Ashtead Group PLC

LSE:AHT

Earnings Call Analysis

Ashtead's Growth Amid Challenges

Ashtead Group reported solid growth in the first 9 months despite setbacks. Revenue increased by 14%, with rental revenue up 11%, bolstered by excellent performance in North American markets and the execution of the Sunbelt 3.0 strategy. U.S. revenue saw a 15% expansion, while EBITDA rose 12% to $3.752 billion. Yet, due to reduced emergency response work and a film industry strike, adjusted PBT remained unchanged at $1.785 billion. The firm continued aggressive expansion, investing $3.5 billion in CapEx for new facilities and fleet, adding 106 North American locations, and completing 26 bolt-on acquisitions at a cost of $906 million. Leverage is maintained at 1.9x net debt-to-EBITDA. Moving forward, Canadian rental revenue growth forecasts are lowered to 11%-13% due to slow recovery in the Film & TV sector. U.S. revenue expectations are now at the lower end of previous projections, with CapEx guidance for the year at approximately $4.2 billion and free cash flow estimated at $150 million.

Robust Revenue and EBITDA Growth Despite Headwinds

The company has exhibited a commendable performance with group revenue and rental revenues growing by 14% and 11% respectively. The North American market has particularly shown resilience, with the U.S. revenue and rental revenue soaring by 15% and 12%. On the EBITDA front, there’s a 12% improvement to $3.752 billion, though the adjusted profit before tax (PBT) stood flat, leading to earnings per share (EPS) pegged at $3.7. This steadfast growth came in light of some industry-specific challenges, such as a decrease in emergency response work in North America and a strike impact on the Film & TV business segment.

Investments in Expansion and Sound Financial Leverage

Reflecting strategic confidence, the company has invested $3.5 billion in capital expenditures (CapEx), supporting the growth of existing locations, the addition of greenfield sites, and the acquisition of new rental fleets. The expansion endeavors saw an addition of 106 North American locations, comprised of both greenfield openings and bolt-on acquisitions. Despite such aggressive spending, the company maintained its net debt-to-EBITDA leverage at 1.9x, securely within the targeted range of 1.5 to 2, showcasing disciplined capital management and the ability to sustain a robust cash-generating business model.

Outlook Adjusted with Prudent Fiscal Planning

Considering the dampened Film & TV segment rebound in Canada and broader Q3 realities, the company has calibrated its U.S. and group revenue growth expectations, now poised at the lower end of the projected range. The revised rental revenue growth for Canada is forecasted to be between 11% to 13%. CapEx guidance for the full year is slated to remain within the approximate $4.2 billion mark, while free cash flow guidance is preserved at $150 million.

Efficient Capital Allocation and Strong Balance Sheet

The company’s balance sheet strength is a strategic pillar, ensuring advantageous market positioning and optimal capitalization of growth opportunities. Debt markets access in July and January bolstered the balance sheet further, facilitating an average debt commitment of 6 years at a cost of 5%. Such financial moves emphasize the company’s adaptability and foresighted approach in capital allocation towards sustained growth and development.

Optimism on Construction and Mega Projects

Despite broader economic uncertainties, the company retains a positive outlook on the construction space, with public and private projects supported by reshoring trends and government spending. There is a particular emphasis on mega projects, where the firm has identified 453 underway or imminent projects cumulating in $555 billion, showcasing a formidable market landscape sustaining well into the fiscal year '25 and beyond.

Anticipated Leverage Reduction and Free Cash Flow Uplift

Looking to the future, the company anticipates an improved Q4 drop-through compared to Q3, with the full-year figure edging towards a 50% mark. A seasonal decrease in leverage is expected, alongside a reduction in CapEx leading to significant free cash flow generation in the next year. This demonstrates a forward-looking stance that prioritizes not just earnings, but also financial stability and shareholder return.

Growth Outlook and Market Maturity

While the growth outlook for 2024 and fiscal year '25 has been moderately scaled down, this recalibration reflects a judicious approach in aligning with current market dynamics. The guide suggests a slight reduction from the FY '24 run rate, posing questions of market maturity and evolution of the business cycle. Yet the company remains vigilant in tracking potential upside and downside risks to evaluate future rates, volumes, greenfields, and mergers and acquisitions, with a keen eye on maintaining historical growth trends.

Earnings Call Transcript 2024-Q3

[Operator]

Hello, and welcome to the Ashtead Group plc Q3 Analyst Call. I will shortly be handing you over to Brendan Horgan and Michael Pratt, who will take you through today's presentation. There will be an opportunity for Q&A later in the call.

For now, over to Brendan Horgan. Please go ahead, sir.

[Brendan Horgan, executive]

Thank you. And good morning, everyone. Welcome to the Ashtead Group Q3 and 9 months results presentation. I'm speaking this morning from our U.S. support office and joined as usual by Michael Pratt and Will Shaw in London. Given our Sunbelt 4.0 event in Atlanta at the end of April is rapidly approaching, we'll keep it deliberately brief this morning. However, before getting into the meat of the presentation, I'll begin as usual by addressing our Sunbelt team members listening in today.

By recognizing our entire team for their focus around our program of Engage for Life, in our branches, on our customers' locations and on the road. In calendar year '23, we experienced our best year on record when it comes to protecting our team members. Further, I'd like to specifically give credit to the thousands of team members we have who drive a company vehicle. Our delivery drivers, field service technicians, crew leaders and our sales force, who not only contributed to our overall safety statistics, but also posted our best-ever safety performance behind the wheel. This was a very good year, and I hope all of you share in the pride of being part of a company leading with such intention when it comes to the safety and well-being of our people, our customers and the members of the communities we serve. So thank you for all you do, and please keep leading positively and safely out there.

Now let's begin with the 9-month highlights on Slide 3. The business delivered strong revenue growth in the first 9 months, driven by strength in our North American end markets, the ongoing momentum and execution in our business as we follow our Sunbelt 3.0 playbook and the very clear structural progression being realized in our industry. For the period, group revenue and rental revenues increased 14% and 11%, respectively, while U.S. revenue improved by 15% and rental revenue by 12%.

Group EBITDA improved 12% to $3.752 billion, while adjusted PBT was flat at $1.785 billion, leading to EPS of $3.7. As detailed in November and again in December, we faced some year-on-year headwinds in the third quarter as a result of lower levels of emergency response work in North America, as well as the ongoing impact of the actors and writers strike on Film & TV activity across the group. As expected, this impacted revenues and profits in the quarter. From a capital allocation standpoint in accordance with our priorities, we invested $3.5 billion in CapEx, which fueled our existing locations and greenfield additions, with new rental fleet and delivery vehicles. We expanded our North American footprint by 106 locations, with 58 through greenfield openings and a further 48 via bolt-on, investing $906 million on 26 bolt-on acquisitions.

Following these investments, our net debt-to-EBITDA leverage is 1.9x, within our long-term range of 1.5 to 2. These activities demonstrate our confidence in the ongoing health of our end markets and the fundamental strength in our cash-generating growth model. So let's move on to our outlook.

Slide 4 details our full year guidance for rental revenue, CapEx and free cash flow. For rental revenue growth, we've adjusted down Canada to 11% to 13% growth as a direct result of a somewhat sluggish bounce back in our Film & TV business following the strikes. This is an issue of timing, but nonetheless, impacts the near term. Based on this reality in the broader Q3 trading, we now expect to be at the low end of our U.S. and group revenue growth range. Our CapEx guidance for the full year is within our range at circa $4.2 billion, and I'll touch on our initial plans for next year in just a moment. Free cash flow guidance remains at $150 million.

On that note, I'll hand it over to Michael, who will 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. As we highlighted in December, our third quarter performance was affected by the lower level of emergency response activity related to natural disasters in North America and the longer-than-anticipated actors and writers strike impacting both the Film & TV business and adjacencies within our Canadian, U.S. and U.K. businesses.

Against this backdrop, the group increased rental revenue 11% in the 9 months on a constant currency basis. This growth was delivered with strong margins and EBITDA margin of 46% and operating profit margin of 27%, delivering an operating profit 7% higher than last year. After an interest expense of $400 million, 56% higher than this time last year, which reflects both higher absolute debt levels and a significantly higher interest rate environment, adjusted pretax profit was similar to last year at $1.8 billion. Adjusted earnings per share were $3.07 for the period.

Turning now to the businesses. Slide 7 shows the performance in the U.S. Rental revenue for the 9 months grew by 12% over last year, which was on top of growth of 27% a year ago. Rental revenue growth has been driven by a combination of volume and rate improvement in strong end markets. The rate piece continues to be an important part of the equation given the increased costs we face, whether it be interest costs, as you saw in the previous slide or the impact of inflation on our rental fleet and operating cost base. The total revenue increase of 15% reflects higher levels of used equipment sales than last year.

As we've discussed before, fleet landings have become more predictable, enabling us to reduce physical utilization from the record levels we've seen over the last couple of years, although absorption of this additional fleet has been lower than we anticipated. We have used the opportunity this provides to take advantage of strong secondhand markets to catch up on delays disposals and accelerate the disposal of some older fleet where utilization is lower than optimal.

This lower level of utilization is the principal explanation for the depreciation charge increasing at a faster rate than rental revenue. This factor, combined with the increased level of used equipment sales, is a drag on margins in the near term. Excluding the impact of lower margin, used equipment sales, EBITDA margins were the same as last year.

In line with our 3.0 strategy, we opened 54 greenfields and added a 35 -- further 35 locations through bolt-on acquisitions, which also affect margins. As expected, all these factors contributed to lower third quarter drop-through, which was 44%, and as a result, drop-through for the 9 months was 51%. This resulted in an EBITDA margin of 48%, while operating profit was $2.1 billion at a 29% margin, and ROI was a healthy 25%.

Turning now to Canada on Slide 8. Rental revenue was 9% higher than a year ago at $573 million. The major part of our Canadian business is performing well as it takes advantage of its increasing scale and breadth of product offering as we expand our specialty businesses and look to build out our clusters in that market. In contrast, our Film & TV business has been impacted significantly by the strikes in the North American Film & TV industry, which were not settled until December, which has also had some effect on the rest of the Canadian business.

While activity in the Film & TV business picked up in January and February, this has been slower than we expected. The disconnect between the rental revenue increase and the increased depreciation charge is exaggerated by the Film & TV impact, but, as in the U.S., physical utilization is lower than we had anticipated. Despite these challenges, Canada delivered an EBITDA margin of 40% and generated an operating profit of $106 million at a 16% margin, while ROI is 12%. Excluding the drag from the Film & TV business, EBITDA margins were slightly better than last year.

Turning now to Slide 9. U.K. rental revenue was 4% higher than a year ago at GBP 441 million, while total revenue was flat year-over-year, reflecting the higher level of service revenue associated with the demobilization of the Department of Health work and the Queen's funeral last year. While we continue to make progress on rental rates, this has not kept pace with the inflationary environment in the U.K., which has impacted margins adversely. As a result, the U.K. business delivered an EBITDA margin of 28% and generated an operating profit of GBP 41 million at an 8% margin, and ROI was 6%.

Slide 10 sets down the group's cash flows for the 9 months and the last 12 months. This emphasizes a strong cash generation capability of the business, and this cash has been deployed in accordance with our capital allocation policy, with capital expenditure of $3.8 billion, funding principally fleet replacement and growth; and $863 million invested in bolt-ons. The significant increase in capital expenditure resulted in a free cash outflow for the 9 months of $463 million.

Slide 11 updates our debt and leverage position at the end of January. As expected, our overall debt level increased in the 9 months. In addition to the capital expenditure and bolt-ons, we returned $368 million to shareholders through our final dividend for 2023 and $60 million through buybacks. As a result, leverage was 1.9x, excluding the impact of IFRS 16. 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.

A strong balance sheet gives us a competitive advantage and positions us well to optimize the structural growth opportunities in our markets. As shown on Slide 12, we accessed the debt markets in July and again in January in order to strengthen our balance sheet position further and ensure we have appropriate financial flexibility to take advantage of these opportunities. We issued $750 million of 10-year debt of 5.95%, and $850 million of 10-year debt at 5.8%. Following the notes issues, our debt facilities are committed for an average of 6 years at a weighted average cost of 5%.

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

[Brendan Horgan, executive]

Thanks, Mike. We'll move on to some operational detail beginning with the U.S. on Slide 14. The U.S. business delivered good rental revenue growth in the quarter, with both General Tool and Specialty growing 8%. This growth is on top of very strong growth last year in the quarter of 23%. Consistent with what we said in December and others in the industry have been noting, time utilization is below the record levels we experienced last year, albeit still historically strong. This continues to reflect both ongoing improvements in the supply chain and the nature or profile of mega projects, which are making up an increasing proportion of the nonres, nonbuilding construction landscape and where utilization levels are typically lower in the earlier phases.

Importantly, rental rates have continued to grow year-on-year throughout the 9 months, doing so despite the utilization movement I just covered. This is affirmation of the ongoing positive rate dynamics in the industry, specifically the discipline and structural progress, attributes that we firmly believe are here to stay. Further, there is capacity or scope to better absorb this year's fleet growth as we progress through next year.

Moving on to Slide 15, we'll cover the outlook for our largest single-end market, construction. Overall, the construction outlook continues to be very positive. Despite macroeconomic concerns and the pressures that come with inflationary and interest rate realities, you will see construction activity has proven to be incredibly resilient and the forecast notably accurate. The latest Dodge starts data published in February forecast growth in 2024 and the forthcoming years.

The biggest constraint on activity levels and projects progressing to start continues to be the availability of labor. Nonetheless, we're experiencing very healthy starts. All this contributes to the forecast for put-in-place activity in both non-res and nonbuilding remaining very healthy for the foreseeable future. These starts and ongoing projects have been fueled in part by the clear momentum behind reshoring or U.S. deglobalization, creating private and public sector projects further supported by the well-documented Federal Government Spending Acts, all contributing to the rise of an era of mega projects.

Let's touch on mega project activity in a bit more detail on Slide 16. Illustrated herein, as we've done since our full year results in June of '23, is once again the U.S. mega project landscape, which gives you an appreciation for just how significant this market opportunity is. As a reminder, our internal definition of mega project is one that has a cost of $400 million and above. We've included all projects meeting this definition, where construction is either underway or planned to start by April of this year.

There are 453 projects underway or soon to begin, ranging in size from $400 million to $12 billion, totaling $555 billion of projects funded by private and public sectors. Some of the projects that were scheduled to start in the back end of calendar 2023 or early '24 are now planned to start as we progress through fiscal year '25. Worth noting, we see very little in the way of project cancellations, something we always pay close attention to.

As we've covered and demonstrated consistently, projects of this scale and sophistication require suppliers with relatable scale, but also expertise, experience, brand product and services and the financial strength to meet the needs of the customer. Since December, we continue to win more than our fair share of projects, which will begin in '24. These include data centers, EV factories, battery plants and semiconductor fabs, just to name a few. We'll give a fresh update on the mega project landscape at our Capital Markets event, which will include forecasted starts over the next 3 years.

What you'll see is that this activity is not a flash in the hand, rather a fixture of the U.S. construction market for years to come. Let's now turn to our business units outside of the U.S. We'll begin with Canada on Slide 17. Our business in Canada continues to deliver strong growth coming from existing General Tool and Specialty locations, as well as greenfield and bolt-on acquisitions activity. Through 9 months, we've added 17 locations, further contributing to advancing our clusters as we execute on our 3.0 plan. This progress enables us to increase our addressable markets beyond construction, and has done so well over the years in the U.S. Our runway for growth improved density, market diversification and margin improvement remains significant in Canada. Importantly, as is the case in the U.S., rental rates continued to grow year-over-year, which we expect to continue to be the case moving forward.

Turning to the U.K. on Slide 18. The business delivered strong rental only revenue growth of 9%, driven by market share gains and an end market composition which favors our unique positioning through the industry's broadest offering of General Tool and Specialty products, which are unmatched. We've made progress better than prior years as it relates to rental rates and charges. However, we have a way to go. The team is focused on this now and will be going forward as we continue to work on passing through the necessary rate increases and charges for the leading services, which we provide.

Let's move on to our initial CapEx outlook for next fiscal year on Slide 19. As touched on, on the outlook slide, for the current fiscal year, our CapEx guidance remains unchanged. As usual, with Q3 results, we set out our initial CapEx guidance for next fiscal year by country and then group. Beginning with the U.S., we plan to invest $2 billion to $2.3 billion in rental fleet and a further $550 million in nonrental assets. A significant portion of this is planned for fleet replacement, while adequately portioning growth for fiscal year '25 greenfields and follow-on investment for recently opened and added locations, as well as recent and anticipated mega project wins and same-store highly utilized categories.

After accounting for Canada and the U.K., total group CapEx is planned for between $3 billion and $3.3 billion. As we employ the growth element of this CapEx and improve current year fleet investment absorption, we anticipate mid- to high single-digit rental revenue growth and strong free cash flow. It's important to note that the supply chain constraints have eased. We can, again, more easily flex CapEx levels and timing during the course of the year as the demand environment necessitates.

Let's summarize on Slide 20. It has been another period of good growth, location expansion and momentum in our business. We're experiencing strong demand for our products and services, and gaining improved clarity to the strength of our end markets throughout the year into 2025 and beyond, driven in part by the recent realities of U.S. onshoring, technology and manufacturing modernization and federal legislative acts. These actualities add to what was already a strong underlying level of end market activity, flushed with day-to-day MRO, small to midsize projects and the very present and growing mega project landscape.

Our business is positioned to win in the near, medium and long term as we both influence and benefit from the structural advancement and secular outcome for our business and industry. We've had a very successful Sunbelt 3.0 campaign, which positions us well for future success. For these reasons and coming from position of ongoing strength and positive outlook, we look to the future with confidence.

So speaking of the future, and finally, turning to Slide 21, we're very much looking forward to launching our next strategic growth plan, Sunbelt 4.0, which will detail our runway for successful growth, increased resilience and performance for our customers, our people and our investors. When we're together in April, it will afford us the opportunity to share the detailed Sunbelt 4.0 plan, while at the same time inviting you to get a deeper understanding of the mechanics of our business. And importantly, an appreciation of our culture as you'll be interacting with some 5,000 Sunbelt team members from throughout the business. So we hope to see you then.

And with that, we'll be happy to take your questions.

[Operator]

[Operator Instructions] Our first question today is coming from Rob Wertheimer calling from Melius.

[Robert Wertheimer, analyst]

So my question, I guess, is on industry fleet balance and what -- from what you can see into it. It seems as though the leaders have been a little bit more -- a little bit less full on the gas pedal, and I think you mentioned, Brendan, that you have flexibility now, so that's not necessarily an indicator where things go, just you could flex up or maybe flex down if you need to. Are you seeing the rest of the industry be a little bit more constrained given the inflationary cost pressures that everybody is experiencing? And just where do you see fleet balance right now?

[Brendan Horgan, executive]

Yes. Rob, when you were asking the beginning of that question before you got to are we seeing others, that's exactly what I was going to go to. And I think to answer your question is, yes, we are seeing the, let's call it, the independents or the sort of regionals out there are curtailing. I mean, let's face it. They've really just begun over the last year catching up on some of their replacement and they're realizing the inflation. It's also why we see that very same thing from a rate discipline standpoint, transcending just the big. But this really -- if you think about CapEx, certainly, what we've been talking about, was we expected the year that we're going into where the CapEx levels will moderate.

I think that's what everyone is doing. We've talked about, again, just the capacity we do have as we look to next year to absorb a bit better some of the investment in growth that we put into the business. That's ourselves and others, whether you call that absorption, volume, time utilization, et cetera. Yes, that's what we're seeing. But to your point as well, which was probably less the question, more just a point, and that is we do have the ability in this current supply environment to flex our CapEx as we see the demand move, which is an incredible position to be in from a mega project standpoint, but also just running the business overall. And that's what we're doing. We're just running the business.

[Robert Wertheimer, analyst]

If I can ask just one more. You mentioned the slow start of megas, just big projects going to take longer. When do you expect in the life cycle to see kind of peak activity? And then how far does your visibility extend on -- we've never had this kind of environment before. So can you see into calendar 2025? Can you see the '26 is likely to be stablish just based on what we have now? Maybe just talk again about the life cycle there, and I'll stop there.

[Brendan Horgan, executive]

Yes. No, we have -- I mean, really, you have much better visibility to the mega project landscape than you do mainstream commercial construction, if you will. So if you just think about the movement on the Slide 16, that we would have referenced in terms of mega projects. Back in December, we talked about 499 projects with a value of plus or minus, I think it was $620 billion. And today, what we see beginning by April of this year, are $453 billion, $455 billion, something of that magnitude. Well, I know this, it was 46 less.

And what's happened in that is we've seen 52 that have so-called moved right. So they've moved into fiscal year '25 for us or a bit further out, but 6 have actually moved left. They moved into this year from outer years. And if you look at these projects themselves, you have incredible clarity and also a high degree of confidence of these ultimately starting, it comes down to that labor issue. And if you look at it from a big picture standpoint, you say, okay, there were 499, which was very consistent with what there was a year ago in terms of in this landscape, and 453 started. So in the real world of construction, whatever that percentage is, 453 or 499, that's pretty good when it comes to actually getting to start.

What I think is interesting too, of those that were pushed into outer years, 43 of those will now fall into our fiscal year '25. And when you put it all together, it just makes sense, about 40% of the value of that was around infrastructure and renewable projects, which just tend to take a bit longer to get going. But as I said, we will cover the next 3 years outlook for mega projects more together in April. Fiscal year '25 will be a notably larger start year than we've experienced in the 3 years running up to fiscal year '25. So we are a few years away from reaching a crest that we anticipate will actually last for quite some time.

[Operator]

We'll now move to analyze Annelies Vermeulen calling from Morgan Stanley.

[Annelies Vermeulen, analyst]

A couple of questions from me as well. So firstly, on the drop-through you expect in Q4. I think when we spoke in December, you had expected that to improve again in the Q4 sort of similar to Q2 levels based on what you've seen through Q3 and also into February, is that still the case? Then secondly, on the Film & TV part, you've obviously mentioned several times that it's been slower to restart. I would have thought, given the length of the strike action, that there will be large backlog of filming work that need to take place. So what are you hearing in terms of why that has been slow to restart? And how is it looking into Q4 and going into next year as well, do you think that will pick up?

And then lastly, your leverage, while being obviously within your target range, is at the higher end of that range. Where do you expect that to land for the full year? And sort of a related point, you've talked about free cash flow being strong for next year. I'm assuming that's an improvement on the 150 you're doing for this year. But given the lower CapEx spend, is there any sort of color or range you can give on that free cash performance to expect for next year?

[Brendan Horgan, executive]

Thanks, Annelies. I'll start with your second question, and then turn it over to Michael for 1 and 3. Yes, Film & TV, like you, I would have thought the same in terms of how fast we would see that rebound. I think, overall, the outlook hasn't changed in terms of pent-up demand. So we will indeed see that. What we were really indexing against was what we experienced post-COVID, and that was really just from feedback from customers. It's not just us sitting here on a whiteboard, thinking what might it look like. And I think what everyone sort of under-indexed was the very fact that, unlike during COVID, the writers themselves were pens down. So it's not like there was actually material ready.

What we are seeing though, just so I can convey confidence ultimately in this recovering, is we are seeing the breadcrumbs. In other words, we're seeing it in some of our business lines like if we take aerial platform, power gen, et cetera, in Vancouver and in Toronto, we're seeing the pickup of that. We're just beginning to see a bit of a tick-up in New York City when it comes to the things that happen before they actually film anything, and that's just the building of the set. So in a way, you see a bit of the GT come before the Specialty. But yes, I mean, I think overall, I would say, I don't think that, that business ever really returns to just this incredible or insatiable appetite for more and more and more content as we've just seen that industry change overall. But there's no reason why it's not a good producer for us and gets more in line with normal. You want to take 1 and 3 there, Michael?

[Michael Pratt, executive]

Yes. So in terms of Q4 drop-through, yes, clearly, we'd expect it to be better than Q3 drop-through. And so for a full year, we're probably looking more around about sort of the 50 mark for full year drop-through. In terms of leverage, yes, we would expect it to come down from where we are at 1.9. Just seasonally, it tends to come down in April. And then as we look forward, we're certainly based as you -- given the delta on CapEx that we're talking about for next year at this stage, that would lead to significant free cash flow generation next year, which will be -- we'll work out how we deploy that, whether clearly, it's still a return to shareholders in terms of dividends, et cetera. We'll obviously be looking at the bolt-on landscape, but it would also expect that to reduce leverage through that period as well given our preference for sort of bottom half or lower half of our range of 1.5 to 2.

[Operator]

We'll now move to Suhasini Varanasi of Goldman Sachs.

[Suhasini Varanasi, analyst]

Just 3 for me, please. When you think about your growth outlook that has been lowered for 2024 and also for FY '25, the guide is slightly below the FY '24 run rate. Can you maybe discuss the assumptions behind this guidance, especially for FY '25? What are the upside, downside risks to this number, rates versus volumes versus greenfields, and the organic virus M&A that you've incorporated here? And is your view on growth outlook now a little bit below historical levels, i.e., has the market now reached a certain degree of maturity in your view?

Secondly, it's on margins. Given the revenue guide for FY '25 and your expectations for maybe improved time utilization, how should we think about the scope for margin expansion and EPS growth for 2025 and beyond? And the last one on Capital Markets Day, is there anything that you can share ahead of the CMD on what we can expect for that day?

[Brendan Horgan, executive]

Yes. Let's start with this just your question around market maturity. And I want to be very clear on this, we're guiding to strong growth next year. Is it the 18% CAGR in revenue growth that we experienced over 3.0? No, it's not, and it's because the end market isn't growing at the same pace that we did experience over the last sort of 2.5 years. If the market were to grow faster or larger, we would grow more. We're just sort of telegraphing the growth based on what we see in our business, what we hear from our customers and what we read in the forecast. In no way, shape or form is that sort of maturation in terms of the runway for growth of this business, which remains remarkable.

However, when it comes to maturity, what I would more characterize that as, is the maturation of the industry from a structural progression standpoint. And that, of course, would be rental penetration continuing to deepening -- to continue to deepen, customers recognizing us or realizing how essential we really are; and of course, the big getting materially bigger over time, which is what we're all positioned to do. And the output of that is the important part. We now have, as a result of that maturation, a less cyclical, a more secular business, a larger addressable market. We've got pricing or rate increase that we believe will be above inflationary levels for the years to move forward, acting much more like a business services company. So that's what we see in terms of the maturation.

You talk about margin, we're going to talk about margin when it comes to Sunbelt 4.0. So if we were to give you any insight as to what you'll hear in Atlanta in April, of course, we're going to talk about the structural progression, which I just covered. But it's really, in the end, it's growth and performance. As you would have seen on that last slide we just covered, growth in our end markets, growth in terms of the latent capacity we have in the business following the expansion that we've executed on through 3.0. Market density continuing to improve, i.e., clusters, rate progression, as I talked about. Ongoing opportunity from a greenfield standpoint and bolt-on. And from a performance standpoint, certainly bringing to the forefront to our customers, our advancement in technology.

But we will pick up efficiencies, which leads to your margin point. So yes, we see a path for progression in margins over time. What exactly that means for fiscal year '25, time will tell. But when you look at a 5-year strategic growth plan, I think that you will certainly see that and you'll certainly see an ever-strengthening balance sheet, which will put us in position for when, not if, we do see an even stronger end market that we'll be able to exploit that growth. So I think I've kind of covered all of yours. Unless, Michael, do you think there's any follow-on?

[Michael Pratt, executive]

No, I don't think I have much to add to that.

[Suhasini Varanasi, analyst]

I just wanted to check on your FY '25 guide, please. What are your assumptions behind rates and volumes, organic and M&A?

[Brendan Horgan, executive]

We think in that sort of midpoint of what we're guiding to, volume and rate won't be all that different. If volumes kind of 4, rate might be kind of 3. Or if rates kind of 4 and volumes kind of 3, that's what we think.

[Operator]

We'll now move to Will Kirkness of Societe Generale.

[William Kirkness, analyst]

Three questions. So firstly, just on growth CapEx. I wanted to check I've got numbers right here. I think you've done the U.S. $1.2 billion year-to-date on growth. I think you said you really about $2 billion this year. I just wanted to check if that was right. Secondly, I just wanted to talk about maybe the puts and takes on drop-through in FY '25. And I guess I don't want to jump ahead of the CMD too much, but obviously, there'll be a -- there is the dilution you get from doing more greenfields. But then as you build out clusters, we know that time and rate is better, so I just wonder how to sort of think about those competing factors.

And then thirdly, on -- thirdly, just on sort of the mega project win rate. Is that number that you disclosed consistent with how it's always been? Or has it just come off a bit as the availability of fleet perhaps has got better?

[Brendan Horgan, executive]

Thanks, Will. I'll start with that last, but I'm not sure I fully understood that. But the win rate has been gaining. I mean, remember, there have always been mega projects, there have never been mega projects that make up this proportion of the overall nonres, nonbuilding landscape. But over time, we have gotten consistently better at these. We have a CV, so to speak, as we are bidding future projects. As we've said there, our math shows us quite clearly that we are winning plus 30% of the actual work that's out there today. And we could -- we expect that to continue just given what is really required to perform on those projects.

Your third question was around sort of the headwind, I think I understood that as, in terms of our greenfields and bolt-ons. It's a good point you make. Certainly, when it comes to bolt-ons, you don't find many businesses out there that you buy that have 50% EBITDA margin. So to the extent in which you do more bolt-ons, it's going to weigh on your overall margin a bit until such time we get to further exercise those businesses, most chiefly just growing them, adding extra fleet and getting the scale benefits there. But we expanded so much what I would categorize it all as, we have significant latent capacity. In all of the locations that we've added throughout 3.0, that will actually turn into a tailwind in terms of margin as we progress those businesses further. Michael, do you want to take the point on -- the first question on CapEx, growth CapEx?

[Michael Pratt, executive]

Yes. On growth CapEx, if we're looking at the U.S., then we're saying that we think CapEx -- rental CapEx will be about $3.1 billion. We are selling around about $1.7 billion or just over $1.7 billion this year at original cost. As we've talked about before, life cycle inflation is just over 20%. So on that basis, the replacement cost of the $1.7 billion is 2.1-ish. So you sort of -- on those pure numbers basis for the year, you get sort of at about $1 billion of growth in those numbers. So that's the CapEx point. And the other one was drop-through for next year, we're budgeting, et cetera, I think we would expect it to be starting with a 5, but as we go through that, we'll obviously give greater color on that and the direction of travel when we talk at the end of April.

[Operator]

Next question will be coming from Arnaud Lehmann of Bank of America.

[Arnaud Lehmann, analyst]

I have 2 questions, if I may. Firstly, you still sound quite optimistic on the rental rate outlook, which is quite encouraging. I'd like to understand if it's more about catching up with the significant inflation you've seen in gross CapEx, the cost of new equipment in the last few years. Or is it driven cost inflation in the P&L, such as wages? Or is it just you getting -- the company getting smarter with rates? Or all of the above? That's my first question. And the second point is, could you comment on the outlook for the sale of used equipment? Quite a big year in 2024, do you think that was peak levels heading into '25?

[Brendan Horgan, executive]

I think you answered your first question on all 3 points. There is ongoing fleet inflation from a replacement cost standpoint. And if you think about it, big picture, we've sort of replaced 2.5 to 3 years of our overall fleet at these higher rates, which we don't expect to really go the other way all that much. We think that the year-on-year increases from an inflationary standpoint will cease. But yes, you always are going to have wages. We fundamentally believe that for the foreseeable future, I'll go on record and say for the next 10 years, wages specifically for skilled trade positions will outpace macro inflation. And all of those require that you pass on those increases to a degree where you're still bringing value to your customer.

So it's really, in the end, just the structural progression. Ourselves, being the big -- getting bigger, so to speak, we can have more efficiencies there to pass on some of that or to save some of the burden, if you will, to our customers.as we gain efficiencies. But yes, we will make up for that cost that we can't fully absorb from an efficiency standpoint. And we think what we're going to see is we're going to see rate progression as a fixture as we move forward into the years to come. So I'll settle with that, I'll let Michael take your second question.

[Michael Pratt, executive]

In terms of -- I guess, in terms of used equipment sales, I'm not sure the direction of the question I asked. So there's 2 elements to it. From our perspective, will we sell less next year than we sold this year? Yes, because part of this year was, I suppose, there are probably like 3 parts to it almost. There's an element of we caught up a lot of the stuff that we didn't sell in the prior couple of years due to lack of -- or supply chain constraints. So we've caught up quite a bit of that. Also then just reflecting the utilization in 1 or 2 categories has been a little bit weaker than we thought about. So where we've had stuff sitting around, which was due to disposed of in early '24, '25, then we've taken the opportunity to get rid of that in what our good secondhand markets and good rates.

Are secondhand values coming off slightly from the sort of the heightened levels that we've seen? Yes, they are. Now I think that's only to be expected, but not significantly so, but they're slightly below peak. So we will expect to have a healthy second half market next year, but we will be selling less in volume.

[Operator]

We'll now move to Neil Tyler of Redburn Atlantic.

[Neil Tyler, analyst]

Just wanted to come back with a question on the FY '25 guidance, please. Just in the context of the Dodge put-in-place forecast that you present in the pack. It looks as if, versus nonres, the growth is double digit. Now I appreciate there's probably some inflation within that number. But against that, can you help me understand the volume growth that you're anticipating in the context of, obviously, previously, you've tended to outpace that end market? Is there a shift in share? Is there a shift in rental penetration perhaps temporarily if owners are receiving deliveries faster than they had been? I just wanted to understand those pieces of the puzzle in combination, please.

[Brendan Horgan, executive]

So I think -- well, first of all, we don't see any shift when it comes to rental penetration, as you pointed. In the main, there will be a specialty line or 2 that would have had an exaggerated deepening of rental penetration that will sort of more normalize for a year or 2, but still produce some strong growth. When it comes to the put-in-place that you see on the top right, there's always this lag. So as I mentioned in the prepared comments, the starts were updated in February. So we're going to see the put-in-place update sometime later this month, and we'll see 2024 not be as strong as that $1,250 billion, which is pronounced there from 2023 to 2024 in the construction, excluding resi.

But time will tell in terms of what actually does result in -- or what the numbers result in for the full year. So it's very -- you have to be very careful just measuring that 1 year at a time, particularly in the forecast. It's probably a better look back. But I think in short, it's this, we've sort of given the guidance for the year based on the building blocks of CapEx, overall fleet size, anticipated levels of utilization, rate progression, and if the end markets dictate and our customers are looking for more, then we will flex up as we go through the year. But this is our starting point.

[Neil Tyler, analyst]

Understood. And then a second question, just back to CapEx probably for Michael. The non-rental CapEx, which stepped up a couple of years ago quite significantly and appears likely to remain sort of elevated compared to history. Can you talk a little bit more about what's causing that and how long it will last?

[Michael Pratt, executive]

Well, I think when you look at our nonrental CapEx, you have to look at the way that we are growing, in that greenfields and bolt-ons. So with greenfields, you're having to add trucks full stop. It's not using latent capacity in existing stores. Similarly, when we do the bolt-ons, quite often, you end up having to swap out trucks. And as we look to do follow-on CapEx into all these businesses that we buy are undercapitalized, so we end up a lot of -- growth CapEx goes into those, but you are adding the trucks to deal with it as well, and we've had seen significant inflation in the cost of those trucks.

So that's the main driver and that's what makes the characteristics of our nonrental may be different from some other folks' non-rental. And then we will spend on -- we continue to improve our facilities, et cetera, so it's leasehold improvements, et cetera. But the trucks is the main piece.

[Operator]

We'll now move to James Rose of Barclays.

[James Rosenthal, analyst]

Just one for me. When you're thinking about utilization in FY '25, what are some of the main pluses and minuses, which you considered? I'm not going to think that there's lots of casing big projects, which is not that well utilized just yet, and you've got TV & Film coming back as well, is there anything else we should consider on the other side of the equation?

[Brendan Horgan, executive]

James, well, I think it's really -- you have some puts and takes. We have some product categories. If we take, for instance, some aerial work platforms and telehandlers, that are still at very, very strong time utilization levels. And you have some other product categories, some of the lighter ground engaging equipment, this may not mean anything to some on the call, but many excavators, skid steer loaders, chippers, et cetera, that are a little bit lower than what we would historically have. So there are some puts and takes. And so we look at that sort of as a wash. Yes, there is some latent capacity in terms of a bit higher time utilization.

But I guess in an ideal world, you have some of them come back a little bit, so you have more on the shelf, so to speak, to be able to say, yes, easier and the other areas get caught up. So you near a bit of a wash there. I think when it comes to Film & TV, et cetera, it's not big enough from a fleet standpoint outside of the adjacent areas that we've talked about earlier, but that's how we're looking at it.

[Operator]

Next question will be coming from Allen Wells calling from Jefferies.

[Allen Wells, analyst]

Three for me, please. Firstly, just on the cash flow side and just thinking about deployment there. Obviously, strong free cash flow expected for next year. Balance sheet a bit deleveraging in there. I just wondered in the context of obviously you saw URI and a big -- reasonably big M&A deal yesterday, how you kind of see the pipeline for bolt-on, small and midsized deals. And then on that, your idea yesterday, is there much overlap with your kind of flooring protection and access business there? I'll start with that question.

[Brendan Horgan, executive]

Very little overlap with the deal. That was a -- it's a business that's been out there that we've all known. I think that was a great deal for United, but that doesn't really matter. I'm sure they don't care what I think about that. But anyway, it's a complementary to their focus. The M&A pipeline is -- from a bolt-on perspective is massive. There are -- there remain thousands and thousands of independent rental operators out there who are increasingly looking for some options as it gets a bit harder to compete against what the likes of us can bring to customers in terms of breadth of fleet and services and sort of modernization from a technology standpoint, et cetera. So there is no shortage of pipeline.

And from an appetite standpoint and capacity, we certainly have both, but we're also pretty vigilant in terms of how we value some of these businesses because we can alternatively greenfield. And in this environment of a more expensive debt from an interest standpoint, we have that weighing in more on how we value some of these businesses as we think we should. But yes, it is a flushed landscape out there.

[Allen Wells, analyst]

All right. And then second question, just, I guess, around the mega project themes. Like I think some of that increased visibility on some of these bigger projects, at least I've heard the margins, from anecdotal evidence on some of the bigger construction companies, may be moving back and maybe buying a bit more fleet versus renting, so like maybe slightly going against that rising rental penetration comments industry as a whole. Is that something you also see a lot from the bigger construction companies? Now the fleet availability has got a bit better, they're back out securing some of their own fleet? Just wondering anecdotally, what you're hearing there.

[Brendan Horgan, executive]

Well, I would say both anecdotally and having walked more of these projects that I can count, these are the deepest rental-penetrated projects in our markets. These customers have chosen quite specifically to rent rather than own. As much as anything, it is -- well, it is, one part, an operational decision. It is quite an operation to have projects that require $100 million, $200-plus million of original equipment cost, not to mention the breadth of what those product ranges are.

So in this day and age, when you have the maintenance required, the health and safety requirements, the technical aspects of updates, et cetera, inspections, when labor is constrained and skilled trade specifically is ever more so, they want to focus on pouring concrete, welding steel, put it in place factory lines, not dealing with the overall management of $200 million worth of fleet. So again, there's no directional change in that whatsoever. I suppose you could see a lot large kind of earth moving side, some contractors out there are doing some buying when they were previously doing leasing directly from OEMs. But all indications point to ongoing rental advancement there.

[Allen Wells, analyst]

Great. That's clear. And then, a final question. I just wanted to check on that FY '25 number, just because I missed it, the CapEx guidance. It looks like you may have put a little bit of replacement, at least from the numbers I had in my model, into a bit more replacement into '24 versus '25. And so I was kind of backing out a growth CapEx number of kind of $500 million to $700 million for next year. Is that right? I'm sorry if I missed that in your prepared remarks as well. I'm going on for Mike.

[Brendan Horgan, executive]

No, that was not in prepared remarks, but your math is right on.

[Operator]

[Operator Instructions] We'll now go to Rory McKenzie calling from UBS.

[Rory Mckenzie, analyst]

Two questions, please. The first question is that, I guess, we clearly expect some moderation in growth. But ex-mega projects, I guess the rest of the market is under more pressure than expected at this point. Can you just talk a bit more about where this piping cycle is having an impact? And if you can maybe differentiate between the small construction clients and the nonconstruction business, but of course, you've focused on building up over the past few years.

And then secondly, previously, when you've seen elements of the capacity in the market, it's been quite a local phenomenon. Thinking about after the oil and gas downturn, for example, and you could kind of deal with that by shifting fleet around the country a bit more. Is this more broader base if less severe? And what are the thoughts on shifting fleet from area to area and using that as a way to improve utilization in FY '25?

[Brendan Horgan, executive]

Yes. I think it's all how this is characterized. I mean we're growing and we're actually growing throughout all of our territories. And I'm speaking of territories in terms of the vernacular we use in the business, in the U.S. and Canada. Are we growing at the rates in which we were growing 2 years ago? No, we're not. So it's not like an oil and gas when you have a very specific end market falloff, whereas you have fleet that you have to spread throughout the geographies. So it's very different than that.

I mean this is -- you sort of mentioned that perhaps a bit surprised in terms of what we're talking about here. This is just a -- it's a -- yes, it's a moderation of the level of growth what we're seeing in the end markets from a construction standpoint is what you would expect. Office, retail, lodging, that sort of run-of-the-mill commercial has been lagging and it's been doing that, frankly, for a number of years. On the other hand, you've got data warehouse, tech, energy, renewable, manufacturing, transportation, like airports, that are growing.

So there's a bit of a shift there and then if you look at the totally other end of the spectrum, on the smallest size of contractors, I would still just say they're busy. They're scrappy. If you are in the U.S. and you'd like someone to do a landscape project for you for your small business or for your backyard, get ready to wait a bit. So there's still -- they still have healthy backlog. It's -- Rory, it's just -- literally, it's just a -- it's a moderation in terms of the level of growth from 1 year to the next. That's where we are now. It doesn't mean that it can't change, but that's where we are now.

[Rory Mckenzie, analyst]

I guess, but just assuming on what's different now versus what you were hoping to see last time you spoke to us in the end of last year, because that has been a change, right? It's not just the change versus 2 years ago. It's the change versus where you thought you would be today.

[Brendan Horgan, executive]

Well, do you mean this year or next year? So this year, yes, 1%, as I would have said, and that was a bit of this ongoing absorption. So time will tell as we progress through March and April. But the bigger thing is next year. And what we will be doing going forward is touching on next year far earlier. So those are analyst numbers that they come up with for next year, with not much steer on whatsoever. And we're now getting people in line for what they should expect next year.

[Operator]

[Operator Instructions] We do not appear to have any further questions. Mr. Horgan, I'd like to turn the call back over to you for any additional or closing remarks.

[Brendan Horgan, executive]

Great. Thank you, everyone, for your time this morning, and we look forward to seeing as many of you as we can come this April at our CMD. Have a great day.

[Operator]

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