Ashtead Group PLC

LSE:AHT

Earnings Call Transcript 2022-Q3

[Operator]

Good day, and welcome to the Ashtead Group Q3 Results Analyst Call.

I will now hand you over to Brendan Horgan. Please go ahead.

[Brendan Horgan, executive]

Good morning, and welcome to the Ashtead Group Q3 results call. I'm joined here today by Michael Pratt and Will Shaw.

Before we get into the 9 months highlights, I'll take this opportunity to speak to our Sunbelt team across the U.S., U.K. and Canada, who are listening in to congratulate them on their steadfast resolve and continuous improvement mindset and advancing our safety culture. Their focus continues to deliver improvement in measures like total recordable incident rate, which improved again in the period and remains below one. But it's really about the culture, surrounding our Engage for Life program that speaks to the sustainable nature of how we operate, which increasingly is something our customers are asking about as they take notice of how all of you, our team members, are operating at their sites, their projects or events. This cultural progress and results are something that you should all be very proud of. So for these efforts specifically and all of the broader contributions which have delivered ongoing success of our company, please accept my thanks and appreciation.

Let's now move on to Slide 3 for some highlights. Our performance picks up where we left off in December at the time of our Q2 results. The ongoing momentum across the group produced another very good quarter and 9 months performance. Rental revenues for the 9 months in North America were well ahead of last year's pandemic-affected levels by 22% and an impressive 16% ahead of the 2019-2020 pre-pandemic levels. This market-leading performance continues to demonstrate the strength in our model, momentum in the business and the broader market, as well as the early benefits of executing on our strategic growth plan, Sunbelt 3.0, specifically adding 81 locations in North America in the period, 57 by way of greenfield and 21 through bolt-on acquisitions. The pipeline of bolt-ons remains strong, having completed 19 through the reporting period and a further 3 in the fourth quarter. This combined investment of $1.2 billion in businesses fully complements Sunbelt 3.0. I'll add more color to these additions in the slides to come.

We invested $1.7 billion of CapEx, primarily on rental fleet to support the growth in our existing locations, greenfield and acquisition follow-on. $311 million was allocated toward our share buyback program in the 9 months. And after these activities, our leverage again ended the period at the lower end of our target range at 1.5x net debt to EBITDA. These highlights and outlook, which we'll cover in more detail on the slides to come, put us in a position to expect full year results slightly ahead of our previous expectations.

I'll turn now to Slide 4 for our latest guidance. In recognition of this ongoing and broad momentum in the business throughout the 9 months in levels of demand, rental rate progress, pace of our greenfield openings and the increased bolt-on activity, we're updating our full year guidance. So for the third time in as many quarters, we take our rental revenue guidance up, most notably increasing the U.S. to 20% to 22%, while narrowing the ranges for Canada and the U.K. At a group level, we now expect revenues to grow between 19% and 21%. We also increased our CapEx investment guidance for the year to $2.4 billion to $2.5 billion, as the pace of new rental fleet landings increased in the latest quarter and our manufacturers' commitments in Q4 are solid despite the ongoing supply constraints present in the broader equipment industry. Regardless of the increased CapEx, we left our free cash flow guidance unchanged. Exactly where we land on free cash flow generation will again come down to the precise timing of new fleet landings and disposals around the year-end.

So with that, I'll now hand it over to Michael to cover the financials in more detail. Michael?

[Michael Pratt, executive]

Thanks, Brendan, and good morning.

The group's results for the 9 months are shown on Slide 6, and as you'll now be accustomed, they're presented in U.S. dollars. As Brendan said, we had another strong quarter, and hence, 9 months, with good momentum across the business. As a result, group rental revenue increased 21% on a constant currency basis in the 9 months and 25% in the third quarter. While for the 9 months comparatives were affected by the pandemic, there was little or no effect on third quarter trading last year, emphasizing the strength of our performance. This can be seen clearly when compared with the first 9 months of 2019-'20 with rental revenue up 17% on a constant currency basis. This revenue performance was achieved with a slightly larger average fleet than last year, which generated EBITDA margin of 46%, a significantly improved operating profit margin of 27% and group return on investment of 18%. As a result, adjusted pretax profit was $1.4 billion and adjusted earnings per share were $2.35 for the 9 months.

Turning now to the businesses. Slide 7 shows the performance in the U.S. Rental and related revenue for 9 months was 21% higher than last year at $4.5 billion and 14% ahead of the same period in 2020. This has been driven by volume predominantly, but also by the benefit of a favorable demand and supply environment, which has enabled us to deliver healthy rate improvement since March last year. As we've discussed, a number of costs have come back into the business as activity levels have increased, and we've seen inflationary pressures in the cost base, particularly related to wages for skilled trades, fuel and transportation, but in reality, across the whole cost base. As a result, EBITDA fall-through of 41% is consistent with the guidance we have given since the Capital Markets Day in April of last year of low 40s, reflecting the significant investment in the first year of Sunbelt 3.0. These factors combined to give an EBITDA margin of 49% while operating profit was $1.4 billion at a 30% margin and ROI improved to 24%.

Turning now to Canada on Slide 8. Rental and related revenue was 35% higher than a year ago at $420 million. This growth reflects in part the depressed comparatives last year, particularly in the lighting, grip and studio business, William F. White, which contributed virtually no revenue in Q1 last year. Since then, it has performed strongly until it was again hit by production restrictions as a result of the Omicron variant during the third quarter. Production started up again in February, and we expect to bounce back strongly. The performance of the lighting, grip and studio business combined with a strong performance from the original Canadian business as lockdown eased enabled Canada to deliver an EBITDA margin of 46% and generate an operating profit of $110 million at a 24% margin. ROI improved to 22% as it benefited from the contribution from the lighting, grip and studio business.

Turning now to Slide 9. U.K. rental and related revenue was 19% higher than a year ago at GBP 406 million. While the business continued to benefit from our support for the Department of Health and its COVID-19 response, the core business is performing strongly and is benefiting from the investments in the operational infrastructure of the business and the reshaping of the operating footprint. Third quarter rental revenue excluding the support for the Department of Health was 9% higher than a year ago. The work for the Department of Health accounts for around 32% of revenue for the 9 months. However, as you'll be aware, the U.K. government has announced that free mass testing will stop from the 1st of April, and so we expect the majority of this revenue to effectively cease at this time.

The 24% increase in operating costs reflects the cost of servicing this work for the Department of Health, increased activity levels within the business, inflationary pressures and ongoing investment in the operational infrastructure as we roll out the regional operating center model. These factors resulted in an EBITDA margin of 30% and an operating profit margin of 13%. As a result, U.K. operating profit was GBP 72 million for the 9 months and ROI was 15%.

Slide 10 sets out the group's cash flows for the 9 months and the last 12 months. I will not spend too long on this slide, but this year's free cash flow does illustrate the significant change we have seen in the business over the last 10 years. As we came out of the last downturn and spent on growth capital expenditure, we were free cash flow negative. In contrast, this year, as we've returned to significant growth CapEx venture, it has been funded from the cash flow of the business. In the last 12 months, we spent $1.8 billion on fleet and nonrental fleet while still generating free cash flow of $1.2 billion.

Slide 11 updates our debt and leverage position at the end of January. Our overall debt level increased in the 9 months as we allocated capital in accordance with our policy, spending $948 million on bolt-ons and then returned to shareholders of $213 million through our final dividend for 2021 and $307 million through buybacks. This was all achieved with leverage at 1.5x, excluding the impact of IFRS 16, the low end of our target range. Our expectation continues to be that we will operate within our target leverage range of 1.5 to 2x net debt to EBITDA, but most likely in the lower half of that range as we continue to deploy capital in accordance with our capital allocation policy. We have a good pipeline of bolt-on opportunities. And as you have seen, we have invested a further $270 million so far in the fourth quarter.

And with that, I'll hand back to Brendan.

[Brendan Horgan, executive]

Thanks, Michael.

Let's move on to some operational and market detail, beginning with Slide 13. In the U.S., our revenue gains continued throughout our business. General tool furthered its improvement in the quarter, delivering 19% year-on-year growth. Specialty continued its remarkable performance, growing 34% on top of last year's strong growth in the same quarter. The strength of this performance in the quarter and 9 months is broad and extends through all geographic regions and virtually all of the specialty business lines.

The supply and demand equation remains incredibly tight, an ongoing dynamic that has led to record levels of utilization throughout the business. Further, our industry, like any other, is experiencing inflation, ranging from equipment, to goods, to services, to wages. As I said during our last update, when you combine these supply and demand circumstances, inflation realities and focus on delivering leading service to our customers, you should be able to do it while increasing rental rates. We have done just that.

Our sequential and year-on-year rate improvement has been very good, even outpacing the ambitious internal targets we've shared with you in previous updates. Further, this incredibly unique circumstance of growing demand and constrained equipment supply serves as a perfect catalyst to encourage and increase the structural shift from ownership to rental. This is exactly what we believe is happening during this inflection period in the market. I'll cover in a bit more detail our views of these dynamics shortly.

Let's move on to Slide 14 for a closer look into our specialty business performance. The year-on-year rental revenue movement seen here gives a more granular look into individual specialty business lines and clearly demonstrates the growth is equally large and broad. Total U.S. specialty revenues increased 34% in the quarter, boosted by the temporary structure acquisition, Mahaffey, which we owned for 2 months of the quarter, and with an exceptional large project. Excluding this, specialty still grew at 25%, its highest quarterly growth rate of the year. As a reminder, this is growth on top of very strong growth throughout the same period a year ago.

This should highlight a couple of things. First, our portfolio of complementary products and services, which is unique to Sunbelt, creates powerful cross-selling opportunities, which we are unlocking at an increasing pace. In the 9 months alone, we opened 42 specialty greenfield and added a further 6 by way of bolt-on. Second, growth rates like this point clearly to early stages of structural change being accelerated by our recently found scale, producing a reliable alternative to ownership. What else can explain growth like this so clearly ahead of any tangible end market growth rates? This level of growth and activity also demonstrates the nonconstruction end markets, such as facility maintenance, municipal activity, emergency response and live events. We commonly refer to these end markets and many more as MRO, or the maintenance, repair and operations of the geographic markets we serve. These incredibly large addressable markets make up the majority of our specialty businesses revenues, however, increasingly benefit our general tool business as our cross-selling prowess continues to improve.

And finally, I'm excited to announce our acquisition of ComRent, the market-leading solutions-driven load bank rental business. The load bank market represents an exciting growth opportunity in a rapidly advancing electrification environment, a product and service which is highly complementary to our largest specialty business, Power & HVAC, creating an even more powerful cross-selling opportunity across many of our specialty and generalist business lines. This addition will be part of the overall Power & HVAC business, but significantly increases our scale and expertise in load bank offering. We just completed this deal in February so there's not much detail in this set of results, but you will hear more about it in the periods to follow.

Now that we've touched on specialty and nonconstruction markets, let's turn to Slide 15 and cover the latest construction market forecast. Construction starts have continued their recovery and are now above pre-COVID levels, with forecast showing further growth all the way through 2026. These starts and put in place figures remain supported by residential construction, which continues to show strength. The remaining nonresidential and nonbuilding put in place forecast improves 5% in 2022, while continuing thereafter through 2026.

Consistent with our recent updates, there remains significant levels of construction activity. These examples would include warehouse, data center, distribution, fulfillment, and manufacturing, such as electric vehicle factories, lithium battery plants and new liquid natural gas plants. These are all examples of an abundance of large scale multiyear projects that are in early-stage construction or late in the planning phases, projects that we are positioned to serve in a meaningful way, more so than at any point in our history. These statements don't even begin to consider the large projects that will certainly be on the horizon as part of the recently passed infrastructure bill.

When you put all of these things together, and of course, barring any meaningful interruption stemming from the geopolitical environment, we feel comfortable to say that with current activity levels and taking on these known and forecasted construction additions will result in a strong demand market for years to come, which we are poised to benefit from.

Let's now turn to Slide 16, which is a new addition to our deck. Designed to frame a set of unique dynamics present in the market today, that when paired with the end market and business activity color I've just covered in our actual results and forecast, we believe makes for an environment where rental generally and asset in particular are positioned to benefit from. Any one of the 3 dynamics seen on the slide is something we have all confronted at one point or another over a number of economic cycles. However, when taken together, as is the reality today, one can draw generic conclusions as to their impact on the macro business environment, but may miss the specific impact of an individual business or industry for that matter, which is why it's important we take you through our thoughts on each and their implications for rental in general.

This view organizes each dynamic to explain circumstances, our educated opinion as to duration, and importantly, how we believe it impacts Ashtead's growth prospects. Beginning with the very well documented constraints on supply chains in general and as it relates to our business. Those of equipment and vehicle OEMs and suppliers to both end users or aka owner-operators of equipment as well as the rental companies that make up our industry, we believe these constraints will remain for another 4 to 6 quarters at a minimum. Our ability to navigate these challenges through our engaged planning with our key OEMs throughout the pandemic and in conjunction with the timeliness of Sunbelt 3.0 becomes an advantage. Look no further than our ability to facilitate the largest rental fleet CapEx year in our history, all in an incredibly difficult supply-constrained environment.

Moving on to inflation. After nearly a decade-long economic cycle with minimal levels of inflation, businesses are experiencing higher levels across most cost lines. We anticipate the current levels will moderate in the quarters to come, but we may well have a cycle with modest inflation throughout. We have thus far been able to digest these inflationary realities through scale efficiencies and rental rate improvements and are confident this will continue to be the case.

And lastly, skilled trade scarcity. There is indeed a shortage of general labor. However, when you think about our business, it's not just labor. The vast majority of our workforce is comprised of very skilled trades, specifically, mechanical technicians, licensed commercial drivers and equipment application specialists. The availability of such a workforce is not just short, it is scarce. As an example, construction job openings are at their highest level in 20 years. Unlike the first 2 dynamics, we believe the duration of this goes on as far as we can see.

Our brand carries a reputation of doing the right thing for our people, in good times and in more challenging times. This fact, along with our growth plans and opportunities for training, development and advancement, positions us to make this challenging skilled trade environment an advantage. When you put all these together, we believe they are a structural tailwind to our business. Specifically, they will foster deeper rental penetration. And those with scale, experience to execute, technological advantages, great levels of customer service, a culture of people engagement and financial strength will disproportionately win. Rental will grow, and the big will get bigger. This is a slide that we'll update and revisit in the periods to come.

Turning now to our business units outside of the U.S., beginning with Sunbelt Canada on 17. Michael covered the financials, which were again a record from a margin and returns perspective as this business continues to gain ground and benefit from its relatively newly found scale. Similar demand and supply constraint conditions as experienced in the U.S. have contributed to record levels of time utilization and strong year-on-year rate improvement. Our lighting, grip and studio business experienced temporarily reduced activity levels in the quarter due to the COVID-induced production restrictions, but activity is already rebounding in the now current quarter. And we fully expect to return to year-on-year growth in the near term. The William F. White team is working on our geographic expansion plans beyond Canada. And I hope to be able to update you on these early next year. We are well underway executing on our Sunbelt 3.0 plans in Canada, and our runway for growth remains long.

Moving on to Sunbelt U.K. on Slide 18. Consistent with our last update, the business has been executing well and carries good momentum in the early stages of Sunbelt 3.0. Demonstrating with trading in the quarter significantly ahead of the pandemic impacted 2020, but also notably ahead of 2019. The support surrounding the COVID testing sites continued at a high level. However, as you would have heard from Michael, following the announcements that free mass testing will stop in April, we expect the support to effectively cease at that time. The progress of the U.K. business is present beyond just these reported financials.

As we continue to progress our 3.0 plans, we are advancing the technological capabilities, the operating organization and efficiencies through improved practices. Similar to what the business is experiencing in North America, supply constraints, inflation, et cetera, we are delivering subtle yet notable sequential and year-on-year rate improvements. Something that I've said is far overdue in our business and the broader industry in the U.K. We're happy to be out leading the way in this regard as a recognition of our unique lineup of products and relentless focus on customer service. This focus on rate improvement will remain and indeed increase as we move into the new year.

Turning now to Slide 19. As we've done during the first 2 quarters of our Sunbelt 3.0 plan period, I'm pleased to update, again, progress across all actionable components. Illustrated herein, you'll pick up some of the specifics related to each. I'll pick just a couple and highlight the sheer quantum of greenfield. We've opened 57 in route to what will be 90 or so in year 1 of 3.0. These are incredibly targeted openings following a detailed playbook to offer more specialty product solutions and general tool convenience, with a focus on advancing our clustered market approach for our customers. The lineup of bolt-on acquisitions completed, augmented and added to our greenfield campaign, having added temporary structures via Mahaffey acquisition, our tent specialty business line, and most recently, significantly bolstering our Power & HVAC business with the addition of ComRent, the market leader in load bank rental solutions. Our plan is clear, and our team is engaged and focused on continuous delivery. We'll keep you posted on our progress with every passing quarter.

Moving on to Slide 20. As mentioned previously, we've increased our CapEx guidance in the current year, driven by strong demand across our business units. The increase comes largely in rental fleet in the U.S. as our OEMs have increasingly filled our ask for incremental deliveries, raising the lower end of our U.S. rental fleet CapEx by $200 million and top end by $100 million. This accordingly increases our full year gross CapEx range to $2.4 billion to $2.5 billion, with proceeds from used equipment sales reducing the gross plan by $300 million. We've deferred some of our planned fleet disposals where the quality meets our standards to satisfy market demands.

We also set out our initial guidance for next fiscal year, which increases the midpoint of our current year U.S. rental fleet CapEx by over 50% to a range of $2.4 billion to $2.6 billion. This is a substantial increase to what will be a record level of CapEx in the current year. This investment will fuel our ambitious growth plans incumbent in Sunbelt 3.0 and demonstrates our confidence in the current and forecasted demand environment, competitive positioning, the strong relationship we have with our key suppliers and our business model in general. The CapEx investment in Canada and the U.K. are similar to current year levels, leading to a group level gross CapEx range of $3.2 billion to $3.4 billion, reduced by anticipated proceeds from used equipment sales of $550 million.

This leads nicely into capital allocation on Slide 21. During the 9 months, we've invested $1.7 billion in the existing location in greenfield fleet additions and a further $938 million in bolt-ons. We've returned to shareholders $213 million in dividends and $311 million through buybacks in the first 9 months.

So to conclude, let's turn to Slide 22. This has been a really good 9 months. The momentum in the business is incredibly strong. This existing demand will be compounded with known and forecasted activity that, coupled with unique market dynamics as we've covered today, we believe will strengthen our business for years to come. Sunbelt 3.0 is advancing at a pace better than planned, and our remaining road map is incredibly clear. The most tangible areas of execution are the addition of 81 locations in the first 3 quarters of a 12-quarter plan and the addition of our tenth specialty business line, hitting the mark on our first 2 actionable components: to advance our market cluster and amplify our specialty business.

The bolt-on pipeline remains very active with potential, giving us great optionality to further supplement our organic growth. Our balance sheet has never been stronger or more efficient, having improved both our fixed and variable debt positions, invested heavily in all our capital allocation avenues while remaining at the bottom end of our target leverage range. For these reasons and coming from a position of ongoing strength, improved trading and positive outlook, we look to the future with a confidence in executing on our well-known and understood strategic growth plan.

So with that, we will open the call up for Q&A. So back over to you, operator.

[Operator]

[Operator Instructions] We will take the first question from Andrew Wilson from JPMorgan.

[Andrew Wilson, analyst]

I've got 2. I just wanted to start, it's a broader question, and I appreciate, Brendan, all the detail on kind of the unique position in that sort of Ashtead has in the backdrop that you described. I guess, just interested in terms of sort of, obviously, geopolitical unrest that we've seen and the impact that that's having in lots of different industries, whether that be how you think about the CapEx guide, how you think about the sort of the business developing. And appreciate that your direct exposure towards Ukraine is basically 0, but indirectly, whether it be for the equipment providers that you're buying from. Just -- I guess interested how you would sort of couch the risk there versus kind of pre this conflict starting and then how that's fed into your guidance. It feels like quite a long and broad question, but hopefully, you get the sentiment.

[Brendan Horgan, executive]

Yes, Andrew. Thanks. It may seem an odd response, but I'm happy you just got that -- we got on with that, because at some stage, we'll -- I'll attempt to answer your question and then maybe we can get on to some of the other matters that we covered. But look, you said it, just to be clear here, we have 0 exposure there, which everyone should know. In the end, what we've done is this. We have, as we always do, we -- I think you know us to be -- have our finger on the pulse as they say. We are incredibly close to our business, and we are incredibly close to all of the leading indicators that may affect us.

So if we think about that end market activity that we talked about, we are always watching. The numbers that we would have shared on Slide 15, for instance, those are a 30,000-foot view. Any of you can get those from Dodge. And you can look at them and take them in on your own sort of -- and gauge whether or not you think they're right or they're not. At a business level, we get remarkably granule. We get all the way down to the zip code or post code level in all the geographies that we serve. And we look for any little hints that things might be happening. For instance, we look at thing -- we look at postponements, deferrals, cancellations of projects. We're not seeing any of that yet.

Now I appreciate it's very early days. I'm sure, like everyone on this call, we're all hopeful that the unrest resolves itself in the nearer term rather than the long term. That's not our area of expertise. I think the best way to look at this, from an investment case, how will our business do? I think the best way to do that is to focus on what we outlined on Slide 16. Because what we think is most likely to come out of these things, in terms of impacts on our end market, things like inflation, things like energy prices, et cetera, it's to really look and say, okay, there are certain businesses that have tolerated these sort of things well, like us, and there are other businesses out there in the environment that haven't.

So if you look at things like supply constraints, where we've said we think this continues for the next 12 to 18 months, I'd probably take the over on that. In other words, what's happening today probably extends that a bit further. But what's happened? How have we tolerated that? We've just had our biggest CapEx year in history in the most challenging supply environment I've ever experienced in my 25 years. And I can speak to our colleagues who stood behind us [indiscernible], the Brad Lulls that are working through all of this. And we've been able to do it because of the partnerships the way that we outlined it.

Then you look at inflation. Could this perhaps challenge what we said there in terms of duration where moderate -- where we believe it moderates in the quarters to come? I actually think we're going to be right. Michael's sitting across from me, and he can opine. Because naturally, what's going to happen is we have high inflation today, we will ultimately lap high inflation. Now could we be wrong and we see 6%, 7%, 8% inflation in the years to come? We could be. This is simply our view. And we believe that in this view, as we have demonstrated, so again, just like the supply constrained environments, we demonstrate our ability to navigate that better than others. When it comes to inflation, we've demonstrated our ability to increase rates and gain efficiencies through scale, and therefore, tolerating it. So that's a big thing.

I mean, I've got Michael across from me. I'm sure we're going to get questions about rental rates. I'm having a hard time stopping Michael's excitement about rental rates, which I think is saying a lot. We are able to actually tolerate that and then even more so, we believe in the year to come. And then the same thing goes with skilled trade scarcity.

So I think, Andrew, that might be not exactly what you're looking for. But I think when you look at Ashtead and you look at how this may or may that impact our business plan, we think these things lend themselves to increasing our North Star. Our North Star is increasing rental penetration. And this mix of dynamics and end market forecast that we think will hold true benefits us. So a long-winded way to answer the first question, Andrew, but I hope that gives you something to go with.

[Andrew Wilson, analyst]

No. I think that's exactly what I was looking for. I appreciate that's not necessarily a very easy question to answer. Second one, hopefully, is a little bit more straightforward, at least in terms of the drivers. But just thinking about the -- looking into FY '23, and not necessarily expecting specific guidance. Obviously, we'll take it if it's coming. But just how to think about the drop-through, given obviously the sort of competing elements around, I assumed, I guess, good growth, but also cost inflation that you've alluded to a number of times and then obviously the positive rate development, I'm just interested at sort of what we should be thinking going into FY '23 on the drop-through.

[Michael Pratt, executive]

Yes, Andrew. I suppose, consistent with what we've said since we launched 3.0, that we'd expect it to be in the low 40s this year and then improve over time as we go through 3.0. So we would expect it to be sort of in that low to mid-50 range for next year and then we'll then move on to the year afterwards. So yes, you would expect -- we've taken -- there will be a number of -- there's been a step change in costs in terms of investing in the business. So conscious decisions to add costs in certain areas this year, whether we're talking about technology or whether you're talking about the greenfield rollout, et cetera. Also, costs that have come back into the business this year that weren't there last year. So those are the factors, of course, to be where we are this year. But going forward, we'd expect to be somewhere in that sort of low to mid-50 range.

[Operator]

We will now take the next question from Suhasini Varanasi from Goldman Sachs.

[Suhasini Varanasi, analyst]

Just a couple for me, please. You mentioned in your statements about how there has been rental rate increase in the call that has been better than expected. Can you maybe comment on the magnitude of that? Given you've also probably seen the product inflation, given the supply chain constraints, how has that compared, maybe price versus volume? And then the second one is probably a little more straightforward. In the U.K., we have to think about the underlying margins ex the government testing business. How should we think about that?

[Brendan Horgan, executive]

Sure. Look, I'll touch on rate. I think I picked up most of that. But yes, we've said better than expected. I'll remind you early in the year, we said, by a way of answering a question, that we had set a -- what felt is the time is an ambitious target of increasing rates 5% sequentially from May 1 through April 30, which would have led to about a 2.5% average rate improvement year-on-year. We're going to finish the year more like 5% year-on-year. But more importantly are those very recent signs and trends that we see. And in the spirit of me mentioning Michael's excitement about rate, I'm going to turn it over to him to answer the piece about rates, sequential movements as we've seen recently.

[Michael Pratt, executive]

Yes. We -- in total, I guess what we -- the way I'd characterize it is rental rate improvement has been strong throughout the year. But what you're typically seeing on a seasonal basis is they go down in -- over the winter period. And this year, we have -- and we've only seen it twice since the great financial crisis. We've seen it twice before whereby our rental rates in February are sort of higher than they were in October, November time of the prior year. And so we've only seen that twice before. And actually this year, that period increase is stronger than it's been before. So overall, we just say a good rate environment with the momentum continuing, and we'd expect it to continue.

[Brendan Horgan, executive]

Right. And what follows periods like that where you have sequential improvement from December to January, January to February, you get a good year that follows as well. So that's the rate piece. The next one was about some U.K. margin underlying?

[Michael Pratt, executive]

Yes. And so we are -- with the NHS stuff, I guess, you've got to look, there's 2 pieces to it. There's both the rental piece, but also there's quite a lot of sales sort of pass-through. So the margin in the U.K. is around about 13% at the moment, in that you're just -- you're losing incremental margin. So with the relatively fixed cost base, then I would expect margins to be slightly lower next year is the best way to look at it.

[Operator]

We will now take the next question from Rob Wertheimer from Melius Research.

[Robert Wertheimer, analyst]

It was interesting to kind of hear you characterize the -- some of the challenges in the business, labor availability, and that's been an issue for a long time, I know, is a probable competitive advantage. And I guess it's obvious, if you acquire somebody, you get to maybe increase productivity and leverage some of the talent that you get in. Is there anything else you're seeing on the ground? I mean, do you actually see an inflow of mechanics and other folks from smaller rental companies? I wonder if you could just flesh out that thought that you expressed.

[Brendan Horgan, executive]

Yes. I mean we -- what we have -- I think first things first is just, as you pointed out there, that an advantage to a degree. And let's talk about just tolerating it to begin with. As I said, we'll do 90 greenfield this year. And as you can imagine, we've either onboarded or recruiting the balance of those that will open in Q4. So clearly, we've been able to sustain. We've also had really strong retention levels. Where are we getting them from? Certainly, some of the people we're getting from these bolt-ons that we've done, which is an attractive part of bolt-ons at this stage and given these dynamics.

But yes, we are attracting, no doubt about it, some of the skilled trade from some of the maybe less adept businesses that are out there on the smaller end of the spectrum, when they look at the overall host of offerings, whether it be our career progression that we engage with our team members with very early on. And then let's not forget about pay. It's been well documented that in October of 2020 before it became vogue, we had a company-wide increase for our skilled trade employees than we would have done September of 2021. So not even a year from when we would have done the first, we did a 6% increase over that period. And at the risk of letting the cat out of the bag, to some of our employees who are listening today, we're going to do another substantial wage increase effective either mid-May or June 1 with the balance.

So those things matter, as do things like 401(k) and never faltering during the pandemic when it comes to things like this. But when you have the reputation we have in terms of the way that we treat our employees and you can share with new team members who get on board very clearly how we're going to grow the business, I think they see growth opportunity but also security. And in general, although it was called the year of the great resignation, we've seen some incredible retention rates throughout our business, skilled trade included.

[Robert Wertheimer, analyst]

That was interesting. Just real quickly, can you remind us your fuel cost as a percentage of cost structure to the extent you're willing to say, and then just how that flows through surcharges on deliveries and/or rental rates? Then I'll stop.

[Brendan Horgan, executive]

Yes. While we're looking for the exact fuel component, let me answer that, Rob, with something that we focus on in the business, which is something called DCR or delivery cost recovery. So our did not -- so the numerator being the revenue, the denominator being the cost, in this fiscal year, our cost of delivery will be $700 million. And, boy, I don't know if I've ever shared this publicly before, but our delivery cost recovery, when you take every single cost, the fuel for our trucks, the license, the tags, the driver, the driver's over time, the driver's benefits in health care, et cetera, it is 79.6% compared to last year's 79.9%. So I think that's actually remarkable to demonstrate our ability to tolerate this.

As I would have come out very early last year and said we have an internal target for increase in rental rates, we will have the same this year. But we will also have an internal target for increasing our delivery cost recovery in a meaningful way, more into that 90% range, I think, is what the target is going to be. So just to put it in perspective, that $70 million like-for-like profit, but our revenues will grow so will our cost of deliveries grow. Michael, did you get an exact fuel number there?

[Michael Pratt, executive]

Overall figure, it's about 1% of revenues overall in terms of -- sort of delivery cost is the driver. It's -- everything else that goes in with it. Fuel is not exactly a large piece of it.

[Brendan Horgan, executive]

Right, right. So I hope that adds some color, Rob.

[Operator]

The next question comes from Rory McKenzie from UBS.

[Rory Mckenzie, analyst]

Firstly, just 2 to clarify the underlying U.S. rental revenue growth. So firstly, can you say how much rental revenue in Q3 came from the acquisitions you made over the past 12 months? And so what the organic year-over-year was? And then secondly, can you just talk about the one-off projects or events that affect the comparisons? For example, last quarter had tough hurricane comps. Next quarter has got tough deep freeze comps. And I think you mentioned there was a one-off project this quarter. So just a few comments on the kind of underlying growth rates. Yes, maybe this one's first, and I've got one on the guidance again.

[Michael Pratt, executive]

Well, in terms of Q3, and we -- I think it's difficult to say what's exactly underlying. But in terms of Q3, our 25% growth in Q3, around 80% of that was organic and the 20% of it was bolt-ons. If you look at it for the year as a whole, then around 19%, then around 15%, 16% of that was organic and around 3% to 4% was bolt-ons. And that's realistically the way to look at it.

What we had is -- you're right, we had hurricanes in Q2. There was variable flow-through that into Q3. And so I think there is a challenge with what is underlying, because you're right, it was hurricanes this year and it was deepfreeze plus hurricanes the year before. There is always something of some else. So we try to avoid stripping things out, it causes -- influences growth rates, but it's not just a concept really. It's underlying. It's all underlying. It's all part of it.

[Brendan Horgan, executive]

And we mentioned around the Mahaffey and, of course, we would have illustrated it as such on Slide 14, showing the specialty growth excluding temporary structures at 25% in the quarter, 24% in the 9 months, because in that business specifically, there was a very large exceptional project that happened over those 2 months. So we'll add some clarity on that as we lap them a year from now.

You were asking about some of the larger projects, and I gave anecdotes around those during the actual reading, if you will, of the results. But it is just big. It ranges from the distribution facilities that we mentioned, data centers. I mean there's an $8 billion theme park that's about to be built in our backyard that were -- I mean, $8 billion rollercoaster ride. Think about that. There's a very well documented Ford BlueOval plant and the EV plant that's right next to it, which is called BOSK, which is just a joint venture between BlueOval aka Ford and SK Battery. Rory, look, you've known me for a long time. I've been in this for 25 years. Never have I seen an end market environment that has more large projects presently in early stages and more large projects that are in very late-stage planning, all of which, as you know, there are a couple of us out there that are incredibly well poised to service those projects.

[Rory Mckenzie, analyst]

Yes. I appreciate one of our projects are very much part of your model. And then just lastly, I appreciate the earlier comments on the structural tailwinds that you benefit from. But coming back to that FY '23 guidance, can I ask on the kind of stress tests that you applied? So compared to the demand that came in from more fleets from all of your branch managers, did you then temper that for risks of fleet availability, the risks of rising costs causing some project delays and pushouts further? Just in today here, how you went through your kind of, first, budgeting process in what -- such an unusual environment?

[Brendan Horgan, executive]

Yes. Rory, we put it through the meat grinder like we always do. We have individual managers look at it. We have certain elements that the sales force look at it. We have district managers, market leaders, VPs, et cetera. Did we do -- did we curtail that some? Yes. I mean look at activity levels right now. Look at time utilization. The levels of demand that -- it's very interesting. So many times I have been talking to our branch level managers, our district managers, regional specialty folks, and they're all talking about we really want to land more gear. It's been so hard to get this gear this year. And I asked them the question, do you know what fiscal year has been the biggest landing we've ever had in the history? And most don't realize it's been this year. So again, we've been tolerating.

How do we calibrate that CapEx? We put it through the same thoughtful mechanism that we always do. We also pair it with what we think we can get from a capability standpoint from our OEMs. And here's our first number. It's early. This is our first stab at CapEx for the full fiscal year, but we feel incredibly comfortable that we will digest that at a really good rate. But the thing to remember too, and if you go back to that profile slide we have on Slide 27 in the appendix, remember, this is updated through the end of last fiscal year. This will be an important one to look at, at the end of this fiscal year when we do our results in June. And you'll see the size, the completeness of what we have in our fleet that is 2021 borne and 2022 borne, but there's massive flexibility.

If you look at the fourth bullet point on the right, it says, clearly, flexibility to turn replacement CapEx into growth. That's what we've done this year. We brought in fleet, specifically designated to replace some of our older fleet. Some of that older fleet, we decided not to replace in the year. But also, we've got the other side of that lever, which is, sometimes, if you bring in a bit too much, that can be treated as a replacement fleet rather than growth fleet. So those that understand the model, we know you do, they understand how versatile we are when it comes to fleet. So that's not something that we're getting out over our season. We feel really good about this early guidance.

[Operator]

We'll now take the next question from Karl Green from RBC.

[Karl Green, analyst]

Actually, just building on 2 of the things that are raised by Rory. Just on the major projects. Can you give us some sort of broad indication as to what percentage of U.S. revenues in fiscal '23 you would expect to be represented by those large multiyear projects? That's the first question.

And then the second one, just on the M&A. I mean, clearly, you spent around $1.2 billion year-to-date. Any sort of updated indication as to the kind of valuation multiples you've been paying for those assets? And specifically, ComRent on the load bank side. I mean, I imagine that was a fairly sought-after asset. Was there any kind of upward inflation on the sort of multiple you have to take to get the asset?

[Brendan Horgan, executive]

We're not going to say how much of our revenue comes from major projects. We'll just say this. It's an increasing proportion of our revenue presently and certainly looks to be an ongoing area of strength. And it's only just so in terms of increasing because the other areas are equally strong. So our SME customers that we've made a living off of are still incredibly robust. Customers are spending more year-on-year with us, not less. I'm just trying to give color in terms of the strength of and the confidence in the forecasts that are out there because when you have these big projects that are incumbent in the actual numbers and in the forecast, those aren't big projects that turn on and off like a ticket. Those are big projects that are -- that matter about decades and decades and decades of production, not just sort of 2 years of a good or not-so-good market.

In terms of multiples, it is remarkably like it was. So I'll refer you back to a colleague of ours, Kurt Kenkel, who during our Capital Markets Day would have broken down what we pay for businesses. But he would have also categorize them in larger deals and smaller deals that we would have sort of stratified with the $100 million mark. So if you look at in total count, 22 of the 20 -- let's just say, all but 4 of the deals we've done were under the $100 million mark. And all of those are in that same exact range, they were a bit lower than what you would have seen on that slide.

Some of the larger deals, in particular, leaders in specialty space, like that ComRent you mentioned, those are going to be a bit higher than that, in the -- I hate to even quote multiples, because in the end, when you put them all together, it looks like it always look -- but they are a turner to more than what would be the norm for a general tool, $50 million acquisition. All of which, we are very, very happy to do and are incredibly confident to get the cross-selling revenue synergies we mentioned and great return on invested capital out of those acquisitions.

[Operator]

We will now take the next question from Allen Wells from Jefferies.

[Allen Wells, analyst]

Just a couple of quick ones for me. Just on the rate environment, maybe if you can, just talk a little bit about some of the kind of, for want of a better word, exit rates that you saw coming kind of Jan, Feb time in terms of the rate increases. And then following on from that, the mid- to low-teen rental revenue growth assumptions for '22. Anything you can kind of talk around what rate assumptions are in there. And then final question, just on the U.K. direct Department of Health COVID exposure. I'm not sure if I missed it, but did you give the exact revenue number? Or can you provide some quantification of the revenue number exposed to that. As it steps down, obviously, in April, we need to speak thinking about taking that out.

[Brendan Horgan, executive]

Sure. Allen, thanks for that. The last one, 32%, so 1/3 basically of the revenues for the NHS. Great color -- I mean February was our largest year-on-year gap. You're talking about circa 8% better than what it was a year ago, which is incredibly strong. And it's part of the reason why we feel comfortable that we will continue to move forward, and we think that the more mature in the industry are focused on similar sequential movements. What we would have in that bridge that you mentioned is a 4% or so year-on-year rate improvement. As we go into fiscal year 2023, don't ask me the question now because I won't answer, but come June, you can ask me what our internal, like, aspirational targets are, and we'll answer those now, but we're just going through the budget process. And John Washburn and others are thinking about what our goals are going to be around rental rate headlines and things like delivery cost recovery, I would have talked about previously. Is that clear enough, Allen?

[Operator]

We will now take the next question from Madeleine Jobber from Morgan Stanley.

[Madeleine Jobber, analyst]

Just 2 for me. Would you be able to provide some detail around how much of your increase in CapEx guidance for this year is due to cost inflation versus higher volume of equipment purchases? And of that, for your CapEx guidance next year, what proportion have you actually confirmed with OEMs, and how much is still sort of pending? And then finally, to what extent do you expect the underlying demand growth in the U.K. to offset the reduction in utilization you'll experience after the demand from the NHS test centers falls away?

[Brendan Horgan, executive]

Well, the last one, in terms of the U.K., again, I've been over this last week and this week. And we've had a chance to meet with Andy, Phil and team to go through their thoughts around the budget as we're constructing it. So we're in the later stages of building that budget out. And certainly underlying strength, as Michael would have touched on earlier, has been strong. We have our sights set on certain spaces and customers that we will make up that NHS revenue from. It won't happen in a year. We think you should really look at it more of that 3.0 plan what we would have set out to do before any of this NHS activity and what ultimately is. But a little early to say what we think that underlying will be.

In terms of our CapEx guidance, we have a combination of firm fixed purchase orders and committed build slots that give us the confidence to put out these early figures at this stage. As I said before -- remember, call it fortunate timing or strategic strength between us in terms of building our plan when we did. But when we built Sunbelt 3.0, which I'll remind you was actually between August and October of 2020, very early in the pandemic, of course, we shared with you on the 20th of April 2021, our teams immediately went to work with our manufacturers to secure build slots and partner with them through our financial year 2024. So that gives us a great advantage, gives the ability to land what we did this year. And it gave us the sort of thoughtfulness from a runway standpoint to be looking to fill those needs all the way down the line. So we feel confident in that. And we are definitely getting our unfair share, if you will, that allocation that the manufacturers are producing in this remaining supply-constrained environment.

Finally, in terms of the CapEx, from an inflationary standpoint, the best way to look at it is just what is the -- that which we would have bought like-for-like product in the current fiscal year '22 and what that same cost of product will be in fiscal year '23, where -- we will be in the 3% to 5% range of inflation on that. And the reason why we gave a bit of a range there is, you don't fully know perhaps for every single one of our suppliers what the early calendar year 2023 pricing might be like. We have certain constraints, of course. But we are confident here to say that, that inflation is going to be in that 3% to 5% range.

[Michael Pratt, executive]

And the tweak that we've made to CapEx for the current year is as much volume than anything else. So it's basically volume rather than anything else.

[Operator]

We will take the next question from George Gregory from BNP Paribas.

[George Gregory, analyst]

I had just 1 follow-up, please. It's just on the fiscal '23 CapEx guidance. What's the built-in assumption on year-over-year inflation, please, on the purchases?

[Brendan Horgan, executive]

Yes. Just we -- that question was part of the last one as well, and that's the 3.5% to 5% year-on-year inflation on CapEx.

[Operator]

There are no further questions in the queue at this time.

[Brendan Horgan, executive]

Great. So with that, thank you all for joining this morning and really look forward to seeing you at our full year results in June. Until then, thank you.

[Michael Pratt, executive]

Thanks.

[Operator]

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.