Ashtead Group PLC

LSE:AHT

Earnings Call Analysis

Strong Revenue Growth Amid Sector Challenges

The company achieved a record revenue increase of 12% and rental revenue growth of 10% despite higher costs. US rental revenue grew by 11%. The Film & TV sector rebounded post-strike, and Canada’s rental revenue rose 10%. Operating profit was $2.63 billion at a 28% margin, with EBITDA margins at 47%. For fiscal year '25, US rental revenue growth is projected at 4%-7%, and Canada's at 15%-19%, with a CapEx plan of $3-$3.3 billion. The Sunbelt 4.0 strategy is set to leverage structural tailwinds for sustained growth, maintaining a low leverage ratio and disciplined capital allocation.

A Year of Record Growth

The company experienced another year of record-breaking growth, driven by strong performance in North American markets. Group revenue soared by 12%, while rental revenues grew by 10%. In the United States alone, total revenue rose by 13%, with rental revenue increasing by 11%. This was underpinned by a strong EBITDA improvement of 11% to $4.9 billion. The adjusted pretax profit remained steady at $2.23 billion despite higher depreciation and interest costs. As a result, the earnings per share were $3.87.

Expanding Footprint and Investments

The company made significant capital investments, totaling $4.3 billion, to expand its existing locations and establish new ones. This led to the addition of 113 new locations across North America, with 66 coming from greenfield openings and 47 from bolt-on acquisitions. The confidence in the market's health and the company's cash-generating growth model is evident from these strategic moves. Net debt-to-EBITDA leverage was maintained at 1.7x, comfortably within their long-term range of 1 to 2x.

Sunbelt 3.0 Conclusion and Future Strategy

The year also marked the successful completion of the Sunbelt 3.0 plan, which resulted in an 18% CAGR in revenue and a 17% CAGR in EBITDA over three years. The operating profit margin improved by nearly 2 percentage points. Looking ahead, the company introduced its Sunbelt 4.0 plan, focusing on five actionable components: customer, growth, performance, sustainability, and investment. This strategic plan aims to leverage structural tailwinds for continued growth, profitability, and stakeholder value.

Segment Performance: U.S., Canada, and U.K.

In the U.S., the rental revenue grew by 11%, on top of the 24% growth from the previous year. Canada saw a 10% increase in rental revenue, driven by the expansion of specialty businesses. The U.K. market experienced a 6% rise in rental revenue but faced challenges in keeping pace with increased costs. Overall, EBITDA and operating profit margins were strong across all segments, although there were some margin pressures due to lower utilization rates and increased depreciation charges.

Guidance and Future Outlook

For the upcoming year, the company is projecting U.S. rental revenue growth between 4% and 7%, with Canada expected to grow by 15% to 19%, and the U.K. by 3% to 6%. Capital expenditure is estimated to be between $3 billion and $3.3 billion, with $2.3 billion to $2.6 billion allocated to the rental fleet. The forecasted free cash flow is around $1.2 billion. These projections reflect the company's cautious approach considering the current market conditions, including the high interest environment and ongoing inflation.

Challenges and Strategic Moves

The company faced several challenges, including a higher interest expense of $545 million, a 49% increase from the previous year due to elevated debt levels and high interest rates. Additionally, a specific customer filing for Chapter 11 bankruptcy led to a necessary provision, impacting the fourth-quarter drop-through rate. Nevertheless, the company remains optimistic, citing positive trends in rental rates and a robust construction market outlook, particularly in non-residential and infrastructure projects.

Earnings Call Transcript 2024-Q4

[Brendan Horgan, executive]

Good morning, everyone. Slightly smaller crowd than what we had recently. But anyway, welcome to our Q4 and full year results. We'll start by saying that we were really pleased that many of our investors, our analysts, of course, customers and suppliers have the opportunity to interact in person with thousands of our team members during our Powerhouse and CMD event that we recently held in Atlanta. You were able to experience firsthand the culture throughout our organization and the commitment not only to the ongoing success and the opportunities ahead that our business has to offer but also the prioritization we place on the safety and well-being of our people, our customers and members of the community that we serve.

So it's in the spirit of safety first, then I'll begin as usual by recognizing our Sunbelt team members listening in today. We recorded the best safety year in our company's history in both our leading metrics, and our lagging measures such as total recordable incident rate and vehicle incident rate. Both of these statistics and our results in them demonstrate a world-class safety culture which can only be the reality that they are with our team members, daily engagement. Our cultural mindset and determination is not one of reach in the destination, rather achieving milestones as in the world of safety, complacency is the ultimate threat. So to our team, thank you, thank you. Thank you for your efforts throughout the year and for your ongoing commitment to engage for life. Moving into the slides, which I'll preface by saying we'll be reasonably brief this morning considering the in-depth update we just delivered during our CMD and our views on our end markets, the opportunities that this business has and our confidence in our strategic plan are unchanged from what they were, of course, in April. So let's begin with the highlights for the year on Slide 3. The business delivered another year of record revenue and operating profit driven by strength in our North American end markets, the ongoing momentum and execution in our business and the very clear structural progression being realized in our industry. For the year, group revenue and rental revenues increased 12% and 10%, respectively, while U.S. revenue improved by 13% and rental revenue by 11%. Group EBITDA improved 11% to $4.9 billion, while adjusted PBT was broadly flat at $2.230 billion, reflecting disproportionately higher depreciation and interest cost leading to EPS of $3.87. From a capital allocation standpoint and in accordance with our priorities, we invested $4.3 billion in CapEx which fueled our existing location growth and greenfield additions with new rental fleet and delivery vehicles. We expanded our North American footprint by 113 locations with 66 through greenfield openings and a further 47 through bolt-on, investing $900 million in 26 targeted acquisitions. Following these investments, our net debt-to-EBITDA leverage was 1.7x, well within our new long-term range of 1 to 2x. These activities demonstrate our confidence in the ongoing health of our end markets and the fundamental strength in our cash-generating growth model. At the end of the year, we completed our Sunbelt 3.0 plan, which I will reflect on only briefly beginning on Slide 4. Beyond the physical expansion of our network of general tool and specialty locations and the advancement of our market share presence and cluster levels, 3.0 delivered a remarkable financial performance. This slide is from CMD, which we'll have updated to reflect the results for the full year rather than just the LTM January figures we would have shared at the time, demonstrated where we were in fiscal year 2021. And what our range was at the onset of 3.0 and what we ultimately performed or delivered on inside the table to the right there, you'll see we have the checks in terms of significantly meeting our ambitions and a couple of hashes or neutral measures.

We grew our revenue by $4 billion in 3 years, an 18% CAGR. We grew our EBITDA at a 17% CAGR, and our operating profit margin improved by nearly 2 percentage points, growing EPS again from $2.19 to $3.87. The plans for U.S. drop-through and group EBITDA margin were impacted, of course, by the higher than planned level of store additions where we added on average, as I would have shared in April, 2 and 3-quarter locations per week throughout 3.0 and by the significant inflation, which was not foreseen during the plan of or the launch of 3.0. So as I said in April, if I have to pick one or the other over the course of the last 3 years, growing more than our originally planned ambitions or having had the 55% drop through, I would take the EPS that was achieved as a result of our growth over the course of 3.0.

By any measure, some of 3.0 was a tremendous success. Of course, none of you came here today or tuned in to hear about past rather what's ahead. So thinking about that and contributing, of course, to the performance we did have over 3.0 as it will going forward is the clear structural progression in our industry, which is now ever present. And with that, we'll turn to Slide 5. During the Sunbelt 4.0 CMD, there was a lively and somewhat playful debate over who had the best slide among the presenters that were on the stage. And I will confess that my colleagues had some great slides all of which we put in the appendix of today's presentation. But I still think the slide that really presents the big picture story about this business. The structural growth story that this has been and the structural growth story, this will continue to be is really the structural progression that is so evident today. First, rental continues to take share from ownership. This has been happening for decades, and there's every reason to believe that this will continue to happen. Second, which is relatively new in terms of how this is expressed or how it's talked about. Our customers have built their businesses around relying on us in an essential manner. Rental is essential for our customers to begin, to run and to complete their projects across many, many sectors and end markets. This is not something we take for granted. Rather, we see it as an honored obligation. It's our role in what we do. And finally, the larger, more capable rental companies have and will get disproportionately larger as we move forward. The outputs of these are, as you see, rental is now core. It's no longer the top-up it would have been once upon a time. There is indeed pricing discipline.

As a result of the progressed organization of this industry, whereas we believe the ongoing pricing progression is a notable fixture of our future growth, all amounting to a more secular business than what it has been in the past. It doesn't mean that there will be no cyclicality. It simply means that it will be far less cyclical than the business would have been before this structural progression that is so clear today.

Moving on to Sunbelt 4.0, the plan itself on Slide 6. Here, we have our Sunbelt 4.0 as we call it, plan on the page. Don't worry, I'm not going to go through all the details of each of these actionable components, rather just put emphasis on what our plan is and focus on these 5 actionable components, our customer, growth, performance, sustainability and investment. And as we did throughout 3.0, we will provide you periodically with updates on each of these in terms of how we're progressing against the road map that we set out when we were together in Atlanta.

In terms of revenues, margins and CapEx within the 4.0 design, let's turn to Slide 7. We designed Sunbelt 4.0 to leverage these structural tailwinds that we've just gone through and execute on each of our actionable components to deliver our next phase of growth, setting our sights on achieving these 5-year targets, which we reiterate our confidence in today. Execution and achievement of this order will amount to an ever powerful strategic position and financial position. Delivering earnings growth, strong free cash flow and low leverage, giving us significant operational and capital allocation optionality for the benefit of all of our stakeholders. As we were explicit in saying at our CMD, this slide is not guidance, rather a direction of travel within a 5-year strategic growth plan. One we are confident is a when not if scenario. However, in a few minutes, Michael will give our guidance for the current year, not to be confused with our Sunbelt 4.0 targets. So on that note, I'll hand it over to Michael.

[Michael Pratt, executive]

Thanks, Brendan, and good morning. The group's results for the year ended April 2024 are shown on Slide 9. In North America, the fourth quarter saw growth in our specialty businesses returned to levels similar to those that we saw in the first half of the year while the Film & TV business improved throughout the quarter as following the resolution of the accident writers' strike in December last year. As a result, the group increased fourth quarter rental revenue 9% at constant currency and full year rental revenue at 10%. This growth was delivered with strong margins and EBITDA margin of 45%, an operating profit margin of 26%, delivering operating profit 5% higher at $2.77 billion.

After an interest expense of $545 million, 49% higher than this time last year, which reflects both higher absolute debt levels, but also the high interest rate environment. Adjusted pretax profit was slightly lower at $2.23 billion. Adjusted earnings per share were $3.87.

Turning now to the businesses. Slide 10 shows the performance in the U.S. Rental revenue for the year grew at 11%, which was on top of growth of 24% last year. Rental revenue has been driven by a combination of volume growth and rate improvement in end markets, which continue to be strong. Despite the impacts of inflation and the higher interest rate environment. The rate piece continues to be an important part of the equation given the cost that we face whether it be interest costs, as you saw on the previous slide, or the impact of inflation among both our rental fleet and our operating cost base. The total revenue increase of 13% reflects high levels of used equipment sales this year. As we've discussed in previous quarters, improvements in the supply chain during the year have enabled us to reduce physical utilization from the record levels that we've seen over the last couple of years, although the absorption of this additional fleet has been slightly lower than we anticipated. We've used this opportunity to take advantage of strong secondhand markets to catch up on delayed disposals and accelerate the disposal of some older fleet where utilization was suboptimal. As we've discussed before, this lower level of utilization is a 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. Fourth quarter drop-through of 40% resulted in drop-through for the year of 49%. This was after we recognized an additional receivables provision following one of our customers filing for Chapter 11 bankruptcy protection in May due to a contract dispute.

While we expect to collect the amounts due to us, we've adopted a cautious approach in preparing the financial statements and made an additional provision. Excluding this late event, fourth quarter drop-through was 57% and full year drop-through was 52%. This resulted in EBITDA margin of 47%, while operating profit was $2.63 billion at a 28% margin, and ROI was still healthy at 23%. Excluding the impact of the lower margin used equipment sales and this additional provision, EBITDA margins were slightly better than last year.

Turning now to Canada on Slide 11. Rental revenue was 10% higher than a year ago at $765 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.

The fourth quarter saw increasing activity levels in our Film & TV business following the settlement of the strikes in North America in December, with revenues now approaching pre-strike levels. 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 anticipated. Despite these challenges, Canada has delivered an EBITDA margin of 40% and generated an operating profit of $138 million at a 15% margin, while ROI is 11%. Excluding the drag from the Film & TV business, EBITDA margins were slightly better than last year. Turning now to Slide 12. U.K. rental revenue was 6% higher than a year ago of GBP 590 million, while total revenue increased 3% to GBP 706 million. While we continue to make progress on rental rates, there is more to be done to keep pace with the increase in our cost base, and this is a headwind to improving margins. The disconnect between the rate of revenue growth and depreciation reflects lower utilization of a slightly larger fleet and also higher nonrental depreciation as we replaced aged vehicles. The U.K. business delivered an EBITDA margin of 28% and generated an operating profit of GBP 58 million at an 8% margin and ROI was 7%. Slide 13 sets out the group cash flows for the year. This emphasizes the strong cash generation capability of the business. And this cash has been deployed in accordance with our capital allocation policy, with capital expenditure of $4.4 billion, funding principally fleet replacement and growth and $876 million invested in bolt-ons. The significant increase in capital expenditure resulted in lower free cash inflow this year of $216 million. Slide 14 updates our net debt position and leverage at the end of April. As expected, overall debt levels increased as we allocated capital in accordance with our capital allocation policy. In addition to the capital expenditure and bolt-ons, we returned $436 million to shareholders through dividends and $108 million through buybacks. As a result, leverage was 1.7x, excluding the impact of IFRS 16. Our expectation continues to be, we'll operate within our new target leverage range of 1 to 2x net debt-to-EBITDA and generally more towards the middle of that range as we continue to deploy capital in accordance with our policy. As we move into Sunbelt 4.0, we remain committed to a disciplined approach to capital as we drive profitable growth, strong cash generation and enhanced shareholder value. An integral part of this is a strong balance sheet, which gives us a competitive advantage and positions us well to optimize the structural growth opportunities that we see in the market. We accessed the debt markets last July and again in January in order to strengthen that balance sheet position further and ensure we have appropriate financial flexibility to take advantage of these opportunities. Following the notes issues, our debt facilities are committed for an average of 6 years at a weighted average cost of 5%.

Turning now to Slide 15 and our initial guidance for revenue, capital expenditure and free cash flow for '24, '25. In the U.S. consistent with the overall direction of travel we discussed in Atlanta. We're expecting rental revenue growth of 4% to 7% or in the range of 4% to 7%. This takes account of current activity levels, our view of nonresidential construction markets and a lull in the large project that I referred to earlier. In Canada, we're assuming a rental revenue growth of 15% to 19% as the Film & TV business turns to pre-strike revenue levels. While in the U.K., we're looking for rental revenue growth of 3% to 6%.

From a capital expenditure standpoint, our initial guidance is for $3 billion to $3.3 billion of capital expenditure, of which $2.3 billion to $2.6 billion is our new rental fleet.

This level of capital expenditure and anticipated business performance leads to expected free cash flow of around $1.2 billion. And with that, I'll hand back to Brendan.

[Brendan Horgan, executive]

Thanks, Michael. We'll go on to U.S. trading on Slide 17. As you'll see, the U.S. business delivered good rental revenue growth in the quarter of 9%. This growth is on top of very strong growth last year in the fourth quarter of 18%. Specialty worth noting was up 15% in the quarter, back to the levels that we would have experienced in the first half. Overall, for the year, rental revenue growth was a strong 12%. Consistent with what we've said previously and others in the industry have been noting, time utilization throughout the year was below the record levels that we experienced in the previous 2 years. This continues to reflect the ongoing improvements and today, the normalization in the supply chain. Importantly, rental rates have continued to grow year-on-year, doing so despite the utilization movements that I've just covered. This is affirmation of the ongoing positive rate dynamics in the industry. Further, there is capacity for us to do better in terms of absorbing more of the fleet investment we made last year in the business as we progress through this year.

Moving on to Slide 18. We'll cover the outlook for our largest single end market, which is construction. Consistent with our usual reporting of construction activity and forecast, this slide leads out the Dodge figures in starts, momentum and put in place. If I draw your attention to the top right there, the put-in-place chart, and in particular, the top 3 rows where you'll see non-resi, non-building and then the 2 subtotal there to capture both of them.

Partially fueling our growth over 3.0 was the significant recovery and indeed, record growth and absolute levels in non-resi non-building. If we look at this just from 2021 to 2023, in just 2 years, those top 2 lines that I've mentioned grew from $817 billion to $1.1 trillion. That's 35% or about $300 billion. That's a big, a really big step change in pace and in total. When we look at this forecast with a 2023 starting point, it goes from a $1.1 trillion actual to a forecast of $1.4 trillion in 2028. So again, that's about $300 billion in growth. However, that's over the course of 5 years rather than that 2-year period that we've just described. So growth is indeed forecasted and it's favoring a bit more toward the nonbuilding pieces, infrastructure, public works, utilities, et cetera, get a boost. And of course, we continue to see mega projects taking more of the non-resi and non-building pot.

Overall, the construction environment looks to be positive for the foreseeable future. And as we progress throughout this next year, I think we'll get an even better feel for the growth that will extract from the changes to the construction makeup whereas mega projects and nonbuilding are taking on a larger portion. Let's touch on mega projects activity in a bit more detail on Slide 19. Again, we have a slide here from what we would have shared in April. The last 3 years were very active, $565 billion and starts, which was 442 projects that started from May of 2021 and were started by April '24. Further, there's a strong lineup of forecasted mega projects over the next 3 years as you'll see there, about 500 projects and $760 billion overall.

Will all of these happen that are forecasted? No. Will all these happen on time? No. Will most of these take longer than planned? Yes. Well, most of these cost more than what's in the plans? Yes, they will. Will some projects start over the next 3 years that aren't even in the bucket of 501 projects that's on the list today? Yes, they will.

However, despite all of that noise from one quarter to the next or as we put up these tables periodically, the key themes to understand here are, one, this era of Mega projects will carry on for sometime, and it's all being influenced by the drivers that we've talked about so many times, deglobalization, technology, legislative acts, et cetera; and two, how essential rental and the related services are for the success of our customers on these projects and for the delivery of these projects overall.

Turning now to our nonconstruction markets on Slide 20. This was our latest attempt at the difficult task of trying to scope the huge nonconstruction opportunity all on one slide. This was better showcased by our Anytown exhibited exhibit in Atlanta where we demonstrated just how capable our products and services are at germinating new market segments or those that are less rental penetrated than the better known areas. So many of our product categories have remarkably universal applications which presents a vast opportunity to progress rental ever more broadly.

This can range from temporary HVAC solutions in a hotel to cleaning, to inspecting or repairing buildings by utilizing their area or platform or the scaffold services that we have. To supply an essential solutions required to put on big live events like the F1 races in Las Vegas and in Miami or the Kentucky Derby, all the way down to the little 10K runs or food festivals, which happened in our -- all of our geographic markets virtually every day of the year. The key to this is that these MRO and live events examples that I've just given and the other nonconstruction markets illustrated here on the slide, produce activities or projects that often happen the same week, the same month, year in and year out time and time again.

And increasingly so, we're there to service them and the power of Sunbelt, once our team gets an opportunity to service one of these, very rarely do we lose the opportunity of the following year. Events and projects like these very much become annuity opportunities. So these are big end markets with very big opportunities for growth as we move forward.

Moving on to Canada on Slide 21. Our business in Canada continues to deliver good growth coming from existing General Tool and specialty locations as well as the greenfields and bolt-on activity that we've demonstrated. In the year, we added 17 locations, further contributing to advancing our clusters in line with what the 3.0 plan was. This progress enables us to increase our addressable markets beyond construction as we have 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. And as is the case in the U.S., rental rates continue to grow year-on-year, which we expect to continue to be the case as we move forward. We've now experienced a good pickup in activity in the Film & TV business, as Michael has talked about. Following the end of the strikes in December, with activity levels now close to what they were pre-strikes.

Turning to the U.K. on Slide 22. The business delivered strong rental-only revenue growth of 9% driven by market share gains in an end market composition, which favors our unique positioning through the industry's broadest offering of General Tool and specialty products and services, which are frankly unmatched in the U.K. We simultaneously launched Sunbelt 4.0 in the U.K. business while we were together in Atlanta and the team has since carried on town hall meetings throughout the business to add emphasis to each of the actionable components.

What we have as a plan that will lead to an ever more diverse customer base and increased TAMs while bringing greater focus and discipline necessary levers and actions to deliver sustainable levels of returns and ongoing free cash flow within the U.K. business. This business has transformed in recent years. And Sunbelt 4.0 aims to add the final piece to this transformation, and I would say that the team is off to the right start.

Let's move on to our initial CapEx outlook for next fiscal year on Slide 23. The CapEx for the full year just gone by was $4.3 billion, in line with the guidance range that we gave in March. Our guidance for fiscal year '25 is unchanged from the initial guidance. We anticipate rental fleet CapEx in the U.S. to be between $2 billion and $2.3 billion. And after our nonrental CapEx across the group and ongoing rental fleet investment in Canada and the U.K., we guide to $3 billion to $3.3 billion for the group for the full year. This investment will fuel our ongoing ambitious growth plans, incumbent in Sunbelt 4.0 and demonstrates our confidence in the current and forecasted demand environment, competitive positioning, and the strong relationships we have with our key suppliers and our business model in general.

However, these plans can be flexed as we progress through the year to reflect our latest views on future market conditions, and that's again -- that's a nice return to have to the more ordinary times, as I mentioned earlier, from a supply constraint standpoint. This leads on to capital allocation on Slide 24. Michael or I have covered every capital allocation element for the current year and the framework for the new year throughout this morning's presentation, all incredibly consistent with our long-held policy, and we will continue to allocate capital on this basis throughout 4.0.

So to summarize, we'll turn to Slide 25. This has been another good year of performance and the full year delivery of Sunbelt 3.0 and positioning for the future as we embark on our execution of Sunbelt 4.0 throughout which we will extract the benefits of the ongoing structural progression, which we've shared again today, delivering strong performance through volume, pricing, margin and return on investment, resulting in an even stronger financial position through earnings growth, strength in free cash flow and operational and capital allocation optionality greater than any point in our company's history. So for these reasons, we look to the future with confidence.

And with that, we'll be happy to take some questions. James?

[James Rosenthal, analyst]

It's James Rose from Barclays. I have got 2, please. The first one, I think just to get it out of the way as well. There's been media comments around your potential U.S. listing. I guess is there anything to update us on that...

[Brendan Horgan, executive]

It was the status quo from April. From time to time, as we've said, we and the Board take the matter of listing residency on. And if we change in terms of our intention along with our investors will be the first to know.

[James Rosenthal, analyst]

And then secondly, on the sort of specific large projects you've highlighted and flagged there. Do you see any risk of contagion to other bigger projects out there in terms of delays or conflicts?

[Brendan Horgan, executive]

That's a good question and what I'm glad is raised. As Mike would have said, this is a contract dispute between contractor AKA, our customer and the owner of the project. And I hope you can all appreciate it. I'm sure there'll be some other questions around this. We're not going to name either of the 2 of those, certainly in this venue. But that's what it amounts to. We see no risk in terms of these other sort of things happening in these mega projects. One, delineating factor when it comes to these mega projects across the U.S. They are being built and developed by the world's richest companies or the government itself in some cases. So we see no risk and contagion. Annelies?

[Annelies Vermeulen, analyst]

Annelies Vermeulen from Morgan Stanley. Just as a follow-up on that. Thinking about your rental revenue guide for next year, I think you said this large project is predominantly in scaffolding. So is that in -- would that sit within specialty. So how should we think about general tool versus Specialty going into next year? Do you still expect specialty to be able to grow double digit? Or do you think the gap between general tool and specialty may be smaller?

[Brendan Horgan, executive]

Yes. Well, there's 2 ways to look at it. Well, first of all, you're right. It is a large portion of the revenue we experienced over the last several years on this project was the labor component of scaffold E&D, not all of the revenue. So let's just say it was about 2/3 labor and 1/3 balance of the rental products that we offer, and that will be specialty and general tool like. To put it in perspective, you're talking about 2.3 million labor hours we would have deployed in erecting and moving the scaffold over the course of 3 years. So it is quite a sizable piece there.

Yes, this is part of what our guide is, of course, for the year. Our guide would have been slightly higher than what it was. It's about 1% or so in terms of overall revenue attributable to the project. But on a go forward basis, I think there's a couple of things to reiterate. First of all, we'll take -- I'm sure a question we'll get how was trading in May. So in May in the U.S., we saw pure rental revenue growth on a billings per day basis of 6.5% but on a total rental basis, which is what we guide, it was 5.5%. The difference there is that labor component that wasn't present on the project in full during the month of May that we would have experienced previously. So there will be a bit of specialty, but I think the key for us will be looking at specialty in pure rental terms. The rest of this is just caught up in terms of where we are on the project. The other thing about the project is this is a, let's just call it, circa $10 billion project. And $6 billion or $7 billion of that project has been built. So the balance of the project, as sure as we're all in this room today, we'll finish, and we believe we're well positioned to be material participator in that project until it's done. This is just a contract dispute that's in the courts and hence, the reason for the sensitivity, if you will, in too much detail.

[Annelies Vermeulen, analyst]

Just one more on that then, if I may. You've obviously said you expected to get that back. Is that factored into your guidance? And do you have any sense on timing? Can these things drag on for years? Or are you relatively confident it will be within this year?

[Brendan Horgan, executive]

They can drag on for a long time. There is an eagerness to continue the project from an ownership standpoint. So one would hope that aids in a bit faster sort of settlement, if you will. The provision that Michael referenced has to do with arrears. So we do think that's conservative because we fully expect to collect it all, not least of which, once we have done all of the accounting behind it all, thanks to the team who would have done all that. We received a sizable payment on Friday and another yesterday. So we feel as though this will progress. It's just a matter of timing.

Will?

[William Kirkness, analyst]

It's Will Kirkness from Bernstein. Two questions, please. Firstly, just on rate, if you can give us any color on the fourth quarter and expectation within that 4% to 7% guide.

[Brendan Horgan, executive]

Yes. I mean rate continued to progress in the fourth quarter. That will bring me to one of my favorites I'll [ give John's ]. Can we advance to Slide 30. I've lost my clicker, 32, I believe. I've got it back. It is 32. This was John's favorite slide. Rate in the fourth quarter was as we expected. I think as we go forward, I mean, there's certainly a component of rate, which -- we won't tell you precisely in terms of what's in that 4% to 7%. And we fully expect rate to continue to progress. What we shared with our business in Atlanta referencing this slide, the real mechanical nature of recapturing the inflation in the labor base, the equipment base and the macroeconomic inflation, it takes a bit of time to turn that into the sort of regimented systematic process that you would have heard John and others talk about.

But we feel as though this is the right guidepost and this is what we're putting in all of the plans that we have for our sellers, our managers, et cetera. So look, we feel confident that as we have said many times, this is a business services company. The industry over the long haul, perhaps hasn't necessarily demonstrated that to revoke the level of confidence that we believe structurally has put us in this position. So we very much expect to sequentially and year-on-year gain rate throughout the year.

[William Kirkness, analyst]

Okay. And linked into that, in terms of the inputs, has anything changed on the cost inflation side in recent months or in terms of skilled blue-collar and...

[Brendan Horgan, executive]

As we go bucket by bucket here, wages, it's more of the same. I mean the -- arguably the most scarce and valued necessity, I hate to call people, commodity is skilled trade. And as we see the abundance of the project, if you read any of the Dodge information, whether it be on the momentum or be the next 5-year outlook. If you don't subscribe to it, I'd highly recommend it, it's the best 110 pages you might read of all the material that you do take on. And they still talk about one of the real underpins being how difficult it is to source the labor. If you look, as for instance, to that as well, the week of May 13, the U.S. government in essence, hosted their 12th, I believe, 12th or 13th annual infrastructure week. And one of the challenges that they talk to in terms of really getting the money fully to work, which has been allocated to the states, et cetera, is the lack of availability in terms of labor, and that also is present very much in CHIPS and science.

Don't worry. That doesn't mean it doesn't happen. It just means that really the spread of that gets prolonged, which from our point of view, is actually very positive. So we're going to continue to see inflation in wages, and therefore, we're going to pipe that through the system more mechanically. When it comes to the equipment, what we're seeing is we're seeing the year-on-year inflation significantly abate. It will be either sort of minus 2% to plus 2% over the course of the year. But remember, we still have 4 years, Michael, right, of material inflation in the assets that we will be disposing of and replacing at these newer and higher cost levels. So will be a material adder for that as we go forward. The rest of inflation, obviously, we're all watching that closely as it relates to interest rates and what might happen. Arnaud?

[Arnaud Lehmann, analyst]

Arnaud Lehmann from Bank of America. It's one question in 2 smaller parts. Just coming back more broadly on your guidance for U.S. rental revenue 4% to 7%. It's slightly below Q4. It's slightly below your medium-term target. So are you -- I guess, are you being conservative? Could you catch up to the 6% to 9% with bolt-on acquisitions? And how do we reconcile considering there is some rates included in there? How do we reconcile the 4% to 7% relative to the slide you showed about construction and rental markets growing 9% to 10%?

[Brendan Horgan, executive]

Yes. Well, first of all, this is organic. So what we're giving in guidance, if we do some bolt-ons throughout the year and to the degree in which we'll have any material impact, and we would reflect that in our guidance. I think how you reconcile that in terms of construction. I think was one of your big questions there, which if I go to -- bear with me 17, I think, or 18 -- 18. One of the things I would have mentioned in the prepared remarks was how we get a feel for overall this construction landscape. As we've said, in absolute non-resi/non-building, it is strong, right?

It's an environment where as -- if you look at the labor component of it, et cetera, it's taken all that it's got, so to speak, to pull off the size of numbers. But if we look at the movement that I talked about from 2023 through 2028 in non-resi/non-building, one of the things that we know is contributing to that, but it's causing a composition change is the relative level of mega projects or infrastructure relative to the ordinary sort of run-of-the-mill commercial which comes to flow through. What can we expect in terms of overall levels of flow-through for that the change in composition of projects, all of which in terms of the direction of travel, positions us remarkably well but that's what we're working through, I think, during this period.

I think we're seeing that in the industry as it relates to time utilization from a supply constraint standpoint or more now normal times, but also really the makeup of that. So what we're going to do with guidance is we're always going to tell you exactly what we think. So based on, as Michael said, our most current trading and as we look at and we go through our modeling of what that should amount to in terms of rental revenue, that's the underpin in many ways to our guidance and, of course, the rate piece. And everyone is going to want to know what exactly we have as it relates to rate in our numbers and we're not going to tell you.

[Arnaud Lehmann, analyst]

Fair enough. And I guess the next line in the P&L. Could you talk about the EBITDA margin outlook for the year? Obviously, you want to increase it by 2029, but does it start already in '25?

[Michael Pratt, executive]

Yes. We're expecting flow-through of sort of low to maybe mid-50s for this year. So if you think of that in relation to where margins are at the moment in the U.S. then that should be incremental. The other piece is used equipment sales. We've talked about it here. We're talking -- the guidance we said we're expecting gains, which is really volume that we're selling predominantly to be about $100 million lower than they were a year ago. Inherently, yes, gains or gains, but they're lower margin. So the absence or the reduction in used equipment sales will be complementary or aid margin progression. So you can take drop-through and lower equipment sales, you'd expect margins to progress.

[Brendan Horgan, executive]

Can you just pass it to Lush there?

[Lushanthan Mahendrarajah, analyst]

It's Lush Mahendrarajah from JPMorgan. The first is just sort of going back on to the sort of larger project whether it's -- where there's been an issue and -- so following on from the other question. I know you can't tell us [indiscernible], but can you give us any color on what the dispute is exactly be? Because I guess what I'm trying to get handled, I guess, going forward, there's going to be more and more at these types of bigger projects. I'm just trying to get an idea of how likely this sort of issue could be to arise again? And then the second question is just on Film & TV sort of helpful saying it's sort of back to sort of pre-strike levels. Can you just give us an idea of how much that actually fell across the year last year because obviously there's moving parts through the quarters, just to get an idea of how strong that rebound could be?

[Brendan Horgan, executive]

I might turn the second one to Michael. But the first one, it's a good question. And you have to look at these projects, which we know remarkably well these larger projects that we participate in. The timing of this particular project, which leads to the -- to your understanding of the contractual dispute without me talking about it too much here. This project began pre-COVID and the cost arrangements in that environment ended up being very different than the realities of what the COVID period brought both in terms of the supply constraints and challenges from material and when it came to the overall inflation as a result of that.

Furthermore, the cost associated with moving 7,000 or 8,000 people a day as an example from where the skilled trade would park and where the skill trade had to go to work. So the dispute has to do with from our understanding, it's dollars and cents. It's dollars and cents on a mighty large project. So I think, again, looking at when this project began, unlike most of the existing mega project landscape today, and the circumstances around that are really at the root of what this is. We think that there is remarkably low risk as it relates to contagion that you and James have both asked about now. And I'll remind you again, look, we deal with Chapter 11 every day. It's interesting to me just that sometimes in the U.K., if Chapter 11 bankruptcy as said, it's just assumed, well, it's bankruptcy, receivership and it's all over.

That's not the case in the U.S. There's 2 types of Chapter 11 in the end. There's Chapter 11 where businesses are dealing with their own sort of solvency and challenges. And then there's this sort of contractual dispute piece. And in that, there's 2 more buckets, one where the well is near dry and one where there's plenty of water in the well. This is not an issue of not enough water in the well, if you will, when it comes to the owners of the project. Okay? Second one?

[Michael Pratt, executive]

On -- I guess, on Film & TV. So rental revenue this year was about 40% lower than the prior year. So in the prior year was broadly normally, it would have got affected a little bit towards the end because people are anticipating the strike, so things slowed down a little bit. And the consequence of which our Film & TV business this year made a loss. And so next year, we'd expect it to be profitable.

[Suhasini Varanasi, analyst]

Suhasini from Goldman Sachs. Just 2 please. One follow-up to your U.S. growth guidance of 4% to 7%. Maybe it's one for Michael. Just to clarify, can you give some color on what the impact of that contract was on the 4% to 7% number, the one that you took the provision on? And how much of hurricane revenues have you actually baked in there? That's number one. The second question is probably on time utilization. I appreciate it was lower in FY '24. What do you have in your guidance for FY '25? Do you have it going back to pre-COVID levels, normal levels? I appreciate it won't be the all-time highs, but just to get some context there.

[Michael Pratt, executive]

So on the revenue guidance in terms of -- well, I'd say it's a combination of where we are with activity levels at the moment and also the specific impact of [indiscernible]. And so to the extent that our guidance adjusted if you would take is probably split pretty evenly between the 2 in terms of current trade -- if you look at -- go back to slide, Brendan, Slide 17, 18 -- 17, then if you take general tool, it is growth year quarter-over-quarter was slower in Q4 than it was in Q3. So we've factored that into growth rates as you go forward and then overlaid a piece from that specific contract.

I'm not going to give quote numbers on it is the honest answer. So I'm not going to give you specifics on that contract, but that's the direction of travel.

[Suhasini Varanasi, analyst]

And the hurricane?

[Michael Pratt, executive]

No, we're not -- we got the question if they actually is to say, it's forecast to be the strongest hurricane season or the most busy hurricane season ever. Well, that's after last year was forecast to be and probably was almost the busiest. It all depend -- we're not assuming anything in -- from a that big event. There's events in our data all the time. So the stuff happens on a day-to-day basis in the U.S., whether it be localized flooding, where it be tornadoes, whether it be fires, et cetera, et cetera, that's just day-to-day trading is that large one-off event, which we're not specifically factoring anything?

[Brendan Horgan, executive]

Just to be clear, last year was a remarkably active hurricane year in the ocean. It just didn't make landing where people reside, which we're happy for. So we're not doing hurricane dances on shores along the coast of Florida. So time will tell. In terms of your utilization question, we're budgeting or anticipating sort of getting back to more norm sort of time utilization levels. However, we do think, if you think about Sunbelt 4.0, the third actionable component of performance, we ought to be able to run at higher time utilization levels than we were pre 3.0. So we will certainly set our sights on being able to do that. But in this year, it's kind of more norm.

[Allen Wells, analyst]

Allen Wells from Jefferies. I just wanted to come back to the question around kind of the end of the construction data and how that relates to you guys. So if you look at the Dodge data, 9% for '24, 6% for '25 to blend that out over your fiscal year. You highlight the fact that more of that growth is driven by bigger projects. You'd expect the rental market to outgrow the construction market based on the penetration discussions on the structural side. And you guys as a bigger rental player should be benefiting from the bigger projects. So what are we missing there? What's the -- is it a temporary issue that's really just impacting this year? I'm just trying to understand how we dovetail the structural side versus the growth guidance there, that's the first time I expect you to outgrow those construction numbers not underperforming.

[Brendan Horgan, executive]

Well, let's touch on it. I mean that's -- so I'd like to describe it as if we go back to that same slide again, 17 the -- 18, pardon me. There we go. There is a bit of cross currents that we're dealing with which is nothing to overreact to. It's just one that we as a business and indeed as an industry, get our minds around. And when you take into account, first of all, so these are forecasts in terms of put in place, we are seeing and we're realizing on a daily basis, that projects are taking a bit longer. So if we look at 2024, to some of the 2024, $783 billion or $423 billion, in the end find its way into 2025. It wouldn't surprise me today whatsoever as it relates to not only the labor piece but also the way in which these projects are trying to manage the costs associated with them. So it used to be fast and furious to get to the sort of prize of producing whatever they're going to be producing, whether that be a vehicle, it be a battery, it be natural gas, it be a chip and balancing out what's the right amount of resource to put into it that is rather sort of sustainable through the course of the project. But the second one again is flow-through.

If you look at a $12 billion semiconductor fab, what will that be? Will 1% of that flow through to rental? Well 1.25%? Well, maybe it's 1.5%. We thought it would be 0.75%. It's gotten a bit higher than that. But if we were to develop a 4-storey office building, it's 5%. So there is a bit of that there that's very difficult to get to the sort of most -- sort of granular level. So I think we just have to go through that, and that's just one of the things that we're working through.

[Allen Wells, analyst]

And maybe just following on, when we think about the other -- over half of your business that's not construction, it's MRO. How do we think -- how are you seeing the broader MRO market versus those sorts of numbers in terms of growth when you think about this? Is it accretive to growth or slightly dilutive to growth as we...

[Brendan Horgan, executive]

I mean what was U.S. GDP in Q1? Anybody know? 1.5%, 1.4%, something like that and look at specialty growth. So I mean, that will continue to be the case. We will outstrip sort of the overall inherent sort of level of growth in the U.S. and we're seeing their share gains, but we're seeing, most importantly, rental penetration and the cross selling power of what we have. But bringing to life that nonconstruction slide that we covered, this is also not a race. This is one that takes time, it takes investment, it takes that cross-selling and it takes that sort of -- as we continue to perpetuate, if you will, the more and more use of more and more products across that MRO base.

[Allen Wells, analyst]

And then just finally, just to clarify, when I look at the exit rate, I think you talked about 5.5% exit rate in May.

[Brendan Horgan, executive]

6.5% rental, 5.5% total rental.

[Allen Wells, analyst]

Yes. And you compared obviously to the Q4 number of [ 9% ], 1% I guess is the impacting -- a number that's around 1% impacting from the provisioning issue, the project, weather impacts, timing, anything else you could just pick up in terms of what maybe was driving that?

[Brendan Horgan, executive]

No, I think we're -- I think -- look, it's just a -- it's a level of growth that we feel like is we're seeing the business today, and we feel like we'll see throughout the year.

[Adrian Kearsey, analyst]

Adrian Kearsey, Panmure, next week Panmure Liberum. A few questions. Looking at Q4 U.S. headcount and Q4 U.S. store openings. Headcount down a little bit sequentially and the store openings going through below trend. To what extent was the headcount impacted or not at all by your scaffolding project? And to what extent should we look at that Q4 store openings going forward and thinking actually your CapEx -- your growth CapEx is going to be more about applying investment into the existing estate and less so about store openings.

[Brendan Horgan, executive]

I think you just picked up on something that is when it comes to pace of openings, nothing to do with anything other than circumstance around properties, leases, et cetera. We very clearly put our intentions out there when it comes to greenfield expansion through 4.0. So it's just a timing thing. You'll see a reasonable return to robust greenfields as we progress through Q4 -- Q1 rather, and even a bolt-on or 2 that we'll do.

When it comes to headcount, again, think about the explosive growth that we experienced both in our existing locations and adding [ 2 and 3 quarter ] locations a week. It requires lots of people. When we look at the pace, obviously, you can -- we don't report same-store versus all stores. But you can imagine with the activity levels when you take into account rate as well, you're growing less. So therefore, what do you do in a business like ours, you add fewer people.

Furthermore, we're working on, again, I'll go back to that actionable component number three, performance, where we're leveraging better the cluster environment that we have, which means the resources within those markets. So it's more than just about the TAMs that we advance through our cluster strategy. It's also about the efficiencies that we unlock and part of the technology that you would have seen that we put in place, part of the overall organization is. I'll give you the most basic example. Having an equipment rental specialist, which is a counter person in one of our locations, who are trained in terms of product and application, understand all the vast products that we carry to provide solutions for our customers based on staffing requirements, we might move them Monday, Tuesday, Wednesday to one branch and Thursday, Friday to another branch.

And that's -- those are the sort of things that as simple as that may sound, they weren't so abundantly available to us like they are today. So that's what we're working through.

[Adrian Kearsey, analyst]

To follow up on sort of your comments on clusters and look in terms of market share, because some of the established depots have got considerably higher market shares. Over the last quarter or last couple of quarters, have you started seeing any friction in terms of the upper movement in market share? Or are they still punching through the sort of national averages?

[Brendan Horgan, executive]

Yes. I mean it's very difficult to gauge market share in a quarter or a couple of quarters. It's probably something worth looking at on an annual basis, outside of the way that the team will look at an individual outside sales representatives territory. I guess there's nothing to be seen there. Well, even in our most mature markets measured by way of density that we would have shared during CMD or by store count, how we measure our clusters, we've yet to reach a ceiling. So even our most matured markets as it relates to our market share in those markets has continued to climb. It continued to climb throughout 3.0. We have every expectation that will continue to climb through 4.0.

Any others? Great. Well, thank you for your time this morning, and we'll look forward to seeing you at Q1.