United Rentals Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2021

There are 13 speakers on the call.

Operator

Good morning, and welcome to the United Rentals Investor Conference Call. Please be advised that this call is being recorded. Before we begin, 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 on Form 10 ks for the year ended December 31, 2020, as well as and will begin with the SEC. You can access these filings on the company's website at www.unitedreynolds .com. Please note that United Rentals has no obligation and makes no commitment to update or publicly revise any revisions to Forward looking statements in order to reflect any 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 all each non GAAP financial measure to most comparable GAAP financial measure.

Operator

Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer and Jessica Graziano, Chief Financial Officer. I will now turn the call over to Mr. Flannery. Mr. Flannery, you may begin.

Speaker 1

Thank you, operator, and hello, everyone. Thanks for joining us this morning. 3 months ago, we We said that 2021 was shaping up to be a great year for United Rentals, and that's still very much the case. Our operating environment continues to recover. Our customers are increasingly optimistic about their prospects, and our company is continuing to lean into growth from a position of strength as a premium provider We've leveraged that to deliver another consecutive quarter of strong results.

Speaker 1

The big themes of the 2nd quarter are Strong growth in line with our expectations and robust free cash flow even after the step up in our CapEx. Positive industry indicators, including a strong use equipment market where pricing was up 7% year over year. The expansion of our go to market platform through M and A and cold starts, this is time to the broad based recovery in demand and our focus on operational discipline as we manage the increase in both volume and capacity, while driving fleet productivity of nearly 18%. Another key takeaway is our safety performance, and I'm very proud of the team for holding the line on safety with another recordable rate below 1, This includes General Finance, which we acquired at the end of May. As you know, this was both a strategic and a financial move designed to build on our strengths.

Speaker 1

The acquisition expanded our growth capacity and gave us a leading position in the rental market for mobile storage and office solutions. The integration is going well. And while we still have more work to do, we're moving steadily through our playbook. As you saw in our release, we raised our outlook to include the expected impact of general finance and other M and A we closed since the Q1. It also includes some additional investments we plan to make in CapEx that will serve us beyond 2021.

Speaker 1

This outlook follows the higher guidance we issued in April when we raised every range compared to our initial guidance. So as you can see, we're tenacious about And before Jeff gets into the numbers, I want to spend a few minutes on our operating landscape. Almost all of the challenges of 2020 have righted themselves. We have a better line of sight and so do our customers. When we surveyed our customers at the end of June, The results show that over 60% of our customers expect to grow their business over the coming 12 months, which is a post pandemic high.

Speaker 1

And notably, only 3% saw a decline coming over the same period. Customer optimism is a great 2020 1 is a pivotal year for us. It confirms our return to growth, including our 19% rental revenue growth in the Q2. I'll point to some of the drivers of that growth, starting with geography. The rebound in our end markets continues to be broadly positive with all geographic regions reporting year over year growth in rental revenue.

Speaker 1

Our Specialty segment generated another strong performance with rental revenue topping 25% year over year, including same store growth of over 19%. And importantly, we grew each major line of business by double digits, which underscores the broadness of the demand. For years now, our investment in building out our specialty network has been a key to our strategic positioning. These services differentiate our offering to customers And add resilience to our results throughout cycles. This is true of cold starts as well as M and A.

Speaker 1

This year, we've opened 19 new specialty branches in segment where the big drivers are non res construction and plant maintenance. Both areas are continuing to gain traction and most of our end markets are trending up. Verticals like chemical process, food and beverage, metals and mining and healthcare all showing solid growth. And while the energy sector remains a laggard, it was up year over year for the first time in 8 quarters. We also have customers in verticals that are less main Like entertainment, where demand for our equipment on movie sets and events more than doubled in the quarter.

Speaker 1

And while it's a relatively small part of the revenue, It's a good sign to see it come back. I also want to give you some color on project types. There are 2 takeaways, The diversity of the projects in Q2 and the fact that each region contributed to growth in its own way. The recovery has taken root across geographies and verticals on both coasts with solid activity at heavy manufacturing, corporate campuses, Schools and transmission lines. In this quarter, we're also seeing project starts in power, transit and technology.

Speaker 1

These job sites are using our Generant equipment and our trench Safety and Power solutions. And fluid solutions are seeing a rebound in chemical processing, And Surabaya, Peshawarik, as well as mining. These are just a few of the favorable dynamics in a very promising upcycle. And I want to put that in context. 2020 was about the temporary loss of market opportunity, particularly in the Q2.

Speaker 1

Now the pendulum is swinging back and 2021 is about locking in that opportunity within the framework of our strategy. Our team is managing that One proof point is our financial performance and the confidence we have in our guidance. Another is our willingness to lean into growth today to create outsized value tomorrow. And it's about more than CapEx and cold starts. We're constantly exploring new ways to capture growth by testing new products in the field, developing new sales pipelines and forging digital connections You could see that reflected on our safety record and our strong culture.

Speaker 1

Here's the thing to remember about 2021. This is still the early innings of the recovery. We're committed to capitalize on more and more demand as the opportunity unfolds. And we see a long runway ahead to drive growth, I'll stop here and ask Jess to go through the numbers, and then we'll take your questions. Over to you, Jess.

Speaker 2

Thanks, Matt, and good morning, everyone. When we increased our 2021 guidance back in April, We expected a strong Q2 supported by the momentum we were seeing to start the year. We're pleased to see that play out As anticipated with the Q2 results. And importantly, we're also pleased to see the momentum accelerate in our core business and support another raise Our guidance for the year. We've also added the impact from our acquisitions, notably the general finance deal.

Speaker 2

And I'll give a little bit more color on our guidance in a few minutes, but let's Now with the results for the Q2. Rental revenue for the Q2 was $1,950,000,000 That's an increase $309,000,000 or 19%. If I exclude the impact of acquisitions on that number, rental revenue From the core business grew a healthy 16% year over year. Within rental revenue, OER increased 231000000 That's primarily due to stronger fleet absorption on higher volumes, in part as we comp the COVID impacted Q2 last year. Our average fleet size was up 0.2 percent or a $3,000,000 tailwind to revenue.

Speaker 2

And rounding out OER, the inflation impact of 1.5 Also within rental, ancillary revenues in the quarter were up about $65,000,000 or 31 And re rent was up $13,000,000 And we'll talk more about the increase in ancillary revenues in a moment. Used equipment sales came in at $194,000,000 That's an increase of $18,000,000 or about 10%. Pricing at retail in the quarter increased over 7% versus last year and supported robust adjusted used margins of 47 point Used sales proceeds for the quarter represented a strong recovery of about 59% Of the original cost of fleet that was on average over 7 years old. Let's move to EBITDA. Adjusted EBITDA for the quarter was $999,000,000 an increase of 11% year over year or $100,000,000 That included $13,000,000 of one time costs for acquisition activity.

Speaker 2

The dollar change includes a 141 We rent added $6,000,000 Used sales were tailwinds to adjusted EBITDA of $12,000,000 and other non rental lines of business provided $6,000,000 The impact of SG and A and adjusted EBITDA was a headwind for the quarter of $59,000,000 which came mostly from the resetting of bonus expense. We also had higher commissions on better revenue performance and higher discretionary expenses like T and E that continue to normalize. Our adjusted EBITDA margin in the quarter was 43.7 percent, down 2 70 basis points year over year And flow through as reported was about 29%. Let's take a closer look at margin and flow through this quarter. Importantly, you'll recall that our COVID response last year included a swift and significant pullback in certain operating and discretionary That was especially pronounced in the Q2 and is impacting flow through this year as activity continues to ramp and costs continue to normalize.

Speaker 2

We expect this will play through the rest of the year, notably in Q3. Specific to the Q2, we've shared in previous calls that One of the costs that will reset this year is bonus expense from the low levels incurred last year. As a result, we had an expected drag in Flow through in the Q2 as we reset and now true up this year's expense. Flow through in margins were also impacted as anticipated by acquisition activity, including the one time costs I mentioned earlier. I also mentioned higher ancillary revenue in the 2nd quarter, which represents in part the recovery of higher delivery costs.

Speaker 2

Delivery has been an area where we've seen the most inflation pressure, including Higher costs for fuel and third party hauling. And while recovering a portion of that increase in ancillary protected Gross profit dollars, it impacted flow through in margin this quarter and the pass through, and we expect to see that play out over the next couple of quarters as well. Adjusting for these few items, the implied flow through for the Q2 was about 46% with implied margins flat With our expenses normalizing, that reflects the cost performance across the core that came in as expected. I'll shift to adjusted EPS, which was $4.66 for the Q2, including a $0.13 drag from one time costs. That's up $0.98 versus last year, primarily on higher net income.

Speaker 2

Looking at CapEx and free cash flow, for the quarter, gross rental CapEx was Robust $913,000,000 Our proceeds from used equipment sales were $194,000,000 resulting in net CapEx in the 2nd quarter of $719,000,000 That's up $750,000,000 versus the Q2 last year. Even as we've invested in significantly higher CapEx spending so far this year, our free cash flow remains very strong at just under $1,200,000,000 generated through June 30. Now turning to ROIC, which was a healthy 9.2% on a trailing 12 month basis. Notably, our ROIC continues to run comfortably above our weighted average cost of CapEx. Our balance sheet remains Rock solid.

Speaker 2

Year over year, net debt is down 4% or about $454,000,000 That's after funding over $1,400,000,000 of acquisition activity this year with the ABL. Leverage was 2.5x At the end of the Q2, that's flat to where we were at the end of the Q2 of 2020 and an increase of 20 basis points from the end of the Q1 this year, mainly due to the acquisition of General Finance in May. I look at our liquidity, which is very strong. We finished the quarter with over $2,800,000,000 in total liquidity. That's made up of ABL capacity of just under $2,400,000,000 and availability on our Our facility of $106,000,000 We also had $336,000,000 in cash.

Speaker 2

Looking forward, I'll share some color on our revised 2021 guidance. We've raised our full year guidance ranges at the midpoint by $350,000,000 in total revenue and $100,000,000 in adjusted EBITDA as we now expect Stronger double digit growth for the core business in the back half of the year. Our current guidance also includes the impact of acquisition activity since Our last update, predominantly to include general finance. That increase for acquisitions reflects $250,000,000 in total revenue $50,000,000 in adjusted EBITDA, which includes $15,000,000 of expected full year one time costs. Additional CapEx investment will help support higher demand.

Speaker 2

To that end, we raised our gross CapEx guidance by $300,000,000 a good portion of which reflects fleet we're purchasing from Acme List. While the fleet will provide some contribution in 2021 and is assumed in our guidance, We expect to see the full benefit next year. Finally, our update to free cash flow reflects the additional CapEx we'll buy As well as the puts and takes from the changes I mentioned, it remains a robust $1,700,000,000 at the midpoint and we'll continue to earmark our free cash Now let's get to your questions. Jonathan, would you please open the line?

Operator

And you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of David Raso from Evercore ISI. Your question please.

Speaker 3

Hi. Thank you for the time.

Speaker 4

A bigger picture question about the margins. I think investors are wondering out there about how the margins And improve from current levels. Over the last, say, 4 years or so, we've seen steady degradation And on the rental margins in particular, even EBITDA margins have been under a little pressure. I'm just trying to think through like when you think of Five large acquisitions you've done over the last few years, right, starting with NES and kind of running through Gen Finance. On the acquisition, You bought over, let me say, about $2,250,000,000 of revenues and those EBITDA margins were only 38,000,000,000 right?

Speaker 4

And you used to run high So I appreciate that's a lot of revenue you bought that's dragging down the margin. But when I look at the business today moving forward, How do we think about the rental margin structurally, if you want to weave that all the way into EBITDA? But really, in particularly, the rental margins, Is this as much about just a shift towards specialty might lower margins, but improve returns on capital, just so we can kind of level set How we should think about not just top line growth, growing earnings, but margins?

Speaker 1

Sure, David. Great question. Thanks for taking a longer view of this because that's really how we manage and see the business. And although we have some short term pressures when we acquire businesses that come in at lower margins, if If you look over our experience of these acquired assets and what we've done with the businesses pro form a, It validates why we do M and A. We feel we can be a better owner.

Speaker 1

We could bring more value to those assets. If it drops EBITDA margin For a period of time, that's one metric, but we also are very focused and quite frankly model our M and A deals on returns. So and our turns continue to be well above our cost of capital. So I don't think rental margin degradation is a concern For us, we'll continue to drive fleet productivity to overcome natural inflationary costs as well as efficiencies And we think that's how we've taken these businesses that are in the 30s yet maintain mid-40s depending on time of the year to Higher EBITDA margin and that's what we do, right? So that's a great question.

Speaker 1

And I think sometimes when people are looking at the headline, they may miss the fact What we've done with these businesses, pro form a, is driving more value.

Speaker 2

And if I can add one thing, Dave. Good morning. It's that to the earlier part of your question, there is no structural change in the way that we're managing the business and we're looking at the business longer term We're thinking about the continued margins that we believe we'll be able to generate going forward.

Speaker 4

But fair to say from that answer, Structurally, you don't think of this as driving margins or not. It's a matter of improving returns on capital, better cash And obviously, what you do with the cash flow from CapEx to M and A is how you drive earnings more So thinking of this as a margin expansion, is that a fair generalization?

Speaker 1

We still are focused on margin expansion The individual businesses, right, just some of them structurally come in a little bit differently to your point earlier, some of the acquired assets, GFN being the most recent one. As an example, that's never going to be a 50% margin business, but it's going to be a heck of a good return. So that's really more We're saying no structural issues that we're having here to continue to focus on margin expansion.

Speaker 4

Yes. Look, everybody wants everything, right? You want margins, you And lastly, at that point, when we think of 'twenty two versus 'twenty one, Anything you can help us with on framework in the sense of resetting the bonus pool, how do we think about how 'twenty two starts initially, Other costs that came back or even how you think about delivery costs on ancillary, can you just give us some thoughts around how we Think of puts and takes on 'twenty two versus 'twenty one, particularly regarding costs.

Speaker 1

Yes. So without even attempting to try to give guidance in 'twenty two, I think it's clear to say we feel good about the environment. We wouldn't be leaning into Capital spend in the M and A, if we didn't, right, that's not just the 'twenty one experience. And we will lap some of the headwinds that we've had this year from a comp And specifically in this quarter as Jess will continue to talk through as she did in her opening remarks. But we feel good about We feel good about the prospects.

Speaker 1

As I said in my opening remarks, we think we're in the early innings of the cycle here. So we're excited about the prospects.

Speaker 4

Any color, Jess, on the cost though? I mean, I appreciate Matt's comments, but that's a little bit of a top line comment, which I think at the moment, folks aren't really Pushing back on that, they're just trying to think about some leverage as well ideally and just anything you can do on the Bonus pool and other costs we can be thoughtful about how you're lining up your delivery costs for next year, any change in how you're contracting things out or any color would be appreciated. Thank you. That's it for me.

Speaker 2

Sure. It's a little too early for us To start to opine on any kind of guide numerically, right, of where we think some of those expenses are going to go, right, As far as how the bonus will play through next year compared to this year and even what the inflation environment is going to look like next year. I think it's anybody's guess right now as to if there'll still be pressure in delivery, could there be pressure in other places. I think the takeaway for us is we're going to continue to respond to the way we have, right, in looking to pass And mitigate some of the inflation pressures that we're seeing right now, particularly in delivery. And just as we even think about where other pressures could come from In looking to how the business would be able to respond to continue to drive the kind of profitability that we can across the business.

Speaker 2

So it's too early for more specifics than that, but I can tell you we're going to continue to be focused on through the planning

Operator

Thank Our next question comes from the line of Mig Dobre from Baird. Your question please.

Speaker 3

Yes. Good morning, everyone.

Speaker 2

Hi, Mig.

Speaker 3

So sticking with this discussion on costs, I think I heard Jessica commenting that The flow through on EBITDA in the Q3 was going to be relatively modest as well. Maybe you can put a finer point here. And I'm curious, on the SG and A side, you talked about truing up on a bonus pool. Is that a comment that impacts Q3 as well? Or was

Speaker 2

So, let me start with the 3rd Q4. And actually, I'll take it from the perspective of the back half, right? We'll talk about the phasing in a second. But just to give a little bit of color behind what's implied, and Yes. I'll start with my normal call out not to anchor to the midpoint here.

Speaker 2

But let me use the midpoint just to Give some color behind those the bonus dynamic and even some of the acquisition impact that we'll have in the back So if I use the margin at the midpoint, the that half implied margin would be down about 120 basis points for And that could have generated flow through again at midpoint of about 39%. So think about margins, 46.2%. Now that bonus headwind is going to continue for us more so in the Q3 than in the 4th as we think about the comp to last where the bonus was, I'll call it abnormally low, right, just lower than normal. So if you think about that bonus headwind as well as the anticipated headwind in flow through and margin that we get from the acquisition activity, That margin goes from down 120 basis points to up 40 basis points or implied in the back half at midpoint of 47.8 percent from 46.2%. Flow through in that at the midpoint About 50% adjusting for those two items.

Speaker 2

So those obviously will be an impact for us. And as you mentioned, The quarterly dynamic will play out if you just think about the comps we have against the belt tightening that we did last year. The 3rd quarter We'll have more flow through pressure than you'll see in the 4th. And then the other thing I just want to mention in the Q3 just to be helpful in Q3 last year, we had $20,000,000 of one time benefits from insurance recoveries and obstacles are not expected to repeat.

Speaker 3

Okay. Yes. Thank you, by the way, for that reminder. Then I guess to try to ask David's question maybe a little bit differently. When we again, sticking with SG and A, when When we're looking at 2022, is it fair for us to think that you guys can get some leverage on this line item that revenue growth Can exceed whatever inflation you're going to have in SG and A.

Speaker 3

Is that how you're intending to run the business? Or are there

Speaker 2

Yes, I think that's definitely fair. And I I missed not to point to the 2021 dynamic is one that in part is because of the comp to 2020, Right. If you think about sort of the normal course in 2022, it gets back to us our comments about there's no real structural change in the way we're planning to run the business in 'twenty two. We'll change in the way we're planning to run the business in 'twenty two.

Speaker 3

Understood. Then lastly for me, Infrastructure is once again in the headlines. And I think by now, we all sort of had a lot of time to kind of ponder as to what this would mean. So I'm sort of curious from your perspective, If something were to actually pass and become legislation, how, if At all, do you plan to change your strategy, your feet, your go to market as a result? And at this point, have you sort of anticipated any of that in your CapEx plans or the way you're kind of

Speaker 1

It's a great question, Megan. We started focusing on this and preparing for this all the way back, if Recall from the NEST acquisition, well that added to some of our DIRTT Engaging fleet experience that That team brought with it and product they brought with it, which would be played into infrastructure. And we've actually been growing our infrastructure business Really because the demand is there, right? We all know the need is there. So now we would view this as icing on the cake.

Speaker 1

As far as fleet profile changes, I don't I'll hazard a guess. So say 80% of the fleet that we would use to support and that we do use to support infrastructure is core fleet. So We have very fluid fleet and very fungible fleet to support this vertical. On the boundaries, Yes, we would certainly as things started to move buy some more attenuated trucks, buy some message for us, some infrastructure specific fleet. But outside of that, most of what we That end market with is core fleet of our very fungible assets.

Speaker 1

But we feel we're really well positioned, not just Talent wise, not just knowledge wise, but also relationship wise. We deal with these large customers, these large civil contractors. So We feel good that whenever the money gets released and gets passed, we'll be able to out punch our weight in that category.

Speaker 3

Okay. Thank you.

Speaker 1

Thank you.

Operator

Thank you. Our next question comes from the line of Ross Gilardi from Bank of America. Your question please.

Speaker 3

Hey, good morning guys. I

Speaker 5

had a couple of specialty rental questions just on growth. And aside from general finance, what are some of the larger growth opportunities in your legacy specialty Rental business. And I'm thinking specifically of Trench and hoping you can comment there. I mean, PG and E is talking about burying 10,000 miles of power lines in California to curtail forest fire risk. I mean, it's an enormous project if it actually happens.

Speaker 5

It's all over the headlines. I don't know that many people would necessarily connect the dots with United Rentals on something like that. But is that the type of project Your trench business would be potentially engaged in. And beyond that, like pertaining to All the stuff in headlines about forest fires, hurricanes and routes and everything, what about disaster recovery and how big that business is And how big it can become?

Speaker 1

Sure. And you made a great point about trench and how we would do with that type of business. And frankly, a lot of infrastructure business, right, really plays into our specialty network as well, but also our GenRent responding to that. But whatever the needs are, our Fluid Solutions team has really broadened their Network of customers they serve back in the day when we basically bought an oil and gas pump company. So this type of Spreading the product knowledge and breadth across our broader network and relationships to serve these unique end markets is really part of the specialty So thanks for giving me that softball.

Speaker 1

It certainly is really a great part of our growth strategy for specialty.

Speaker 5

But Matt, specifically, what about burying just power like thousands of miles of power lines? Like is that Something you'd be engaged in? Is that like would that be kind of a common project for your trench business, All the dirt that's got to be dug for that and it's I'm just trying to rather than just talking about this all in very much generalities, Trying to talk about in relation to like a big project that's all over the headlines that we can all kind of relate to a little bit more concretely.

Speaker 1

Yes, I'm sorry. Absolutely. That is an absolute truth. So one that maybe we take for granted, but absolutely would be a Higher participation of TrenchNet anywhere else.

Speaker 5

Okay, great. And then just studio entertainment and live events. I mean, you've got a little bit of a presence there, but the absence of a bigger presence was it seems like it was a key factor That might have caused you to lag some of the competition on top line growth at least off of the bottom. Do you feel like you need to get bigger in that market? And are there opportunities To do so via acquisition?

Speaker 1

We certainly it's a market that we continue to get bigger in. I think you just saw where there's The official looks of the supplier of NASCAR now. So we keep adding to this portfolio organically. We don't feel like aching need in the space, but we If an M and A opportunity arose that was positive, I think you always know we have a robust pipeline we look at, but it's not Thank you. Thank you.

Operator

Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question please.

Speaker 6

Yes. Hi. Good morning, everyone.

Operator

Good morning, Jay.

Speaker 6

Matt, Jess, I'm wondering if you could just talk about your capital deployment Options, now that you have a bigger footprint in terms of broadening the specialty business with GFN and new regions as well, Where are you folks optimistic about being able to put capital to work in a way where United Rentals is a good owner for additional assets Now that you have those additional regions and products. Thanks.

Speaker 1

Well, certainly, GFN, right? So this is an absolute growth Not a synergy play, not a consolidation play. So that would be the most obvious area because we really think we could spread That's throughout our network and fill in the blanks in their distribution points. Continued focus on penetration within our existing And someone had asked earlier about specialty growth. We continue to grow specialty strong double digits because although we're very, very mature in some of those markets, there's still opportunity To continue to penetrate further in those spaces.

Speaker 1

And so I would say all of the above. And then we'll see. We're not ready yet to declare, but we'll see about some of the other opportunities that are out there. We're certainly going to fund organic growth in a very aggressive way because we think coming off of This disruption that we had last year, we're seeing the opportunity to refresh the fleet, get the fleet out there and continue to serve more customers.

Speaker 6

And on the GFN acquisition call, Jesse, you spoke about a good line of sight on getting GFN margins closer to Industry level margins and now that you've owned the asset for a little bit, I'm wondering if you could talk about and just flesh it out In terms of what do you think of the logistics opportunities that the opportunity to leverage your pricing tools? I know it's early, but Given we have a little bit more visibility than we did at the time of the acquisition, I'm wondering if you might just parse that out a little bit for us.

Speaker 2

Sure. Good morning. So, I can tell you, we are doing the system integration in North America for general And this weekend, right? And that's a great step towards continuing to leverage the United Rentals tools And support the growth and the opportunities, and the efficiencies, right, that We can share with that business as they grow. Obviously, as Matt mentioned, with this being the growth play, we're going to look for every opportunity we can To grow as productively and as efficiently as we can and to work through how the Extension of those branches, right, if you think about part of the growth that we talked about was cross sell with United business, but the other part of the growth was to expand that business into More MSAs where they currently aren't, right?

Speaker 2

That's an opportunity for us to leverage the efficiencies and And the productivity that we have now in our branches as we continue to support those geographic extensions for them. So we still feel very comfortable with our original thesis of Getting those margins up to be closer to where that business and the peers in that business operate. And again, very excited about looking under the hood over the last month and a half, very excited about Getting that going as soon as possible.

Speaker 6

Terrific. I appreciate the discussion. Thanks.

Speaker 1

Thanks, Jerry.

Operator

Thank you. Our next question comes from the line of Tim Theit from Citigroup. Your question please.

Speaker 7

Thank you. Good morning. Matt, the first one was just On trying to kind of talk through the opportunity for fleet productivity in the back half of the year. And obviously, the comps get tougher. But As you think about kind of the components of that, if I mean, I don't know if my estimates are right, but I would assume that From a time standpoint, you're running at or near all time high levels.

Speaker 7

So obviously, Well, I would assume from here rate and mix are likely to play a bigger role, but maybe you can just Can you just touch on each of those in terms of where you and how you see the opportunity in the back half of the year?

Speaker 1

Sure, Tim. So we're very pleased with fleet productivity, and we have expectations for high fleet productivity But just for clarity, that very gaudy 18% number is partially driven by the easy comp that we had in Q2. So we don't to have those types of double digit fleet productivity improvements in the back half of the year, but still significant fleet productivity improvements. A lot of the absorption opportunity Well, certainly the big driver here in the near term, but we think market conditions without getting into the each individual component, we think the market conditions And frankly, the industry's discipline is very favorable towards continued fleet productivity, and most importantly, the demand is there. So we really feel good About it and although I don't think we'll see 18% again, I do think that we'll see strong fleet productivity and that's embedded in our guidance for the back half of the year.

Speaker 7

Got it. Okay. And then on as you think about the volatility that we've Seeing this year and not just in terms of just commodity costs and how that's impacting Equipment and some of your supply costs, but as well as the just the availability of new fleet from the OEMs. Is that do you expect that will influence how you'll approach the timing of as you get closer to that initial planning in In terms of CapEx planning for 'twenty two, as well as maybe how you're thinking about used sales And perhaps maybe flex that fleet age higher. I'm sure there's some push and pull here.

Speaker 7

But if the used market is, If it remains as strong as it is, which obviously will depend somewhat on new supply availability, but does that impact How you're again thinking, 1, about the timing, the initial budgeting for next year? And then 2, just how you're thinking about managing the fleet in this environment of Super tight used markets. Thank you.

Speaker 1

Sure. So I'll take the latter part first. I think and you've seen a little bit play out This you'll see a little bit play out in Q3 as it's in Q2. The used metering, so to use a word to characterize what you're what you're saying is more about just time utilization, right? As we continue to drive high demand and high use of our assets, then they're not as available to sell.

Speaker 1

But the end market is strong there. So I think we'll continue to fill that demand versus a fleet. I don't think that's necessary. And on the first part on the supply side, we've got some really good partners and good suppliers out there, and I think they'll get their arms wrapped The supply chain disruptions that everybody has been dealing with in every industry, but commodities probably will right I'm assuming that our vendors are working I'm not assuming, I've talked to them, working really hard To continue to improve any supply chain disruptions they have. So I'm not really seeing that as a barrier to us supporting our customers next year.

Speaker 1

If it is, we'll adjust. But we're not that's not in our calculus right now and certainly not to age the fleet.

Speaker 7

Got it. Thank you.

Operator

Sure. Thank you. Our next question comes from the line of Ken Newman from KeyBanc Capital Markets. Your question please.

Speaker 8

Hey, good morning guys.

Speaker 1

Good morning, Ken.

Speaker 8

I kind of want to piggyback off that last question a little bit. One of your big suppliers talked this morning about some deliveries having slipped due to supply chain tightness. And I guess I am curious if you have any comments on Equipment availability that you're seeing today, are you getting equipment on time? And obviously, you took up CapEx guide this quarter. And I'm curious, 1, how did you how are you able to pull that off?

Speaker 8

And 2, where do you see the opportunities for potentially increasing that fleet side Dan, for the year end.

Speaker 1

Sure, Dan. So we still have a pretty big range. So within that, right, at the midpoint, you all know about the $300,000,000 change that we made. Although a lot of that is the acne fleet that we acquired that we So talked about, there's still a portion of that that's just organic, but even raising that guide in April tells you that we feel good about Our ability and our team's ability to source the equipment that we need to supply customers. So we understand the noise.

Speaker 1

Maybe it's Our relationships maybe it's our scale or leverage, but we've been able to exceed when we sat here in January what we originally expected to purchase this year. So I think that's a good story. And I get the challenges that everybody has, but we've got Yes, there's been some slippage. And if you ask me within a quarter, did stuff come in a few weeks later, absolutely. The team worked through it.

Speaker 1

We drove higher fleet productivity on the assets that we had. And this is part of those strong supply demand and dynamics that I referred to in the earlier question about fleet productivity. So nothing that's inhibited us supporting customers, But something we'll continue to talk to our suppliers at, how can we help them help us? And that's how we'll look at it going forward.

Speaker 8

Right. I know you're not ready to give guidance on CapEx or fleet growth next year. But As we kind of think about the normal course of ordering patterns, I mean, do you can you give us a sense of just how much of the production slots you've got for next year so far or is there any kind of sizing of the production slots that you've talked with the suppliers In terms of just helping us kind of figure out just how tight is supply today and how hard is it to get new equipment?

Speaker 1

Yes. It's a little bit early for us. We're not in that planning process. But as far as the more strategic part of the conversation, Our suppliers know us pretty well. They have a good idea what categories we're turning.

Speaker 1

They have enough information to know what kind of fleet is coming out of what we All Rental Useful Life or RUL as we referred to. So they've got a pretty good idea and then it's just a growth bet. How much outside of your replacement of your Rental So, 70% of the answer is there for them already, maybe more in some years if you're not growing a lot. So, we'll get through the planning process, see how we work This year, but we don't see a need to actually lock in deals with who's which vendor is going to supply what So Q4 like we normally do, they all certainly are much more keen to what's the opportunities and our fleet team discusses that with them every week. Yes.

Speaker 8

Last one from me. Jessica, thanks for the clarification on the guidance bridge, particularly from the acquisition contributions. I'm curious, could you clarify how much of the $250,000,000 in incremental acquisition sales are expected to flow through equipment rental versus some of the other businesses

Speaker 2

So in that number, there's about $30,000,000 of used sales.

Speaker 1

Thanks. Great. Thanks, Ken.

Speaker 2

Thanks,

Operator

Ken. Thank you. Our next question comes from the line of Steven Fisher from UBS. Your question please.

Speaker 9

Great. Thanks. Good morning. Just wanted to follow-up on the acquisition impact It sounds like the market environment is continuing to get even better than it was a few months ago. So I guess I'm curious, I know it's still early So like a GFN and Franklin, but I'm wondering to what extent the improvement in the market could enable perhaps faster realization of the synergies on some of these acquisitions?

Speaker 1

Yes, certainly. So, 2 totally different scenarios, right? Franklin is kind of a scrambled day in with the rest of the business already. We're not even looking them standalone. Great acquisition by the way.

Speaker 1

I went and visited some of these folks in the last 2 weeks and pleased with the Facilities, quality, team and everything. So they're all united right now and they're working hand in hand with the stores that we already had in that market. GFN, just converting them this weekend, right? So we're going to convert them, get them on our system this weekend. Dale and I attended a management They had last week at the Meet the Team, so 100 of my new best friends.

Speaker 1

And it was we're really impressed with the quality, and they're Excited about moving forward, but it's too early to try to accelerate the timing one way or another. But I would say They're excited about growth prospects. They're excited about the opportunity to get more fleet to serve more customers. So the growth play is still very much In our sites, but a month in here and then not even on the system yet would be premature for us to already ramp up the Internally, maybe the story, if we told them about growth, growth, growth by 10 times last week.

Speaker 9

Got it. And I wonder if you can talk a little bit about the re rent market. And I'm wondering if this is

Speaker 1

Yes. So that is not mischaracterized and this may be I'm assuming this question Coming from the Acme acquisition, we're not necessarily buying those assets to re rent them. We do re rents And we do rewrit from people every once in a while, but this was really us buying these assets because they were available and they really Sure. Thank you.

Operator

Thank you. Our next question comes from the line of Neil Tyler from Redburn. Your question please.

Speaker 10

Yes, good morning. Thank you. I suppose, Matt, sticking with the topic of the Admiralis deal, Could you talk a little bit more about the how that perhaps came about? It seems to me that quite as a unique opportunity that presents itself. And I think Jessica said in her introductory comments that the impact from those assets wouldn't really Be meaningful this year.

Speaker 10

And I wondered if I've interpreted that comment correctly, why that would be? And then secondly, also on the topic of Tesco's growth capital. When you're thinking about the pace of new branch openings and presumably those branches before they mature, they act as some Drag on margin. Is it that There aren't branches that you could potentially acquire in those locations or they're not for sale at least not at the right price Or is there something else about the sort of the greenfield development that is more attractive than acquiring? Thank you.

Speaker 1

Sure. Thanks. So a couple of questions here. So I'll break it down. Let's talk about the So within that $300,000,000 of gross CapEx improvement, anywhere from $200,000,000 to 2 $1,000,000 of that we've been telling people are going to be the Acme assets.

Speaker 1

The reason why that's not a definitive number is we are going to buy these throughout the rest of the year. Those assets, A lot of them that we don't have right now came off or have to come off rent from where they are, have to be serviced and delivered to us in rent ready good condition. And if they're not, We won't buy them. So where that ends up, we'll know a lot more when we all talk at the end of October. By then, hopefully, we're primarily done.

Speaker 1

But because this is so back half loaded on the receipt of these assets, that's why you wouldn't see the normal correlating CapEx position revenue impact that you'd see, let's say, if we brought them in the Q2. So I think that's what was referred to there. And that opportunity came organically. We've had a relationship with them for many, many, many years and they're changing their model and we saw it as an opportunity to buy assets that fit our profile very well. So that's how that came up.

Speaker 1

Your second question, I call it a build versus buy conversation. We absolutely have a dual pronged approach strategy. As you know, M and A has been a big part of our business. I would even call the Franklin acquisition part of a build versus buy. We thought we had opportunity to do a better job in the markets they're operating in, and there was an opportunity to happen to do that one in acquisition versus cold starts.

Speaker 1

But we're not going to wait just for the perfect deal to come along for us to have organic growth plans, whether it's in specialty or markets where we think we have more Opportunity within the overall portfolio in GenRent. So it's an analysis we do. It's part of our pipeline that will diversify conversation, and We'll continue to look at it that way.

Speaker 10

Thank you. That's helpful. Perhaps if I could just chance to follow-up as well. On the topic of fleet utilization as it sounds currently, and I understand you don't provide those numbers, but it's clear that It's at a record level or close to. At what point does that start to introduce inefficiencies In the cost base and if so, are any of those represented in the higher delivery costs Or is that just simply a cost of fuel and drivers?

Speaker 1

Yes, I would say the latter for the delivery cost, right? This is such quick ramp up of the business when you look at it on a year over year perspective. But your question about utilization, we've always run higher utilization and we're not sharing individual components anymore. But from when we did, you all know that we've always shared That's part of what scale gives us. So we expect that.

Speaker 1

We continue to drive for that. And you don't see a correlating Higher R and M so forth, yes, that would be an area where you'd say you're maybe getting dilutive impact Running high utilization. We're not seeing that, and I think we will continue to reinvent ourselves, get more And we're pleased with the execution of our business that scale may give us options that haven't existed before to help continue to drive utilization because that's a big component of Fleet Productivity.

Operator

Thank you. Our next question comes

Speaker 11

So my question is just on the bonus accrual. Can you quantify the dollar amount that you're seeing this year? And just to double check, it sounds like There was a pretty good catch up in 2Q. What's the cadence for the balance of the year?

Speaker 2

So in that back half, as I As I said earlier, Chas, there's about $45,000,000 of year over year headwind that's coming from the bonus.

Speaker 11

Got you. And for

Speaker 1

the full year? For the

Speaker 2

full year, it's top 90%. Okay, great. And The way that will phase, Just based off the comp from last year, there'll be a little bit more in the 3rd than in the 4th.

Speaker 11

Got you. That's helpful. And then just a bigger picture question. Can you just talk about the customer acquisition costs for in branch versus e commerce? How much of your sales are actually made through the e commerce channel today?

Speaker 11

And Is there any real preference from your end? Is there any margin differential? And I mean, I imagine that you want to segment that channel More towards your non key account customers, maybe you can talk about that strategy. Sure. I wouldn't say that this is

Speaker 1

a cost I think it's about giving the customers the avenues to communicate with you that they prefer, right? So and I've been very clear about that strategically that We want to engage with the customers the way they want to engage. It's still not a big part of our revenue or To be fair, a big part of the industry's revenue, but it's continuing to grow. I think more importantly, specifically for the leader in the You have to have that option available for the customer. And I will say the more and more that engage with it and a little bit of that ramps up during COVID, the more Opportunity for growth there.

Speaker 1

I also think it's the information that some folks want to access information at their own time and their own way. And I think that's where The digital connections with customers really played out even more than just the acquisition. The acquisition is only a piece of the digital engagement with the customer, Getting them the real time information, getting them access to information they haven't had, I think probably longer term the more valuable customer experience than just the acquisition

Operator

Thank you. Our final question for today comes from the line of Scott Schneeberg from Oppenheimer, your question please.

Speaker 12

Thanks very much. Good morning. Matt, just curious, in times of When business is going well, just supply demand imbalance, delivery costs go up because the 3rd party purchased transportation. I'm just curious, Cyclically, you encounter that. It's somewhat of a high class problem.

Speaker 12

But how are you thinking about that strategically To mute it, having a very large business, maybe to mute that in the future with Employing more full time drivers. And as a follow-up on this question, how are you seeing the labor market right And then how are you feeling about staffing? And is that going to be a problem going forward if we continue to see the robust demand environment? Thanks.

Speaker 1

Thanks. You're singing my tune here, Scott. I think as far as the in sourcing, which was we talked about a lot Last year during COVID, keeping our people working showed us the opportunity. Now admittedly, the ramp up came really quick and now that we're in the peak season, Outside services were necessary, but longer term, I view this as an opportunity for us. The recruiting of drivers is probably the one area, Not just for our industry, I think my trash pickup was late last month because they didn't have driver pickup.

Speaker 1

It's a problem for everybody. It's not going to be forever. So longer term, I This is an opportunity for us to continue to drive even more efficiency in our business by in sourcing things that we were As far as the labor market, and overall, we're doing pretty well outside of being able to hire more drivers and even get trucks I would say the rest of our labor situation, we feel really good about. Part of it is our low turnover. So we're not having to replace as many As if we had had higher turnover and frankly part of it is decision we made to not do layoffs.

Speaker 1

So thank goodness we didn't do that Because it would be really tough right now if we had mass layoffs during COVID and then still had to support this level of activity. So I feel really good about the way we've managed through it, but still opportunity to in source in the future, and we've been talking about that a lot

Operator

Thank you. This does conclude the question and answer session. I'd like to hand the program back to management for any further remarks.

Speaker 1

Thanks, operator, and thanks, everyone, for joining And I'm sure you can hear and you can see we're full steam ahead in a favorable market. And our Q2 investor deck reflects our recent So please download it from the website and feel free to reach out to Ted if you have any other questions. We look forward to talking to you soon. Stay safe. And operator, you can now end the call.

Operator

Thank you. And thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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Earnings Conference Call
United Rentals Q2 2021
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