demand. We have taken our decision when it comes to CapEx from a guidance standpoint. And I think what you'll see is the industry, the primary peers that remain in North America are taking a pretty similar stance. You have a far different discipline, I would say, at this stage in the cycle when compared to at this stage at previous points. So what's all that mean to rate? I think we could experience a reasonably positive rate environment over that period. Look, if we could produce a rate that was anything positive in 2020, 2021 and 2022, we may even turn some that have a slightly negative view. So I mean I think overall, it's very important. But on that, I need to point out from a construction standpoint, so you understand what the underpins of this are and how the construction end markets themselves have changed over the years. So the dynamics driving construction today are a bit different than what they were before. Like for instance, last time around, we would have seen incredibly strong retail, say, construction, town centers, movie theaters and the like. From a housing standpoint, as you see on the bottom left there, we would have seen what were clear as day certainly bubbles. So when you look at it today and you look at absolute starts on the top left there, look how far off we still are from previous peaks, which again makes that forecast feel pretty sensible. I mentioned retail. It's been replaced in the overall market by things like office, by things like warehouse and distribution that have filled completely that gap. This is a really interesting one. If you look at the top right of this appendix slide, and again for those listening on the web, that's Slide 33. Look at what that outlook is for overall office construction. That is strong. So in any of those scenarios, even though they go up, they go down a bit, those are strong. Look at data centers, we've been talking about data centers now for years and years. Look at data center starts in the bottom right. This is just what has started in calendar year 2019. I was working on an interesting stat this morning with Barbara. I think this is a very relevant one. In 2018 and 2019, we have had in absolute more data center starts than we had for the entire period of 2008 through 2014. Did I get that right, Barbara? So we've had more starts in the last 2 years than we had from 2008 to 2014. Now look, we are not just Sunbelt Rentals, data rental business, but it is an anecdote that I think you can understand is how those end markets have changed. These projects that you see listed here, whether it be those that started in '18 or those that started in '19 or those that started in '17, will still be going on through 2021. And finally, on that point, look at residential. So look at the bottom left there and pay particular attention to the multifamily because multifamily clearly is the part that we are more directly tied to. Look, we like housing starts because, in general, it creates some other construction. But if I were to talk to any of our team, whether it be John Washburn, Russ Brown, Tim Robinette, our VPs that are out there, and say, hey, level of multifamily construction, here's how they describe it. Anywhere from that point of about 2014 all the way through what is forecasted in '22 -- 2022, they call that the fun zone. So anywhere in there, we will be busy. So Rory, again, I think that's the overall dynamics in the market. And of course, that will drive pricing and in time utilization. Long-winded answer to your question.

[Rory Edward McKenzie, European Support Services Analyst]

No, no, very, very important topic. And then just 2 on the specialty business, which you're highlighting is going to be more important. I'm just wondering whether those 8 verticals you've called out on Slide 17, how broad is the coverage of those verticals across your footprint. How early are you in some of those areas? Clearly very early with some. And then also, are those figures excluding hurricane, or was that with the drag from the hurricane components?

[Brendan Horgan, CEO & Executive Director]

So good we've decided not even to back out hurricane. I mean what's the point? So power and HVAC would have been 20%. But this is just illustrating, so as you can imagine, it wouldn't take much to draw this conclusion on your own. It's kind of most mature from the left to the least mature on the right. But these are not necessarily small businesses. We talked about our flooring business. And we've talked about climate control for a long time. We've just begun talking about ground protection. We've just begun talking about trench shoring. These are businesses that we now know. This is no longer a test. We now know they are individual segments. You'll hear from Adam Camhi when we're together in Washington, D.C. the flooring business alone, we are now incredibly confident that, that business for us when we drive it to a 20% rental penetration and if we just have 1/4 of the share, which we surely will have more, that would be in excess of a $500 million business for us, just that little vertical. And clearly, we'll talk a lot more about that in the Capital Markets Day.Come to the front. We've got a couple of mics going here.

[Arnaud Lehmann]

Arnaud Lehmann, Bank of America. Just one question, if I may, on your CapEx plan. Because on the one hand, you give a fairly bullish message about your business outlook in the U.S. But at the same time, you're still trimming your CapEx plan for the year. So just to understand the $100 million, maybe $150 million that you are not going to spend this year, that you were maybe thinking of spending initially or that was an option, is it fewer locations? Or is it less equipment on existing locations? And is it -- are you trying to protect utilization rate? Are you pushing utilization rate higher than you initially thought? Because it doesn't feel like your market outlook, okay, U.S. construction flattish. It feels like that's been sort of the base case for quite some time. And initially, I mean, 6 months ago, you thought you could continue to outperform that in a meaningful way. So I'm just trying to understand is it just going through each location and adjusting at the margin or is it you taking a slightly more cautious outlook on the business.

[Brendan Horgan, CEO & Executive Director]

You covered there about all of the points. You've covered about all the inputs that there will be. But look, let me put it to you this way. Keep in mind when we say, okay, $100 million, $150 million less than we would have indicated, that's all got to do with 2020 and 2021. So it's not the pace in which we've spent thus far in the year, it's really that Q4 look you take to say how much do we sort of pull forward into the current year to fulfill the back part of that. And yes, this forecast has been out there, but remember, out until -- at the full year results, when we set this out there and we said, "Hey, remember, let's pay attention to the construction market, again, our -- half of our business. But let's not get too carried away on when we see a construction downturn. Let's focus more on to what extent we see it." So look, we said all along we have responsible growth, but let me address a couple of things you said that are adamant -- that we are adamant. No, we will not stop greenfields. So in other words, yes, we will continue to add greenfields. Of course, we will. When you look at the collection of businesses that we've put together, why would we stop, why would we stop anything that would be like this? The 229 locations we have added over the last 10 quarters, I mean this is a big and profitable business stand-alone. As a matter of fact, it would be the fifth largest rental company in North America, and we just got started on it 2.5 years ago. I'd argue to say it's more than the fifth in terms of profitability. So that will continue. It's just moderating. It's moderating levels of growth. It is not ending growth. It's moderating levels of growth. And why would we see any different right here at the half year? We will take a closer look when it comes to CapEx guidance and, of course, come out with that in Q3.

[Arnaud Lehmann]

Maybe just one last one on the U.K. I mean as you say, it's a business that is running flat but generate nice amounts of cash. I think you guided $100 million -- GBP 100 million free cash flow potentially. I mean how do you keep U.K. management happy when you basically take their cash and reinvest everything in the U.S.? I mean are they incentivized on -- at group level or just on the U.K. side?

[Brendan Horgan, CEO & Executive Director]

Well, it should come as no surprise. They probably haven't been hitting their bonus targets for a few years. If we go back to 2016, we've invested something like GBP 500 million between '16 and '19, and operating profits went from GBP 70 million to GBP 65 million. Generally, when you add that much investment and you make that level of return, you probably don't bonus all that much. They've been doing fine from a PSP standpoint. But look, this is an engaged and energized leadership team. It's a bit of a new leadership team. You'll meet Andy Wright, our COO; and Phil Parker, our FD and CFO of A-Plant business in April. They are enthused. They are enthused with this Project Unify. And remember, although we're saying less CapEx, we're not saying no CapEx. We'll invest on the low end of that range, GBP 75 million. Am I correct in saying that will be the most investment any U.K. plant hire business would invest? So we're investing more than anyone else is, we're just saying let's take a modest approach at this and while the business is under repair. And as I've said, I am confident we will ultimately bring this business to long term and sustainable returns which we'll all be happy with. But in the meantime, let's produce over GBP 100 million in cash. So we're just doing what we said we would do.

[Michael Richard Pratt]

When we say we're getting rid of underutilized assets and the lower returning assets, we sell those, we don't replace those, so the replacement expenditure we're spending in other areas where it is actually growth. So if it's part of -- where the part of the business is doing well, we're investing and growing, it's just you're shrinking the bits where you've got underutilized or lower returning assets.

[Brendan Horgan, CEO & Executive Director]

At the end, your field calls you, and you said no about CapEx?

[Michael Richard Pratt]

Yes, yes.

[Brendan Horgan, CEO & Executive Director]

So the team, as you will see, is engaged and looking forward to the future.

[Andrew Nussey, Analyst]

Andrew Nussey from Peel Hunt. A couple of questions following on. First of all, in terms of Whites, I'm just curious about the rental of studios as opposed to the rental of fleet and just how significant is that. And does that represent maybe a slightly change in your strategic direction, maybe we should see other similar type moves? And secondly, in terms of A-Plant, just going back in terms of history, how much do you think it has been management as opposed to actually being in the wrong markets with the wrong fleet?

[Brendan Horgan, CEO & Executive Director]

Let's start with Whites. First of all, so fresh off of IFRS 16, we have plus or minus 1,100 leases. Is it about right? We now have 7 more. So no, it's no big strategic change. There are some properties, they're great properties, they are profit centers. In these studios, what happens is not only do you rent the studio space, which I should add, thus far, our new business in William F. White has yet to ever have a tenant leave once they've come. So every single studio has been rented from the beginning by a blue-chip production company. You would all know the names of every single one of them, and they've never yet left. And not only are we making good revenues on the rental of that property, we then, of course, get all the lighting, the grip. And now going forward, what we will get is all the aerial work platform, climate control, power generation. Look, this is a really, really good business I'm excited about, and we will absolutely grow this business in the U.K. and perhaps even in the U.K. because we do have some really nice ties to that. On to the U.K., look, I will just say it this way. The management team that we have in place today that you will meet in April are hard and fast and focused on -- as I said, the only nonnegotiable was we will be doing nothing for the short term to put out a good quarter or a good half because it doesn't matter. What we will do is we will build a long and sustainable business model that really shares the same attributes that we've had in Sunbelt Rentals for North America for years and years. You will see more collaboration there. We see that already between our businesses and given the long and sustainable aspect of that. Again, in the meantime, it was let's generate more cash in the next 12 months than we have generated. It's a bit like data center since 2012. Sorry. Yes, wherever the microphone goes.

[Edward Stanley, Equity Analyst]

Ed Stanley from Morgan Stanley. A couple of questions. If we go back to the Dodge outlook, the last time we were here, you said minus 2%, but that's okay because the absolute level of the market is still good. It's now minus 4%, but you're still okay with that because the absolute level of the market is good. But at what point do you get concerned when that forecast starts to turn more meaningfully negative?

[Brendan Horgan, CEO & Executive Director]

Well, again, remember, it went plus 1 first before minus 1. So 2020 last time, was minus 1. Now it's gone plus 1. So in absolute, I'm comfortable anywhere in this range. As a matter of fact, this is borderlining Mike getting his wish to come true because Mike would say we need an even stiffer test. We're not worried about any of these, and I don't know how you answer, "Hey, at 10%, I will be really worried." No, I lived through 2008, okay? So anything we can put through from a resiliency standpoint, we put through any of those scenarios that you model. Now it changes, but it changes in terms of cash. We can't forget to talk about and think about cash implications in this model, which I think we probably ought to go to this appendix slide, which is so, so important as it relates to that and to underpin even our greater level of flexibility. So let's just say the minus 4 is correct, okay? On the bar chart to the left, that's just our fleet in the U.S. based on its age band. So real simple, I'll give you a rundown on it. 2012, you see that. That's about $500 million, $600 million on that green bar. And if you go to the top right, this is our CapEx plan. From a replacement perspective, it's $500 million to $600 million. So you can see the tie, the correlation between the fleet age and that. If 2021 is this year where we have a minus something, whether it be 3 or it be 5, we would be in that 2014 bar and probably a bit of the 2015 bar. So we'd have $1 billion, $1.2 billion that would be prescribed, if you will, from an aging perspective to replacement. It is that -- it's at that time when you would think you probably won't spend much in absolute growth CapEx, as we would have indicated here. That replacement CapEx becomes all of your sort of flexibility. So for instance, with that $1 billion that we have, some of it we would just go ahead and replace where it lies. Some of it we would sell and not replace. And quite a bit of it, in reality, what would happen is we would sell it in one part of the country where there was a bit more of a dampened construction end market, and we would replace it in another part of the economy that today even is growing at 25%, 30% growth. Our California business is growing at 30%. Our Northeast business between Maine and Boston is growing at 27%. So we would deploy that in those areas. But in the end, if it was a real, real drastic, there's $1 billion you don't have to spend. So obviously, you have the proceeds from that. So I think you have to look at it from that perspective. It's very hard to answer what would make us scared.

[Edward Stanley, Equity Analyst]

Okay. And on Slide 16, when you show your rollout of general tool and specialty, last year, you had about 70% of your new locations in specialty, and now it's sort of running back at a more normalized 50% kind of level, on the previous slide. Do you -- is the 50% level sort of broadly split specialty where you expect to be for the next year or 2? Or do you expect to...

[Brendan Horgan, CEO & Executive Director]

No, no, well, that was -- the math on that is 61%. So 61% of those are specialty. It's just purely timing. You add 13 Whites businesses to that which are specialty. And the majority of our greenfields and bolt-ons we will be led by specialty. Anywhere, wherever it is at hand, the mic.

[Steven John Woolf, Analyst]

Steve Woolf from Numis. Just one from me. You mentioned the number of the large multiyear projects that you've just been put on. Could you give us any more detail of wherever that is, locations, infrastructure spend, that type of some background there, please?

[Brendan Horgan, CEO & Executive Director]

Yes. Good. I mean we've had just this incredibly encouraging calendar year '19 in terms of long-term wins. We've won them with great customers. We've won them at really good pricing. And they range from the data centers, of course, so every one of those data centers listed, we would either be primary on-site or secondary. So we have a lot of equipment there. But we have the Javits Center, which we're on-site on, which is a construction -- I'm sorry, a convention center in New York City. We have on-site at LAX, which is stated to be a 4-year project. If you ever have seen an airport project finished on time, let me know which one it is, I'll try to fly through there. But the airports are not only there. We've got some great projects that are going on in Seattle that have just recently broken ground that have nothing to do with data centers but may have to do with an e-commerce business that you would know well. Short answer is they're everywhere. And then we've had some really, really nice special events wins that are long term in nature. Like we've won the Super Bowl for the next 3 years. It doesn't seem like much, but it's a couple thousand pieces that we put on rent when the Super Bowl comes rolling around. Another really interesting one I think, a certain warehouse expanding for a different business that's out there. We have a long-term contract for 1,500 light towers with demand for an additional 1,500 light towers as they're looking to augment some of the dual fuel light towers that we have with fully solar light towers. So it's in addition to, not replacement of. So just a little bit of color, but there is an extraordinary amount. Yes?

[William Kirkness, Equity Analyst]

It's Will Kirkness from Jefferies. I got 3, please. It seems like you've got pretty good visibility through calendar 2020, so I'm just wondering how much of a range on CapEx we should expect for your first look on FY '21, next quarter?

[Brendan Horgan, CEO & Executive Director]

Well, I mean the reason it's the next quarter is because it's the next quarter. Look, I think we'll take a view on that then. But remember, that will just be a first pass. And within our -- we have all the flexibility in the world, and that's what we will leverage as we go through the year.

[William Kirkness, Equity Analyst]

Okay. And then in terms of your capital allocation priorities, obviously very clear and consistent. But if you spend a lot less on CapEx and the cash comes in, you're already doing a buyback. The bolt-ons are there, maybe wouldn't accelerate in more difficult markets. What do you just deleverage for a while, or is there something else?

[Brendan Horgan, CEO & Executive Director]

Well, look, I think that's the absolute thing people should be paying attention to. Look, it is the cash that we will generate. So let's look at it this way. So at our current rate, we anticipate we will finish this year in April at -- in the 1.8x. So 1.8x leverage at a -- we're thinking from an early growth CapEx, which I still won't answer your question on that, and the replacement, which is pretty obvious because we've shown it to you on that appendix slide, including the dividends that we would anticipate next year and the GBP 500 million buyback. So all of that we'll end the year at about 1.6x levered. So every 0.1, so 0.1% for us is GBP 0.25 billion in flexibility. Now how will we utilize that? Certainly one way could be to accelerate our buyback, but no matter what, we'll be between that 1.5 to 2x. So I think the key is there really -- or in that is the flexibility. But let's make sure we pay attention to the cash but the cash we are generating while still being a growing business.

[William Kirkness, Equity Analyst]

Okay. And just lastly, on the U.K., operating costs increased year-on-year. Just wondering if you can maybe help with how much of that is exceptional one-off, and then therefore, how much is kind of drop away on what payback in second half?

[Brendan Horgan, CEO & Executive Director]

Well, a lot of it is -- Mike will know the precise details, but a lot of it is the cost of disposal of the assets. So it's not like it is -- it's not parts or supplies or that sort of thing. It is -- when you have that increase in the level of disposition of your equipment, you have an increase in the cost. And due to some leadership realignment, we do have some redundancy costs. As I said, we're looking for long. I think you will see us begin to make the turn in that business certainly through next fiscal year.

[Jane Linsdey Sparrow, Director]

Jane Sparrow from Barclays. Just one on drop-through, where you went to 48% in the first half, which obviously by implication is lower than that in the second quarter. And you've talked about some softness in mature store drop-through. Now some of that, I assume, is relating to hurricanes. But if next year we're going to have a lower top line growth number as well, how do you think about drop-through in a sort of lower growth environment where you've still got cost inflation coming through?

[Brendan Horgan, CEO & Executive Director]

Well, look, 2 things really in fall-through. One part of it is hurricanes, as I said, albeit it looks like small numbers. 7 million in EBIT is 5 points in fall-through. That's all. Don't get me wrong. We are very, very precious about 7 million in EBIT, so I'm not trying to cast the wrong impression on that. But 19 million in pure rental in hurricanes is 20 -- couple 20 few million in total revenue. And you all realize the tail that we had in these hurricanes, it's incredibly strong fall-through. You pick a fall-through rate, I'd pick a fall through rate of 60%, 70% of the 19 million, and I'd have 11 million or 13 million in profit attributed to that. So that's part of it. The other part of it is although we've been demonstrating for some time the degree in these openings and bolt-ons, that 229 today is proportionately larger than it's ever been. So if we take the previous 10 quarters, as we have illustrated, at any point in time, this previously -- this tranche of 10 quarters is significantly more from a weighting standpoint than it's ever been before. Now to your question which is the more we will demonstrate how we do that, when growth rates do moderate in those more mature locations, you will see the business highly focused on fall-through. You'll see a business that -- it's a changing of tides, if you will. When you are experienced and you have gone through at a branch level or a district level 18% growth, 22% growth, that sort of thing, and then you find yourself over time it doesn't -- you don't go from 20 to 7 overnight. But when you find yourself in that mid- to upper single-digit range, it is a bit different. But the difference is they tend not to bring on the people, they tend not to bring on the extra truck, so you do get that fall-through aspect. So look, long term, I would just say, just use 50%. 50% EBITDA in the long run is what we -- fall-through is what we should be able to deliver, and 2021 fiscal should be no different.

[Charlie Campbell, Housebuilding Analyst]

It's Charlie Campbell, Liberum. I've got 2 actually, probably quite quick. Firstly, on the U.S. infrastructure, what would be the view on that 2020 and 2021? And does that matter? And then secondly, another question on Sunbelt just on penetration rates. Just could you give us a rough idea where we are in general tool and specialty as the 2 broad categories in terms of penetration rates in rental?

[Brendan Horgan, CEO & Executive Director]

Sure. First thing, infrastructure, until we get -- look, it's status quo. There is a lot of infrastructure work that's going on, and that's gone through, as you've seen. But it is by no means the extraordinary overall infrastructure package. Which I think it's hard to argue that is a matter of when, it's not a matter of if. Do I expect to see anything extraordinary before we get through the 2020 November elections? No way. No way. No chance. But all of that is built into what these overall forecasts are. No one is going out on a limb saying that there will be some extraordinary package. I would say the earliest you would see that would be sometime in 2021. But nonetheless, there's a lot of activity. As far as rental penetration, it's a great question because it is one of the key drivers of what our overall strategy is and our opportunity from a growth perspective. If I were to broadly categorize, I would say our general equipment business is at a 55% rental penetration. And I would say all of our specialty businesses combined are less than 15%.

[Rajesh Kumar, Analyst]

Rajesh Kumar from HSBC. Just in terms of labor inflation, how is the market looking? Are you able to keep the staff churn levels low? And how far are you required to pay them higher to -- basically, you've invested in a lot of branches. You do need the people there. Second is what is the nature of discussion you're having with your suppliers in terms of CapEx? How does the competitive landscape look like? And third, the Slide 32, which you very helpfully point out that you've got a 7-year asset holding period, 7 or 8. But when we think of smaller players, they tend to stretch that to 10 or even -- and if there is a cyclically weak patch in 2022, as Dodge seems to think there might be -- they might even stretch further, so do you see a risk that the bolt-ons evaporate at that point because nobody sells their family silver at a point when the prices are quite low?

[Brendan Horgan, CEO & Executive Director]

Okay. Well, let's start with labor. If you follow Dodge at all, you mentioned Dodge, we recently met with Richard Branch. And his first slide had a makeup of words that were their overall poll, you may have seen it, and 2 stood out, capacity and labor. I would call it skilled trade positions. So is there inflation in that market? Well, of course, there is. Is it 7% or 10% or 9% like we might have seen at some point? No. We have invested significantly in it, and we will continue to do so because you're very right in pointing out we wouldn't have it any other way. But yes, it does take those people. Think about all the hours I mentioned in the very beginning as it relates to safety. So that will continue to go. Remember, though, capacity when it comes to labor in the both construction and nonconstruction markets is a tailwind when it comes to rental. So it is an important component of the entire piece. Look, as it relates to suppliers, what better way than to be the one sitting down with your key partner manufacturers and say look at the level of insight we have and clarity we have into our CapEx needs for the years to come. So we are at an incredible advantage when it comes to that. And I'd like to think we negotiate incredibly good win-win outcomes as it relates to that. Your final point on the independents, look, we went through 2008, 2009, they didn't just go away then. It's -- these businesses are cash-generative businesses. The key to remember is when you do go through something that is more difficult, they won't go away but they just really can't grow because too long into the recovery, they're still mining -- they're still needing to be replacing their fleets. They don't have the capital to grow. It kind of goes back to Rory's original question like the market share piece. We will gain market share simply because we can.

[Michael Richard Pratt]

Back to your point on what's it do from an M&A perspective, then, yes, we don't tend to choose to buy poor businesses. We're looking to buy good businesses. So if you are at the bottom of the downturn and your margins and profitability are lower, are you likely to sell if you could have sold it 2 years ago for significantly more or wait 2, 3 years before you can sell it. So we will be at a similar sort of -- you could see it. One natural default is to say, well, once we're down, there'll be lots of businesses to buy. Yes, but they're probably not the ones we want. So you could actually see a slower pace of M&A in the bottom of a downturn, but we'll see.

[Brendan Horgan, CEO & Executive Director]

But look, I mean let's just be clear. There is a long, long, long list of independents that we can buy for a very, very long career.

[Rajesh Kumar, Analyst]

No, I'm not debating that. The question is that when we are expecting the bolt-on profile, do you expect to do a bit more in 2020 because you think that 2021 might be a year when people are not willing to sell? Or you do you wait after 2021 to do? There will be a peak. Will it be before '20...

[Brendan Horgan, CEO & Executive Director]

I mean, look, bottom line is this. We are always actively in conversations with lots of business owners out there because you build relationships over time. It's very hard to say one year will be bigger than next. In our base case scenario, we think this current year was on the busier end of the spectrum. I would expect next year to be a bit less. We won't buy them just because, because keep in mind, some of those that are out there that you may want to buy, they'll be around, so there's no big rush. In some cases, half of our deals we do aren't running processes, they're just building relationships.

[Andrew J. Wilson, Analyst]

Andy Wilson from JPMorgan. Just 2 quick ones, please. Just you mentioned on the large piece of work that you won recently and obviously had a good run with those. And I think you mentioned that you're on good pricing terms. If you're not competing on price, what actually are you kind of winning on that? It sounds like a really naive question. Or is it that pricing is competitive, but this is still good pricing because there's not that many people that can do it. I'm just interested as to how you describe why you're winning.

[Brendan Horgan, CEO & Executive Director]

On these big projects I mentioned or even the one-off at lots of sites like the light towers, how many can spend 20 million in CapEx for a project, where all the tens of millions it takes to have 3,000 light towers around? I'll give you the answer, 2. So those 2 are both responsible and looking to, over time, on our own, independently, just nudge rates up. We don't need 4% in a year. I mean I'd take it, I wouldn't give it back to you, but you just don't need that. But the real key is this, not just that because we can, it's because of the breadth of products and services we have. All of these customers we talk about, the one, for instance, around the light towers, they, in their full operations, nothing to do with construction. Inside of the last 6 weeks had a -- not a hurricane event but had a fire event, which we had to deploy all of our specialty businesses into. So our remediation, our climate control, our power generation, they're looking for partners who can actually solve multiple solutions.

[Andrew J. Wilson, Analyst]

So if the market has been consolidating, which clearly it has, and less so from yourselves but maybe from somebody else, presumably that dynamic is just going to get better because you don't need to kill each other, and those large contracts, presumably you just have less competitors?

[Brendan Horgan, CEO & Executive Director]

You can perceive that -- that's something you could draw an assumption to. Sure.

[Andrew J. Wilson, Analyst]

And second one, just around specialty, and again maybe this is just -- it's just as simple as not worrying about it. But I kind of feel like I've asked this before, but in terms of are you seeing more people trying to kind of replicate that model in terms of specialty?

[Brendan Horgan, CEO & Executive Director]

Yes.

[Andrew J. Wilson, Analyst]

And the reason I ask is -- sorry, but the reason I ask is just it feels like I asked that question because I'm worried about it being kind of more competitive and, therefore, less attractive, right? But is it just that there's not that many people who can actually do it to the scale you can, and therefore, I'm actually just worrying about a big competitor when I should be worrying about you're just taking market share?

[Brendan Horgan, CEO & Executive Director]

Yes. Well, it won't be just a bunch of independents because it is too complex. It requires some confidence in terms of your out-of-the-gate capital investment. Look, we try some of these you never hear about. And the ones that we tried that you never hear about, we fail fast and you never know the difference, we spend 10 million. If I'm a little independent business owner and I spend 10 million and I fail fast, I go bankrupt fast, right? So there's a difference in that. In a way, we actually need some larger organized competition in this space if to only increase rental penetration. Remember what I said about flooring? If we go from 3 -- we took it from 2 to 3 in about 3 years. It's all we've done, and we have about $100 million business that, by the way, has 32% ROI, so it's a damn good business. But if we get it to 20% rental penetration, just 20%, in essence, it's a $2 billion rental space annually. So my $500 million I gave you was 25% share. We're happy to have a couple of others. So in a way, no one wants just one choice, they ultimately want a couple of choices. So look, we are a little precious about sharing some of this stuff because some can copy. It's okay. I mean in the end, we will have our fun fair share. Is that good then, Will? Great. Well, thank you all for your time this morning.