Thank you, Operator, and good morning—a very early morning, I'm sure, for some of you listening in. Welcome to the Ashtead Group first half results call. I'm speaking from our field support office in South Carolina, and joining on the line from London are Michael Pratt and Will Shaw. Before getting into the half-year highlights, I'll take this opportunity to speak directly to our Sunbelt team who are listening in live or via replay at some later time. I'm incredibly happy and proud to announce another period of record safety performance across the group. Our total recordable incident rate again improved and remains below one. Results like these are what's required for world-class
operations in a business like ours. We think of lagging metrics such as TRIR as table stakes. As such, I'm even more proud of our team's focus on the leading metrics which will truly drive results in the lagging measures. In particular, the position the Sunbelt team has taken to eliminate exposures that could lead to serious injuries or even fatalities. Our business can be dangerous if one does not possess the appropriate processes and culture, which are at the core of our Engage for Life safety program, something the team I'm speaking to will know well. This element of
Engage for Life draws on the importance of controlling and eliminating exposures for the individual team member as well as the customers and members of the communities in which we operate. For this ongoing safety progression and their all-around remarkable efforts, I extend my thanks and appreciation to our team members across all geographies and disciplines who have come through safely and consistently for our customers, communities, investors, and indeed for themselves and their colleagues. To Team Sunbelt, thank you. Let's now move to the slides and cover first half highlights beginning on slide three. Our performance in the Q2 very much picks up where we left
off in September at the time of our Q1 results. The ongoing momentum across the group produced a very good first half. Rents revenues in North America were well ahead of last year's pandemic-affected levels by 19%, and perhaps more telling, 13% ahead of 2019 pre-pandemic levels.
This market-leading performance demonstrates the strength in our model, momentum in the business and the broader market, as well as the early benefits of executing on our strategic growth plan, Sunbelt 3.0. Specifically, having added 58 locations in North America in the half, 43 by way of Greenfield, and 15 through bolt-on acquisitions. Our strong pipeline of potential acquisitions resulted in a more active pace in the Q2 , amounting to 10 bolt-on
acquisitions completed in the half for a total consideration of $428 million, with a further four completed since the quarter end for $320 million. Year to date, we've completed 14 deals, investing nearly $750 million in businesses very much in keeping with our Sunbelt 3.0 growth strategy. We invested $1.2 billion of CapEx primarily on rental fleet to support the growth in our existing locations, Greenfields, and acquisition follow-on.
$209 million was allocated toward our share buyback program in the half. After these activities, our leverage ended the period at 1.5 times net debt to EBITDA. As a result of our growth and improved performance, and in keeping with our progressive dividend policy, I'm pleased to announce a 28% increase to our interim dividend. These highlights and outlook, which we will cover in more detail in the slides to come, put us in a position to expect full-year results ahead of our previous expectations. I'll turn now to slide four to update our full fiscal year guidance. Clearly, there
remains some uncertainty surrounding COVID, particularly given the emergence of the latest variant. However, our business is fundamentally strong, and any potential impact we believe would be to timing and not to the ultimate direction and level of growth in our plans.
With that said, and in recognition of the significant and broad momentum in the business throughout the first half, the levels of demand, better than targeted rental rate progress, pace of our Greenfield openings, and the increased bolt-on activity, we are updating our full-year guidance, beginning with rental revenue in their respective currency. We adjust our U.S. guidance from 13%-16% to an even stronger 18%-20%. Canada and the U.K. remain as they were at
25%-30% - 9-12%, respectively. Therefore, we now improve the group range to 17%-20%. These levels of demand will be supported by gross capital expenditure of $2.2-$2.4 billion, an increase of $200 million on the bottom and $100 million on the top of the previous range. Regardless of the increased CapEx, we have left our free cash flow guidance unchanged.
However, one may expect to be toward the lower end of the $900 -$1.1 billion range. Much of this will come down to precise timing of new fleet landings and disposals as we closely monitor utilization levels throughout the winter and early spring to make the right decisions for the business. With that, I'll now hand it over to Michael to cover the financials in more detail. Michael.
Thanks, Brendan, and good morning. The group results for the first six months are shown on slide six, and as you'll have become accustomed to, they are presented in U.S. dollars. As Brendan said, we had another strong quarter and hence six months with good momentum across the business. As a result, group rental revenue increased 20% on a constant currency basis in the first six months and 18% in the second quarter. While the comparisons were affected by the pandemic, this effect was much reduced in the Q2 of last year, emphasizing the strength of this performance. This can be seen clearly when compared with the first half of 2019-2020, with rental revenue at 14% on a constant
currency basis. This revenue performance was achieved with a similar-sized rental fleet to last year in North America and a slightly larger one in the U.K., which generated an EBITDA margin of 47%, a significantly improved operating profit margin of 28%, and group return on investment of 18%. As a result, adjusted pre-tax profits were $979 million, and adjusted earnings per share were $162.40 for the half year. Turning now to the businesses, slide seven shows the performance in the U.S. Rental and related revenue for the six months was 17% higher than last
year at $2.9 billion and 10% ahead of the same period in 2019. This has been driven by volume predominantly, but also the benefit of a favorable demand and supply environment, which has enabled us to deliver healthy rate improvements since March. As we've discussed before, a number of costs have come back into the business as activity levels have increased, and we have seen inflationary pressures in the cost base, particularly related to wages for skilled trades. These factors combine to give an EBITDA margin of 50%, while operating profit was $969 million at a 31% margin, and ROI improved to 23%. Turning now to Canada on slide eight, rental and related revenue was
49% higher than a year ago at $280 million. This growth rate reflects in part the depressed comparisons last year, particularly in the lighting and grip and studio business, William F. White, which contributed virtually no revenue in Q1 last year but has performed strongly since then.
This, combined with a strong performance from the original Canadian business as lockdowns eased, enabled Canada to deliver an EBITDA margin of 48% and generates an operating profit of $81 million at a 26% margin. ROI improved to 23% with an increasing contribution from lighting, grip, and studio. Turning now to slide nine, U.K. rental and related revenue was 26% higher than a year ago at GBP 272 million. While the business continues to benefit
from our support for the Department of Health in its 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. The work for the Department of Health accounts for around 32% of revenue for the six months. The 36% increase in operating costs reflects the cost of servicing this work for the Department of Health, increased activity levels within the business generally, inflationary pressures, and ongoing investment in the operational
infrastructure. These factors resulted in an EBITDA margin of 31% and an operating profit margin of 15%. As a result, U.K. operating profit was GBP 54 million for the six months, and ROI was 15%. Slide 10 sets out the group's cash flows for the six months and the last 12 months. I will not dwell on this slide for long, but it does illustrate the significant change we have seen in the business over the last 10 years. As we came out of the last downturn and spent on growth CapEx expenditure, we were free cash flow negative.
In contrast, this year, as we've returned significant growth CapEx expenditure in the first half, this has been funded from the cash flow of the business while still generating free cash flow of $440 million. Slide 11 updates our debt and leverage position at the end of October. Our overall debt level increased in the six months as we allocated capital in accordance with our policy, spending $428 million on bolt-ons and returning $213 million to shareholders through our final dividend for 2021 and $209 million through buybacks. As a result, leverage of 1.5 times, excluding the impact of IFRS 16, was at the low end of our target range.
Our expectation continues to be that we will operate with our target leverage range of 1.5-2 times net debt to EBITDA, but most likely in the lower half of that range as we continue to deploy capital in accordance with our capital allocation policy. We have a good pipeline of bolt-on opportunities, and as you will have seen, we have already invested a further $320 million in the Q3 . Turning now to slide 12, one of the five actionable
components of Sunbelt 3.0 is dynamic capital allocation. An integral part of this is a strong balance sheet, which gives us a competitive advantage and positions us well as we take advantage of the structural growth opportunities available in our markets. In August, we took advantage of good debt markets to strengthen our balance sheet position further, extending our debt maturities and reducing our overall cost of debt.
We made our debut in the investment-grade debt market through a dual tranche notes issue of $1.3 billion at an average cost of just over 2%. We used this to refinance $1.2 billion of notes with an average cost of 4.7%, resulting in an annual interest saving of $30 million. In addition, we increased the size of our ABL facility to $4.5 billion and extended its maturity to August 2026 on similar terms and conditions. The redemption of the old notes gave rise to
the $47 million of non-recurring interest expense in the six months related to the core premium and the write-off of deferred financing costs. Following refinancing, our debt facilities are committed for an average of six years at a weighted average cost of less than 3%. With that, I'll hand back to Brendan.
Thank you, Michael. Let's move on to some operational and market detail beginning on slide 14. In the U.S. business, our revenue gains continued. Compounding our return to growth in Q4 and a strong performance in Q1, our general tool business furthered its improvement over the same quarter a year ago in Q2 to deliver 13% growth. The specialty business continued its remarkable advance, growing 23% on top of last year's 18% growth in the same quarter. The strength of this performance in the quarter and half is geographically broad and extends through
virtually all of the specialty business lines. The supply and demand equation remains incredibly tight, an ongoing dynamic that has led to record levels of utilization in our U.S. general tool and specialty businesses. Further, our industry, like any other, is experiencing inflation, ranging from whole goods to services to wages. As I said during our last update, when you combine these supply and demand circumstances, inflation realities, and focus on delivering leading service to our customers, you should be able to do it while increasing rental rates. We've done just that. Our sequential and year-on-year rate improvement has been very good, even outpacing ambitious internal targets.
Further, this incredibly unique circumstance of growing demand and faltering whole goods supply serves as a perfect catalyst to encourage and increase the structural shift from ownership to rental. This is exactly what we believe is happening during this inflection period in the market. Let's move on to slide 15 for a closer look into our specialty business performance. The year-on-year rental revenue movement seen here gives a more granular look into individual specialty business lines and clearly demonstrates the growth is equally large and broad.
As a reminder, this is growth on top of very strong growth in the same period a year ago. This should highlight a couple of things. First, our portfolio of complementary products and services, which is unique to Sunbelt, creates powerful cross-selling opportunities, which we are unlocking at an increasing pace. Second, growth rates like this point clearly to early stages of structural change, being accelerated by our recently found scale producing a reliable alternative to ownership. What else can explain growth like this so clearly ahead of any tangible and market evidence? This level of growth and activity also demonstrates the underlying strength of the non-construction,
broader economic markets our business serves. Finally, I'm excited to announce the addition of our 10th specialty business line following the acquisition of Mahaffey Temporary Structures just a week ago. This is a great business who we have a long history of collaborating with, renting products to, ranging from material handling and lighting by our general tool business to power, HVAC, flooring, climate control, and air quality. Mahaffey are the market leaders in temporary structure rentals serving the emergency response, industrial, and events markets. This is a business that is not only highly complementary, but equally has a great runway for growth. Given the newness of this addition,
there's not much detail on this exciting new specialty line in this set of results, but you will hear more about it in the periods to follow. As we turn to slide 16, I'll cover the latest and most relevant construction and rental industry forecast. Construction starts have recovered to pre-COVID levels in 2021 and are forecast to grow through 2026. This forecast is improved from the prior update, which did not anticipate starts to reach pre-pandemic levels until 2022. These starts and put-in-place figures are supported by residential construction, which continues to show strength. Notably, multifamily has an improved forecast, which also grows through 2026 and is seen as shifting
toward more suburban areas surrounding major metros, which will be a bit more favorable to rental. The remaining non-residential and non-building put-in-place forecast improves 5% in 2022 while continuing thereafter through 2026. Consistent with our last update, there remains noticeable increased activity in our markets, particularly around warehouse, data center, and distribution, with recent and increased activity in manufacturing, notably in electric vehicle and the battery production space. Further, and not necessarily fully taken into account in the forecasted figures, let's recognize the Dodge Momentum Index. This marker is at its highest level in 14 years.
On top of that, you, of course, all know the infrastructure package Paston's Law, which will not have been a contributory factor to the current activity levels in the market, nor the Momentum Index. Important to understand as it relates to the infrastructure spend that will surely have an element of fall-through to the rental industry, we firmly believe this will favor rental in general and the larger rental companies in particular. I'm sure a further view on this will come in Q&A, so I'll leave it at that for the moment. When you put all this together, we feel comfortable to say that with current activity levels and taking on these known and forecasted construction additions will result in a strong
demand market for years to come. Turning now to our business outside of the U.S., beginning with Sunbelt Canada on slide 17. Michael covered the financials, which were a record from a margin and returns perspective as this business continues to gain ground and benefit from its relatively newly found scale. Similar demand and supply constraints, as experienced in the U.S., have contributed to record levels of time utilization and indeed a year-on-year rate improvement even better than in the U.S. as we leverage our proprietary technology-enabled dynamic pricing
systems. Also contributing to these results are the benefits of our maturing model and executing on the Sunbelt 3.0 roadmap. Again, consistent with our September update, our specialty business advancement continues to take shape, led by our lighting grip and studio business, which is benefiting from the operational and financial support that comes with being part of Sunbelt and the exemplary customer service and engagement in a market that shows no signs of slowing demand for content in the exciting over-the-top streaming space.
These facts are combining to give ongoing record levels of performance and revenue growth and financial metrics. Things are going well in Canada, and our runway for growth remains long. Moving on to Sunbelt U.K. on slide 18. Consistent with Q1, the business has been executing well and carries good momentum in the early stages of Sunbelt 3.0, demonstrated with trading in the quarter significantly ahead of the pandemic impacted 2020, but also notably ahead of 2019. The support surrounding the COVID testing sites continues at a high level. As it stands today, we expect the number of sites and level of support to reduce significantly in the spring. Our hope is that remains the
case. However, as I said earlier in the presentation, things have been fluid from the start and throughout this pandemic, and therefore timing of this could always change. Beyond the testing sites, I can comfortably say the business has achieved encouraging customer wins over the period and has an impressive sales pipeline of accounts who the team believe increasingly recognize Sunbelt U.K. has a range of general and specialist products and services unlike any other in the market and an increasingly good track record of coming through in even the most challenging of circumstances. New customers gained and in the pipeline are also the most diverse in terms of
end markets served that I can recall in our U.K. history. These achievements are a result of the improved cross-selling and operational advancements very much at the center of our 3.0 plans, such as OPEX and regional operating centers. Finally, and consistent with what the business has experienced in North America, supply constraints, inflation, etc., we're experiencing subtle yet notable sequential and year-on-year rate improvements, something that is far overdue in our business and the broader industry in the U.K. We're happy to be leading the way in this regard
as a recognition of our unique lineup of products and relentless focus on customer service. Turning to slide 19, I noted a strong start to Sunbelt 3.0 in each of our operating geographies. Although only two quarters into a three-year plan, I'm pleased to demonstrate progress in all five actionable components. Illustrated here, you'll pick up some of the specifics related to each of these components. Our strong pace of greenfield expansion continues, having added 43 across a broad geography with a nice mix of specialty and general tool.
This organic expansion was added to with 10 acquisitions in the half and, of course, the further four thus far in Q3. This is a great start to our 3.0 expansion ambitions, and the team is dutifully working on our greenfield roadmap several quarters ahead and a still robust bolt-on pipeline. We recently launched a new customer-facing app purpose-built to markedly improve our mantra of availability, reliability, and ease in the palm of our customers' hands. This app taps into our vast database of transactional activity to bring a smarter, more succinct experience to
our customers. Further, our technology team, in conjunction with our operational excellence and sales teams, have a very clear roadmap to scale and improve and, in some cases, replace critical systems such as Chronos, VDOS, shop services, and advanced e-commerce tools. To showcase and advance this actionable component of Sunbelt 3.0, we'll be holding an internal conference in January where we bring in 300 or so of our senior leaders for the express purpose to detail our technology roadmap and demonstrate in person, within a market cluster of branches, how our
bigger, better, faster digital platform will synthesize the future of our clustered market operations. Our ESG efforts continue to advance. I'll be back to the E in a moment. In the all-important S, I'm happy to report the inroads Sheryl Black is making. You may recall Sheryl, our SVP of Culture and Engagement, from our Capital Markets event. Sheryl and her team are making great progress working with our D&I task force and Women's Employee Resource Group as two examples of building an even better culture throughout Sunbelt Rentals.
There'll be more to come on actions like these in the future. Let's turn to slide 20. As promised in September, we're taking a closer look at the E in ESG in respect to our work to advance sustainability in the products we rent and services we provide, as well as notable market areas of heightened awareness and attention. These two areas are covered in the two columns on the right portion of slide 20, starting with the innovation column. I like to explain this with the statement. Within the equipment industry in general and rental industry specifically, you're either a spectator to innovation or, so to speak, a player on the field. We are indeed an instrumental player.
Examples include working on our own to create application solutions for our customers by augmenting combustion engine products with battery or solar alternatives to significantly reduce fuel burn and emissions, or partnering with our existing network of world-class manufacturers to develop fully electric versions of products incredibly core to our rental fleets. Further, we're exploring new ideas that are out there to include exciting startup manufacturers in the portable battery space, which works to augment today's diesel engine portable generator, or a lithium battery
design and packaging company with aspirations to produce replacements for internal combustion engines in a broad range of products in the marketplace today. We are investing time, equity, and in the end, CapEx in businesses such as these. It's engagement, like I've described, with existing and new manufacturers that is required to build scale, which in the end is a requisite for sustainability.
Moving to the far right of the slide, we've listed some of the leading and more notable areas of market demand where our customers are eager for solutions. These are not likely to surprise anyone, as many of the leaders in the markets identified are large technology-rich companies or operators of large networks of facilities or leading film and live events firms who are, as you would expect, highly focused on being green. A notable point, however, is the last one relating to federal and state-funded projects. We expect there will be emissions-related requirements in some way, shape, or form to be attached to this very large area of future spend, most notably as part of the new
infrastructure package. Yet another reason why we believe the spend that does flow through to rental will indeed favor the larger, more capable companies like us. The overarching point of both sides of this slide is that with our scale, resources, and intellectual capital, Sunbelt is a capable and necessary partner in innovation, both in the advent of new products and working with our customers to achieve their carbon reduction objectives. Moving on to slide 21. As mentioned in our guidance, we've increased modestly our CapEx investment in the year, driven by strong
demand across our business units. The increase comes largely in rental fleet in the U.S. and with some addition to support the underlying increased activity in the U.K. beyond the Department of Health work. Accordingly, our full-year gross CapEx range is $2.2 -$2.4 billion, with proceeds from used equipment sales reducing the gross plan by $400 million.
Given the supply constraints we've addressed throughout this update, we'll certainly flex or delay disposals as necessary while constantly monitoring new fleet landings availability and, of course, demand. This leads into capital allocation on slide 22. Throughout the half, we've invested $1.2 billion in existing location and greenfield fleet additions and a further $428 million in bolt-ons. We've returned $209 million or GBP 151 million to shareholders
through buybacks in the first half as part of our two-financial-year plan of up to GBP 1 billion in buybacks. To conclude, let's turn to slide 23. This has been a really good first half. The momentum in the business is incredibly strong. The existing demand will be compounded with the known and forecasted activity that we believe will lead to activity levels leading to a strong market for our business for the years to come.
Sunbelt 3.0 is advancing at a pace better than planned, and our remaining roadmap is incredibly clear. The most tangible areas of execution are the addition of 58 locations in the Q12 of our three-year plan and the addition of our 10th specialty business line, hitting the mark on our first two actionable components to advance our
market clusters and amplify our specialty business. The bolt-on pipeline remains very active with potential, giving us great optionality to further supplement our organic growth. Our balance sheet has never been stronger or more efficient, having improved both our fixed and variable debt positions, invested heavily in all our capital allocation avenues while still remaining at the bottom end of our leverage range. For these reasons, and coming from a position of ongoing strength, improved trading, and outlook, we look to the future with great confidence and expect full-year results to be ahead of our previous expectations. With that, we'll now turn the call over to Q&A operator.
Thank you. If you would like to ask a question, please signal by pressing Star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press Star 1 to ask a question. We will now take our first question from Andrew Wilson from JPMorgan Chase & Co. Please go ahead.
Hi. Good morning.
Hi. Good morning, Andrew.
Hey. Thanks for the attention to the detail. I've got three questions, or maybe I'll take them one at a time. You mentioned a few times the M&A pipeline obviously is, or continues to be, very strong, I guess. The rate seems to have picked up pretty significantly in recent months. I guess my question is around, firstly, are you seeing more
consolidation in the industry more generally? Secondly, can we expect this kind of higher run rate to continue, or is there some sort of element of catch-up in terms of a slower period last year and therefore sort of a bit of a pent-up demand almost in terms of the deals you wanted to do? Just interested in terms of the cadence you might expect over the next couple of years.
Yeah. Sure, Andrew. I mean, I think, first of all, you'll remember in Q1, we would have signaled that the pipeline was pretty robust. We had a slower—I think it was $130 million in deals we closed in Q1, and obviously, you've seen that ramp up. We attempted to signal, if you will, that that was coming. There's been definitely a few accelerants that are out there. One, you just have that notable absent period during the earlier days of the pandemic where there wasn't anything really going on. There was definitely a degree of, let's say, incentive, if you will, in the minds of owners when it came to potential tax code, particularly surrounding capital gains treatment.
Frankly, I was expecting that there would have been a bit of a pause when it looked as though—and this is about 60 days ago now—that capital gains were likely not to change. Of course, they have not as a result of what is out there presently in terms of being proposed. Really, it has not. The deals that have come across or, in many, many cases, remember, many of, more than not, of our deals we do are shoulder taps. These are relationships we have been building for years with businesses. Ultimately, we get to a point of it takes a buyer and a seller to agree to progress. Long-winded way of saying, yeah, the pipeline is still strong. I do not know how different, really, 2022 will be to 2021.
It seems active at the moment. To your point about broader consolidation, yeah, there is. We've seen some others get into a bit of bolt-on space themselves, which is all perfectly fine. I suspect—I wouldn't bank on my suspicion here—but I suspect we'll see some maybe bigger M&A that happens in the year to come out there. This industry will
consolidate. This industry is primed for that and ongoing consolidation for so many reasons, whether it be the technology required, the supply constraints today that are required where bigger companies are just more capable of dealing with it, infrastructure plan when it comes to the green aspect of what I've talked about. Again, Andrew, long-winded there, but I hope that gives you some necessary color.
Yeah. No, very helpful. I guess secondarily, I wanted to ask about just, obviously, equipment availability. I mean, it strikes me that given the momentum in the business and sort of, as you outlined, the outlook that you're kind of looking to, given that US non-rescue spending is still somewhere from fully recovered, it seems the biggest constraint that you have in terms of the CapEx spend at the moment is availability of equipment. Clearly, that has
some positive advantages for you in terms of the market. What sort of indication, I guess, are you getting in terms of your sort of FY2023 when we think about CapEx for next year? I'm not expecting you to guide, but I'm interested in terms of, are you beginning to get the indications from some of your suppliers that you're able to book up the slots that you need and that the availability is going to be there?
Yeah. I mean, look, you've flagged such a vital element of what's going on in the markets today when it comes to supply constraints. I think I would make, I will make a statement around markets are strong, and we think shaping up to be stronger, both in terms of physical end markets and the dynamics affecting rental. And those dynamics I'm talking about around demand levels, supply constraints, labor scarcity, inflation, etc. In a way, it's the perfect storm that we think we were purpose-built to solve. So it is indeed a tailwind. Now, how do we manage it? Just as we have been doing. Our fleet team is working with our partner manufacturers for orders and build slots out to 2024. We are
working all the way through the 3.0 timeline. What sort of signals are we getting? Yeah, I'm not here to guide CapEx for FY23 because Michael wouldn't like that, but it's going to be a lot bigger, I would say. We are working with our OEMs to secure significant tranches of their supply. We are in rationary times, not irrational or rational. I mean, rations. Companies like ours—and look, there are a few others who will do really well in this regard—will be working hand in hand with manufacturers on these supply chain challenges. There is—one could argue time utilization today in the industry is probably on the topy side. It's a bit higher than you'd probably ordinarily like to operate, or at least
we would. I won't speak for others because I think we would be taking even more share, perhaps, if ours was just a bit lower. The way that you do that, of course, is you add more fleet and you dispose of a bit less. Anyway, rest assured, we will navigate the challenges and we will get, as I've said before, our unfair share of that allocation. We have instances, literally, of manufacturers where we are taking 100% of their full 2022 allocation. There is a solar light
tower manufacturer. We will buy 4,500 of their light towers in 2022, which is 100% of their production. Michael often—you heard Michael talk about investment-grade debt offering. Do not underestimate the impact of our balance sheet in terms of the credentials, if you will, in these times when manufacturers are looking at who they are picking from an allocation standpoint and the consistency and duration in which we are looking out, as I said, into 2024.
Would be very helpful. Final one, which is very quick, and I suspect it's one for Michael. Just looking at the receivable days, look to have increased, I think, to 52 days from 45 kind of in the equivalent period in the prior year. Just interested if there's anything, I guess, to read into that or anything specific happening there.
No, nothing to really read into it. A couple of factors, in part, volumes were very strong in the second quarter. If you take the US, there's quite a bit of work for the hurricanes in there, which invariably that work does take a little bit longer for settlement. In the U.K., our U.K. tends to be distorted by payment patterns with the NHS. Our regular billings—or our billings are regular, our collections are not quite so regular as we jump through hoops in getting things approved. It all gets collected eventually. It's just a timing aspect. No, nothing really to read into it.
Great. Thank you both for all the detail. Appreciate it.
Thanks, Andrew.
We will now take our next question from Will Shaw from Jefferies. Please go ahead.
Thanks very much. I've got three questions as well, if that's okay. The first one, I just wondered if you could give us the trend on rental revenue in the US for November. Secondly, just on the rate. I mean, utilization we can see is incredibly strong. Just wondering if you could just give us a bit more color on rate, whether you're sort of—you said you're sort of ahead of your internal budgets. Just be interested to see if any quantification you can give us there would be really helpful. And then lastly, just on cost, something Michael mentioned, I just wondered what you're pushing through on wages, particularly around the sort of skilled technical side, I think. Thanks very much.
Sure. Good morning, Will. November was 19-point something % year-on-year on a billings-per-day basis, so closer to 19% than to 20%. I've forgotten the exact point there. Your question on rate, you'll remember in the year we would have come out initially anticipating a full-year rate improvement of 1%, which would have meant, in pure simple terms, if you would have straight-lined that, you would have ended the year 2% higher than you started, so you'd have an average of 1%. At Q1, we upped that, and we said that we were more in the 3% on average range. If you look at our increased guidance today, I would compartmentalize that in three areas. The first and largest contributor to
that would be the increased pace and timing of bolt-ons. Obviously, that's going to be a contributor. Second and third are probably tied, if you will, in terms of contribution of that growth between underlying activity and rental rate improvement, even better than we would have anticipated. Now that three is 3-point something on average for the full year. We will see how that goes. We are confident. John and the team, who many of you know, are doing a great job in leading that. It is an interesting time of year because a lot of our rate gains have come from the more spot or transactional sort of customers who are less fixed-priced, if you will. We are coming up on, at the end of this
calendar year, a natural expiration of a relatively large portion of our fixed-pricing agreements. Our success has been similar with those as it has been transactional. We are not discriminating between large and small customers here. We're increasing rates across the lot. That's going to give us some momentum as we make the turn of the year. That's the rate piece. Cost, when it comes to inflation, yeah, it's everywhere. It's outside haulers. It's wages, as you pointed out. Some will remember. I am on record for saying very early on in all of this that I don't think that this
inflation is transitory. I think it's going to be here for a while. I'm probably leaning closer to right than wrong on that right now because it's already been some time. I think we're going to continue to see that from a wage standpoint, particularly in skilled trade. It's something that we're ahead of on. As you'll remember, we had a 2% increase for all of our skilled trade back in October of 2020 when the world felt a lot different than the world feels today. We did a
further 6% in June across the entire business. You're talking about a compounding there of over 8%. We have discussions ongoing as to when we think the next time is for that. We are perfectly fine because it's another one of those perfect storm elements I sort of mentioned when answering Andrew's questions. Does that cover your questions, Will?
Yeah. That's perfect. Thank you very much.
Great. Thanks, Will.
We will now take our next question from Annelies Judith Godelieve Vermeulen from Morgan Stanley. Please go ahead.
Hi. Good morning. Thank you for the update. Just a couple of questions from me as well. Firstly, on clearly, both the greenfields have seen very strong execution since your CMD in April, but as has the M&A pipeline. I'm just wondering if you could comment on the strong M&A activity, which sounds like it will continue certainly over the coming months. Will that have any bearing on how many further greenfields you plan to do, or is it more likely the case that the additional M&A will be on top of the greenfields, i.e., your target of an additional 300 stores could actually be a lot higher by the time the end of your three-year plan rolls around? Secondly, just a comment in the
statement on fleet deliveries being delayed by supply chain constraints. I assume that's more to do with transportation and freight and shipping and so on rather than the OEM supplier side. I'm just curious if you've got any visibility as to how that will develop over the second half in terms of actually being able to get that equipment onto your yards. Lastly, a quick one on the U.K. You mentioned also in the presentation that you'd seen an incredibly diverse mix of U.K. customers and the most varied that you'd ever seen. I was just wondering if you had some examples of newer customers or end markets that perhaps you hadn't anticipated. Thank you.
Sure. On the greenfield piece, the easiest way to answer that is all along we say with our bolt-ons that they will augment but add to our total location count. I mean, you said a lot I did not say, a lot higher than the 298 we had said, but it will be higher than 298. In the nature of the markets today, you just have to be working very far out to get greenfields done. Our team is literally working on calendar Q1 2023 greenfield site selections, leases, etc., right now. That is what you have to be doing.
In the end, as I said, I think the headline is, "Look, bolt-on activity will continue as a core part of our strategic growth plan." We will, in some cases, find a bolt-on that takes the place of a greenfield, but most often it's kind of an augmenting but mostly adding. In terms of fleet deliveries, I'm not so sure your characterization's right. I mean, it's
less look, there are transportation issues. When a whole good's built and it's ready, yeah, is it a bit longer than it would have been in periods past to go from the factory loading dock to a Sunbelt location near you? Yeah, it's a bit longer. That's not the problem. Rest assured, we are the 14th largest commercial truck carrier in North America. I've got trucks. We'd send them to go get the gear if we had to. It's not that.
It's really more downstream, so to speak, with suppliers in general dealing with their component parts, their own labor issues, etc., is the real logjam there when it comes to our whole goods. Your point about the sort of shipping, trucks, etc., is probably more when it comes to parts. So the parts to actually repair and maintain, but that wouldn't
be the whole goods. This part of it, we will progress. Yes, we've had some late deliveries. Those deliveries for this year will catch up, hence our ability to increase CapEx, $200,000,000 on the low range, $100,000,000 on the high end of that. Moving on to U.K. customers, yeah, it is. It's incredibly diverse. I'll mention a few things. First of all, first time in our history successfully, we are working transatlantic to close deals with very large customers.
Those very large customers in the U.K., like in the U.S. and Canada, are customers like I have mentioned before when I read off the categories of our top 10 customers around warehouse distribution, fulfillment, entertainment customers, remediation customers. Some of the customer wins we have made, we have made jointly, and it has
gone both ways. We have had great relationships with U.K. companies that are translated into U.S. wins and great relationships with U.S. companies that are translated into U.K. wins. Generally, I would say this: they are companies that are focused on, my example of diversity, facilities, maintenance, events, and response efforts has been high on the list, which we are very happy to see. Does that touch on all your questions, Elylise?
Yes. That's very clear. Thank you for the clarification.
Sure.
We will now take our next question from Neil Tyler from Redburn. Please go ahead.
Yeah. Good morning. Thank you. A couple more from me, please. Firstly, Brendan, back to the topic of M&A, and I just wanted to ask you for some insight into the sort of what is prompting some of those businesses to sell up now, given the strong outlook that you mentioned. I understand that the tax situation might have been a consideration. Particularly with something like the Mahaffey business, what prompts a 100-year-old family-owned business to sell to you at this stage when you've already got a good collaboration?
The second question, more specifically looking at some of the data on the slide 16 that you provided, and I understand that they're not your forecasts, but it seems that there's a divergence in the out years between construction growth forecasts and rental market forecasts, which I wonder if you'd like to provide an opinion on because it doesn't seem to square with the way you've described the outlook for the rental industry. Thank you.
Sure, Neil. I'll start with the second. Yes. I agree with your characterization of slide 16 when it comes to rental market growth. What can I say? They're laggards. They're behind. I think I'm more right than they are. That's going to grow. If you just look at what's embedded in that and you start talking about infrastructure package that obviously has come
on, that's not taken into account rental penetration gains. I am sure of some things, but one I'm extraordinarily sure of is rental penetration is gaining. It's gaining in core products that we've always had, and it's really, really gaining in this journey from fully diesel or internal combustion engines as we move into electrifications, which we've got some great examples of, which I won't get to unless asked. I think that will grow.
Time will tell, I suppose, in terms of what those forecasts are. When it comes to M&A, why? Which is always a great question. I mean, the most common answer to that question is, you're right. I mean, you look at Mahaffey. What an extraordinary company and 100-year history. It's worth noting with Mahaffey, they've grown considerably just in the
last 10 years. And a lot of that has been partnering with businesses like us in collaboration in order to win contracts, whether it be government-related contracts or large event contracts, etc. The key thing is, generally, they are good businesses, highly profitable businesses, but they really can only grow so much as they're willing to invest further. So oftentimes, that's what it is.
The potential for the business is larger than either they can or they're willing to invest personally in things like CapEx, technology, etc., in order to grow it. That is definitely continuing to be the case. I mean, there are times when you have other circumstances where no secret or surprise to anyone, some companies were hit on some hard times during this pandemic, and everyone doesn't have the diverse markets and customers that we serve. You have some
businesses who, in some cases, even though we're in these supply-constrained circumstances, were underutilized because their channels for service were far narrower. I'm going to answer a question that you haven't even asked, and I'm surprised that it hasn't come up. What are the multiples looking like? Rest assured, the same. You'll all remember Kurt Kinkle.
Kurt would have presented also during the capital markets, and we would have covered a decade's worth of bolt-ons and the multiples in which the output was. It is the same, which is, I think, incredibly encouraging. We have this nice mix between general tool businesses and specialty businesses that we have done throughout these 14 through
the printing today. It is interesting when you look at individuals in between, there is an instance or two of what I call EBITDAC, earnings before interest, taxes, depreciation, amortization, and COVID. There are some instances where you have a bit higher multiple on one, but still, when you put them all together, it is the same as what it has been. It is interesting times out there, and the team that is engaged with so many business owners is doing a really, really great job. I think Neil's dropped off, operator. We can go on to the next if you have one.
We will now take our next question from Arnaud Lehmann from BofA Securities. Please go ahead.
Thank you very much. Good morning, Brendan. Good morning, Michael. Three, hopefully, brief questions on my side. Firstly, the upgrade on the fully-add guidance, as you mentioned, is driven more by the bolt-ons rather than the rental rates. What are the implications for the drop-through rate? I'm assuming that these bolt-ons, at least initially, are a little bit less profitable than your ongoing operations. That's my first question. My second question is more, I
guess you've answered to some extent, but rental rates are increasing, and as you highlighted, availability is hard to secure. You're saying that is supportive to rental. If rental is getting more expensive and you can't find the equipment, then maybe at which point is there a risk that ownership could become more attractive, maybe a bit of a reversal? I'm sure you will disagree. Lastly, if you could just remind us the impact from the potential closure of the U.K. testing sites in spring next year. Thank you.
Michael, why don't you take one and three?
Okay. If we take on where we've always said in the U.S. that drop-through would be low 40s this year, and certainly on the one hand, you might think rates would help improve it, but by the time you say the bolt-ons that we tend to do, they tend to not be as profitable and have the same margins we do. It will be a drag on drop-through, which puts us up in the low 40s, keeps us where we've said we'd be from the outset.
In terms of where Brendan would have prefaced it on testing sites and where we are with variants, as we stand at the moment, the direction of travel is we're expecting the testing sites that we've got to significantly reduce and very quickly from spring next year onward, so sort of the May, April timeframe, such that there'll be a handful left as we go through into FY2023. With what we've seen over the last week, the whole environment is fluid. That's what we're expecting at the moment, but it wouldn't surprise me if something doesn't change at some point over the next three to six months.
On the second one, I should say you said you would ask the questions briefly, which you did, and Michael is certainly better at brevity than I am. Your second one is an important question to understand. Yes, rates will go up. Our rate sequentially from March to October is our best-ever sequential rate movement over that same period dating back to 2011. It is moving as it should. Remember, we are also seeing the whole goods aspect to a degree of inflation, not at the pace of the rental rates, but nonetheless, it is there. Rental is one small part of that equation, the pure rental itself. I mean, think about everything that surrounds the decision to buy or rent a piece of equipment. It is the trucking. It is
the skilled trade required to maintain and repair the assets. It's the technology required, increasingly so, to maintain and repair the assets. It's the technology required to understand where it is, what it's doing, what it's going to do next. That is so instrumental in all that. When you really look at that same slide 16 that we'd have the question on when you look at rental and is it forecasted right. Look at it like this. We talk about it oftentimes. If you look at slide 16 and you look at, say, calendar year 2022 in the top right there, you'll notice we have construction excluding resi. We have non-residential construction in 2022 forecasted put in place to be $499 billion. You have non-building, so
construction, but it's non-building construction, utilities, etc., 301(c) of $800 billion. The rental industry forecast is $52 billion. $52 billion on 800, that's 6.5%. What that kind of tells you is now, obviously, there is more than construction the industry serves, not as diverse as we are, but let's just say 75%-80% of what the industry overall serves is construction. You get to something around about 5%, let's call it. My point there is all rental, according to
these, to fulfill these projects, it's 5%. It goes really far down the list and carries many more complexities than almost any other element when it comes to construction, and the same thing could be said for facility maintenance, etc. You were right. I would disagree with your ascertain. Also remember, this ship sailed. When a business makes a decision to go from ownership to rental, all those component parts go away over time, and it's very, very difficult to go back. Our job in the whole thing is to give our customers incredible service, and we won't have to worry about that. Rental penetration will continue to grow.
That's it. Thank you very much.
Thank you.
We will now take our next question from Rory McKenzie from UBS. Please go ahead.
Morning, Rory. Just two from me. Firstly, again, just on this tight fleet supply and that industry utilization that you said maybe is on the top of your slide already. Can you talk about just when that could change? Appreciate your taking an outside share and have great relationships with the OEMs, but do you know what they're saying to the 65% of the market outside the top 10 players? When are they promising orders to the rest of the market? In your experience of
previous fleet cycles you've seen over your many years in the company, does the industry tend to risk over-investing or supply overshooting in times like this? Secondly, on the bolt-on M&A, as you said, the multiple is probably a key part of the why as well. Given rental rates are going up, almost why haven't the multiples gone up yet in the industry? Appreciate you guys remain super disciplined, but are you having many conversations where you just don't get to a price agreement at the end? Thank you.
Thanks, Rory. I'll take your second one first because it's pretty easy. I mean, there are some deals that happen out there that we don't make it to the table to. It's not many, but it does happen, and we just deal with that. To your point, we've got our pretty regimented way of going through these things, and that's just the way that it is. When it comes to supply constraints, your question around that, I don't know what OEMs are telling player number 12. I suspect it is get in line in a very, very nice way. In general, you really have to look at your question about could we over-invest?
The short answer would be yes. The long answer would be really unlikely, and here's why. Remember, remember the flexibility we have. Refer to our appendix slide. I believe we have it in there. Yep, there we go. Slide 27. The tranches we have, we can always dispose of fleet. Regardless of what the end market fleet values are, we can always dispose of fleet. It's never a good idea to have too much fleet in your yard, too much. You want to have availability, the right amount of availability. More important, I think, is the lack of, I think it's becoming increasingly clear, and I think it will
become clearer to more as we move forward. There is not enough fleet in the market right this second, as I said. Our utilization, speaking for ourselves, I have no idea what our peers' time utilization is. Ours, I would say, is on the top end of how we like to operate for all the reasons that I've mentioned before. There's a $100 billion fleet in the industry, plus or minus, right?
We've got our 11 and some change, so that's our kind of share as it translates. My rough math is the industry needs $3 billion-$5 billion more fleet right now for current activity levels. When you look at the Dodge Momentum Index on slide 16, on what's coming our way, the compounding activity on top of the activity that's out there today, I've got numbers behind all this, figures, so this is not just back of napkin. I think there's another $5 billion in fleet needed in terms of growth fleet. If you look at the same sort of math I walked through in an earlier question when it comes to the infrastructure package, remember the 5% of construction that finds its way into rental. Let me be uber
conservative here and say in the infrastructure-related construction, remember the bill passed $1.1 trillion. $550 billion of that $1.1 trillion is really just a carry forward of existing levels of activity and infrastructure funded by the federal government. Then of the remaining $550 billion, throw away $150 billion because it's other stuff not relating to construction. You have $400 billion left that's related to construction. Let me be conservative and not use 5% and
use 3%. That's $12 billion of revenue. If that is put in place over the course of six years, that's $2 billion a year over the course of six years. That's $5 billion in fleet you need. I've just said the industry needs $13 billion-$15 billion more fleet on top of $15 billion in replacement fleet. The manufacturers have to make something like $30 billion in fleet. As I said, the market is strong, and we think it's shaping up to be stronger.
I like our odds when we are positioning with our manufacturers in a market like that. I hope that adds some color, Rory. We are going to be in this period for a while. This is not an inflection point. This is an inflection period that is going to go on for a while.
Yeah. As you said, that's a lot of billions to arrive before this really gets classified as transitory, right? I understood. That's really helpful. Thank you.
Great. Thanks, Rory.
We will now take our next question from Rahul Chopra from HSBC. Please go ahead.
Hello. Good morning. Thank you. I have a couple of quick questions. In terms of your guidance for FY22, could you tell, I mean, is it maybe strictly inorganic, that is bolt-on? And does it include any potential and any beyond $320 million that you are considering for GST? That is the first question. Second, in terms of operational gearing for next year, given the additional acquisition, should we expect some asset price inflation? How should we think about operational gearing versus rental rates due to higher acquisition? Thank you.
I'm going to do my best there because that was a really bad line. I think your first one was the guidance between organic and bolt-on. We don't break it out between organic, same store, etc. I'll just use the same bridge I did before. If you take the previous guidance to the new guidance and you put a 4% delta there, whether you pick the what was 16-20 on the high end or you pick your midpoint, whatever, the largest contributor of that will be bolt-on because of
the timing and pace of that bolt-on being largely Q2 and ending Q3, as we've said. The lower contributor of that's going to be an even mix between rate and underlying activity, part of which is hurricane activity in the quarter. Your second one, I thought I heard the word inflation, but I really didn't get it. Unless you're on a clear line now, were you talking about inflation for equipment for next year?
Yeah. Basically, my question is operational gearing implications given the asset price inflation and rental rates. How should we think about operational gearing given the higher deficit next year?
Rahul, I would go back to sort of what we said at the capital markets day whereby we thought over the course of 3.0, then drop-through rates would probably be in somewhere in the 50s, but this year it would be low 40s. It would improve next year, and it would improve the year after. That is where you see the operational gearing coming through, and I think that is probably the easiest way to explain it.
Understood. Okay. Thank you.
We will now take our next question from Dominic Edwards from Deutsche Bank. Please go ahead.
Thanks for taking the question. Apologies. I dropped off earlier, so if you've answered any of these before, then please say so. Just in terms of the yield management, firstly, how should we think about what you've done so far? Is it effectively taking up low rates? If you're sort of a scatter chart, as it were, of what the rates are, what they have been, and where you are now, do you feel that it's basically just been getting the low end up, or have you got basically the whole sort of the whole distribution up? Secondly, I mean, it does look as though, as you say, you put up your spot rates by quite a bit. In the market, you are quite a bit ahead of the market now, particularly given some of
your peers haven't moved theirs. Are you a little bit limited now in terms of what you can do in that regard? Just a second question regarding contracts coming up. I know there's the big federal government framework contract coming up for renewal next year. Are there many other sort of major contracts or anything like that we should be thinking about going into next year where there'll be potentially some price resets? Thanks very much.
Yeah. Sure, Dominic. To address your first one, which is a really good question, if you were to look at our dynamic pricing system we have and the models and algorithms underneath, it obviously touches on just that. If you think about it like this, if we have a grouping of customers within a certain size, let's just say, that have a group that are in our top decile of rates presently, and we have a group that are in our bottom decile of rates, our systems are going to put out a price increase higher for those that get lower rates today and still move them forward, but somewhat lower for those that pay a higher rate in that same spectrum. That goes across the gamut.
Regardless of what one of these customer groupings, if you will, that we're looking in, that's the mechanism of dynamic pricing or one mechanism within. In terms of your contracts, first of all, I would have answered a question previously. A lot of those fixed price contracts, not all, it's something like 60%-65% of all of our annual priced customer agreements expire at the end of the calendar year, so we're coming on to that time. All that work's been done, obviously. It's already the 7th of December, so that work's been done. It's all been agreed to. It will take effect January 1st. We will see that. We have been across our customer grouping of progressing rates. When it comes to
big contracts that affect us, remember, we don't have a single customer that represents 1% in revenue. It does not really, your question there that you are going for there does not matter. We do not have a 10% of revenue customer who there is a big contract renewal or negotiation coming up with. What we do have, I can tell you, is a big list of large, large projects that are coming up, whether it be data centers, warehouses, distro, fulfillment, auto. I mentioned
EV auto manufacturing specifically, FEMA parts, airports. Those big, big projects are going on now, but also new starts coming our way, as you see in the forecast. We are negotiating those agreements in many, many cases for onsite agreements during these times where there is inflation in the market. It is a favorable time to be negotiating big, large, long-term projects like that as well.
Great. Just to follow up on the points about I know it's a bit difficult for you to discuss what your competitors are doing out there, but I mean, what do you get the feeling is going on in the market, as I said, from what we can see? It doesn't feel as though maybe they've been as proactive as maybe you've been. Is that an unfair comment to you?
Yeah. I mean, you're exactly right. I mean, look, we have the data through Ralph. Let me say it this way. Look, some of our competitors are doing a look, they do what they do. They're doing a great job in terms of making sure that rental rates are advancing the way that they should in an inflationary environment and a supply and demand environment like it is. There are some that are doing really, really well. It seems odd to say, but we would commend them in that. When we look at our information from the sources that we have, yeah, we see the delta growing, not shrinking. How
far can it go? That's a good question. We are comfortable at and a bit higher than we are today in terms of our delta to the market. When you look at the broad range of products and services that we offer, the significant amount of fleet we're landing this year, the significant amount of new fleet we anticipate will land in the years to come, it's very hard to get an exacting answer on that. Others that aren't following yet will follow. They will. As everyone knows, it's still a very fragmented market out there. Sometimes it takes a while for others to catch on, particularly when you look at some of the independents who were a bit more shell-shocked, perhaps, of what happened during this pandemic.
Thank you very much. Much appreciated.
Yeah. Thanks, Dominic.
We will now take our last question from Zohar Sani for Rani C from Goldman Sachs. Please go ahead.
Hi. Good morning. Thank you for taking my questions. I'll try to be very brief here. I just wanted to get some more color on the temporary structures, the new line that you've added in the specialty space that you mentioned a couple of times. Can you please tell us why this is an exciting line to be in? Anything on market size, opportunities,
and anything on the competition here? Is it larger players or just smaller players here? The second one, apologies if I missed this earlier. I know you've spoken about drop-through, but I guess the concern in the market has been generally around wage inflation in the US in particular. Is that something that has generally surprised you negatively or not really? Thank you.
Yeah. I'll take the second one first. Wage inflation, yeah, we talked about fall-through. We guided to this at the capital markets day, April 20, far earlier in the year. It is a combination of both the inflationary environment we're in, some costs that were not in the business coming back into the business over the pandemic, as Michael has described well. Remember, it is also investment in our growth that we so clearly flagged with 3.0 that is impacting this year in particular. We will improve in the next two years of 3.0, so that will go. No, nothing surprising around wages and some of the other. It just becomes something that you understand and you learn how to absorb, as we have been
doing. Yeah. Your question about the temporary structures business, how do I describe it best? This is what the business does. It does small to very, very big temporary structures. Do not be thinking like pop-ups at a backyard birthday party. They serve events. When I say events, I do not mean like tented event companies that you would be used to. These are big events, whether it be live events or it be events that happen in the marketplace, industrial
MRO, distribution, storage, military, and more. These are steel frame structures that have fabric shells. I am not going to get into on the call now the market sizing we have done. Many of you will remember slide 44 from the capital markets deck. Ultimately, you will see that. We will size the entire market for you and what our ambitions for growth are. It is a very fragmented market as well, so there are lots and lots of independent players that are in space. The key to it really is this.
It's what's inside and around these structures that is the great opportunity to better service our customers, aka the revenue synergies. The power, the heating, air conditioning, the air quality, the ground protection, the material handling, the lighting, all of these things that are a virtual Sunbelt Rentals catalog are what they are.
Got it. That's very helpful. Thank you very much. There appears to be no further questions. I'd like to turn the conference back to the host for any additional or closing remarks.
Great. Thank you all for all of your time this morning, and we'll look forward to seeing some in the weeks to come.