Sunbelt Rentals Holdings, Inc. Morgan Stanley's 14th Annual Laguna Conference
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Literally. Yeah. All right, perfect.
Good afternoon, everyone, and thank you for joining us. For those that don't know me, my name is Angel Castillo, and I'm the U.S. machinery and construction analyst here at Morgan Stanley. It's my pleasure today to have Brendan Horgan, CEO of Sunbelt. Thank you for joining us.
Great. Thank you. My pleasure.
Yeah. Good afternoon. Well, before we get started, just want to read a quick disclaimer.
For important disclosures, please see the Morgan Stanley Research disclosures website at www.morganstanley.com/researchdisclosures. If you have any questions, just please reach out to your Morgan Stanley representative. With that, Brendan, we'll just dive right in some of these questions, I guess.
Sure. Maybe a good place to start.
At CMD, earlier this year, you kind of laid out the next phase of Sunbelt 4.0, and the fiscal year 2029 framework. Just following the strong performance, particularly that we've seen in this past quarter, very recently last week, just which elements of that framework would you say now look a little bit more conservative, or where do you still see perhaps execution risk around that?
Sure. So maybe just to level set, we had our March CMD, which was just a two-year update on our Sunbelt 4.0, which is a five-year strategic growth plan. What we did was we sort of gave illustrative targets for years three through five. In particular, really, let's face it, we're one quarter now through what we would've updated on, and you're asking were we conservative. But look, we had a great quarter in the business. We had record revenue, record adjusted EBITDA, record operating profit, record EPS. So it was a great start to the year. What's important to understand about that was the momentum was really broad. We saw strength in our gen rents business growing at 7.5%. That's compared to last year Q1 of 1%. Specialty business growing 25%, which has just been a real growth machine for years and years now.
We saw it frankly, across multiple segments: construction, non-construction, mega project, local non-res stability, which I'm sure that we'll talk about. In terms of what to be on the lookout for, so to speak, I would just really say that local non-res market. We've taken into account the momentum in our guide. We increased our guide by 2% in rental revenue and sort of the rest all the way through. Local non-res now, we're 16 months of stability there. I would characterize that local non-res market as good demand with stability and good supply and demand. If we were to see, we're not calling it in any way, shape, or form, but if we were to see an inflection point in that throughout the year, I think you'd see even more growth.
No, that's very interesting. Maybe just digging a little bit first with the kind of longer-term targets, right? To your point, it's super early on, so definitely appreciate that there's a lot that is still to come. But maybe to that point, the 200 basis point margin improvement. For fiscal year 2027, the margin side is expected to be a little bit more flattish. Could we just talk about the bridge in terms of how much, as we think about that 200 basis points through your outlook, how much comes from perhaps rate versus SG&A leverage, fleet productivity, branch maturation? Just when should we kind of expect and the cadence of that margin improvement over the- Sure.
Let's look at the Q again, and remember, we're talking about EBITDA margin.
Yeah. Because we did say, and we have not only conviction, but a path to improving EBITDA margin by +200 basis points over the course of Sunbelt 4.0.
We expect that to be year 4, year 5 rich, make the turn this year. I want to remind you that the growth that we saw in Q1 actually was accretive to operating profit margin. So we saw a 60 bip improvement to operating profit margin in the quarter. What are we doing from an EBITDA standpoint? Most of them, you answered in your question, but we're doing the things that we've been doing. Leveraging SG&A, driving time utilization, efficiency, leveraging rental rate, and the progression around rental rate. Focus on areas like delivery cost recovery. These are all core to actionable component number 3, which we called performance in Sunbelt 4.0.
All that we're doing, notwithstanding the fact that we're seeing ancillary growth 2x that of pure rental revenue growth in the business. But you again see that that's accretive to ROI and EPS.
Yep. No, that's very helpful. I think another area as part of this is ultimately just how much further you can kind of push utilization structurally to improve as the network gets denser, and just how material that can be as part of the 200 basis point margin ambition. As an overlay to that, I feel like there's been a lot of discussions about how time utilization has been very robust or very strong so far in 2026. Just could you talk about kind of that ultimately?
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