Hello and welcome to the Ashtead Group PLC Q2 Results Analyst Call. I will shortly be handing you over to Brendan Horgan and Alex Pease, who will take you through today's presentation. There will be an opportunity for Q&A with a limit of two questions per participant. For now, over to Brendan Horgan at Ashtead Group PLC.
Thank you, Operator, and good morning. Thank you for joining, everyone, and welcome to the Ashtead Group Half- One and Q2 Results Presentation. I'm joined this morning by Alex Pease and Kevin Powers, with Will Shaw on the line from London. Let's get into it, beginning as usual with Safety on Slide Four. I'll begin by addressing our Sunbelt team members to specifically recognize their leadership in the health and safety of our people, our customers, and the members of the communities we serve. Our Total Recordable Incident Rate and Lost Time Rates that you see here continue to be best- in- class. However, despite these results and momentum behind our Engage for Life program, there are incidents that remind us there is never a finish line in safety, rather, improvement milestones, nor is there room for complacency.
With this said, I'll share with our team members that in 2026, we'll be taking on a significant effort to conduct Engage for Life Culture and Compliance Assessments at every one of our branches. These third-party reviews will address local health and safety compliance, leadership engagement, along with a deep dive into the systems and programs our locations have in place to manage tasks that could potentially lead to a serious event if not controlled properly. The safety of our team will always be the top priority at Sunbelt, and this will be one of the most important initiatives that we have in calendar year 2026. So thank you for your dedication and engagement thus far, and in advance for welcoming these assessments in the months to come as we continue to pursue perpetual improvement in our safety culture. Turning now to Slide Five.
The key messages you'll hear from Alex and me today are the following. First, this is a solid set of results in line with our expectations, with Group rental revenue growth at 2% for the first half and 1% in the second quarter, despite a non-existent hurricane season compared to an active period in the second quarter last year. On an underlying basis, growth in the second quarter was 3%, a sequential improvement from the first quarter. Second, the strength of Free Cash Flow after CapEx investment in fleet and business expansion demonstrates the through-the-cycle free- cash- flow power of this business at our scale and margin, generating $1.1 billion of Free Cash Flow, which is a 164% growth on last year.
Third, while our key construction and markets remain mixed, we're seeing signs that the local non-residential market is now in equilibrium in terms of completions and starts, as well as continued positive momentum in many of our internal and external leading indicators. megaproject activity continues to be strong, and we're winning share across our regional and national strategic customers. Fourth, our strong Free Cash Flow generation has enabled us to return over $1 billion to shareholders in the half through dividend payments and share buybacks, and we've announced today a new share buyback program of up to $1.5 billion that we intend to commence on March 2nd, which will follow on from the completion of the existing program and will coincide with our expected relisting date on the New York Stock Exchange.
And finally, we are confident in reaffirming full-year guidance for rental revenue growth, CapEx, and Free Cash Flow. Moving on to the financial highlights of the first half Slide Six. Despite the quiet hurricane season, Group Rental Revenues were up 2% in the first half, consistent with the 0%-4% guidance we gave in September. The leading indicators, both internal and external that we track, have continued to trend positively, and therefore we remain cautiously optimistic that these trends in our business will continue and are early signs of the local non-residential portion of our end- markets recovering. As when they do, we will experience accelerated momentum and improved results. Group Adjusted EBITDA was $2.7 billion at a 46% margin.
As we explained in the Q1 results, these margins reflect the mixed effect of higher ancillary revenue, the proactive repositioning of our fleet to drive utilization and unlock pockets of growth, and increased repair costs as a larger portion of the fleet comes out of warranty coverage. From a capital- allocation standpoint, and in line with our Sunbelt 4.0 priorities, we invested $1.3 billion in CapEx focused on a mix of replacement and growth. Free Cash Flow in the six months was just over $1.1 billion, which is a record, demonstrating the resilience of our business while we continue to invest in growth. The strong free cash flow is supporting the current $1.5 billion buyback program, which we are on track to complete by the end of February 2026 before commencing the new $1.5 billion program that I've just referred to. Moving on to our Segmental Performance on Slide Seven.
As I've already mentioned, performance in the second quarter was impacted by a very quiet hurricane season compared to Q2 last year when we reported that hurricanes had contributed $55-$60 million in incremental revenue. Rental revenue on a billings per day basis for General Tool grew 2% in the second quarter and 1% in the first half, reflecting positive volume momentum and resilient rates in end markets, which continue to be mixed. As expected, we continue to be in a moderated local non-res construction market through the first half, offset in part by the ongoing strength of the mega project landscape and the broader non-construction markets. Specialty growth is more impacted by lower hurricane activity, with growth in the quarter flat. Adjusting for the hurricane impact, underlying growth in Specialty was 5%.
The strength in Specialty segments was broad-based, led by Power & HVAC , Temporary Fencing, Structures & Walls , and Trench Safety , all delivering strong growth in the half. On a constant currency basis, U.K. rental revenue was down 2% in the quarter, reflecting the ongoing challenges in the U.K. and markets. As a response to this, and consistent with our 4.0 strategy, we're undertaking a series of one-time restructuring actions, including location consolidation, people transitions, exiting non-core lines, and G&A reductions. These actions will enable better service to our customers, unlock value, deliver sustainable double-digit return on investment, and produce consistent free cash flow while continuing to lead as the premier rental platform in the U.K. Alex will cover the financial implications of these actions shortly. Slide eight shows fleet on rent for North America over the last four years.
You can clearly see that our efforts to drive growth with existing fleet have resulted in improved time utilization. This supports a more constructive rate environment and contributes to our strong ROI. It also demonstrates our disciplined and flexible capital allocation approach. Over the next couple of slides, we'll cover the activities and outlook for the North American construction end market. On slide nine, we set out the main leading indicators for the construction sector, namely Dodge starts, Dodge Momentum Index, the Architecture Billings Index , and Fed funds rate. The outlook for construction growth continues to be underpinned by mega projects and infrastructure work, which remains strong and, in many cases, gaining further momentum. We made great progress in mega project wins in the first half with a growing funnel of future projects and advancing market share with our strategic customers both regionally and nationally.
Exercising the cross-selling power across the Specialty and General Tool businesses, as well as the advantage of Sunbelt's significant breadth and depth of products, solutions, and expertise is a strategic differentiator. Combine this with a technology suite that is second to none creates a platform that can deliver world-class customer experience, efficiencies, and value across a wide range of complex applications. As it relates to our local non-residential end market, we remain in a moderated environment. However, as I flagged with the Q1 results, both our internal leading indicators, such as quotations, reservations, and continuing contract activity, and key external indicators are encouraging. The Dodge Momentum Index, in particular, remains near record highs.
Just to remind you, this index represents non-residential projects excluding manufacturing that are below $500 million and entering the planning phase for the first time, and is therefore representative of future velocity in what we refer to as the local non-residential construction market. This clearly indicates ongoing strong planning activity across our non-res construction markets will lead to an increase in starts, likely within a period of 12 to 24 months, so while clearly positive leading indicators, it may take some time for this planning to translate into project starts. When it does, as we've said, we are poised to benefit. On slide 10, you can see how these starts forecasts translate into the latest Dodge put-in-place forecast and the S&P forecast for the North American rental market. As we expected, Dodge's September report lowered their forecast for construction, excluding residential, by 2% for 2025 and 3% for 2026.
Although we've not updated the mega project slide, which you can find in today's slides, appendix number 37, I can confirm that the outlook for ongoing growth in the mega project space is strong as new project plans are entering the funnel often. Further, the makeup of projects is broad in sector and geography. And finally, the team's done a great job year to date, winning more than our fair share and are very active in current RFPs. More details to come in this mega project landscape in March. Before I hand it over to Alex, I'll just touch on our Sunbelt 4.0 strategic plan on slide 11. We're now six quarters into a 20-quarter plan. As I've previously mentioned, our team has been laser-focused on advancing each of the five actionable components, which are customer, growth, performance, sustainability, and investment.
While I'm not going to give you a further detailed progress report today, I will say that our clarity of mission throughout the organization is certain, and our momentum is building. We'll share more detail as we progress through the year and in particular during our upcoming Investor Day this coming March. With that, I'll hand it over to Alex to cover the financials in more detail. Alex?
Thanks, Brendan, and good morning to everybody. Starting with the second quarter results for the group on slide 13. Group total revenue and rental revenue both increased 1% in the quarter, reflecting the impact of the quiet hurricane season that Brendan has already mentioned. Adjusting for the impact of the hurricane, underlying rental revenue growth in the quarter was around 3%. The EBITDA margin and EBITA margin continue to be strong at 47% and 27%, respectively.
In line with the Q1 performance, the slight drop in margins primarily reflects the fact that top-line growth is being driven by higher activity levels in both the mega project space and large strategic accounts, as opposed to the more transactional business, as well as a planned repositioning of fleet to drive both growth and utilization. Margins have also been impacted by a higher level of ancillary revenue associated with the growth in the non-construction markets, an increased level of internal repair costs with a greater portion of our fleet out of warranty coverage, just as we expected, and lower gains on disposals of used equipment. Adjusted EBITDA at $592 million was up 1%, matching rental revenue growth as the challenges associated with the slight overfleeting of the industry have abated.
After an interest expense of $133 million, reflecting lower average debt levels, adjusted pre-tax profit was 4% lower than last year at $656 million. As explained previously, we're adjusting for non-recurring items associated with the move of the group's primary listing to the U.S. These costs amounted to $19 million in the quarter and $32 million in the first half. In addition, we've taken a one-time exceptional charge of $37 million in the quarter relating to the restructuring of the U.K. business that Brendan has already mentioned. The bulk of this charge is non-cash in nature, and the full scope of the actions taken in the year are expected to be cash accretive. Adjusted earnings per share were up at $1.168, reflecting the benefits of the ongoing share buyback program and ROI on a trailing 12-month basis was a strong 14%.
Slide 14 shows the first half results in a similar format. Rental revenue growth in the half was up 2% and up 3% on an underlying basis, adjusting for the lack of hurricanes. The EBITDA margin and EBITA margin remained strong at 46% and 26%, respectively. Adjusted PBT was down 4% and adjusted EPS down 1% for the half. Slide 15 illustrates group revenue and EBITDA progression over the last five years and in the first half, highlighting a significant track record of growth and margin strength over a range of economic conditions. Turning now to the individual segments, slide 16 shows the performance for North American General Tool. Rental revenue for the first half grew by 1% to $3.2 billion, driven by improved volume, time utilization, and stable rates. Excluding the hurricane-related impacts, rental revenue increased about 3% in the first half.
As I explained previously, margins were impacted in the half primarily by growth being driven by higher activity levels. EBITDA was $1.8 billion at a strong 54% margin. Operating margins were 33% and ROI was 20%. Turning now to North American Specialty on slide 17, rental revenue was 2% higher than the first half of last year at $1.8 billion as the non-construction market continues to be strong, particularly in power and HVAC, Climate Control , and Flooring Solutions . On an underlying basis, adjusting for hurricanes, rental revenues were up around 5% in the half. Margins in Specialty were broadly flat, with EBITDA margin of 48% and an operating margin of 33%. ROI was 31%, again clearly illustrating the higher returns achievable in the Specialty businesses. Turning now to the U.K. on slide 18, and please note all of these numbers are in U.S. dollars.
U.K. rental revenue was 3% higher than a year ago at $422 million, benefiting from favorable FX movements. The U.K. business delivered an EBITDA margin of 26% and generated an operating profit of $35 million at a 7% margin. ROI was 5%. As Brendan has already mentioned, during the quarter, we commenced a restructuring of the U.K. business, better positioning it for the future, and aimed at delivering improved margins and returns at a sustainable level while positively impacting the customer experience. This involves aligning the network of locations to current business needs, right-sizing the staff, and disposing of non-core fleet and business lines, including the sale of the U.K. hoist business in October for $16 million. Slide 19 illustrates the flexibility, resilience, and agility of our capital allocation model.
When markets are experiencing transitory headwinds, we have experienced over the last few quarters, we remain disciplined in our deployment of capital to support strong utilization and rate discipline. When markets are growing more rapidly, we accelerate capital spending to capture opportunities and market share. In all cases, we generate significant free cash flow in excess of our investments, which we return to shareholders in the form of dividends, debt repayment, and share buybacks. You see this clearly in the fiscal years 2021 and 2025, and we have started this year strongly with $1.1 billion generated in the first half, a record and significantly ahead of the comparable period of last year. We are well on track to deliver record free cash flow generation for the full year. Slide 20 updates our debt and leverage position at the end of October.
This again clearly demonstrates the strong cash-generative characteristic of the business as we have lowered net borrowings by over $500 million in the last year to $7.6 billion. This is despite the fact that we returned over a billion dollars to shareholders in the half through share buybacks and dividends, invested $1.3 billion in CapEx, and invested $143 million on seven bolt-on acquisitions. In addition to that, we opened 22 greenfields in North America, of which 12 were in General Tool and 10 were in Specialty, with a clear line of sight to achieving around 60 greenfields in the full year. As a result, excluding lease liabilities, leverage was 1.6 times net debt to EBITDA, well within our stated range of between 1 to 2 times net debt to EBITDA.
We expect to be in the 1.5 to 1.6 range at the end of April, including the impact from the share buyback activity, but not including any potential impact of additional M&A activity. On the M&A front, we have a robust pipeline, which we continue to develop and pursue opportunistically as long as it is accretive to growth and generates margins and returns in line with our capital allocation expectations. Turning now to slide 21 and our latest guidance for revenue, capital expenditure, and free cash flow for fiscal year 2026. We're pleased to reaffirm the guidance that we gave in September. Our guidance for Group rental revenue growth is between flat and plus 4%. The plan for growth capital expenditure is in the range of $1.8-$2.2 billion. And finally, we expect free cash flow to be between $2.2 and $2.5 billion.
And with that, I'll turn it back to Brendan to close us out.
Thanks, Alex. Turning to slide 22, I think you'll agree, Alex, that I have covered all these capital allocation elements as part of the presentation this morning. All this is consistent with our long-held policy, and we will continue to allocate capital on this basis throughout 4.0. To conclude, let's turn to slide 23. In summary, I'll leave you with a few takeaways one should gather from our update today. One, recognizing the impact of hurricanes, the half resulted in exactly what we expected in revenue growth, improving utilization, free cash flow, and advancing our 4.0 strategic plan, leading us to reiterate our guidance for revenue, CapEx, and free cash flow. Two, we're continuing to see positive leading indicators in our business activity levels and in our pipeline, coupled with an encouraging indication of market demand statistics.
And three, when you piece this all together, you should clearly see the secular progression in our business and in our industry. This demonstrates ever so clearly, in particular during this modest growth environment, we continue to maintain discipline in pricing, investment, and strategic focus, all while delivering record free cash flows, which we've used across all our allocation priorities. This business and balance sheet is stronger than ever and puts us in an incredibly powerful position, giving us great flexibility and optionality as opportunities unfold. And finally, just a comment, you should have received a save the date for our March 26th Investor Day in New York City, where we'll update you not only on our 4.0 progress, but showcase our ever-growing capabilities. We certainly hope to see all of you there. And with that, operator, we will turn the call over to Q&A. Thank you.
As a reminder, to ask a question, please signal by pressing Star 1 on your telephone keypad. If you wish to cancel your request, please press Star 2. And we kindly ask you to limit the number of your questions to two questions per participant. Our first question is from Lushanthan Mahendrarajah from J.P. Morgan. Please go ahead.
Morning, guys. Thanks for taking my questions. I've got two. The first is just on rental rates and how we think about the combination of that and margins as we go through the second half. Clearly, some of those things are mixed related, etc., and repositioning related. I mean, is that something that you want to start to offset and push rental rates a bit more, or are you sort of happy with the status quo and sort of those things will sort of iron themselves out over time?
So that's the first question. And the second is just on leading indicators, I think they're on the Dodge Momentum and sort of the 12- to 24-month lead time, but also interesting to hear, I think you said quotations and reservations for yourselves is trending upwards. I mean, is it typical to see a lead time of 12- to 24 months for those as well? I'd imagine those are short, but just to get an idea of exactly what you're seeing there and what that actually means in terms of translating into revenue.
Sure. Thanks, Lushanthan . And good morning. Yeah, rental rates, as we've said, so much so, in particular during this moderated level of growth that we've talked about, the resilience of. Our rates are strong, make no mistake. Your question specifically talks about what is our anticipation of where rates go in the second half.
I could probably obviously always say to you that we'd prefer rates be a bit higher as we move. We feel good about the momentum that we have. We have a number of initiatives underway to further progress the mechanized progress, if you will, of pricing. So we'll certainly be talking about that a bit in the Investor Day . I think the key thing is this when it comes to pricing. We believe at this stage that we've reached a good fleet balance in the industry. It's well known that for a period of time, the industry was a bit overfleeted. We think that that has largely corrected itself, and therefore that leads to even more momentum and really expectation around pricing.
But there are also a number of moving parts between some of that local, not as we've talked about, and also our national strategic customers that we're growing so significantly. But overall, our expectations on rates are positive, and we do expect rate progression to be a feature of our growth for the years to come. Second question around the momentum that we're seeing, particularly in the internal indicators and, of course, in areas like that Dodge Momentum Index. Yeah, internally, what we're seeing really now, as compared to what we would have seen a year ago, we're seeing more normal rhythms in the business. And by that, I mean rhythms as it relates to seasonality, where we had actually seen a decoupling of that at prior points. And in that, that's supportive of what we would have said in our prepared remarks.
We feel as though, both in terms of the actual data and then just the feel on the ground, that when you look at completions versus starts, we've reached equilibrium, and if you think about that local non-res market, really for about two years' time, completions in essence were outpacing starts. We feel as though we've reached neutrality in that, and that gives us even more confidence in what we're seeing in some of these forecasts. That being said, and you asked it, you sort of answered it in your question, Lushanthan , that lead time from planning to actually progressing to start is 12-24 months, depending on what it may be. Some of your smaller retail might be 12 months, offices and lodging might be 18 months, larger projects beneath that $500 million may be more like the 24 months, so when that comes, time will tell.
We're seeing positive signs for that. And as we've said so many times, we are positioned well to take advantage of that when, not if, that returns.
Okay. Brilliant. Thank you, Brendan.
Thanks, Lushanthan .
The next question is from Annelies Vermeulen from Morgan Stanley. Please go ahead.
Hi, good morning, Brendan. Morning, Alex. And two questions, please. So just on the U.K. restructuring charges, so you've mentioned closing branches and some headcounts. So do you expect that business will be materially smaller going forward? And if you could talk a little bit about what has prompted that. And as part of that, you mentioned double-digit returns on those investments. So over what kind of timeframe could we see that come through?
And then secondly, just coming back to some of those green shoots on leading indicators, is there anything incrementally different relative to the last time we spoke in September with regards to the type of customers or projects that you're seeing that across or any particular drivers you're hearing in your conversations with customers, such as rates, etc.? Any color there? Thank you.
Great. Thanks for the question, Annelies. I'll take the first part, and then I'll turn it over to Brendan to talk a little bit more about the green shoots that you mentioned. So the U.K. restructuring, this is activity that we're undertaking to really sort of improve the performance of that business. We mentioned $37 million of non-recurring charges. That's a one-time charge, mostly non-cash in the quarter. Important to say that all of that will be cash accretive in the year.
We pointed to the sale of the hoist, the hoist business for about $16 million. There's a little bit of severance in there, but it'll all be cash accretive for the year, and largely, those actions are already behind us. So there's really not a whole lot more to be done. In terms of your question, will that be a materially smaller business? No. This is really about sort of optimizing the footprint, divesting some of the businesses where we weren't really competitively advantaged, closing locations where we didn't have scale, so it's really, I would say, just basic hygiene about how we drive improved performance in that business. In terms of what's our trajectory to more sustainable returns, obviously, it's a bit of a tricky question to answer because it depends on how top-line performance evolves as the market recovers.
But we would expect all of these actions, like I say, to be accretive in the year and to be delivering positive returns as we look out into the next fiscal year. And so with that, I'll turn it over to Brendan to talk more about the green shoots that we're seeing in the marketplace.
Great. Thanks, Alex. And Annelies, your question really was, or is there anything different really from Q1 when we first talked about what we're seeing internally and some of the forecasts externally? And I think the biggest is we've had three prints now of DMI that have maintained really high levels. And the key to that is it is indicating the demand in the marketplace. And as we see that maintain that quite wholesome level, we have increased confidence that we will see those progress to starts.
And that actually, that question brings up a good point I think I'll make to perhaps reiterate our conviction there. When you study over time the correlation between DMI and starts, it is a remarkably strong correlation, about as strong as you can get, which one would expect. You have someone who has literally entered the planning phase, and the correlation from entering planning to therefore actually becoming a start is remarkably high. So that gives us extra confidence. And again, what we're seeing there is it's just the demand. And that demand, just to emphasize, remember that is specifically DMI pointed to projects that are below $500 million, non-manufacturing. So it really gets to the core of that local non-res.
That's really helpful. Thank you very much.
Thanks, Annelies.
Our next question is from Neil Tyler from Rothschild and Company at Redburn. Please go ahead.
Yeah, good morning, Brendan, Alex. Two from me, please. You've increased the amount of M&A slightly. You mentioned a robust pipeline. Does this reflect a more attractive M&A landscape more broadly? Is that maybe tying into your comments about some of the industry being a little bit overfleeted? Are there assets available that have got increased headroom to improve sort of utilization compared to, say, a year or two back? That's the first question. And then a similar topic, but on your own fleet utilization, how are you thinking about utilization rates as you shape up for the 2026 season? How much growth headroom in terms of utilization rates do you think exists in your current fleet before CapEx will need to kind of raise to move the fleet in sort of lockstep with demand growth? Does that make sense?
Yeah, sure, Neil.
The first, in terms of M&A, well, look, we did two in Q1. We did five in Q2. Nice little bolt-ons mixed between Specialty and Gen Rent. So really, it's a combination of density and a bit of expansion into some markets where we didn't have quite the presence that we would have wanted, all part and parcel of our 4.0 expansion plan. Nice little Specialty businesses in the first half that we added, one around perimeters that really supports our events business, everyday events, and then, of course, magnified with events like LA28. From a pipeline standpoint, it's remarkably strong, and it's remarkably strong, particularly in the Specialty space. So there are a handful of opportunities that are out there that both complement existing lines that we offer today, but also some nice adjacent lines.
Your question about do we see this ability to extract, in essence, higher utilization because of the industry's fleet levels? I think, frankly, it's not so much that. We get that in almost every circumstance, so we buy a business in any town in North America, as, for instance, and they may be running at a utilization level of 60, let's just say, for conversation's sake, and as we fold that into our overall system, our overall apparatus, we can comfortably run that business at a higher level of time utilization if for no other reason than we have a deeper offering of whatever products we tend to bring in, so certainly, that's one of our overall hallmarks of this bolt-on M&A strategy that we have, and we take those customers that we acquire by way of the acquisition, and we offer them a far broader set of solutions.
It's really no different than what it has been. As we've said in all of our updates, the pipeline has remained robust. We're just in a really good position right now. And frankly, we would expect the momentum in terms of our allocating capital investment in this regard to strengthen over the course of the quarters to come. From a, in terms of our own time utilization to your second question and what sort of headroom, I mentioned that similar to the end market from a local non-res standpoint, I think we're kind of at equilibrium now. When you look at our business today, as you've seen and you would have heard from Alex's remarks, Specialty is becoming a larger part of our overall business. So time utilization isn't quite what it was before.
Take, for instance, as we grow our climate business or we grow our load banks business to the degree in which we are. You have different seasonality as it relates to time utilization. So really, the answer to your question is the devil's in the details. We have certain product categories that we do have a bit of headroom, but we also have, and I would put it this way, equally have product categories that are at quite high levels of time utilization, and that therefore, that's where you'll see our growth CapEx invested, not only in the second half, but as we complete our planning from a CapEx standpoint for next year, which we're right in the middle. We're right in the throes of our growth plans for next fiscal year. Hope that answers your questions, Neil.
Thank you. Yeah, that you did. Thank you. That's very helpful.
Thank you.
Our next question is from Arnaud Lehmann from Bank of America. Please go ahead.
Thank you very much. Good morning, gentlemen. Two questions from my side. Firstly, on margin trends, you highlighted again a little bit of margin erosion year on year, highlighting the repairs and repositioning of the rental fleet. Do you expect that to continue into the second half of the fiscal year, or the repositioning is largely done? Maybe something remained on the repair side. My second question is just a few follow-ups on the U.S. listing. When are you expecting to transition to U.S. GAAP? Are you going to move to a December year-end for reporting? And what sort of incremental U.S. listing costs should we expect into Q3 and Q4, please?
Hey, okay. So I'll take both of these.
On the margin point, a couple of points that I think are really important to understand. First of all, this is largely driven by mix, and the mix is coming from a couple of things. First, we have disproportionate growth in Specialty relative to General Tool , and remember, Specialty is a little bit narrower margin, although it's higher return because it's less capital intense, so that should be somewhat intuitive from the numbers. Secondly, the growth, as Brendan would have mentioned in his results, the growth broadly is coming from mega projects and the large strategic accounts as opposed to that local non-res, more transactional business, and so again, I think it should be intuitive that that type of business mix would carry with it a bit more of a lower margin profile, and then lastly, we're really optimizing the fleet positioning to unlock these pockets of growth.
That higher level of activity comes with it higher cost. So as Brendan says frequently, we're really just running the business as you would want. There's nothing sort of structurally changing in the underlying economics. In terms of as it looks towards the second half, I think we would continue to expect Specialty to have relatively stronger growth than General Tool . I think the other issue that we pointed to was the higher internal repair costs as a portion of the fleet comes off warranty. You would expect that to continue through the balance of the year. So I think largely you should expect the second half to look and feel similar to what the first half looked like. As it relates to the U.S. relisting, we're on track for that to be delivered March 2nd.
We've submitted the first round of comments to the SEC, or first round of response to the SEC's comments. We expect to get a second round back here in the course of the next week or so, and so everything's going exactly as we would have hoped, despite the government closure throwing a bit of a speed bump in it. In terms of your question, as it relates to the December year-end, we will likely make that decision at some point in the future. That is not something that we would undertake sort of imminently as we need to get through this process first, but we would likely take that decision at some point in the future, and we will continue to see some incremental costs as we get through the balance.
I think we're kind of targeting a total budget of around $90 million or so by the time this is all said and done, the majority of which will happen as we get into sort of the second half of the year, but there will be some residual cost as we get into next year, which will all be adjusted out of the adjusted GAAP numbers, and then obviously, once we start reporting on the SEC regime, we'll be reporting U.S. GAAP numbers. And we'll bridge that very clearly for you and the investor today.
That's super. Thank you so much.
Thank you. Our next question is from Rob Wertheimer from Melius. Please go ahead.
Hi, thank you. Question on just profitability and ROIC on the mega projects versus the rest. We've seen the fleet positioning costs.
I'm not sure if I understood the last answer to indicate that the repositioning is it kind of fades, or I don't know whether it continues with each mega project as they sort of bounce around the country, whether that's just a new cost of doing business, but does the profitability kind of curve up to average, or is it lower given competition, and well, anyway, I'll stop there for now.
Hey, good morning, Rob. Thanks for that. You heard Alex allude to that margin impact, and I just want to clarify that. I think this will answer your question. That's in the early phases of those wins and of those build-ups.
So as we've said many times in the past, not only does history tell us, but our expectations are, as you reach that sort of crest, which is quite long on these megaproject s, we would say at a minimum, those are parity to the margins for the overall business. And the same thing goes really with our national strategics. I mean, when you think about these, not just megaproject , but these national contractors, and you put all that together, these are more experienced operators. The conditions on these sites are better governed. The products themselves, in so many instances, move in many ways a bit less than they do on other projects.
And the repair maintenance, when it comes to upkeep with those, you have this great opportunity to have field service technicians deployed that are on site, and they spend most every single day on those projects maintaining this equipment. So over time, we would expect for that to be at a minimum parity to the rest of the business.
Perfect. That does answer it. Thank you. And then just out of curiosity, I guess just as you slowed expansion appropriately with the industry, then the repair cost comes up as more of the fleet's off warranty. I get that. Is that a one-year effect and you kind of rebase, or if you didn't expand faster again, would that continue to be a margin headwind for the next year? I'll stop there.
Thank you. Yeah.
If you look at the fleet profile slide that we have in the appendix, you'll see two extraordinary years of growth where we extracted significant share gains and expanded our business. So it's really those two rather long, large tranches. So unless we were to go to those levels of CapEx, say next year, I think we have another year of that sort of headwind, and then we balance out as we ordinarily would. And then, of course, look, there'll be these periods where you have significantly low replacement CapEx for tranches seven, eight years ago that were lower. But I would expect that same sort of headwind for another six quarters or so.
Thank you. Great.
Thanks, Rob.
Thank you. Our next question is from Suhasini Varanasi from Goldman Sachs. Please go ahead.
Hi. Good morning. Just one final follow-up from me, please.
The U.K. restructuring program of the $7 million, you mentioned it was cash positive, but can you maybe give us some color on what's the benefit on annualized SG&A costs for that region and therefore the benefit to margins on an annualized basis? Thank you.
Sure. So the bulk, as I would have mentioned, the bulk of the restructuring would have been in sort of fixed assets, sale of underperforming businesses, consolidation of locations, and those sorts of actions. So really where it hit, and it's non-cash, by the way. So where it typically would hit is more on the ROIC and the depreciation line than the sort of SG&A side. I don't have the exact number in front of me. I think it would be reasonable to expect 150 to 200 basis points of SG&A improvement on leverage.
But again, the bulk of it is really focused on the asset footprint, if that helps.
Yeah, that's very helpful. Thank you.
Thank you. We'll now take our next question from Allen Wells from Jefferies. Please go ahead.
Hey, good morning, Brendan. Good morning, Alex. A couple from me, please. Firstly, just on the margins, sequentially slightly worse, I think down 140 versus 120 in Q1. The incremental decline there, is that all related to hurricane activity, or were any of the other headwinds stronger in the quarter? And maybe linked to that, I think kind of follows on from Rob's question on the repair costs. We should expect that, obviously, to be a continued headwind over the next few quarters.
But when you look at that CapEx profile, the step up between 2022 and 2024, should we be thinking that the headwind from higher repair costs actually steps up over the next few quarters as well? So let's just start those on the margin. And then secondly, just on the rate environment, following on from a question earlier, beyond the broader market conditions being slightly muted, are there any other factors that you would call out that are impacting rates? I'm particularly thinking about, are there any particular smaller or mid-sized competitors being a bit more aggressive than you would typically expect on pricing or anything like that, or is it just a broader market issue? Thank you very much. Yeah.
Yeah, I'll let Brendan take the rate question, but I'll hit the margin question quickly. So you sort of answered your own question.
Yes, the hurricane activity, the lack of hurricane activity, I should say, did have a dilutive impact on margins. You're also lapping a very strong period of margin expansion. So you sort of have a tougher comp that you're comparing against. So those are really the issues. As it relates to the higher repair costs, I think Brendan answered that. We do expect that to continue for the next, call it, six quarters as we're lapping those really two high CapEx years. So I think that would be more of a sustained headwind. And I'll let Brendan comment on the rate environment.
Yeah. Allen, from a pricing standpoint, look, there will always be some competitor in some market somewhere who leads with price. That has been the realities of the business forever. The key to understanding pricing is pricing, as in any business, is dynamic.
And the big takeaway would be, think about the structural change, the structural progression of this business, and the secular outputs of that. And we're seeing those so clearly today. Secular outputs, particularly highlighted during this market that we are working through today, that create larger TAMs, that create more resilience overall in the business, that deliver discipline when it comes to pricing. And largely speaking, that's exactly where we are. It's not different than most anywhere else. Pricing does have a momentum element. And at this particular juncture, it has proven to be remarkably resilient. And as we've said, pricing is still very much strong. And we look to take further advantage, if you will, of this structural output to progress pricing, as I've said, that we expect to be a feature of our growth for years to come.
All right. Thank you.
Sorry, just a quick clarification, Alex. I appreciate you kind of confirmed that there's to be a sustained headwind in the higher repair costs. But I guess my question was, when I look at the CapEx profile, 2023 was more CapEx than 2022, 2024 was more than 2023. So is there any reason why that headwind shouldn't actually increase given that CapEx profile?
Yeah. I guess when we return to fueling larger growth capital investments, you would see that impact mitigate because you'd be putting more capital on the balance sheet that's under warranty cost, and the age of your fleet would come down slightly. So really, the higher warranty cost is entirely connected with the aging profile of the fleet. Brendan's pulling up the slide in the appendix, which really shows the nature of how we've invested in the last couple of years.
You would expect that trend to continue as we lap those two years of $3-$4 billion of investment. As those levels of CapEx get retired, you would expect it to come down to somethi ng a little bit more normal.
Yeah. I think, Allen, to just add, let us not over-index on. I appreciate we may have put ourselves in that position because we call out the impact of higher repair costs as assets come out of warranty. Think about Sunbelt 4.0 and the actionable component of performance. Make no mistake, we have opportunities which are being actioned to drive margin improvement in this business just as we set out to do with 4.0.
So whether it be the over 25 Market Logistics Operations that we have employed year over year, growing from last year's 10 or 12 to today's over 25, which is more than 500 of our locations, we'll have more than 30 of these rolled out by April of our top 50 markets. Part and parcel of that MLO is a consolidated market field service approach. Furthermore, as you will see in full color on March 26th during our Investor Day , is the new service platform that we've implemented throughout the business. So all of these improvements not only deliver exceptional customer experience, but they also will deliver over time improved operational processes and therefore improved margins. So this is just a moment in time where we're going through those two years of extraordinary growth investment, which we all look forward to returning to.
But make no mistake, the business is actioning significantly an improvement in the way that we operate, and that will translate into margins. I'll just talk to MLOs a bit more. We have reduced days to pick up for our assets. That creates opportunity for higher-time utilization of an existing fleet. We have circa 15% better truck utilization in these markets. We reduce outside hauler spend in many cases by 50% or more. And this whole measure we've looked at for so long, Delivery Cost Recovery , improves by 4% or 5%. So it's not all about just the warranty of the fleet. It's about how we continue to get better at our operations. And you've met the Brad Laws and Shai of our business. And that's what they're focused on every single day. And we have great momentum behind that.
Thanks for the clarity. Thank you.
Thanks for the reminder.
To ask a question, please signal by pressing star one. Our next question is from Karl Green from RBC. Please go ahead.
Yeah. Thanks very much. Good morning to you. Just two questions. The first one, Brendan, given that we're seeing double-digit auction inventory builds in major equipment categories, I just wondered what gives you the confidence in the statement of the overfleeting and the industry as being largely corrected. And then the second question, Alex, perhaps for you, just on depreciation. It looks like sequentially adjusted depreciation went down between Q1 and Q2. So just wanted to understand the moving parts of that. Was that partly due to accelerated write-offs in the U.K., or is there anything else going on there in terms of fleet mix that we should be aware of?
Then just the final follow-up on that would be, what would your expectation be for full-year depreciation, please?
Sure, Karl. On the first, look, I think when you look at two things, really, is your questions about how we feel comfortable that we're reaching this sort of balance from a fleet versus demand standpoint in the industry. You're right. We do see some, and I want to say that very clearly, some product categories that are creating a bit of a backlog in that auction environment. As you know, there's some activities going on in the industry where some are taking the decision to rebalance fleet in some way, shape, or form, more so when it comes to composition than when it comes to absolute levels. And you'll see that from time to time. I think you'll see that work through quite quickly.
You can see that also when it comes to secondhand values, which it's important to understand when you think about this business over the years rather than just quarter by quarter. You'll see oscillation when it comes to secondhand values. If we sort of color what we get for assets, at least through the auction channel, you'll see peaks in the 42%-45% of original equipment cost range down to extraordinary times like 2008/2009, where you saw 25% or so relative to OEC. Today, we're in the kind of 32%-33% range. That also indicates a relative level of health in that space. I think when we look at many of our OEMs are publicly traded, and you can understand what their volumes look like year on year or really over the last 18 months.
So all of those line up to, and indeed, our own time utilization, giving us this confidence that we are in a pretty good position overall from a fleet makeup in the industry.
Yeah. So a couple points on depreciation. It would be the case that the majority of the decline would be tied to the U.K. Remember that $37 million charge that I mentioned is largely accelerated depreciation. So that would be the case. If I look at rental depreciation in the quarter, it was for the first quarter that we had, really in the last probably six, rental depreciation was a good guy. So we've got back to a world where rental growth and depreciation are more in balance. You do have some other effects of depreciation going on with things like lease amortization, some of the greenfield investments before they come to scale.
Obviously, those would be headwinds to depreciation. But I think the headline number is the fact that this rental depreciation was more in line with rental growth, which is a good thing in the quarter. Does that help?
That's helpful. Thank you.
Thank you.
Thanks, Karl.
Our next question is from Neil Tyler from Rothschild. Please go ahead.
Yeah. Hi again. Just wanted to follow up, actually, on the answer to the previous question about the used equipment recovery rates. You said for some time that you have been trying to optimize the channels that you use. Can you give us any sort of update on that, your thoughts on the current split and how far through that sort of optimization process you are?
Yeah. Neil, I'm glad you asked that question because shame on me for not addressing that when I had the opportunity. Yeah.
I mean, we have, as you know, over the years of such significant growth and such organic investment in the business, we've relied primarily on two channels, one being trades to OEM because when you're buying three, four, and even five to every one you're selling, it's a pretty optimal path. An asset lives a perfect life after its last day of rental once we deem it to be an asset to be replaced. It's sold nearly immediately, not taking any time away from the business or distraction to the business. And then secondarily was the path through auction. We have been working on standing up a strong retail and wholesale platform, which I would call three quarters through its build. And you will see in significance beginning next year more and more of our secondhand sales going into that retail and wholesale market.
And of course, we think that overall will lead to better proceeds for our sales of used equipment.
Thank you. That's very helpful. Exactly what I was after.
Yep. Thank you.
Thank you. It appears there are currently no further questions at this time. With this, I'd like to hand the call back over to Brendan for closing remarks. Thank you.
Great. Thank you, operator. And indeed, everyone, for joining this morning. I think we have gotten across, or hope certainly clearly, that over the half and indeed year over year, we have invested in growth in this business. We have been working vigilantly to improve our craft, to improve the service throughout our actionable components of 4.0. We have generated significant free cash flow, which we have returned in record levels to our shareholders.
We've paid down debt, and we've done all of this within our leverage range presently at 1.6, and I'll just reiterate what I would have said in my prepared remarks, which is this business is in a remarkably strong position, and we are poised to benefit as we see things recover and this great industry continues to grow, so with that, we look forward to seeing all of you on the 26th of March.
Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.