United Rentals Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 14 speakers on the call.

Operator

Morning, and welcome to the United Rentals Investor Conference Call. 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 and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the Safe Harbor statement contained in the company's press release.

Operator

For a more 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 update or publicly release any revisions to forward looking statements in order to reflect new information or subsequent events, circumstances 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. Please refer to the back of the company's recent investor presentations To see the reconciliation from each non GAAP financial measure to the most comparable GAAP financial measure.

Operator

Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer and Ted Graetz, 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. As you've heard us say since the beginning of the year, 2023 is about raising the bar off of last year's record results and our 2nd quarter performance across growth, Profitability and returns provides evidence of that. I'm pleased with how the year is playing out, including the Ahern integration, which remains on track. Of course, key to all of this is our employees, who do an exceptional job supporting our customers every day.

Speaker 1

Without them, we wouldn't be able to generate the results we consistently deliver. And I'm pleased to report that once again, they've done this with safety at the forefront as our company wide recordable rate remained well below 1% in the second quarter. Importantly, Our growth shows that we continue to outpace our underlying markets as we leverage our competitive advantages to provide a superior level $3,600,000,000 Within this, rental revenue grew 21% as reported with broad based demand across verticals, Regions and customer segments. While fleet productivity increased 2.1% on a pro form a basis, Adjusted EBITDA increased 29% to a 2nd quarter record $1,700,000,000 driving solid margin expansion. Adjusted EPS grew by 26% to a 2nd quarter record of $9.88 And critically, our return on invested capital Driven by robust customer activity and the increases to our full year guidance reflect our continued confidence in customer demand.

Speaker 1

Used equipment sales were another highlight in the quarter. We generated a record second quarter proceeds of $382,000,000 The retail market remains very strong and we also broadened our channel mix as we discussed we would last quarter. Combined with the improvements we've seen across most of the supply chain, this has allowed us to refresh our fleet by rotating some of the older assets out. As you saw, rental CapEx totaled $1,250,000,000 in the quarter, in line with our expectations and helping to ensure that we have the capacity our customers need to support their projects today and going forward. And as I alluded to earlier, the integration of Ahern remains on track.

Speaker 1

The teams have come together especially well, and our 2nd quarter results reflect the ongoing improvements in the efficiency of their business. And at this point, We're focused on optimizing the combined branch network and fleet, which should be completed by year end. Now let's take a closer look at the 2nd quarter demand. Key verticals saw broad based growth led by industrial manufacturing, Metals and Minerals and Power. Non res construction was also up double digits.

Speaker 1

Within this, Our customers kicked off new projects across the board, including numerous EV plants and semiconductor plants, Solar power facilities, infrastructure projects and for the Buffalo Bill fans out there, a new stadium. Geographically, we saw growth in all of our regions on both the reported and pro form a basis. And our Specialty Business delivered another excellent quarter with rental revenue up 17% year on year organically and double digit gains across all major categories. Within Specialty, we opened 19 new locations in the Q2 and are on track for the 40 cold starts this year. Turning to capital allocation.

Speaker 1

We returned over $350,000,000 to shareholders during the quarter through share buy And dividends are on track to return over $1,400,000,000 of cash to shareholders this year. And our balance sheet remains in excellent shape. Looking ahead to 2020, 2023 is on track to be another record year across a variety of KPIs, including revenue, EBITDA, EPS and Returns. We're encouraged by the customer sentiment and external indicators, which point to growth and give us confidence in our updated guidance. For example, the ABC's Contractor Confidence Index remained strong across the 2nd quarter As did its backlog index, the Dodge Momentum Index was up 19% year over year in June, while non res construction employment growth also remained solid.

Speaker 1

And most importantly, our own customer confidence in Vex continues to reflect their optimism. Beyond 2023, we remain positive on the longer term outlook, driven by key tailwinds including infrastructure, Industrial Manufacturing and Energy and Power. As we shared at our Investor Day in May, we spent the last Building unique and diverse capabilities that position us very well for the $2,000,000,000,000 plus of construction projects Underpinned by these tailwinds over the next decade. Put simply, our advantages across scale, Complex solutions, technology and people put us in a first call position. We believe this provides a platform for leveraging our resilient business model and pursuing continued growth both organically and through M and A.

Speaker 1

Finally, I want to highlight our new sustainability report, which we released yesterday. While there's a lot of great content in that report that we're very proud of, this year I'd especially point out to the work our team has done quantifying While the equipment that we have in our fleet also helps our customers reduce their emissions intensity based on its younger age and greater fuel efficiency. Not only does this benefit our customers, we believe that it also benefits our employees, the communities we're operating in and our shareholders. Before I hand the call over to Ted, I'll sum up today by saying I'm very pleased with how the year is playing out. We entered 2023 with high expectations, and As you can see through our results, that's what we're delivering.

Speaker 1

We feel good about the rest of the year and what's ahead for United Rentals and our And with that, I'll hand the call over to Ted before we open the line for Q and A. Ted, over to you.

Speaker 2

Thanks, Matt, Good morning, everyone. As you saw in our Q2 release, our team produced strong results that were consistent with our expectations and keep us on track for another record year. And as we shared at our Investor Day, we continue to feel very good about our beyond 2023 based on the tailwinds we've discussed extensively. One quick reminder before I jump into the numbers. As usual, the figures I'll be discussing are as reported, except where I call them out as pro form a, which are adjusted to include Ahern's standalone results from last year.

Speaker 2

So with that said, let's get into the details. 2nd quarter rental revenue was a record $2,980,000,000 That's a year over year increase of $519,000,000 or 21%, supported by diverse strength across our end markets. Within rental revenue, OER increased by $443,000,000 or 22%. Our average fleet size increased by 25 5% providing a $514,000,000 benefit, which was partially offset by a decline in as reported fleet productivity of 2% were $41,000,000 and our usual fleet inflation of 1.5% or $30,000,000 Also within rental, Ancillary revenues were higher by $75,000,000 or 19.3 percent and re rent provided an additional $1,000,000 I'll note that on a pro form a basis, rental revenue was up a robust 12.4% year over year and fleet productivity increased 2.1% as industry discipline continues to support a healthy rate environment. Turning to used results.

Speaker 2

Our 2nd quarter revenue increased 133 percent to $382,000,000 as we continue to return to more normalized volumes, to support these higher used volumes. During the quarter, retail accounted for 65% of our mix, consistent with its longer term proportion versus 90% last year. Within this shift, we doubled our retail volume and remains a very strong demand environment. Moving to EBITDA. Adjusted EBITDA for the quarter was just under $1,700,000,000 another 2nd quarter record, reflecting the increase of $384,000,000 or 29%.

Speaker 2

The dollar change includes a $310,000,000 increase from rental, within which OER contributed $298,000,000 ancillary added $15,000,000 and re rent was down 3,000,000 Outside of rental, used sales added $117,000,000 to adjusted EBITDA, while other non rental lines of businesses contributed another $8,000,000 SG and A increased $51,000,000 due primarily to increases in variable costs such as higher commissions. As a percentage of sales, however, SG and A declined 180 basis points year on year to a 2nd quarter record low of 10.6% of total revenue, so nice efficiency there. Looking at second quarter profitability, our adjusted EBITDA margin increased 40 basis Basis points on an as reported basis increased 130 basis points on a pro form a basis to 47.7%. This translates to an as reported flow through of 49% and pro form a flow through of better than 54%. And finally, adjusted EPS increased 26% to a 2nd quarter record of $9.88 Shifting to CapEx.

Speaker 2

Gross rental CapEx was $1,250,000,000 and net rental CapEx was $869,000,000 This represents an increase of $161,000,000 in net CapEx year over year, supporting our continued growth in 2023. Year to date, gross CapEx has totaled roughly $2,050,000,000 This equates to about 60% of the midpoint of our full year rental CapEx guidance, which is where we expect it to be at this time of the year. Turning to return on invested capital and free cash flow. ROIC, which as you know is a critical metric for us, set a new record at 13.4% on a trailing 12 month basis. That's a 30 basis points sequentially and 190 basis points year on year and remains well above our weighted average cost of capital.

Speaker 2

Free cash flow also remains a good story with the quarter coming in at $340,000,000 or a trailing 12 month free cash margin of 12.3%, all while continuing to fund significant growth. Moving to the balance sheet. Our net leverage ratio at the end of the quarter improved to an all time low Notably, this was after returning $352,000,000 to shareholders in the quarter, including $250,000,000 through share repurchases And $102,000,000 via dividends. So let's look forward and talk about our increased guidance, which $14,000,000,000 to $14,300,000,000 implying a $200,000,000 increase at midpoint and full year growth of around 21.5% and pro form a growth of roughly 13.5%. Within total revenue, our used sales guidance is now implied at around 1 point We've increased our guidance for adjusted EBITDA by $100,000,000 at midpoint to a range of $6,750,000,000 to $6,900,000,000 This continues to imply as reported flow through of around 48% and pro form a flow through in the mid-50s.

Speaker 2

On the fleet side, we've narrowed our gross CapEx range by $50,000,000 between $3,350,000,000 $3,550,000,000 Given the increase in our used sales expectations, this now implies net CapEx between $1,900,000,000 $2,100,000,000 And finally, we are increasing our free cash flow guidance by $175,000,000 at midpoint to between $2,300,000,000 $2,500,000,000 which is before repurchases and dividends that together should return over $1,400,000,000 of cash to our investors or better than $20 per share. So with that, let me turn the call over to the operator for Q and A. Operator, please open the line.

Operator

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

Speaker 3

I was wondering if you could help us with how you're thinking about fleet productivity the rest of the year And maybe a little more color on what drove the pro form a decline from 5.9% down to 2% for the Q2?

Speaker 1

Good day. It's Matt. How are you doing? So as far as what drove the pro form a down, I mean, it's We're pleased with pro form a being up 2.1%. We understand some of the concern out there and is that Telling The Street something, so I'll be clear about a few things since we don't actually give you the whole numbers.

Speaker 1

We said we'd talk to you qualitatively about it. This is not a demand or a rate issue. The industry still remains in really good shape. I think you're Seeing that through the others that report the actual numbers, rate environment is strong and frankly the discipline in the industry is strong and demand is supporting that. So that's first off.

Speaker 1

This is really a time issue for us. We made the decision to front load fleet this year to tamping down the very, very aggressive time utilizations We've been running frankly for a couple of years, and we didn't really think it was responsive to our customers' needs, and we were doing a little bit of too much hand to mouth Putting big relationships at risk, we weren't comfortable with that. So we front loaded our fleet, you remember back in Q4 And that's on top of bringing in the apron fleet. We're very pleased of how it's working out. And just to put it in context, although I'm not going to I'll refer to giving back whole numbers.

Speaker 1

Our actual time utilization in Q2 was higher than pre COVID averages and higher than the last time we gave you guys time utilization in 2019. So this is still strong time utilization Just compared to the very frosty, almost inflated time mutes that we ran last year because we couldn't get the fleet timely enough, It's dragging a comp issue and that's all this is.

Speaker 3

And regarding the rest of the year, how should we think about year over year fleet productivity that's baked into the guide? Yes. I think you'll see these

Speaker 1

Yes. I think you'll see these dynamics play through in Q3 similar to what they did In Q2, we'll continue to have seasonal build, but there were seasonal builds in the comps as well. So we think these dynamics will play through and We're very comfortable. We continue to see a strong rate environment. We continue to we'll continue to bring in fleet To support this demand in Q3 and so we think the dynamics to be similar.

Speaker 3

So if the fleet productivity is similar in the back half of the year as The Q2, where does that leave you at the end of the year as we think about 2024? You made the comment just now about time you On a historical basis, it's still sort of above average. Is that how you see the full year time you just trying to think about your confidence in starting The conversations for rates for 2024, where are we exiting our thoughts on this time you level versus history?

Speaker 1

Yes. To be clear, we don't want to get into forecasting ahead that far. But I will tell you, and we said this in May at the Investor Day, we do view 24 is a growth year. If you do the math on the capital guide we gave and where we started the year, we're going to start the year with more fleet To support growth, we do think the end markets will come out at an exit rate this year at strong end market demand. We still believe that.

Speaker 1

So And then from there, we'll build up our through our planning process towards the end of this year, we'll build up what we think we need from more growth CapEx. We do expect that we'll continue this will be a more normalized replacement CapEx. You're seeing that in this quarter as well. We expect to do that next year as well. We want to replace Somewhere around 10% to 12% of our fleet per year, and I think this new number puts us right in the center of that target.

Speaker 2

David, this is Ted. The one thing I might add is Matt made the comment about Q2 time you felt the history. Just to be clear, for the full year, we would expect the same to be true. Relative to history, 2023 will be a strong time year.

Speaker 3

Okay. That's helpful. And on the rest of the year guide, the implied I'm talking reported, the implied EBITDA margins Are down a little bit from the second half of last year. But in the first half of this year, your EBITDA margins were 50 bps higher And a year ago, so just curious why the margins would be down year over year in the second half, but having been up in the first half of this year?

Speaker 2

Yes. So I'd say a couple of things there, David. One, we always caution people against anchoring the midpoint. But Hey, Vern, it's really kind of the factor that people need to be thinking about as they think about first half and second half dynamics year on year. Yes, we've been clear to talk about pro form a flow through in the mid-50s.

Speaker 2

We've been delivering that and we would expect that to be true in the back half of the year, Which will be driving margin expansion on a pro form a basis, which as Matt said, is the way we think about our business.

Speaker 3

And last quick one, sorry to hog the call here, apologies. But your implied free cash flow the rest of the year and your EBITDA, it would imply that the leverage, the financial leverage at the end of the year is at 1.6. So to get back to even the low end of your target of $2,000,000,000 to $3,000,000,000 for leverage would imply you have about $2,800,000,000 to put to work Just to get to the low end, just curious how you're thinking about deploying that. And again, that already counts for $500,000,000 repo the rest of the year and a couple of $100,000,000 of dividends. So this is above and beyond that.

Speaker 3

Thank you.

Speaker 2

Correct. It does. And this is one of the things we've been working on internally and we'll Work on it further as the year progresses. For 2023, kind of our allocation of capital is committed, as you know. As it relates to next year, we will have decisions to make, and certainly, we'll have an update for where we end up come January, I would expect.

Speaker 2

But We're left with a couple of options, and we've talked about these publicly. On one hand, there's the potential that we could lower the range, You don't keep it where it is. That's one of the things we're working on, trying to figure out what's the best way to allocate capital to drive shareholder value. So there's not much more specific I can add right now, but certainly, that's how we're thinking about it.

Speaker 3

All right. Thank you very much. I appreciate it.

Speaker 1

Thanks, David.

Operator

We'll take our next question from Rob Wertheimer with Melius Research.

Speaker 4

Hi, good morning everybody. So I had a question on Ahern and just the maturation of acquisitions in general. And I know you talk about how you sort of scrambled the egg and can't always unscramble it, but I assume that you've still got some ongoing repair and maintenance as you sort of fix up a fleet that was Presumably under Investor Day. And then I assume there's also a process just because you guys have so much process. You have so many SKUs and so forth of training people up So I just wonder if you have any comments on how long or how big that margin differential is and how That maturation of that acquisition, drags up margins.

Speaker 4

Are we there now or is it going to take 2 or 3 years? Is it going to be a tailwind for 2 or 3 years? Or any

Speaker 2

commentary around that would be helpful. Sure, Rob. It's Matt. So to your

Speaker 1

Sure, Rob. It's Matt. So to your point, it takes time to get everything done. We always start with the people. 1st and foremost, We make sure we secure everybody, get them comfortable with their jobs and we train them on the systems, make sure everybody is working on the same operating system.

Speaker 1

All that's been done. So that's the front end and always is in any deal we do. From there, we start working through the fleet and then any kind of branch changes, whether Consolidations, whether we're repurposing any facilities, and we'll continue to work through fleet and facilities through the balance of this year. So we've got the game plan. It's just a matter of execution and we're working through that.

Speaker 1

Then as far as margins and the maturation,

Speaker 5

I'll let Ted talk to it. But I wouldn't expect us to

Speaker 1

be fully mature. So I'll let Ted talk to it. But I wouldn't expect us to be fully mature certainly by year 1. We've done some work in this in the past With other deals, but Ted, you may want to answer the call.

Speaker 2

Yes, Rob, it's a good question and it kind of gets to some of the margin dynamics in the quarter that this is a good chance to kind of get those out there. So if you were to look at the equipment rental gross margin, on an as reported basis, it would look like it was down 140 basis points year on year. That's a slight improvement from the down 170 in the Q1. So you can see some of those benefits playing through there. But importantly, on a pro form a basis, Our gross margin actually expanded 20 basis points.

Speaker 2

So you can see that impact of Ahern just putting the year ago period into the numbers. So we've got margin expansion there. And if you adjust for the increase in depreciation related to the asset the valuation The acquired assets, gross margins were actually up 80 basis points in the equipment metal gross margin line. That includes the drag that we're talking about from this ongoing investment in fleet, which we talked about last quarter, continuing this quarter. I think it's reasonable to assume it will continue in the second half as we get that fleet up to our standards and other investments we're making that do get expensed in things like facilities.

Speaker 2

So to us, things are playing out very well even In spite of these additional costs that are hitting us from a P and L perspective and you can see that in these numbers I just shared.

Speaker 4

Okay, perfect. And I can sneak in one more. I guess the normalization of supply chain means you and others are able to get fleet kind of more When you want it versus when you thought. And maybe some of that plus some of the better margins you're getting on sale used equipment Has led to the net rental CapEx coming in a little bit. Any relation of that to end market demand?

Speaker 4

Mean, are you still seeing strength in every vertical and everything? Is there any tie between those two ideas? Thanks, and I'll stop there.

Speaker 1

Yes, sure. Thanks. So first off, let's be clear, supply chain is not fully remedied, which is why we front load CapEx so much in the if we could have pulled in some more upfront in specific categories, we probably would add. We had said in the beginning of the year, we didn't really think there was an opportunity To pull CapEx forward, this is a decision that probably we'd make in Q4 if we're going to raise CapEx that would really have to in its entirety. So this change in net CapEx is just strictly about us having the opportunity To sell more fleet through the retail channel, and we're talking 90 month old fleet at $0.07 on the dollars, Just smart business.

Speaker 1

It's time for that stuff to rotate out and we wanted to normalize that. So there if we could have pulled some more forward to maybe make that CapEx number more whole, we may have done it in the right categories. We just didn't really have that option because the supply chain is getting better, but not 100% there yet. Hopefully that answers your question.

Speaker 4

Thank you.

Speaker 1

Thanks, Rob.

Operator

Thank you. We'll take our next question from Steven Fisher with UBS.

Speaker 6

Thanks. Good morning. So I understand that some of the lower utilization you're seeing is by design because you're running And your product availability wasn't where you wanted to be to serve some of those key customers you mentioned. But would you say, To what extent are your service levels now back to where you like them to be? And so that sort of intentional lower utilization has now run its course or do you still think you need to have more slack in the system by design?

Speaker 2

No, I think we're at

Speaker 1

a comfortable level. Listen, we want to continue to improve utilization over the long term trend. It was just we haven't had a normal year in 3 years, right? So when you think about the COVID year, which was just goofy overall and then the 2 years of just not being able to get fleet at the proper cadence, We'll revert back to continuing to try to drive better metrics from 2019 on as we had always So I'm not saying we're capped out. I'm just saying right now, with especially with continuing to work through the Ahern fleet, We're on a pretty healthy time utilization and we are being able to be responsive to these major opportunities we have with big customers on big projects.

Speaker 1

So That's how I categorize that, Steve.

Speaker 6

Okay. That's helpful. And then in terms of the rental gross margin trajectory, So you had a 170 basis point year over year decline in Q1 on a reported basis and 140 basis points in Q2. It's a little narrower decline. Should we extrapolate that pace?

Speaker 6

Or should that drag Get smaller at a faster pace and maybe even really kind of just ends this year and so that by the start of next year, You're growing your gross margins on a year over year basis. How should we think about that sort of trajectory?

Speaker 2

Yes. So we do our best not to guide to Kind of gross margins, but certainly directionally, we would expect it to continue heading in the right direction. There's going to be a gap there structurally because that was a less profitable business Then what we would have on a legacy basis, right? So we've talked about that. I think on an LTM basis, their EBITDA margins were 35%, whereas ours were 48%.

Speaker 2

And so that will obviously be a dynamic in these as reported numbers. But certainly, that gap should narrow. And then as we get to next year, I think it would definitely be reasonable to assume that we'd be looking for margin expansion across the business.

Speaker 6

Terrific. Thank you.

Operator

Thank you. We'll take our next question is from Seth Weber with Wells Fargo Securities.

Speaker 7

Hey, guys. Good morning. Maybe Ted, just following up on your Margin comment answer. SG and A was surprisingly good this quarter. It was down sequentially on a dollar basis, Great leverage, as a percentage of revenue.

Speaker 7

Can you is there still more operating leverage to come on the SG and A line for the company here going forward Or is this as good as it gets?

Speaker 2

So here again, this is an example of things we don't typically guide towards. So I want to be Careful there. It's all embedded within the EBITDA and EBITDA margin and closer guidance we've given. So certainly, we would expect to continue driving very good efficiency there. But in terms of kind of trying to get people more precise handholding, it's just Not something we've done.

Speaker 2

So I don't know if that helps Seth, but we feel really good about it and Certainly, we'd expect to continue to be very efficient.

Speaker 7

Okay. Maybe Matt, just Appreciate all the color on the needle that time you and all that stuff. Maybe just a bigger picture question on the industry Supply, we've heard from a few different some of your competitors have reported recently, some companies raising CapEx, some are Moderating CapEx. Can you just talk to what you think kind of industry supply looks like industry utilization looks like? Yes, just leave it there, I guess.

Speaker 2

Yes, I think so let's talk about

Speaker 1

the large companies, which We all get a little more information from I think we're in a similar boat. I think you'll hear from most of them that this is still a good demand environment, Still a good solid rate environment. And I think that points to the industry discipline. And I think not everybody has reported yet, but I think everybody has had the same Challenge at that time, it was just running a little too hot, and I think you're seeing people remedy that. I think a lot of us that had the ability to, so specifically The big guys that had some scale to leverage, front loaded their capital to try to bring it in ahead of The demand curve, so you didn't get stuck in that same box we were in for the last year or 2.

Speaker 1

So I think the dynamics of the industry are really solid. And I think you're going to hear we already have heard a couple report similar trends to what we're talking about. So we think the industry is in good shape. We think supply demand is in good shape, Historically strong time utilizations and that it's a solid rate environment. So good all the way around.

Speaker 1

Got it.

Speaker 7

Appreciate it guys. Thank you.

Speaker 2

Thanks, Scott.

Operator

Thank you. We'll take our next question from Jerry Revich with Goldman Sachs.

Speaker 8

Yes. Hi. Good morning, everyone.

Speaker 2

Good morning. Hey, Jerry.

Speaker 8

Matt, I'm wondering if we just expand on that You made a moment ago. So if we look back 2015, 2016 where there was a time utilization soft spot and rising used equipment inventories and 2Q, then in 1Q. So can you just talk about the distinctions now versus then? How big of a factor is availability of Ralph's market by market information, any other significant distinctions that are driving the Much better industry discipline today versus 7 years ago.

Speaker 1

Sure. So be specific, if you remember that 15 was at oil and gas dislocation, right, which really drove kind of a double dip, we'll call a rate problem, because it was the highest Value of rate in just about every company's portfolio that was serving it, rates were really high there and it went away quickly across the board. But your point is still fair. That was what happened when there was too much fleet in the system. The time you then dropped to levels that made people have to make different decisions.

Speaker 1

The time you now in the industry is very healthy. So even though it's dropped from inflated time utilization, the reason why you're seeing different behavior is part But also everybody is running at healthy time utilizations. People are able to make good returns, good margins at these utilization levels And the price of goods is higher, so people understand the necessity for rate. So I think it's a totally different dynamic and that's important to note because Some people may be reading through the drop in time utilizations that are reported is a demand problem. That's not the case whatsoever.

Speaker 1

So thanks for helping make that point.

Speaker 8

And in terms of just the natural implication of that, right, if we're not going to be Looking to gear up in the Q1 as hard as an industry in 2024. Obviously, you're not giving 2024 guidance yet, but just the implication of that is Lower year over year CapEx for the industry in the first half of twenty twenty four, just mathematically to tie all that together given how we're running in first half

Speaker 1

Normalized cadence, I wouldn't say lower, but we're not even sure of that yet, right? We've got to get these slots from the OEMs. They have to be able to Commitments, I know they're working hard. I know you talk to these folks as well. They're hopeful.

Speaker 1

That's a supply chain will remedy. But I wouldn't go all the way there yet, but hopefully, But either way, we're going to do what we need to do for our customers, right, not manage the metric more than the business and the output through the P and L.

Speaker 8

Appreciate the discussion. Thanks.

Speaker 1

Thanks.

Operator

Thank you. Our Question will come from Jamie Cook with Credit Suisse.

Speaker 9

Good morning and nice quarter. I mean most of my questions have been asked, but first just What your customers are saying about 2024 and the implications for how they're how they'll work with you going forward. So if we have above Average visibility, do they want to lock in business with you earlier and have sort of longer term contracts to make sure They're able to capitalize on the multiyear spend that's out there or with supply chain getting better, do you feel like customers potentially could get less sticky because they know there's And then my second question, specialty margins continue to improve year over year. I'm assuming That's the trajectory for the back half of the year. And is there any opportunity on the M and A front and specialty that would be more imminent?

Speaker 9

Thank you.

Speaker 1

I'll take the first part of that, Jamie, and Ted can talk to the specialty side. So big customers are still concerned, especially major projects still concerned about making sure they have surety of supply, right? Even though it's a small amount of spend, right, couple of So we're having those conversations and a lot of the projects we're talking about today kick off this year and will carry in through next year and they all hit different phases. So we're in regular planning with our large customers on these mega projects because it's really important to them. And They felt the crunch over the last couple of years and they want to make sure that surety of supply is there.

Speaker 1

So it's definitely more that way They're thinking they can wait. I think the last 2 years, in some ways, it's better for us planning more with our big customers because they realize it's an important It's an important factor to making sure we both have a win win situation. Ted, do you want to touch on the second part?

Speaker 2

Yes. Quickly, Jamie, I just wanted to be sure I understood The questions, it sounded like there are 3 and Matt answered the first. I heard the second half margins, I didn't know if that was a general question or specific to specialty. And the third, it sounded like the outlook for specialty M and A?

Speaker 9

Yes, it was specific the question was specific to specialty both in terms of margin and both in terms of M and A opportunity.

Speaker 2

So here again, it's all kind of embedded in the guidance we've given. So we do our best not to get into kind of giving specific guidance by segment For Unit, so certainly, as you've heard us say, we feel very good about the way the business is performing and The outlook for margins in the second half and that would be true on both sides of the business. Not sure I can be any more specific. In terms of the outlook for M and A, both broadly and within specialty, it remains a very robust market. We've seen kind of We've done year to date and we continue to be active shoppers.

Speaker 2

In terms of success, that's harder to say. Discipline is always Job number 1 for us when we're allocating capital. So we're hopeful and optimistic that we'll have some things to do in the back half In M and A more generally, but certainly within specialty as well. Matt, anything you'd add on that front?

Speaker 1

No, no. I think you covered it. I mean, you folks all know We're very acquisitive and opportunistic, but we're going to make sure it meets that high bar that we have.

Speaker 9

Thank you.

Speaker 1

Thank you.

Operator

Thank you. Our next question comes from Tim Thein with Citigroup.

Speaker 1

Thanks. Good morning. I just first to Matt,

Speaker 10

I wanted to follow-up on the earlier discussion on sleep productivity. I realize you don't love dissecting all these But I just wanted to follow-up just from a mix perspective. As you talk about, I realize there are multiple Pieces and components that go into that. But as you cycle more of that Ahern fleet out of the business And you're refreshing the fleet as you talked about. Does that continue to be presumably that's Just given the inflation that we've seen recently in that product category that they were so big in Aerials, does that act As a headwind into 2024 or just and again, I know we're not I'm not looking for Super granularity on this, but I'm just thinking from a high level, does that continue to drag on that fleet productivity or does that start to fade away?

Speaker 1

No, not more significant than what we deal with in our own fleet, right? So we're always going to manage inflation. That's why we track fleet productivity. But I think You'd have to imagine that our buying power was a little bit better. So some of those OECs and that's why you have part of the difference between as reported And pro form a, some of those OECs are a little pumped up a little higher than ours.

Speaker 1

They didn't buy as well as us. So there's a little bit of a trade off there as we replace. So it won't be incrementally the replacement won't be incrementally as high as it would be maybe on one of our old assets, our own assets that was 9 years old or 8 years So nothing that we would call out, nothing that we can't manage through in the normal course of business.

Speaker 10

Okay. All right. And then maybe just to get a bigger picture, A fair amount of disruption that's occurred to the regional or the banking system over the last Several whole months and more concerns around just lending availability and do some of these regional banks tighten up. Again, nothing that you haven't heard, but I'm just curious as your conversations with fellow The C suite folks, is that are you hearing or seeing much from the standpoint of projects That maybe were on your drawing board that are pushing out or anything that you would flag along those lines? Obviously, It's been a concern for some recently.

Speaker 10

I'm just curious if that's if it's something that you're seeing or hearing much about? Thanks.

Speaker 1

No. As a matter of fact, our project pipeline remains robust. We're not seeing cancellations. We talked about delays on some solar projects that was more And we actually think those are coming back on quicker than they were, which is good news. But when we look at Mega projects overall, right, and you can decide how you define a mega project.

Speaker 1

Is it whether it's $400,000,000 $500,000,000 $600,000,000 worth of value, These are all up significantly. And we're talking depending on which cut you use somewhere between 70% and over 100%. So doubling the size of these amount of projects, and that's what the pipeline looks like right now. So we actually feel really good about the pipeline. We haven't seen any Deterioration because of any kind of financing or interest issues.

Speaker 1

Ted might want to add something.

Speaker 2

Yes. Tim, I guess things I'd add, you said regional banks, but I think it's Cost of capital remains reasonable. And so if we look at our customer confidence, really going back to the middle of March when all this Started, it's really unaffected. And if we look at our performance by customer segment, right, so you look You're not seeing any real difference in how those are Performing, so certainly on the through the second quarter, there's no discernible impact. And in terms of what the potential may be going forward, Our customers aren't really talking about it and we're not sensing it's an issue, but it's something we're obviously watching closely as you'd expect.

Speaker 6

Very good. Thank you.

Speaker 1

Thanks, Tim.

Operator

Thank you. We'll take our next question from Ken Newman with KeyBanc Capital Markets.

Speaker 6

Hey, good morning guys.

Speaker 1

Hey, Ken.

Speaker 11

Matt, so obviously it sounds like you feel very confident in the demand environment here. I am curious if

Speaker 1

you could just give a

Speaker 11

little bit of color on what you're seeing between your 2 customer sets, right? Because obviously your internal Any signs of material moves between your national accounts and your local accounts?

Speaker 1

No, not anything that we're seeing. We don't do a lot of Harry Home Owner type, Weekend Warrior type work. So I don't know what that segment is doing. We definitely skew more towards the contractor and large contractor, but we're not seeing any delineation in our local market business Versus our big job business, we're actually in pretty good shape. We talked about that when we were talking about the non res numbers earlier.

Speaker 1

So We're that's one of the areas where you would think it would show up and it's not we're actually not seeing any delineation and we're not seeing it in the customer confidence index results as well.

Speaker 11

Got it. And then just to follow-up on that non res comment, obviously, you talked about industrial manufacturing demand being strong here in the quarter.

Speaker 1

I think you said was up double digits.

Speaker 6

I'm curious if you could just dissect that

Speaker 11

a little bit. I mean, I didn't hear too much about civil infrastructure projects. My understanding is that starting to accelerate here in these last couple of months. Is that a category that you're expecting to accelerate here into the back half? And if so, How do we think about the margin impact on some of those projects, if any, here for the back half of twenty twenty three?

Speaker 2

Yes, Ken, I'll take that one. So it's not one of those things that's easy to track, as you know. I would say intuitively, Yes, we do expect a lot of the civil projects that are funded by the infrastructure bill and prospectively the Inflation Reduction Act to start gaining momentum. In terms of exactly what that cadence looks like, it would be great if there were a schedule. We have not found one.

Speaker 2

But certainly, the outlook for infrastructure It's positive, right? You've got north of $1,500,000,000,000 of spend over the next 10 years, let's say, And Sven, we are very well positioned for given Matt had made this comment in his prepared remarks, but the strategy we've developed over the last 10 years It is unique and puts us in a great position to be the most value added partner to the contractors that are executing those projects.

Speaker 1

Thanks, guys. Thanks for your time.

Speaker 2

Thanks, Ken.

Operator

Thank you. Our next question comes from Scott Schneeberger with Oppenheimer.

Speaker 5

Thanks guys. Good morning. I'm going to follow-up that last non res question. A common question we feel is about weak spots within non res And everything we've heard on this call sounds very, very good across non res. So one of the areas of concern is commercial real estate and non manufacturing And office buildings, any insight you can share there or any other areas of weakness?

Speaker 5

Matt, it just sounds like it's very broad based and very good. I just want to hone in on any trouble points that you might be seeing.

Speaker 2

Yes. No, and I know Ted

Speaker 1

has done some work on this data. I mean, we all know what the vacancy We know those are issues, but I don't know that that was ever a real big part of our business, right? It's vertical versus horizontals, usually a bigger rental need As opposed to vertical, but Tess may have some information to share.

Speaker 2

Yes, certainly, if you look at what we call non res, it continues to grow quite nicely. We don't get as granular as the questions you're asking. So if you were to look at the construction put in place data, Scott, certainly looking at office and commercial, whether it's year to date or I think June, which is the most recent data, they both continued to show growth. Now I think you're asking more on a forward looking basis. And when we think about that, and we have, In total, those 2 verticals are about 20% of total non res construction put in place.

Speaker 2

And I'd say the office part is one people worry about given return to office and work from home and those things. Commercial is a huge segment. So it's not strip malls wherever people live. It's much broader. But I think those are the 2 areas that we've talked about being reasonably at risk.

Speaker 2

Now then you talk about the areas where we see where we are optimistic, where we see strong pipelines and where you continue to see Strong growth and the ones you'd highlight would be manufacturing as we've talked about, public road and highway, Power, communication, transportation and healthcare, all of which are performing well. In total, those are 55% of total non res. And our contention would be the growth in those markets is really going to offset Any headwinds we would reasonably anticipate in the office commercial combination. So that is logically what drives our optimism looking out across The back half of this year and going forward.

Speaker 1

Great.

Speaker 5

Thanks, Ted. That's the answer I was looking for. Appreciate it. Just a quick follow-up, specialty rental, could you speak a little bit to the asset categories? It sounds like things have been going very well and it sounds like that's broad based as well.

Speaker 5

But just curious if anyone is lagging behind at the Category or pulling ahead and also any commentary on GFN. The old goal was To double that within 5 years, just an update now that we're 2 years past that, the close of that acquisition, where that stands? Thanks so much.

Speaker 1

So for the first part of your question, nobody's falling behind. As I said in the prepared remarks, specialty had 17% organic growth And all the business segments were in double digits, which is great. Now certainly, the GFN, which you pointed to, is growing a little bit faster than the rest, but we would expect that. And As far as that goal to double the size of the business in 5 years, I think we shared this earlier in the year that we're ahead of schedule. Whether we're a year ahead of schedule or 2 years ahead of schedule, time will tell.

Speaker 1

But we're very pleased with where they are and we're continuing

Speaker 5

Sounds good. Thanks, Matt.

Speaker 1

Thanks, Scott.

Operator

Thank you. Our next question comes from Neil Tyler with Redburn.

Speaker 12

Yes. Hi, guys. Thank you. Two left, please. Firstly, on the topic of CapEx and availability.

Speaker 12

1 of your competitors floated the notion that ticket prices, OEC ticket prices Had been sort of inflated recently by things like surcharges That you heard that should or may well fall away if availability improves. I don't know if that's a perspective. I'd love to hear your perspective on whether that's a likelihood or a certainty or not a notion that you're considering, first of all, please.

Speaker 1

Sure. So we don't talk about our negotiations on open mic. We want to be good partners with our vendors. But the comment of some of the surcharges and the costs associated with creating those surcharges is certainly a fair comment when we publicly, but the characterization is fair one.

Speaker 12

Great. Thank you. That's still helpful. And then just apologies, but I want to just quickly come back to the Time mute comments you made earlier, just so I understand this, the lower year on year time mute splits between The timing of fleet arrivals and the deliberate move It's a normalized time, you'd and am I right in thinking that the first of those two categories is more or less behind us And the second will persist for the rest of the year. Is that fair?

Speaker 1

Yes. I mean the first enabled us to do the second, right? If we didn't bring in the fleet, we wouldn't even be able to tamp it So they're very much going hand in hand. But just by definition of how much capital we have left for the year for growth,

Speaker 2

going to bring in a

Speaker 1

good amount of our CapEx in Q3 here, as you would expect for the balance of the what's left of the balance of the year. And I think like I said earlier, when people trying to see if we could forecast the productivity number, we'll sequentially grow, but we think you're going to see similar year over year dynamics So we feel good about it. We feel good about the demand and we'll continue to have CapEx rolling here in Q3. Super. That's really helpful.

Speaker 1

Thank you, Matt. Thank you.

Operator

Thank you. Our final question comes from Mig Dobre with Baird.

Speaker 13

Thank you for fitting me in. Good morning. A lot has been covered here, but maybe On the topic of non res, and Ted, appreciate all the context you provided, but I wanted to sort of ask a hypothetical question. If we're looking at private non res this year, the put in place is growing north of 20%. If growth Flows in 2024, right?

Speaker 13

Tougher comps or maybe some of the pockets that A weakness that people are worried about. And we're talking about growth reverting back to lowtomidsingledigits. What does that mean in terms of how you're going to manage your business? How do you manage fleets in terms of CapEx, disposals? And again, I'm not asking for guidance.

Speaker 13

I'm just trying to understand hypothetically how you would react to something like that.

Speaker 2

Yes, it's a good question, Megan. It's something we go through every year. So of course, we're talking in nominal dollars, so you've really got to convert this all to volume. But that's how we approach the forward year as it relates to CapEx. As we get into the fall and into the Q4, we'll start our bottoms up planning process.

Speaker 2

That process will help us get a Much better sense for what our customers think their growth will look like at 24%. At that point, we can then think about what our replacement CapEx needs will be Based on the OEC we plan to sell next year and then the incremental fleet we would need to support growth in that environment, as Matt said, We think we've kind of reset the baseline back to where we want to be this year. So as we think about next year, let's just say we're kind of at that steady state, Then there's less of a time you've dynamic that comes into this and then it's more a function of how do you manage the growth in your OEC. Matt, is that fair?

Speaker 1

Yes. No, I think you covered it well. Okay.

Speaker 2

Does that hypothetically answer your question? Well, it could

Speaker 13

help. I'm still kind of scratching my head on the fact that you're going to be exiting the year with Significant year over year growth in fleet, right? So if growth slows, does that mean that you're sort of pivoting towards Just pure replacement CapEx or you're still in fleet growth mode? That's what I was trying to tease out.

Speaker 1

Yes. And it's a fair question, but it will depend on what we see as a demand as we go through our planning process. But we're certainly Not as negative on the growth, that's maybe the tone you're sharing, but you know what, time will tell and we're going to adjust and manage the business appropriately for whatever environment we have. All that being said, we do expect, and I think you're seeing this with most of the big players, for us to outpace Overall industry growth. We think the bigs getting bigger is a dynamic that will continue to play.

Speaker 1

And I would say the type of work that we've talked a lot about to everyone Lends itself to the larger players. So I

Speaker 2

wouldn't even even if there is

Speaker 1

a slower growth in the overall industry, we think we'll have the ability to I'll take that, but I do get your point and we'll manage through it.

Speaker 2

And that's the thing about doing it at year end is we'll know what that carryover growth in capacity is, Which allows us then to factor that into whatever our CapEx spend will be. All right, let's get back to It's continuing to be very good stewards of our shareholders' capital.

Speaker 13

Understood. Thank you, gentlemen.

Speaker 1

You got it, Mig. Thanks.

Operator

Thank you. At this time, I'll turn the call back over to Matt Flannery for any additional or closing remarks.

Speaker 1

Thanks, operator. And no additional remarks, that wraps it up for today. So I want to thank everyone for joining us, and we look forward to speaking with you all again in late October. And in the meantime, please feel free to reach out to Elizabeth at any time if you have any questions. Thanks again.

Speaker 1

Operator, please go ahead and end the call.

Operator

Thank you. This does conclude today's call. We thank you for your participation. You may disconnect at any time.

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Earnings Conference Call
United Rentals Q2 2023
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