United Rentals Q4 2022 Earnings Call Transcript

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Provided by Quartr
January 26, 2023

Key Takeaways

  • Record Q4 and FY 2022 performance: Q4 rental and total revenue rose 19% year-over-year, adjusted EBITDA grew 26% with a 50% margin and 65% flow-through, while full-year free cash flow reached $1.76 billion and ROIC hit a record 12.7%.
  • Ahern acquisition fully integrated: Closed December 7 and merged into United’s systems by December 16, immediately adding people, fleet and facilities to bolster capacity and market share.
  • 2023 financial guidance: Total revenue of $13.7–14.2 billion (≈20% growth), adjusted EBITDA of $6.6–6.85 billion, free cash flow above $2.1 billion, and gross CapEx over $3.4 billion.
  • Enhanced capital return program: Reactivating a $1.25 billion buyback (targeting $1 billion repurchases) and introducing quarterly dividends totaling $5.92 per share, returning about $1.4 billion in 2023.
  • Broad demand tailwinds: Construction activity up 19%, non-residential up 22%, industrial up 11%, specialty rentals +18%, supported by 35 new greenfield locations in 2022 and at least 40 planned in 2023.
AI Generated. May Contain Errors.
Earnings Conference Call
United Rentals Q4 2022
00:00 / 00:00

There are 10 speakers on the call.

Operator

Again, to all sites on hold, we thank you for your patience in holding. We ask that you please continue to remain on the line. Good morning, and welcome to the United Rentals Investor Please be advised that this call is being recorded. Before we begin, please note that the company's press release, Comments made on today's call and responses to your questions contain forward looking statements. The company's business and operations are subject to a variety of risks uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected.

Operator

A summary of these uncertainties is included in the Safe Harbor statement contained in the company's press release. For a complete description of these and other possible risks, please refer to the company's annual report on Form 10 ks for the year ended December 31, 2022 as well as to subsequent filings with the SEC. You can access these filings on the company's website at www.unitedrentals.com. Please note that United Rentals has no obligation and makes no commitment to or changes in expectations. You should also note that the company's press release and today's call include references to non GAAP terms such as Free cash flow, adjusted EPS, EBITDA and adjusted EBITDA.

Operator

Please refer to the back of the company's recent investor presentations Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer and Ted Grace, Chief Financial Officer. I will now turn the call over to Mr. Flannery. Mr. Flannery, you may begin.

Speaker 1

Thank you, operator, and good morning, everyone. Thanks for joining our call. Yesterday, we reported record 4th quarter results that capped the best full year financial performance in our history. We definitely raised the bar in 2022 and we intend to raise it again in 2023. We're moving forward with a larger sales and service team, A more expansive footprint and a fleet that's significantly larger than a year ago, and that's a lot of tailwind at our back in another year of high demand.

Speaker 1

I'll start with a recap of 4th quarter results, which kept us on a strong trajectory. We grew both rental revenue and total revenue by a solid 19% compared with Q4 last year. And we grew adjusted EBITDA by 26% With a 280 basis point improvement in margin, that brought our margin to 50% in the quarter and that came in at a very strong flow through of 65%. We also continued to generate significant cash. For the full year, we delivered 1.7 $6,000,000,000 of free cash flow, and that's after investing over $3,400,000,000 in fleet.

Speaker 1

And none of this would have been possible without our people. 1st off, as you know, our top priority is always safety. And our team delivered another 1st class recordable rate in 'twenty two Quality of Team United behind the results. For example, our revenue growth comes from keeping our customers front and center in the field. Our people are laser focused on helping our customers succeed.

Speaker 1

And our flow through comes from the team's ability to leverage our growth And maintain good cost discipline. Inflation was a factor, but that didn't stop us from delivering very good margins. We also reported a record return on invested capital of 12.7% at year end. And on the ESG front, The customer adoption of our new emissions tracking tool has been excellent. This is the technology we launched on our Total Control platform And it's an industry first.

Speaker 1

Another highlight of the quarter was the Ahern acquisition. And I'm pleased to say the integration is going very well. We closed the deal on December 7. And then by 16th, our new team members were already operating with the rest of the company on the same technology system. This means our branches are sharing fleet and customer information seamlessly.

Speaker 1

One of the main reasons we like M and A is the capacity we gain. And that comes in 3 forms: people, fleet and facilities. We always focus on the people first because it's critical to get that right. And we're really bullish about the talent we onboarded in this acquisition. We had over 100 of the Ahern managers at our annual meeting earlier this month, And they fit like a hand in glove.

Speaker 1

They're excited to be part of United and they're raring to go. Now we're focused on optimizing the fleet and facilities. We're running on schedule and it's boosting our resources at an ideal time to capture share. The diversity of demand that we pointed to a year ago turned out to be a major tailwind in our operating environment and that continues to be true. I'll share some 4th quarter data to underscore how we translated this opportunity into top line growth.

Speaker 1

Demand in our key verticals was broad based With total construction up 19% year over year and non res up 22% and industrial up 11%. We leaned into that opportunity across the board and grew rental revenue by solid double digits in all of our GenRent regions as well as all of our specialty businesses. Our Specialty segment delivered another strong performance with an 18% increase in rental revenue year over year. And it's notable that every line of business in that segment reported solid gain led by our mobile storage business. Our greenfield investments in specialty are highly strategic and they're targeted by geography and line of business to generate attractive returns.

Speaker 1

We opened 35 of these locations in the past 12 months and our plan calls for at least another 40 cold starts in 2023. That brings us to 2023. There are plenty of reasons to feel confident about our operating environment. We have terrific internal and external momentum with good visibility into revenue, and the team has done a great job of driving strong fleet productivity to help offset the cost inflation we've experienced. Contractor backlogs are growing and not surprisingly, The employment reports indicate that U.

Speaker 1

S. Contractors continue to be in expansion mode. Industry indicators like Dodge Momentum Index show healthy growth and this includes the planning trends for future projects. There's also a strong institutional component to the trends, Which we see in our business. A number of our multiyear projects are in sectors like healthcare and education.

Speaker 1

And the industrial indicators like the PMI still are hearing from improvement, but the construction activity in manufacturing is going strong. We're winning business on a wide range of new plant construction, including automotive and batteries, semiconductors and petrochem. And importantly, our own survey shows that customer sentiment remains strong with the majority of our customers pointing to growth over the next 12 months. One final indicator of market strength and an important one was at our annual management meeting. We had over 2,000 field leaders with us Houston 2 weeks ago and their take was extremely positive.

Speaker 1

And I'm throwing that into the mix because this is coming directly from people on the front lines. We took all this into consideration when we developed our 'twenty three guidance. And as you saw yesterday, we expect our revenue and adjusted EBITDA to hit new high watermarks, Including free cash flow of more than $2,100,000,000 while our return on invested capital should be another milestone for us. In addition to the capacity we carried into January, we plan to invest more than $3,400,000,000 in gross CapEx this year. And at the same time, we'll continue to take advantage of a strong used equipment market to optimize our fleet.

Speaker 1

Longer term, the outlook for our industry continues to be very favorable, driven by several tailwinds that we believe are largely independent of macro conditions. We've talked about these before, things like infrastructure spending, the Inflation Reduction Act and the return of manufacturing to North America, 2 important announcements we made yesterday regarding capital allocation. First off, we're reactivating the $1,250,000,000 share repurchase program that we paused when we announced the Ahern deal. We plan to buy back $1,000,000,000 of stock this year. And we'll also be instituting quarterly dividends for our shareholders, totaling $5.92 per share this year.

Speaker 1

These two decisions underscore our confidence in the durability of our cash generation and the strength of our balance sheet. And together, they'll return $1,400,000,000 of capital to our shareholders in 2023. So to come full circle, 2022 was a demand environment that threw the door wide open for a record year, and we ran with it. But to quote Babe Ruth, we also know that yesterday's home runs don't win tomorrow's games. So now it's onwards and upwards.

Speaker 1

2023 is officially the start of the next quarter century in business for United Rentals. And by all accounts, this will be another memorable year. So with that, I'll ask Ted to cover the results and then we'll go to Q and A. Ted, over to you. Thanks, Matt, Good morning, everyone.

Speaker 1

As you saw in the results we reported last night, the team did a great job delivering across the board, both in the quarter and for the full year. And importantly, as you can see in our guidance, we expect these trends to continue in 2023. Combined with the enhancements to our capital allocation strategy that we've announced quarter, we are confident that we will continue to drive meaningful long term value creation for our shareholders. I'll dig into this more in a bit, but first, let's dive into the quarter. 4th quarter rental revenue was a record $2,740,000,000 That's an increase of $435,000,000 or nearly 19% year over year.

Speaker 1

Within rental revenue, OER increased by $354,000,000 or 18.6 percent. Our average fleet size increased by 14.2%, which provided a $270,000,000 benefit to revenue And fleet productivity increased by a healthy 5.9%, which added another $113,000,000 This was partially offset by our usual fleet inflation of 1.5 percent or roughly $29,000,000 Also within rental, Ancillary revenues were higher by $81,000,000 or 23.1 percent year over year, while re rent was essentially flat. Outside of rental, 4th quarter used sales increased by roughly 26 percent to $409,000,000 as we sold some fleet we held back on selling earlier in the year. To help accomplish this, we've broadened our channel mix for used sales in Q4 to something closer to normalized levels. The net of this was our adjusted used margins increased by 9 40 basis points year over year to 61.6%, supported by strong pricing.

Speaker 1

Let's move to EBITDA. Adjusted EBITDA for the quarter was $1,650,000,000 another record and an increase of $338,000,000 25.8 percent year on year. The dollar change included a $291,000,000 increase in rental, within which OER contributed $256,000,000 ancillary added $34,000,000 and re rent was up 1,000,000 Outside of rental, used sales added about $83,000,000 to adjusted EBITDA, while other non rental lines of businesses contributed another $18,000,000 SG and A was a $54,000,000 headwind to adjusted EBITDA due primarily to higher commissions and the continued normalization of certain discretionary costs. EBITDA margin increased 2 80 basis points to 50.0%. Excluding the benefits of used sales, Flow through was in line with recent quarters at a healthy 59%.

Speaker 1

I'll add that within the Q4 results, in the roughly 3 weeks we owned Ahern, The business contributed about $54,000,000 of total revenue, the vast majority of which was rental and roughly $20,000,000 of EBITDA. And finally, 4th quarter adjusted EPS was $9.74 per share. That's an increase of $2.35 per share or almost 32 CapEx was $571,000,000 This represents an increase of $205,000,000 in net CapEx year over year, which positions us well for the growth we see in 2023. Now let's look at return on invested capital and free cash flow. ROIC was another highlight at a record 12.7 percent on a trailing 12 month basis.

Speaker 1

That's up 50 basis points sequentially and an increase of 240 basis points year Free cash flow also continues to be very strong, with the year coming in at $1,760,000,000 or a free cash margin of better than 15 All while continuing to fund growth. Turning to the balance sheet. Our leverage ratio at the end of the quarter was 2.0 times And finally, our liquidity at the end of the quarter was a very robust 2 point $9,000,000,000 with no long term note maturities until 2027. Now let's look forward and talk about our 2023 guidance. Total revenue is expected in the range of $13,700,000,000 to $14,200,000,000 implying full year growth of about 20% at midpoint And pro form a growth of roughly 12%.

Speaker 1

This increase is supported by the momentum we've carried into the New Year, particularly within rental revenue And the contribution from Ahern. Within total revenue, I'll note that our used sales guidance is implied at $1,300,000,000 With the expectation we'll sell roughly $2,000,000,000 of OEC. This 35% increase in used sales year over year primarily reflects two things. 1st is the normalization of our used sales as the supply chain continues to improve. And second, a substantially larger fleet, including the addition of Ahern to our business.

Speaker 1

We remain focused on efficiently converting this growth to our bottom line. Our adjusted EBITDA range is $6,600,000,000 to $6,850,000,000 On an as reported basis, Including the impact of Ahern, at midpoint, this implies roughly flat full year adjusted EBITDA margins and flow through of about 48%. On a pro form a basis, however, which we think is the more appropriate way to think about it, our guidance would imply roughly 80 basis points of margin expansion and flow through in the mid-50s. On the fleet side, our initial gross CapEx guidance is $3,300,000,000 to $3,550,000,000 with net CapEx of $2,250,000,000 And finally, our free cash guidance is $2,100,000,000 to $2,350,000,000 To be clear, this is before dividends and repurchases. Assuming these two factors are a use of cash of roughly $1,400,000,000 That leaves $825,000,000 of remaining free cash flow to fund additional growth or reduce net debt.

Speaker 1

Now before we go to Q and A, I want to make some additional comments on our updated capital allocation strategy, specifically around our plans to return excess cash to our investors. As you heard Matt say, we are very pleased to be adding a dividend program to our mix. Based on an initial yield of 1.5%, we to pay $5.92 in dividends per share in 2023. This will translate to approximately $400,000,000 this year Roughly 18% of free cash flow. We expect that our 1st quarterly dividend payment of $1.48 will be made on February 22nd with all four payments expected within the calendar year.

Speaker 1

Following the transformation of the company over the last decade or so, We feel that it's the appropriate time to add this last element to our capital return strategy to help drive greater shareholder value. Not only will this help expand the universe of potential investors, we expect that it will also provide another means of enhancing total returns for investors over time. We're also very pleased to announce the restart of our share repurchase program, which we paused in November with the announcement of Ahern. The restart is probably a bit ahead of schedule, but the integration is off to And the decision is well supported by the financial performance we expect this year. It's our intention to repurchase $1,000,000,000 of the $1,250,000,000 authorization In calendar 2023.

Speaker 1

As Matt said, these two programs combined should return approximately $1,400,000,000 to our shareholders this year Or about $20 per share at the same time that we continue to see substantial growth in our earnings. Finally, I want to be clear that these announcements are being made in the context of our continued commitment to a disciplined balance sheet strategy. Our financial strength has The company and its shareholders very well, and we're not planning any changes there. So with that, we'll turn to Q and A. Operator, could you please open the line?

Operator

We'll take our first question from David Raso with Evercore ISI.

Speaker 2

Hi. Two questions. One where there's some worry by investors and another where there's a clear cementing of a structural improvement On people's minds about the business model. First on the area of some angst, equipment availability, I think Matt you had mentioned earlier about maybe taking some market share Can you let us know what you're seeing and hearing regarding competitors and even include OEM dealers rental fleets in this comment? What are you hearing about their incremental ability to get equipment?

Speaker 2

What are you hearing about their adding fleet for the year? Just the overall availability From that side, and what are your equipment suppliers suggesting about increased availability versus last year? And then I'll follow-up the other question.

Speaker 1

Yes, sure. So we it's still a tight market. I'm hoping it will be a little better as far as delivery slots than we got last year, but we don't expect the supply chain to be fully back to normal this year. Maybe to the back half, but to be fair, I thought maybe the back half of last year would have and we still saw slippage. There's some niche products that are being quoted out The 2024, now that's the exception, not the rule.

Speaker 1

But I think that that's kind of underlies another year of some supply And we're mitigating that by, as you saw, we brought in some fleet in Q4, and you'll probably see us do A little bit more in Q1 than usual to make sure we're ready for the build season. And then from there, we'll adjust according to demand So I think it will still be a little bit of a challenge. I think our vendors work hard, David, to get us a fleet they did in 'twenty two and we think they'll work hard to get this number. I'm not seeing a remedy to the supply chain challenges.

Speaker 2

Can I ask one question related to what you just said? The Q1 a little larger than normal. I'm just Curious, just the cadence for the CapEx for the year, I'm talking gross, the 3.425 midpoint. Can you give us some sense of Cadence is and I know you pulled forward, but on the idea of roughly flat gross for the year, is The down quarter more the 4th quarter because of the pull forward in the 4th quarter?

Speaker 1

Yes, you would that's our expectations as we sit here today, David. What I really wanted because it's the one that we feel pretty sure of, is that you'll probably see us do more about 20% of our capital spend here in Q1 As opposed to maybe in a standard year, it'd be 12 to 15. And that pull forward is really just to get ready for the spring season Is that really what I was referring to? As far as the cadence for the rest of the year, Q2 and Q3 really will depend on how fast we're absorbing the fleet that we brought in as well as How well we're doing with the Ahern fleet. So we'll adjust as we had the past 3 years accordingly.

Speaker 2

That's pretty interesting. That's taken about 1,600,000,000 6 of fleet in the 4th quarter and the first quarter when you combine the 2. I assume you're seeing project backlogs that are really focused on we need this Equipment for certain projects, this is not a presumption of demand. I mean, is that just a pretty big Q1 number to follow the Q4?

Speaker 1

Yes, absolutely it is. And that is because we see the underlying demand and we've talked a lot, right, in the last quarter as well about the mega projects. So They'll require a lot of this high time utilization assets. Additionally, we'll also get more to a more normal cadence of used sales That then we have we held back and we hope we don't have to this year. We're planning on selling about 35% more Use sales to get back to a normal fleet rotation, so that some of that capital will be to make sure that we have the ability to sell and we don't have the team losing Their ability to rotate fleet out so that we can still meet demand.

Speaker 2

Just a strong obviously, you're seeing very strong demand and the year is going to start very strong that much fleet over the 6 months, even with the used sales as well. Yes. Second question. So even if we do the dividend, we do the repo, If you look at the guide, it implies net debt to EBITDA at the end of the year at 1.55, which is almost a half turn below the low end of your range. You give us a sense of the capital allocation, how we should think about that?

Speaker 2

Where would you be comfortable with the leverage? Or should we think of it as you want to get the leverage back to the low end of the range And thus, M and A.

Speaker 1

David, this is Ted. I'll take that one. There's no change to that longer term framework we've provided of 2 to 3 times Being that optimal level, we'd always said there was nothing religious about the low end. And so living there for some amount of time to us Something that is consistent with what we've articulated. The idea really would be to kind of stockpile dry powder for potential growth opportunities.

Speaker 1

If we were to kind of decide to live in a different zip code entirely, we would certainly update The Street. But certainly for the immediate future, we're comfortable at these levels.

Operator

Thank you. Our next question comes from Steven Fisher of UBS.

Speaker 3

Thanks. Good morning. So just I'm curious How the fleet productivity you reported in Q4, how does that compare to what you thought you could do going in? Some of the investors we chat with kind of seem to note the moderation in fleet productivity as the year progressed. I guess, what's the message you want to give to them about How they should think about sort of lower level of fleet productivity in 2023?

Speaker 3

Is it just more that it's settling into A more normalized level, still above your hurdle rate, but just kind of moving beyond these unusual dynamics of utilization and inflation in 2021 2022, and it's just sort of settling into a more normalized path. Is that what message you would give or how would you frame that?

Speaker 1

I think that's a first of all, this is an output, right? So we're going to manage the heck out of rate and time even though we don't report it out individually. And I'm very pleased that the whole industry is doing that and we see the discipline shown in the industry from that perspective. But I think the way you characterize it is fair. We're pleased with our Q4 fleet productivity.

Speaker 1

It was what we expected. And just for clarity, for those that may not have picked it up, The 5.9 as reported, when you take out Ahern, that would be 6.5. So that's about 3 weeks of Ahern built into the 4th quarter. So we will report next year fleet productivity on as reported and on a pro form a basis, so you could see that impact. And what we'll really be focused on Making sure we take the entirety of the fleet and drive more value out of it.

Speaker 1

And anytime this number exceeds our threshold, we expect Comfortably due next year, that's a net gain and we'll be measuring that on a pro form a basis for you. So you can see what we're doing with the Ahern fleet against their baseline as well.

Speaker 3

Okay. And then I'm wondering about the general cadence of project activity that you expect during the year And where you are with these large projects, obviously, you talked about taking all the extra CapEx more front end loaded. I guess I'm wondering how you compare what's in the still in the planning stages on these large projects compared to what you have on rent at the moment, Because there are some investors that think your business is slowing down, but I'm wondering if there's actually if you're seeing more Large projects in the planning stages and what's on rent, I'm wondering if that could actually lead to some type of acceleration as the next year or 2

Speaker 1

Yes. We'll stay away from quarterly cadence, but obviously, you could tell by our pull through that we expect to need more fleet come the spring buildup. We're not Q1 is always going to be the slowest quarter seasonally, but we see strong demand here today and we expect that to continue to ramp up From big projects. And then once you really get to the peak season, once you get past May, June, and even all the local market stuff So when you hear about this pull forward, we don't feel the fleet that we would normally have had ready is going to be enough when we get to the real build season in And that's really more. What that pretends to be in Q1 isn't really the focus.

Speaker 1

The focus in is, are we going to be ready for the build, all these projects that are Scratch and dirt are coming out of the ground that we're going to need. We're going to need to mobilize fleet for in the spring.

Speaker 3

Okay. Just a quick clarification, if I could. What's the embedded flow through that you have on the Ahern business in 2023 compared to 2022? I know you got a 55 percent pro form a for legacy URI, what's the AHER flow through?

Speaker 1

Yes. See, that one's harder to speak to just because of the way we integrate Acquisitions, especially in GenRent, and that's why it's easier to frame as a function of pro form a. So I think you hit the nail on the head. Certainly, As reported, flow through would look like 48, excuse me, as reported looks like 48 pro form a 55, but it's hard to kind of discretely break apart the business.

Speaker 3

Okay. Thanks very much.

Speaker 1

The one thing I would note just to remind people of, we do think we'll achieve about $30,000,000 of the cost savings out of the $40,000,000 we've talked about.

Operator

Thank you. Our next question comes from Rob Wertheimer with Melius Research.

Speaker 4

Hi, thanks and good morning everybody. I wanted to kind of circle back to the demand side or at least the end market support It's out there, in the short and the long term. And so if you look at the dynamics, I guess we have the mega projects that people talk about. You have the fear or the risk that rising interest rates and potential recession will cause project delays or cancellations. And then you have the infrastructure bill, which is kind of different from some of the chips So I wonder if you could level set us on those.

Speaker 4

Are you seeing any delays, cancellations, etcetera? The mega projects I assume are flowing in and are you seeing any of the infrastructure bills starting to flow? And I assume there's pretty good duration on some of I wonder if you have any comments on what your visibility is now versus past eras in history?

Speaker 1

Yes, sure Rob. So broadly, we believe that these many of these projects are not macro relying. You heard me say that in our opening comments, and we're talking about the type of mega projects we're talking about. We feel really good about that. As far as infrastructure, we've been saying all along, we this to be a 'twenty three event, and I'm pleased to say that we are seeing projects coming out of the ground and projects that are taking fleet as we speak, Mostly you're looking at bridges, airports, whether it be expansions or remodels.

Speaker 1

So we're pleased and we think that will carry out and accelerate through this year And beyond, right, the multiyear event. So we're very pleased with that. Ted, I don't know if you had anything to add. Yes. No, I mean, we really have not seen anything along those lines, Rob.

Speaker 1

Probably the one area where maybe we've seen some delays, we've talked about it, has been more on the alternative power side. And I think there's been some stuff written about this publicly. Solar, we've had some supply chain issues within wind. We've seen a couple of permitting issues. All that said, our power business The quarter was up about 9%, and for the year, we're up about 10%.

Speaker 1

So while we're seeing kind of reports that you're seeing delays on project starts, That business process continued to be very robust. And just for clarity on the broadness that we've been talking about, right? It isn't just the mega projects. The mega projects Are really the kicker why you hear this strong tone and guidance that we're coming out with. But we have seen this broad breadth growth So it's not mega project reliant, but they're kind of the kicker that maybe could offset if you think commercial retail is going to drop or you think office space is going to drop.

Speaker 1

So we really feel the balance is appropriate for this type of guide and the bullishness here in

Speaker 4

And just to clarify on that, I was going to ask anyway, but we all talk construction, but you have a lot of non construction verticals. You're seeing strength kind of throughout the industrial side?

Speaker 1

We are, yes. I mean, if you really go through all the verticals With the exception of midstream, which throughout the year has been the only vertical down for us, everything's up. And Even if the rate of change across those verticals has been negligible, I mean, it's really been very consistent across the year.

Speaker 4

Perfect. Thank you.

Speaker 1

Thanks, Rob.

Operator

Thank you. Our next question comes from Seth Weber With Wells Fargo.

Speaker 5

Hey, guys. Good morning. You guys are obviously planning to sell a lot more fleet used fleet this And Matt, I think I heard you reference something about a broad mix or something different channel mix or whatnot. Can you just give us some more details What's your kind of how you're selling this used fleet? I mean, there's obviously some concerns about used pricing starting kind of rolling over and What your expectations are?

Speaker 5

What's embedded in your expectations for used equipment pricing for 2023? Thanks.

Speaker 1

Sure. So we feel good about the end market, including pricing. We'll fall off the historic highs that we've set over the last 2 years, maybe a little bit, But we'll find out. And I think one of the things we're going to see is that the increase of replacement capital costs Could definitely have a halo effect on used pricing. But when we think about what channels we're going to open up is what we were talking about, We've been strictly or 90% retail all the way in the 1st 3 quarters of 2022.

Speaker 1

And then you saw we loosened it up a little to do some more volume in Q4 and that wasn't because there weren't options, it was to retain fleet to rent Because the supply chain just wasn't getting fleet to us fast enough for our customers. We're hoping our expectation is that we can go back to a more normalized channel mix In 2023 and that's what's embedded in our guidance. So we'll open up the broker chain. We'll do some trades. We probably won't do much auctions unless you have That's really in disrepair.

Speaker 1

We're not really a big auction player. But just opening up that channel mix over and above the retail, And that will allow us to rotate out about $2,000,000,000 worth of fleet.

Speaker 5

Got it. Okay, that's helpful. Thanks. And then just on The strength in the specialty margin in particular was pretty notable. It is I think it was 400 basis points year to year.

Speaker 5

Is there something Is there some step change that's happened there? Is it the general finance business that's clicking or anything you'd call out that Is supporting that big jump year over year? Thanks.

Speaker 1

Yes. I think there are a couple of things there, Seth. I mean, certainly growth It's been good. So that's helped drive fixed cost absorption. But beyond that, you had really good cost control in the quarter.

Speaker 1

And you also had some beneficial mix, Both within the specialty segments and on a project basis that benefited that flow through.

Speaker 5

Okay. All right, guys. Thank you very much.

Speaker 1

Thanks, Seth.

Operator

Thank you. Our next question comes from Timothy Theine with Citigroup.

Speaker 6

Thanks. Good morning. I'll just maybe group 2 together here. Matt, maybe the first is just on fleet productivity and just how you think about the components within that In 2023, just thinking of maybe time and rate, given that you held on to fleet longer This year, to make sure you've met the demand, I'm presuming you're running pretty hot on time. So potentially that And then the second question maybe for Ted is just any help in terms of EBITDA to operating cash flows.

Speaker 6

How should we think about, say, cash interest and cash taxes? Any help you have on that? Thank you.

Speaker 1

Sure, Tim. On the fleet productivity, We still feel that the environment is going to be very constructive to drive positive fleet productivity. But you pointed out the reality of our time may have Even if time becomes a headwind, just because we're running so hot in some key categories and we need to make sure we have availability for We'll feel comfortable that both in the as reported and pro form a basis will exceed our hurdle rates that we talk about that one even if that goes up to 2%. So we feel good about it. And Ted, you can take the EBITDA question.

Speaker 1

Yes. So Tim, just in the absolute, we would look for cash taxes in 2023 to be about $565,000,000 That's an increase roughly of about 240,000,000 Cash interest at about $600,000,000 which would be an increase of $195,000,000 or so. And so when you bridge Kind of that $1,100,000,000 increase in EBITDA against roughly $460,000,000 increase in Free cash flow, really that the delta is going to be the change in working capital.

Speaker 6

Got it. Thanks, Ted. And did you Usually, you speak to a merit increase as we think about an SG and A kind of bridge year over year. Have you Quantified that as to how we should think about that for this year?

Speaker 1

Yes. I don't know if they're ready to quantify it, but certainly we've got that built into our guidance built into our operating plan. We always talked about the importance of supporting our employees and taking care of them, and that's an important aspect of doing just that. So There is absolutely a merit increase built into this guidance. But in terms of quantifying it, it's not something I think we're prepared to do.

Speaker 6

All right. Fair enough. Thank you. Thanks, Tim.

Operator

Thank you. Our next question comes from Jerry Revich with Goldman Sachs.

Speaker 7

Yes. Hi, good morning, everyone.

Speaker 1

Good morning, Gary.

Speaker 7

I'm wondering if you could just talk about the impact The new higher pricing, new equipment on the marketplace, when we saw a Tier 4 higher pricing pull through that had a nice Pricing umbrella on the rental industry for the entire fleet. And I'm wondering, I know it's early post the January price increases by the But to what extent is that a pricing opportunity for the industry as you folks see it? How would you Comparing Contrinus, this transition versus the Tier 4 transition in terms of driving pricing upside? Thanks.

Speaker 1

Sure. Well, number 1, this would be more across the board. We feel comfortable. I talked about it in used pricing as replacement CapEx Yes, increase, that's kind of an umbrella on the used pricing, residuals, which is a positive. And I think to your point about The whole industry having absorbed some inflation has bolstered the discipline that we've been seeing.

Speaker 1

But to be fair, we saw it even before the price increases, and I think This is just a maturity of the industry. You heard us talking about the bigs getting bigger and just more sophistication and information In the industry, I think all those are helping and certainly, increased OEM pricing makes that even more important. And so I think your Points well taken. It will probably bolster some of the behavior in the industry.

Speaker 7

Okay, super. And just curious, lots of crosscurrents in the cycle as we've discussed. I'm wondering if you look at the 2011 through 2015 environment, any analog that you would draw in terms of the industry's ability to match supply and demand Today versus that cycle where early on, supplydemand matched pretty well, but obviously 2015 touch of oversupply. You just talk about how you view the industry's position today between availability and data, etcetera, and how you're managing the supply demand balance?

Speaker 1

Yes. So one of the biggest differences is the information that access everybody has access to, right? Whether it's the Rouse data, whether it's Now that over a third of the industry is covered by top 3 public companies, right, these type information gets everybody More understanding and visibility of the important metrics to focus on and the opportunities that exist in the industry. So and the scale. So specifically for us and let's say our next largest competitive scale allows us to get through things in a different way.

Speaker 1

And I don't really wouldn't draw a comparison. I think the industry changed significantly in my 32 years, but even in the last 10, we do things differently and I'm sure some of our peers do. I think you're seeing that manifest in better performance overall for the customer and for the shareholders.

Speaker 7

Okay. Super. And lastly, if I just sneak one more in there. Ted, I'm wondering if you could just talk about what level of inflation is embedded in Guidance overall. And if you can just touch on transportation specifically where it feels like there might be some tailwinds for you folks on 3rd party?

Speaker 7

Thanks.

Speaker 1

Yes. In terms of the inflation that's built into our expectations, it's certainly probably elevated versus historical levels, Probably not as significant as what we saw in 2022 and yet we've been able to manage it very Right. So if you look at that flow through last year as an example, when you back out used across the full year flow through would have been 56%, 57%. So clearly indicative of our ability to manage that inflation very effectively. And when you think about what we're pointing towards in 2023, Similar level of flow through on that pro form a basis.

Speaker 1

So it's not to say that we're in a benign cost environment. There's still elements inflation that we're managing and all companies are managing, but we feel very comfortable in our ability to manage it effectively. In terms of Pickup and delivery, that's an area where, frankly, we're not trying to make money. So as you see the price of diesel, as an example, ebb and The impact on our margins is relatively de minimis. So it's something the team has done a great job managing through in 20

Speaker 7

Super. Thanks.

Operator

Our next question comes from Michael Feniger with Bank of America.

Speaker 8

Just I know there's been a lot of talk of mega projects. We see Tesla announcing a $3,600,000,000 of new investments in 2 battery plants in Nevada. Just We think about the economically sensitive areas of non res like office and retail. Can you just help us understand when we think of these mega projects, how much more fleet On rent for these projects versus your typical office or retail, are the terms and structures different? Is it different in terms of the multiyear visibility there On the different type of fleet required, just curious if we see that trade off over the next 12, 18 months, how we should kind of view that?

Speaker 1

Yes. Michael, the type of projects vary so much that it would be pretty hard to do. I mean outside if you're thinking about towers, right, large towers, office buildings, Which may be more limited in what type of fleet you would rent on it. All these projects have different And the great thing about our product line is whether it's early when they're scratching dirt or whether they need trench plates From creating the infrastructure to then creating the structure to then finishing off the building, We've got the opportunity to cross sell into all those needs. But as far as the volume and needs, we do attribute models.

Speaker 1

They're really hard to be predictive. I wouldn't really say that it's something that you can rely on. I think the speed and the time to do the project and Probably drives more variation of how much men, material and fleet they're going to put on there, right? And it seems like nowadays everything's a fast track project. 10 years ago that meant they were going to do something quicker.

Speaker 1

Now every project is fast tracked. So I think that has implications of driving more rental than anything else.

Speaker 8

Thanks. And you guys highlighted all year that, that fleet productivity number was going to decelerate. I know you kind of gave us some puts and takes for 2023, but is the view that the number continues to decelerate through 2023 or Finds more stability at some point, because you guys were kind of clear through the year how we should kind of prepare for that throughout the quarter. Curious if there's anything we should kind of prepare as we go through 2023 there directionally?

Speaker 1

Yes. I mean, you see what's embedded in our guidance on as reported basis, right? And within that range would be a different number anywhere. I won't even say the number, you Well, I think really the most important thing is that the environment is good for us to continue to drive positive fleet productivity even if Time utilization doesn't go up. And that's really what matters.

Speaker 1

That's the important part of it. And we will report this on a pro form a basis. There'll be a little bit as reported drag From the Ahern, bringing in the Ahern fleet, but we'll report that out and that will be a couple of points differentiation there even as reported and pro form a is what our expectation is. So we'll it's an output that we really don't want to try to predict, But what our expectations are for rate and time are all embedded within our guidance.

Speaker 8

Great. And just I'll sneak one last one. Just I know we talked about Power exposure alternative energy, just on the traditional side, the upstream, midstream, downstream, just are you seeing more Is that actually accelerating? Just curious if you can kind of touch on the traditional side.

Speaker 1

Yes. It's been pretty consistent in terms of that progression. Hold on, I'm just turning to something quickly, Mike. So certainly, you continue to see strong momentum in upstream. I mentioned midstream has been kind of the one sector that Has been a headwind for us this year.

Speaker 1

They're relatively small, call it 2% of our total mix. And downstream has been pretty steady as well. Chemical processing would be the same. So if we look at the business, it's consistently been about 13% of our total business across the year.

Speaker 6

Thank you.

Speaker 1

Thank you, Mark.

Operator

Thank you. Our next question comes from Ken Newman with Bank Capital Markets.

Speaker 1

Hey, good morning guys.

Speaker 5

Thanks for squeezing me in here.

Speaker 1

Good morning, Ken.

Speaker 5

Good morning. Matt, I wanted to go back to a couple of your comments that you made. Obviously, you gave a lot of good color on infrastructure spend opportunities earlier in the call. I think the guide implies, call it, a low double digit organic growth after you strip out Ahern. But maybe is there any way you can help us try to Size with the midpoint of guide assumes are the benefits from the trends we're seeing in industrial restoring or your visibility on infrastructure projects?

Speaker 1

We're planning more by region versus the verticals and then we track the verticals as we assign capital after I actually don't have that number for you, Ken. We can do a little work and get back to you on that. But just generally, right, Without trying to get too pegged on numbers that I haven't vetted, generally, it's We view infrastructure as something that's accelerating, right? We view that we're seeing the beginnings of it, of the spend, and we think that will accelerate through 2023 and beyond Into multi years. As far as the manufacturing, someone mentioned earlier, there's some big plants going on right now that have a lot of fleet on rent as we speak.

Speaker 1

But there's also some projects coming out of the ground that we think are multiyear megaprojects. I don't really know how to lay those against each other. But I'd say overall, the mega projects work will certainly outpace infrastructure work in But the acceleration infrastructure will continue throughout the year.

Speaker 5

Understood. For the follow-up, and you touched on this a little bit, but obviously, we've seen some cracks start to emerge for the broader industrial space, Especially on the you talked about PMI in your prepared remarks. I know that's a little less than 50% of your customer mix, the industrial MRO part of the business. Maybe talk to us a little bit about how much conservatism is built into the bottom end of the guide range? What's embedded there in the assumption?

Speaker 1

Yes, Ken, I'll take that one. As Matt mentioned, when we do our forecasting, it's really built by the branches up to districts, regions, Divisions and corporate ultimately, so it's really kind of said by the field. We don't look at it kind of top down looking by vertical. So As I mentioned, our industrial business has held in very well. We're not seeing any signs of cracks and I know people have looked at whether it's the PMI or other metrics and it's concerns.

Speaker 1

We're not seeing signs of those. And as Matt mentioned in his prepared remarks, we also See a lot of these industrial projects kicking off this year. We've talked about autos and related stuff. We've talked about semis. But frankly, it's even broader than that.

Speaker 1

So if there is an offset from this if there is a headwind on the MRO side, I think we're very confident you'll see within industrial kind of offsets on the Construction side? But just to answer the question pointedly, we don't forecast our business based on these industrial verticals.

Speaker 5

Got it. If I could just sneak one more in here. It doesn't sound like you guys expect any constraints certainly from a capital perspective, Even with the new dividend and the share repo, but I am curious if you think there's enough management capacity to go after M and A here in the near term?

Speaker 1

Yes, Kent. So outside of anything that has a significant overlap with Ahern, right? So in those markets where they're Integrating the teams together, right, getting the sales reps together, that's a lot of work on the ground. So we're going to pause for a little bit on anything that would have a large overlap. But if we have opportunities and we continue to work the pipeline as we have for the past couple of years, that don't have a big overlap and we have capacity We're absolutely if they clear that final hurdle of the financial makes financial sense, we have the dry powder, we have the capability and we certainly would consider M and A, whether it be a tuck in gen rent deal in a market that Ahern wasn't in or a specialty product line where they're not dealing with any integration Right now, so or integration work rather than issues.

Speaker 1

So I would say absolutely we would. And just to touch on the capital allocation, One of the reasons why it was the right time for us to do a dividend now is because this is not at the expense of growth. When you look at the past 2 years and the kind of We drove including significant M and A, we still have the capacity and free cash flow to give a dividend. So We had asked that question by someone earlier. Have you given a dividend because of less Growth prospects?

Speaker 1

No, quite contrary. It's because even after supporting growth, we have excess cash to return and that Push points to the resiliency of our strong free cash flow through the cycle.

Speaker 5

Very helpful.

Operator

Question is from Stanley Elliott with Stifel.

Speaker 9

Hey guys, thank you guys for fitting me in. Matt, in the past you guys have talked The big getting bigger. And in the K, you mentioned 4% North American rental growth. And you're talking about 12% sort of growth right now. Mean, you guys have consistently outgrown the broader industry, but are we seeing a step up now, an inflection point with the scale that you have, the specialty that Now it's reasonable to think that you guys might be able to put up 3x what the industry is growing at?

Speaker 1

We'll certainly ask Because that's what our guidance implies. I think you'd have to think that that 4% number will be locked in as well. So I don't know what the coming out number for ARA was last year, but I know they raised it throughout the year. But we don't focus on that as barometer limiting ourselves, we focus on what we see in front of us, what we do during our planning process and what we hear from our customers Before, how the top end of the business, the big is getting bigger is a trend that we think is going to continue. And we think scale gives you some opportunities and options as well as adding additional product lines and cross selling that are Gives better service to the customers and gives you an opportunity to grow faster than the industry.

Speaker 1

And I think we'll see that continue.

Speaker 9

Great, guys. That's it for me. Thanks.

Operator

Our next question comes from Scott Schneeberger with Oppenheimer.

Speaker 6

Thanks, guys. Good morning. I guess my first question, in GenRent, specifically, I guess, I'd probably Ted, you may be the best to speak to this, but how is rental duration performed over the last few years. Have you seen an expansion of your equipment staying out on rent? And with Mega projects coming and infrastructure bill feels like 2023 is going to be a lot of that.

Speaker 6

Is it likely that we may see that expand? I know we're talking a matter of days here, but might the length A period that assets are out on rent expand and could that have a positive margin benefit for the company? Thanks.

Speaker 1

So I'll touch the first part of the question. I'll start there. In terms of the mix between daily, weekly, monthly, which is really the way we would look We don't kind of measure contract duration in maybe the way you're asking, Scott. But those numbers have not moved meaningfully. You've seen a very modest shift between Daily and monthly to the point of to the tune of about a point.

Speaker 1

So we'd be kind of mid single digits on the daily and we'd be about 80% on monthly. Those numbers have been remarkably consistent for a long time and there really hasn't been an appreciable change in terms of 2022 versus 2021 or prior years. In terms of the margin impact, certainly what we're always trying to do is be mindful of getting more of your volume and serve you more efficiently. And so certainly, I don't know that there's a huge change there, but we do have that benefit As we do get larger projects that last longer and we get more fleet on those projects, we're able to serve that customer more efficiently And that certainly benefits margins to some degree and importantly returns.

Speaker 6

Great. Thanks. Appreciate that. And then Ted, still for you kind of your thoughts and kind of how the Board is looking at, with the new dividend program. Should we anticipate United Rentals to be a dividend growth story?

Speaker 6

I think you referenced About an 18% payout. I don't know if you want to quantify this, but is there comfort going higher on payout Joe, is that kind of a direction we'd expect to take vis a vis share repurchase? Just high level thoughts there. Thanks.

Speaker 1

Yes, absolutely. Don't want to get ahead of the Board, but absolutely, we have the intention of growing the dividend over time. In terms of what that relative growth looks like relative to net income because you're asking about a payout ratio, I don't know that we'd get locked in there just yet, but absolutely the intent is to continue to grow the dividend over time. It's fully our expectation we'll continue to grow the company over time. We'll continue to expand margins.

Speaker 1

We'll continue to generate more cash. And so one of the things that dividend allows us to do is have another tool to that excess cash to investors as we keep growing. So yes, I think it's very fair to assume that we will grow the dividend over time.

Operator

Thank you. That concludes our question and answer session. I'll now turn the call back to Matt Flannery for any additional or closing remarks.

Speaker 1

Thanks, operator. And that wraps it up for today. I want to say thank you to everyone for joining us as we kick off another year of growth for our shareholders. And we look forward to reporting a strong quarter for you in April. Until then, if you have any questions, please feel free to reach out to Ted.

Speaker 1

Have a great day. Operator, please go ahead and

Speaker 7

end the

Operator

call. Thank you. This concludes today's call. Thank you for your participation. You may disconnect.

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