Good morning, and welcome to the Ashtead Group full year results presentation. Today's update details our strong financial performance for the year, establishes our outlook for the new year, and covers the year one execution of our strategic growth plan, Sunbelt 3.0. In addition, we'll review the most current views and forecasts for our end markets, coupled with what are remarkably unique market dynamics very much on everyone's mind. Let's begin with highlights on slide three. Our business continues to perform very well and experienced accelerated momentum throughout the year, demonstrating the strong levels of demand so clearly present. The strength delivered a record performance driven principally by a 23% increase in North America revenues, which led to PBT of $1.8 billion and a 40% increase in earnings per share.
Throughout this period of the strong revenue growth, we expanded our footprint by 123 locations, 88 greenfield openings and a further 35 by way of 25 strategic bolt-on acquisitions. This existing store growth, greenfield expansion, and bolt-on acquisition activities were fueled by CapEx and acquisition investments of $2.4 billion and $1.3 billion respectively. We further exercised our capital allocation priorities with returns to shareholders. Our proposed final dividend is an increase of 40%, and we completed $414 million in buybacks. Despite these record levels of growth, capital investments, acquisition, and returns to shareholders, we're at the bottom end of our net debt to EBITDA leverage range. This result demonstrates the fundamental strength in our cash-generating growth model and will illustrate in more detail over the slides to come. Let's turn to slide four.
This performance delivered a year that would not be possible without our dedicated and engaged team members throughout the U.S., U.K., and Canada. I'd like to address them directly. When I refer to our team members, I mean our entire team. From our skilled trade colleagues comprised of professional truck drivers, talented technicians, scaffold builders, and the list goes on, to our branch managers and senior leadership. You have come through time and time again for all of our stakeholders, for which I am extremely thankful. However, above all, I'd like to thank you for your ongoing and embedded culture of safety. We've made great strides and achieved record lows in leading and lagging indicators. Thank you for your relentless efforts in this regard, and let's remember our successes in safety have been milestones, not our destination.
Keep up the great work as we safeguard ourselves, each other, our communities, and the members of the communities we serve, our customers. Our employee resource groups are leading the way through engagement and advocacy for one another. Advancing our diversity and inclusion efforts in a brave and positive manner. Developing our WISE group, Women Inspired, Supported and Empowered. Of course, our veterans program. Those of you leading these efforts, you know who you are. Thank you for your engagement and determination in advancing and supporting our various people initiatives in the business. Remember, every challenge is an opportunity. With that, we'll now move on to our outlook on slide five.
Our initial revenue, CapEx, and Free Cash Flow outlook set forth herein is derived by taking into account the current and anticipated demand environment as well as momentum in areas such as pricing, structural growth, and project starts. These contributory elements will be covered throughout the operational update this morning. Consistent with our approach in recent years, the slide frames our current estimate of year-on-year rental revenue change by business in their respective currencies, as well as group level CapEx and Free Cash Flow. Beginning with revenue, we anticipate the U.S. to be in the 13%-16% growth range, Canada to deliver 15%-18% growth, and the UK to experience reduced rental revenues by 5%-2%. This is, of course, a direct result of the Department of Health testing sites ramp down, which completed in April.
Michael will cover the timing and underlying momentum in some detail briefly. From a CapEx standpoint and consistent with our preliminary view that we gave you in March, we begin the year with a range of $3.3 billion-$3.6 billion, of which $2.7 billion-$3 billion is new rental fleet. These activities and anticipated business performance lead to expected Free Cash Flow of circa $300 million. On that note, I'll now hand it over to Michael to cover the financials in more detail.
Thanks, Brendan, and good morning. You'll be pleased to know we managed to persuade him to wear a jacket but not a tie, but never mind. The group's results are set out for the year ended April 2022 are shown on slide seven. As you're now accustomed, they're presented in US dollars. It was a record fourth quarter to round off a record year for the group. As we enter the new financial year, we've got strong momentum across the business. Group rental revenue for the year increased 22% on a constant currency basis and 24% in the fourth quarter.
While for the year, the comparatives were affected by the pandemic, there was no effect in the fourth quarter last year, so you can see the strength of that performance. This performance was achieved with a slightly larger average fleet during the year, which generated EBITDA margin of 45% and an operating profit margin of 26%. The group return on investment was 18%. The lower interest expense benefited from last year's timely refinancing, which I'll come on to later. Oh, that's my job. As a result, adjusted pre-tax profit was $1.8 billion, and adjusted earnings per share were $3.07. Now turning to slide eight. Let's turn to the businesses. On slide eight, we've got the performance in the U.S.
Rental and related revenue was 22% up on the prior year at $6 billion and 20% ahead of 2020. This has been driven by volume, but also a favorable demand and supply environment that's enabled to deliver a healthy rate improvement. The rate improvement will continue into 2022 and 2023. As we've discussed, a number of costs have come back into the business as activity levels have increased, and we've invested in the business as we embark on Sunbelt 3.0, particularly in relation to technology. In addition, we've seen significant inflationary pressure in the cost base, particularly in relation to wages for skilled trades, fuel, transportation, but in reality, across the whole of the cost base, both this year and headed into next. The extent of this inflationary pressure was not readily apparent as we launched 3.0.
It acts as a drag on both flow-through and margins. However, our strong performance on rate, combined with our scale, has enabled us to navigate this inflationary environment and deliver EBITDA flow-through, consistent with our guidance for the first year of 3.0 at 39%, which we expect then to increase in years two and three. These factors combined to give an EBITDA margin of 48%, while operating profit was $1.85 billion at a 29% margin, with ROI improving back to 25%. Turning now to slide nine and Canada. Rental and related revenue was 30% higher than a year ago at $569 million. While this growth reflects in part the depressed comparatives last year, particularly in the lighting, grip, and lens business, it does demonstrate the overall strength of our business in Canada.
The strong performance of the original Canadian business reflects an increased maturity of that business as we develop its clusters and introduce our specialty businesses. The strong performance across Canada enabled to deliver an EBITDA margin of 45% and generate an operating profit of $144 million at a 23% margin. These margins are aided by a contribution from lighting, grip, and lens, but the original Canadian business has now achieved our initial targets with over 40%+ EBITDA margins and 20%, 20%+ operating profit margins, and ROI has improved to 20%. Turning now to slide 10. UK rental and related revenue was 13% higher than a year ago at $544 million. Pounds even.
While the business continued to benefit from our support for Department of Health in COVID-19 response, the core business is performing strongly and is benefiting from the investment in the operational infrastructure of the business and the reshaping of the operating footprint. Rental revenue, excluding the Department of Health, was 12% higher than a year ago. While the work for the Department of Health accounts for about 30% of revenue this year. However, as Brendan's mentioned, you're all aware, free mass testing ended at the beginning of April in England and Wales, and so the majority of this revenue effectively ceased at that time. That's reflected in the revenue guidance for next year, which Brendan touched on earlier.
While we expect rental revenue to be down mid-low single digits%, total revenue will be down mid-teens% due to the level of the services we're also providing to the NHS testing sites. However, if you exclude the impact of the NHS, we expect rental revenue in the underlying business to grow low- to mid-teens% next year. The 16% increase in operating cost reflects the cost of servicing the Department of Health, increased activity levels in the business in general, inflationary pressures, and the ongoing investment in the operational infrastructure of the business and the rollout of the regional operating center model. These factors resulted in an EBITDA margin of 30% and operating profit margin of 12%, with the result that UK operating profit was GBP 87 million and ROI was 14%.
Slide 11 sets out the group's cash flows for the year. I'm not gonna spend too long on this slide, but this year's Free Cash Flow does illustrate the significant change we've seen in the business over the last 10 years. As we came out of the last downturn and spent on fleet growth, we were Free Cash Flow negative. In contrast, this year, despite a record year of capital expenditure, it's been more than funded from cash flow from the business. We spent $2.16 billion on fleet and non-rental fleet, yet still generated Free Cash Flow of over $1.1 billion. Slide 12 updates our debt position and leverage position at the end of April.
Overall debt level increased in the year as we allocated capital in accordance with our policy, spending $1.3 billion on bolt-ons and then returns to shareholders of $269 million through dividends and $410 million through buybacks. This was all achieved with leverage at 1.5 x, excluding IFRS 16, the low end of our target range. Our expectation continues to be that we'll operate within our leverage range of 0.5x-2 x net debt to EBITDA, but most likely in the lower half of that range. As we've said on many occasions, a strong balance sheet gives us a competitive advantage and positions us well to take advantage of the structural growth opportunities that are available in our markets.
We took advantage of good debt markets in August to strengthen our balance sheet further, both extending debt maturities and reducing our cost of debt. We entered the investment-grade market for the first time through a dual tranche issue of $1.3 billion at an average cost of just over 2%, which we used to refinance $1.2 billion of existing notes with an average cost of 4.7%. The timing was opportune and it results in an annual interest saving of around $30 million. We also increased the size of our ABL facility to $4.5 billion and extended its maturity to 2026 with similar terms and conditions to the previous facility. As a result, our debt facilities are committed for an average of almost six years at an average weighted cost of 3%.
It's this strength that gives us confidence in our ability to take advantage of the structural growth opportunities available to the business. With that, I'll hand back to Brendan. Can't do anything without these.
Thank you, Michael. We'll now turn to slide 14 to get into some operational color. Beginning with the U.S., our revenue growth continued throughout the business. General Tool capped the year with 23% growth in Q4, gaining momentum throughout the year despite the comps getting progressively more challenging. Specialty continued its remarkable performance, growing 34% in Q4 on top of last year's 18% in the same quarter, achieving full year growth of 28%. The strength of this performance in the quarter and year was broad, extending through all geographic regions and virtually all of our specialty business lines. As has been the case now for several quarters, the supply and demand equation remains incredibly favorable. This dynamic has led to record levels of utilization throughout the business. Further, our industry, like any other, is experiencing inflation, ranging from equipment to goods to services to wages.
As I've said consistently throughout the year, when you combine these supply and demand circumstances, inflation realities, and your business has a relentless focus on leading or delivering leading services to your customers, you should be able to increase rental rates. We continue to do just that. Our sequential and year-on-year rental rate improvement has been very good, even outpacing our internal ambitious targets we would have shared early in last year. As we enter the new year, we've once again set internal targets in rental rate improvement, as well as other impacted areas such as delivery cost recovery. These targets are stretching in nature, however, are built on executable plans. The growth in our General Tool and specialty business is driven by a number of factors, ranging from end market conditions to structural change progression to unique market dynamics.
before covering these, let's take a more granular look at our specialty business performance on slide 15. The year-on-year rental revenue movement seen here gives the usual detailed view of our individual specialty business lines and clearly demonstrates the growth is both large and broad. Total U.S. specialty revenues increased 34% in the quarter, leading to a robust 28% growth for the year. As a reminder, this is growth on top of very strong growth throughout the same period a year ago. This should highlight a few items. First, our portfolio of complementary products and services, which is unique to Sunbelt, creates powerful cross-selling opportunities which we are unlocking at an increasing pace. Second, growth rates like this point clearly to early stages of structural change being accelerated by our growing scale, producing a reliable and often better alternative to ownership.
What else can explain growth like this so clearly ahead of any tangible end market growth rates? Finally, it serves as an indication or a proxy, if you will, for the strength of our non-construction end market, which makes up over 50% of our revenue. Let's take a closer look at this market on slide 16. Both our specialty and General Tool businesses service a heightened demand in our non-construction markets. When we describe the vast scale and diverse landscape of this component of our end markets, it seems some struggle to understand the relationship between equipment rental and non-construction. It could also be the case we failed to illustrate it properly, or it could just be difficult to do without specific end market figures to point to from which one can do the math. Whatever the case, let's try again.
We commonly refer to an incredibly large component of this non-construction end market as MRO. The maintenance, repair, and operations of the geographic markets our business serves, such as facility maintenance, clearly defined as a market in which hundreds of billions of dollars are spent annually running and maintaining facilities. From cleaning to painting, to decorating, to planting, to temporarily powering, to cooling, to repairing, and so on. Of the many, many types of facilities that make up the 100 billion square feet of commercial space under roof in the U.S. alone. Let me repeat. The vast spend and scale within this space, hundreds of billions of dollars spent annually to maintain and repair and operate the 100 billion square feet of commercial space under roof in the U.S.
The rental of our broad range of specialty and general tools will increase in what is very much a structural growth arena in the very early stages of what we think is a very clear and long runway for growth. With other non-construction examples being live events, emergency response, and municipal spend, these incredibly large addressable markets make up the majority of our collective specialty business revenues, however, increasingly also benefit our general tool business as our cross-selling prowess and capabilities continue to improve. As private and public sectors alike wrestle with the challenges such as supply constraints, inflation, labor scarcity, they have been, and we believe, will continue to increasingly choose rental over ownership. Now that we've touched on specialty and non-construction markets, let's turn to the next slide and cover the latest construction market forecast as you'll see here on slide 17.
Consistent with what we've shared for some time now, this slide summarizes the most relevant construction and rental industry forecast. The shape of the most current forecasts are very similar to our Q3 update in March, only a bit larger. It's for two main reasons, really. Firstly, the forecast increases stem from inflation, which of course, increases the spend. However, in actual square footage of forecasted new construction, it's little changed. Secondly, there's a greater clarity on the infrastructure package, which was pushed further out than previously expected, with a view that the funds will turn into project start from the second half of 2023 and beyond. Part of the infrastructure spend is also found in the non-building figures. As illustrated on the top left of the slide, actual construction starts remain very strong, with forecasts showing further growth all the way through 2026.
Another positive indicator is the momentum index on the bottom left of the slide, illustrating just that. Momentum and planning beyond the prescribed starts is present. Something the numbers themselves won't reveal is the significance of very large projects, which we've been internally tagging as mega projects. Over the last several years, and most recent years in particular, more and more mega projects have begun. These are projects with a value of $400 million or more. There are unique dynamics causing this, which I'll cover in a bit more color in just a minute. Before I do, it's worth putting all of this together.
As the forecasts stand today, it is simply the case that with the strength in the recent starts, current activity levels, presence of these mega projects, and if these forecasts are directionally correct, it will result in a strong demand market for years to come, which you'll find we are incredibly well-poised to benefit from. However, we would be foolish in this macroeconomic climate to take these forecasts as absolute. As we've always done and go-gotten far better at over time, we're keeping a hawkish eye on any negative movement in these forecast data, including postponements, cancellations, and other movements we can track at an incredibly granular level throughout the geographies that we serve. Further, we monitor closely feedback from our circa 2,000 sellers who are seeing what's happening on the ground in real time and of course, incredibly engaged with our customers.
I'll remind you that the first time we shared construction forecast in the manner illustrated here on the slide was in June 2019, and we did so because we indicated a forecasted slowing in starts, and put in place construction, particularly in non-residential that was coming in 2020, which matched the sentiment from our sellers on the ground. The information at the time impacted our initial CapEx guidance for the year, and in December 2019, we further took it to the lower end of the initial range. The point is this, if we see a slowing, we will be the first to let you know and of course, take actions fitting whatever the circumstances may be. Now, let's talk more about these mega projects that I've mentioned as we move to slide 18.
As construction began to recover following the Great Recession, which took a considerable aim at the construction market, a trend started which progressively increased through the last cycle, and even more so in the recent years. Projects of very large scale, defined here and again as $400 million or more, made up a larger and larger portion of the construction landscape. Specifically, if we look at the decade from 2000 to 2009, these projects accounted for only 13% of the non-residential and non-building construction. Today, these mega projects represent 30% of the current and near-term forecasted project starts.
The slide attempts to cover the primary contributors to this important understanding of the current and forecasted construction market, ranging from the ever-growing e-commerce environment to the manufacturing revolution, led in part by the electric vehicle and related battery production to the $550 billion incremental federal infrastructure package. The duration of these projects is longer than their smaller comparators, and the economics behind them is not based on the next couple years' macroeconomic outlook. We thought this was a worthwhile level of detail to present for the first time today. I'm sure we'll get into further discussion on this view in Q&A. Turning now to our business units outside of the U.S., and we'll begin with Canada on slide 19.
Michael covered the financials, which were again a record from a revenue margins and returns perspective as this business continues to gain ground and benefit from, as we've been saying, its relatively newly found scale. Similar conditions to those present in the U.S. have contributed to record levels of time utilization and very strong year-on-year rental rate growth. Our lighting, grip, lens, and studio business experienced temporarily reduced activity levels in the quarter due to the COVID-induced production restrictions, but activity is already rebounding in the now current quarter, and we fully expect to return to year-on-year growth in the near term. After our most recent greenfield and bolt-on expansions, we are now in seven of the 10 Canadian provinces, and we're well underway in executing on our Sunbelt 3.0 strategic growth plan in Canada as well, and we believe that our runway for growth remains long.
Moving on to the UK on slide 18. The Sunbelt UK team performed incredibly well over the last two years. A key aspect of Project Unify, which we would have shared with you, launched just prior to COVID, was to bring a disparate branded and siloed selling business into a joined-up power of Sunbelt, bringing to the market the UK's most comprehensive suite of products and services. In putting this to practice, they were awarded two NHS COVID testing sites by literally presenting the broad capabilities of the business as they had established in their Project Unify, that they were working on. This led to the full deployment, setup, and maintenance of over 500 sites. This effort was, of course, a welcome revenue stream during these times, but it was also tangibly fulfilling for our team as they came through for the communities they live and work.
Yes, it was expensive in terms of financial and human capital deployment. However, it demonstrated the power of Sunbelt in a way we think that our team certainly noticed, but the market did as well. Despite this extraordinary effort and full wind down of the testing sites, our business is now trading considerably ahead on an underlying basis, as Michael will have just covered. This performance is being delivered by a better-organized business, programs developing operational excellence and regional operational centers, and importantly, a focus on necessary advancement of rental rates, which is what we're doing. Before leaving the UK, I'll note our recent entry into the lighting, grip, and lens business via small bolt-on acquisition completed in May. This is our first effort to expand our Canadian-based William F. White International business into the very attractive UK production market.
As Michael covered, this will be a transitionary year for the UK business, but it is on very solid footing. Turning now to slide 21. As we've done throughout the first year of our Sunbelt 3.0 strategic growth plan, I'm pleased to update again progress across all actionable components. Illustrated herein, you'll pick up some of the specifics related to each. I'll highlight just a couple. First, would be the addition of 123 locations in the year through a combination of 88 greenfields and 35 locations by way of acquisition. Two-thirds of the total were specialty. Second, these additions contribute to achieving cluster status in another 8 of the top 100 U.S. markets. I'll remind you, our 3.0 plan was designed to grow our top 100 market cluster achievement in the U.S. from 31.
Closer look at our progress towards amplifying specialty. The basis of this slide illustrated within the bar graph reminds you of the Sunbelt 3.0 growth plan, specifically by specialty business line. Green representing where we are, yellow our planned growth over the 3.0 period, and gray demonstrating the size our analysis tells us each of these business lines can become. The confidence in this growth over time very much stems from the early phase of structural change the products that make up our specialty business are in, as evidenced by the only 10% rental penetration in this regard. When you combine our planned growth for the 3.0 period, we set out to grow our specialty business from $1.4 billion to $2.4 billion just over 3 years.
In year one, our specialty business delivered 34% rental growth rate, putting them well ahead of this planned pace. Also worth noting are two material bolt-on acquisitions in specialty, one creating our tenth specialty business line, Temporary Structures, and the other significantly enhancing our product offering and expertise in our largest specialty business, Power & HVAC. Let's turn to slide 23 to take a look at these two additions. Our acquisition of Mahaffey USA in December 2021 added a business with a nearly 100-year track record of delivering turnkey solutions to their customers. We believe this business has ample runway for growth by way of geographic expansion and from incredible cross-selling opportunities when combined with the larger power of Sunbelt.
When setting up and operating these large structures, many of the product lines incumbent in existing Sunbelt General Tool and specialty business lines are required. Examples include Material Handling, lighting, power, Temperature Control, Ground Protection, and more. This is an exciting business with great expertise who are poised for growth. On the right side, we described in brief the addition of ComRent, a load bank specialist we acquired just in February. With this addition, we have the largest offering of load banks in North America, and as important, the technical expertise requisite to satisfy the often complex solutions in this increasingly electrified world in which we live. Turning now to slide 24. As you've seen the results today, our business has enjoyed a successful year of growth and execution against our plan.
This has been accomplished despite a number of uniquely challenging dynamics happening simultaneously in the markets in which we serve, specifically supply chain constraints, inflation, and skilled trade scarcity. We covered these dynamics well in our Q3 results in March, but updated today, you'll notice our anticipation of duration for these conditions has not changed. The important takeaway here or takeaways here are, one, our business has been able to navigate these challenges as evidenced by our largest ever CapEx landing in the year, rental rate progress and economies of scale, and our onboarding of the necessary skilled trade team members to make possible our existing location and greenfield growth. Two, the understanding that with these dynamics are indeed advancing structural tailwinds in our business, which puts us in a great position to further take advantage of these conditions as they do remains. Turning now to slide 25.
The reported and current activity levels throughout our business are robust, with very strong levels of demand driven by end markets and further supported by the unique dynamics present, as I've just detailed. However, there are macroeconomic uncertainties on the horizon, which we pay particularly close attention to. Given this backdrop, we think it's important that you understand just how much our business, and indeed our industry, has progressed over a number of years. In essence, this slide illustrates how structural change has progressed in our business and industry over 15 years. Notice our positioning during the great financial crisis, where the top two rental companies had less than 10% market share, a consequence of which was a lack of pricing discipline, which led to a 20% decline in rental rates in the matter of months.
Contrast that with today, where the top two have greater than 25% market share and demonstrated not only discipline in pricing during the pandemic, but also the technology and massively advanced capabilities through delivering a better overall alternative to ownership. Further, once you take into account the size and proportionality of our specialty business today, accounting for 30% of our revenue, very different than during the great financial crisis. Finally, our financial position is wildly different from the 3.2x net debt to EBITDA we found ourselves in then to today's 1.5x. Our business today addresses a far broader end market and more diverse customer base. We demonstrated a great level of resiliency during the pandemic and believe this further demonstrates just how differently our business will perform in varying economic cycles.
I'm sure, again, we'll get to this in more detail in Q&A. Moving on to slide 26. Consistent with our initial guidance in March, we anticipate rental fleet CapEx in the U.S. to be between $2.4 billion and $2.6 billion. After our non-rental CapEx across the group and ongoing rental fleet investment in Canada and the U.K., we guide to $3.3 billion-$3.6 billion for the group for the full year. The midpoint of our U.S. rental fleet CapEx guidance is a 50% increase to last year's record levels. This investment will fuel our ongoing ambitious growth plans incumbent in Sunbelt 3.0 and demonstrates our confidence in the current and forecasted demand environment, competitive positioning, the strong relationships we have with our key suppliers, and our business model in general.
However, as always, these plans can be flexed as we progress through the year to reflect our latest views on future market conditions. This leads on to capital allocation on slide 21. In the year, we've invested $2.4 billion in existing location and greenfield fleet additions and a further $1.3 billion in bolt-ons. Our proposed final dividend increases by 40%, and we completed $414 million of share buybacks in the year. Despite these record levels of investment and returns, we're at 1.5 x net debt to EBITDA, the bottom end of our leverage range. To conclude, let's turn to slide 28. This has been a really good year.
We hope that today's update demonstrates the strength in our financial performance, as well as the execution of our strategic growth plan, Sunbelt 3.0, while adding detailed color to our outlook for the new year, supported by the most current views and forecasts for the end markets in which we serve. Coupled with that, what are remarkably unique market dynamics advancing the growth of and the structural advancement of our business, which we believe will persist for some time to come. Our growth plan for the year will deliver in excess of 100 greenfield openings, and the bolt-on pipeline remains very active with potential, which gives us great optionality to further supplement our organic growth.
Our balance sheet has never been stronger or more efficient, having improved both our fixed and variable debt positions, invested heavily in our capital allocation avenues, while remaining at the bottom end of our targeted leverage range. When this is combined with the comprehensive strength in the performance of our business and business model in general, it gives us great optionality during these times when end markets are strong, but macroeconomic environment is uncertain. For these reasons, and coming from a position of ongoing strength, improved trading and positive outlook, we look to the future with confidence, which will strengthen our business for years to come. With that, we will turn it over to take your questions.
Just try and get a sense of that.
Yeah, May, sort of entry rate revenue-wise. Is that what you said? I'm sorry.
Well, yeah, mid-run rates [crosstalk].
25% increase on a billings per day basis in the U.S.
Any change through the month?
Any change to what?
Through the month. Better at the start of the month, end of the month or?
Better at the end of the month than the start of the month. Yeah. We're, you know, we're in that season where most of our business we're getting, you know, sort of mid-spring and approaching summer, and we are seeing activity gain. Look, part of it, of course, will be the CapEx that will land. You've seen what we've guided to in terms of CapEx. We landed $200 million in new rental fleet in North America in the month of May, and we are on pace to land $300 million in June. And that is being absorbed incredibly quickly. The demand is there.
In terms of drop-through in FY 2023, there's obviously quite a lot of moving parts given the inflation you've mentioned, and we've obviously seen in 2022, and then you've got kind of rent on them. I'm just trying to get a sense of kind of where the confidence, well, I guess, any sort of help in terms of at least a number to start the year to think about. I guess confidence around that because it feels as if drop-through obviously became more challenging as we kind of went through last year, I think, off the top of my head, which is understandable given the inflation situation. Just, yeah, where the confidence kind of sits on that and visibility around the moving parts.
Yeah. What we'd say, you know, we're thinking of somewhere in the region of 50% for 2023. When you compare it with you've got to think about the drag specifically on FY 2022 in terms of why we're where we are. We'd always guided to being in sort of roundabout the 40, low 40s, which, you know, frankly we are, because of the headwinds that we're gonna face. This year we had costs coming back in, whether that be overtime, whether it be T&E, et cetera, post the pandemic. We have a significant investment that was a conscious decision of 3.0. We started investing from a technology perspective, but in other parts of the centralized functions that actually are needed to support the growth aspirations that we have.
When you've had that one step change, while we'll continue to invest going forward, the step change ain't so great. There's an element of sort of math in all of that. Also when you think back also to last year, we had benefit. You know, we were somewhat pessimistic as we went into COVID, so we were very conservative how we looked at receivables. And we made a large provision, while in the end, thankfully, we didn't actually need it, so that got released last year. There's lots of moving parts which mean last year's number was, or the year we just finished, was always gonna be a sort of funny number, and we always expect it to progress as we went through 3.0.
Yeah. I think I can just add. First of all, we landed right where we said we would. Michael would have stood up during the capital markets event. Of course, given it was April 2021, it wasn't live. Well, it was live, it just wasn't in person, so it was via a webcast. But he would have outlined our path through in each of the three years. Year one was gonna be circa 40, and it was gonna grow from there. We did 39, in April 2021, no one was anticipating inflation the way in which we ended up being hit by it from a market standpoint. I think it really speaks to our ability to navigate that inflation, coupled with what our intended investment was in year one, and consequentially, we had.
We achieved what we were shooting for in year one, and we feel strong about being able to progress that the next two years.
Maybe this sort of feels a bit unfair given the backdrop that people are at least talking to, if not necessarily you're seeing in the indicators. When you think about capital allocation, if you take being at the bottom end of the target range, if you take where the share price is today versus where it's been, if you think about your optimism on the markets versus what seems to be getting priced in, I would argue, in the shares, how do you think about further buybacks? Obviously, you have the program, but you could definitely expand that program. It feels as if this might be an interesting opportunity. I'm just at least interested in your thinking [crosstalk] on that.
I think it's a very fair question. Look, I mean, in general, when you look at our capital allocation policy, the buybacks is sort of what's left. You know, it's sort of the rounding figure. If you actually look closely at our share buyback progression through the year, you will notice that we will have picked up a bit our share buybacks when there were times of weakness, which of course we've experienced over the last six months. I think the key really is, without us saying today that, hey, we will increase our up to GBP 1 billion program, which of course we've got quite a bit of headroom because remember, we did $411 million in US dollars. We have up to GBP 1 billion , which we have now about 11 months left. We'll of course keep an eye on things and exercise as we see fit.
Thank you.
Thank you very much. Arnaud Lehmann, Bank of America. I have three, if I may, maybe one by one as well.
Sure.
Can we maybe start with Michael on Free Cash Flow generation? You are above $1 billion the last couple of years. I appreciate the CapEx is increasing, but the $300 million feels a little bit low. Is there anything we need to know about?
No, it's all predominantly reflective of the CapEx position. Without getting into sort of the boring accounting of it, but if you think about, you know, we spend a lot more on CapEx this year than we did last year. As a consequence of that, you have just higher creditors come the end of the year. Actually some of this year's CapEx that's just gone, we haven't actually paid for or we pay for in the coming year, and there's not such a big step up. If you actually just work the numbers through, you'll find it's predominantly CapEx. Yes, do we have more tax to pay and more interest to pay? Yes, we do, 'cause we're expected to make more profit, but it just really just flows down through. There's nothing unusual in there.
Okay. Thank you. The second one is related to the relationship with your suppliers. You have decided to be a bit more committed in terms of CapEx to get, as you repeated a few times in the past, your unfair share of the new supply. But at the same time, you say you would be reactive if there was a slowdown. What sort of flexibility do you have now compared to, let's say, pre-COVID? Remember, you know, you cut your expansion CapEx to zero literally overnight. I believe that's not something you would be able to do these days, but what's the timing?
Yeah. Well, I think we would be able to cut some. If we look at the fiscal year we're in, we have a degree of firm and fixed orders that are in place, but we have great flexibility when it comes to Q4. If you just take the math in the North America numbers for instance, we're anticipating landing $1.7 billion from May through the end of December, and I've just covered we will land $500 million of that in the first two months. We have some flexibility on the back piece, which is not a small level of flexibility at the $2.8 billion. You have about $1.1 billion of flex base there.
Again, if you think about the position, Michael often talks about our strategy when it comes to our leverage. It's not defensive, it's offensive. We can take advantage of opportune times in the marketplace. If you, again, think about our fleet profile, if we were to go back through the pandemic, of course with hindsight, we wouldn't have actually cut CapEx to the degree in which we would have or we did. When we think about going forward, we're comfortable with the level of commitments we have with our OEMs because at a minimum, we're gonna be using it for replacement CapEx. Replacement CapEx also further, you'll remember where we landed. We may have, let's just say $50 million of replacement CapEx coming to our business in South Florida.
If the demand isn't there to actually satisfy that replacement, in other words, we would dispose and not bring it in, it doesn't mean there won't be demand elsewhere in the business. Even the replacement, in a way disguises what is really growth CapEx on a market by market basis. We're very comfortable with our flexibility. Times like this, why we've been able to get our unfair share, you have to be working with your partner OEMs much further out. We're working with our OEMs all the way out past 2024.
Thank you very much. The last one is staying on the CapEx. Obviously the infrastructure spending is expected to ramp up as well. Do you need to adjust the mix of equipment? Do you need bigger trucks, bigger diggers compared to what you have done historically?
Yeah, I mean, it looks like the rest of our fleet really. You know, Big projects need products of all shapes and sizes. They need handheld tools. They need 135-foot Ultra Booms. They need Telehandlers, they need Power Generation, et cetera, et cetera. You know, it's something that our strategic team, led by John Washburn and Janelle Strawbridge, pay very close attention to those projects that are coming online. 'Cause there's something else that's changed, not just the mega projects, given how much it's less top up these days and actually a requisite to get the project done when it comes to fleet, 'cause they won't own much of this, whether it be a data center, or it be a fulfillment center or it be a electric vehicle manufacturing plant.
We're working with those contractors very early on, long before we break ground. That team of Janelle and John are working with our procurement team to make sure that we're bringing in the right fleet. All of that is part of our plan.
Thank you very much.
Hi. Good morning. Hasti from Goldman Sachs. Just a few for me, please. You mentioned that rental rates have been increasing and you do have projections on the targets. Can you give some color on what you're expecting in the coming year?
Yeah. You remember last year. Last year we shared, which I will do again, an internal target, which is not guidance, forecast, budget, et cetera. A year ago we had budgeted an average 1% increase for the fiscal year 2022, which just ended. Very early in the year, we said we were looking to gain five so from May to April, that would give you about a 2.5%-3% average. At the half year point, we said we're ahead of pace, we're gonna target an average of 5%, which we've delivered. This year, we have set an internal target of a 6% rate increase. It's not just rental rates, which we are feeling good about that given our May entry rate in terms of rates year-over-year, which has continued to progress.
I'll share with you, we did a big town hall series. We went around beginning May 9th, we saw 4,000 people in 15 stops over the course of seven business days. The reason why I say that is, a colleague of mine, John Washburn, presented to every single one of our sellers and every single one of our managers, those 4,000 people, what our plan was for the year beyond the budget. He put it together in blackjack fashion, and why wouldn't you? The first card that fell was five, which was the rates we achieved in the year just ended. The next card that fell was six. I don't know if you're a blackjack player, but what do you do when you have 11? You double down. Anyway, the six was on this year's rate target.
The reason why I say that is then the 10 card fell. That's our internal target to progress delivery cost recovery. That's a big deal. You know, in the year just ended, the denominator in our delivery cost recovery was over $700 million, and we're only recovering 80% of that cost directly from delivery. What John challenged the team to that internal target was a 10% increase in DCR. That's even more than a 10% increase in the numerator as the denominator will go up. Our year is we're playing for 21.
Thank you. On the mega projects, it's clear that from your slide that there are quite a few that are coming up. Any color on some of the big ones that you anticipate coming up in the next few months?
Yeah. Well, I keep mentioning John here, but, you know, we've both been in this business for a long time, and we were reflecting on the fact that we have never seen such a level of extraordinarily large projects that are coming up on the horizon that we were very actively bidding in. There's a few things to point out here. First of all, when you think about some of these mega projects, whether it be that, the EV revolution in which we're going through, it's not just domestic automotive, it's foreign automotive. Any manufacturer supplying the U.S. market are increasingly trying to do production in the U.S. So whether it be Ford or it be Hyundai, et cetera, we see brand-new projects just breaking ground or having just been awarded in order to break ground.
These are multi-billion-dollar projects that, coupled with them, have lithium-ion battery factories not too far away, of course, to satisfy the battery needs for these EVs. Furthermore, if you look at kind of what's happened here in general, you see this big migration from storefront to doorstep. That is, of course, led by way of e-commerce. What we've seen over the years and continue to see is the advent of everything that goes into that, the warehouses, distribution, fulfillment, et cetera. Then, of course, if it's e-commerce, what gets busier? The cloud. Well, the cloud's actually on the ground. They're data centers, and they build more and more of those. All of these projects, again, $400 million or more. Just put in perspective, you know, a project.
I had to get one here in London. Like, the Shard is a one half a billion dollar project. We're talking about projects that are kinda that big or bigger, most of which are bigger. Finally, it's worth pointing out just the federal infrastructure package. You can see we have more clarity to that. I would have mentioned in my delivery that that's been pushed back a bit, which is a good thing. Demand right now is incredibly strong, and the starts that just happened and the starts that will take place outside of the federal infrastructure package will keep us very busy. Of course, that being now the second half of 2023 to begin in earnest, which is gonna make for an incredibly busy 2024, 2025, 2026 starts when it comes at $550 billion, which is lots of mega projects.
Thank you. Last one is on the greenfields, please. Given you expect to open up more than 100 greenfields, what kind of flexibility do you have over there? I think one of the concerns is if there is a bit of a macro slowdown, do you have flexibility in shutting it down? Or if there's inflation that increases your budget, for example, do you have flexibility on that side?
Yeah. Well, I meant to say one more thing on the mega projects, and that is, these are not, as I would have said, economics around these projects that are based on macroeconomic climate. When they start, they will finish. There are more now than ever before going on, which paints the picture. If you think about the companies that can actually satisfy the demand, they're very few. When it comes to our greenfields, I appreciate the sentiment on macroeconomic. I think that's the last thing we would stop doing. We only slowed our greenfield expansion because of the pandemic. We weren't allowed to have people traveling around.
Just like the way that these large projects are started, the macroeconomic conditions for us opening a greenfield that we know, we don't have a single location in our entire network that is not profitable and cash generative. Not one. We're very confident to greenfield. Our track record in that case is very strong, which also helps augment, to the earlier question, some of that fleet. If we don't need it for growth, we can open a new greenfield.
Thank you.
Hey, good morning, guys. Alan Wells from Jefferies. I'll keep to three seeing as everyone's doing that. Firstly, can you maybe provide a little bit of color around that rate environment? Are there particular equipment verticals that you're seeing much stronger rate increases in? I hear as an example that, you know, some of the heavy kind of earth-moving equipment is in big demand at the minute. Maybe aerial is a bit weaker. Just interested to get your
It's just across the board. It, you know, it is, you know, generally speaking, we may not be increasing the rate of a 2-inch gas centrifugal pump that costs $700 by 5%. It, the algorithm sort of says that, but certainly the high time utilization, higher first cost assets, Telehandlers, Aerial Work Platform, Power Generation, cooling, flooring, et cetera, it's just across the board.
Yeah. Okay. questions on the CapEx increase from today, which was obviously kind of non-fleet related, a bit more kind of facility enhancement, ESG. How does that flow through, if at all, to things like P&L? Can it drive efficiency? Can it drive, you know, improved delivery cost recovery? Just interested how that kind of additional investment that we're seeing announced today drops through to
Yeah, you know, I mean, it will do in the long run. I wouldn't expect that you see it in the year that you make the investment. Really what you have. I'm looking for my cluster market slide here, which should be coming. You know, that brick-and-mortar investment, non-rental CapEx, you know, it is to get the right facility. Some of that is moving from what was a facility into a new facility that we can have better economies of scale. Of course, the advancement of our specialty business and the cadence in which we're doing so. Yes, we think overall that lends itself to better economies of scale, and therefore, as we talk about these benefits of our cluster market strategy.
You touched on the ESG point. Not everyone may have heard that, but some of that investment is things like, you know, replacing with LED lighting, et cetera, which our customers are increasingly wanting those things, and you have to demonstrate what you're doing from an ESG standpoint, and this, of course, is a demonstrable piece of that.
Yeah. Then a very final question just on the fleet CapEx side. I think you talked about 3.5%-5% was your assumption around inflation within CapEx year-over-year. Has that changed at all? Just thinking about that back half stuff where you got some flex, is there potential given the inflationary environment that kind of is more like five than 3.5?
Well, the best way to do the math is to look at the fleet that we have scheduled to land or has landed from May 1 to December, will carry on average a 7% more first cost than it did 2 years ago. Fiscal year, all the fleet we landed in fiscal year 2021 compared to what we will land through December in 2022, 7%. If you think about the inflationary environment, that's not bad. Also, that would include any of the surcharges that some of the OEMs have chosen to do. To your point there, January through April, could it be something more? We're not gonna call them and ask them to do it, but we may get a letter or two.
Okay. That's really helpful. Thanks, guys.
Yeah. How are you?
Hi, this is Anvesh Agrawal from Morgan Stanley. Two questions for me. First on the pricing environment, how do you expect that sort of competition to behave in case there is a soft landing from a macro perspective? We saw during GFC that the pricing was a bit bad. Clearly, your own business is very resilient versus the last downturn, but how's the overall market? Maybe if you take that first.
Yeah, yeah. What we expect is for the industry to act as it did during the pandemic. I appreciate the fact that, let's face it, with our share price today, we're not getting much credit for our resiliency and growth during the pandemic, 'cause think about how much our specialty business grew. But what we will see in almost any economic circumstances, incredible discipline. It's not just us. It's gonna be the other larger well-known names. I can tell you, with the inflationary pressures as they are, the rest follow. You know, when you talk about rates in an environment like this, rest assured, yeah, there's lots of, you know, analysts on these calls, et cetera, but these get watched over and over and over again throughout that industry, all the way down.
They've got to charge more for what they're faced with from an inflationary standpoint, but it comes down to the leaders.
Just specifically on slide 22, where there are some big drivers for the specialty business. If I look at the two big gray boxes there, that's in Power & HVAC and climate and air quality. That feels to me more like CapEx than MRO, or sort of we are wrong to think about that. I mean, you talked about specialty, and it's a bit more MRO in nature. When we look at the big growth drivers there, that feels more like CapEx in nature than MRO, or that's not really the case in power and climate control.
I think there's a disconnect between when I'm talking about MRO. It's not our MRO. It's the MRO market we serve. Of course, it would be fueled with CapEx, unless I'm misunderstanding you. Yes, indeed, it will require CapEx to grow to, you know, $2.1 billion in revenue as it shows our Power & HVAC business there. What I'm talking about is the primary addressable markets that these businesses pursue is that greater non-construction end market. If you think about Power & HVAC, for every one of those data centers, distribution centers, fulfillment centers that have been constructed over the last several years and those that are ongoing now, after they're turned over, there's lots of maintenance. The older they get, the more the maintenance.
Our Power & HVAC businesses, one of its biggest end markets that it services is specifically those big box buildings that we do just that, heating and cooling and powering.
We are right in thinking that you see the business impact after the CapEx has happened. That's the way to sort of think about-
As you're saying. When it comes to this, there is certainly both, but the vast majority of the revenues here would be servicing that already existing square footage under roof, which just grows with the advent of these mega projects.
That's very clear. Thank you.
Yep.
Hi, it's Reginald Watson, Barclays. I'd like to come back on slide 25, if I could.
Happy to.
If we can think about the specialty business, first of all, what sort of belief or visibility would you have that the structural growth there could continue to be strong through a slowdown? And then when we think more broadly about the range of exposures you have now, what would it take for you not to grow?
Sure. Well, if you look at specialty in general, it's growing at about a 2x clip of General Tool. That 30 will continue to progress, which we fully expect. Underpinned, of course, by two things. One, our specialty business line by line has now achieved a level of coverage and scale that actually creates that next level of step change in rental penetration. We can do that, and then two, of course, would be just what we talked about. It's only 10% rental penetrated, and we see that moving quickly. With those unique market dynamics that are going on, it's just getting propelled. We often say, you know, you tell us the recession we're in, and we'll tell you the results of our business. First thing comes to specialty.
If we look at, again, in more detail, our end markets that we covered, meaning MRO and then non-construction and construction. Regardless of what happens, economically speaking, when it comes to facility maintenance, the $100 billion won't shrink, so it's there. The facility maintenance required to do that, the $340 billion-$350 billion, whatever precisely the number is, every year, will still happen. I mean, let's use an example. The Barclays Center in Brooklyn, New York. There's a team called the Brooklyn Nets. Regardless of what's happening economically, they will play their games. They played their games even during the pandemic. Every February or so, the Lumineers will play or otherwise. If you think about that, in that building, there's a janitorial contractor.
That janitorial contractor, who is a very big target in terms of our specialty customer we're looking for, they need sweepers and scrubbers in order to do their job. In these conditions, when you're faced with those three things everyone's worried about supply chain, inflation, and the lack of availability when it comes to labor, are you gonna choose more often to rent than you had previously, or are you gonna buy more? We know for sure you're gonna choose more often rental. We think in almost any circumstance, our specialty business continues to grow. Then when it comes to the rest, when you think about our construction market, it's how directionally different this is.
As we would have stated in December 2019 when we were forecasting a -1— a 0% and then a -2% growth in overall construction and even greater decline in non-res, we would have expected to grow right through that. You have to go from a pretty. It's a stark difference from what the forecast is today to get to the level of negative growth in non-res construction to lead to us not growing. You know? Look at the guidance this year. We're gonna go from what we grew the year that just ended to the 15% or so for the year coming. We think in many circumstances, we're still growing. One more here.
Thanks. It's Neil Tyler, Redburn. One for Michael, I suspect, on capital allocation or perhaps Brendan as well. Has there been any change regarding the willingness of businesses or business owners to sell or the availability of assets? Is there any sort of anxiety creeping into that process that's prompting those business owners to come to you?
You know, we had our largest-ever bolt-on year of $1.3 billion. We closed on five deals for $250 million since May 1. It's a robust pipeline. It's increasingly. I mean, if you think about, I think you have to put all this in context. I'm gonna reference one more slide. When you look at the makeup of the industry and you think about how they're. In these times today, with those three things again, can you get it? If you can get it, how much more does it cost? When you get it, can you hire at the right wage? We've given our skilled trade a 13% increase in 18 months. The pressure is against them to do that. If you look at this makeup of our industry.
This is the RER 100, and then there are 5,400 independent rental companies that make up what is $44 billion worth of fleet, which happens to be 44% market share. The 100th has a OEC of about $25 million. It was called A Tool Shed. We bought them. They're increasingly deciding that it's harder to compete. We have a much newer fleet, we have the technology, we have the benefits for our employees. I've said for a long time, there is a long, long career's worth of runway for bolt-on M&A, and we don't see that changing.
I think Brendan's only been here a week, and I think we've had two updates from Kurt as to his latest list of, you know, where things have progressed to LOI or otherwise. You know, there is a, you know, the continuous dialogue with a good supply.
Great. Yes, another follow-up.
Small one, please. Appreciate resi is quite small in the mix. But if you [audio distortion].
Yeah. Again, I mean, what we can speak to is the underlying activity that Michael spoke to, which I think again is gonna come down to. We feel comfortable in our positioning and our unique makeup of products to better cross-sell. We're seeing evidence of gaining market share. In terms of what's going on in the market overall, and you look at that lineup of businesses, it's not terribly different than what we have in North America in terms of the specialty component mixed with that General Tool. If you look at some of the projects around infrastructure, et cetera, you know, it remains. I would say it's okay.
Your question was specifically residential.
Resi, yeah.
Oh, I'm sorry. Go ahead.
No, we're not, you know. We've touched on another thing here, what's different about last time, et cetera. You know, if you think about what caused the great financial crisis, a lot of it was residential, whether it be subprime lending, et cetera, et cetera. It's true, all that. You haven't had that this time. You haven't had the elevated levels of housing construction. You'll know better than me, but the reality is there's still a shortage and there's a catch-up to be had. You know, you're seeing strength in that in the forecast. Time will tell, but you're seeing still strength in the forecast.
Yeah. I mean, the solution for you know not of homes appreciating is not stopping to build homes. You know, that would just accelerate that, if you will. Again, we're seeing, to Michael's point, reasonable forecasts in that regard.
Thank you.
Okay. Well, great. Thank you for your time this morning.