United Rentals Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2022

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 company's annual report on Form 10 ks for the year ended December 31, 2021, as well as to joint filings with the SEC. You can access these filings on the company's website at w 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 for 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 presentation 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 Jessica Grazano, 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. I'll start with the main takeaways from yesterday's release. In the Q2, our team executed extremely well in a robust demand environment. And as a result, We delivered very strong performance by any measure.

Speaker 1

Our rental revenue increased by 26% year over year to a 2nd quarter record Of almost $2,500,000,000 well above expectations. And adjusted EBITDA grew faster than the top line, Up 31 percent to a record $1,300,000,000 We also demonstrated good cost discipline. Our adjusted EBITDA margin expanded 360 basis points to 47.3%. This contributed to a strong flow through of about 65%. And importantly, we delivered a 2 30 basis point start of the year continued to fuel our momentum.

Speaker 1

The macro environment remained favorable, which created more demand in the quarter, and you can see that in our rental revenue growth, which included fleet productivity of better than 11%. In addition, the customer trend toward renting equipment is alive and well. We see this as a secular shift that will continue to move the market from owning equipment to renting it over time. And lastly, we're confident that our growth is outpacing our industry as we continue to take share both in our core markets and with key customers. One reason we're gaining share is our positioning as a one stop shop.

Speaker 1

Customers place a lot of value on being productive And our combination of scale, job site solutions, superior service and technology is unique in our industry. Customers also care about safety, and we prioritize safety on and off the job site. And this was another area where our team delivered in Q2 By keeping our recordable rate well below 1. And increasingly, customers place a value on sustainability. In May, we announced an initial agreement to purchase over 500 all electric trucks and vans from Ford, including the F-one hundred and fifty Lightning pickups.

Speaker 1

This partnership is a good example of how we're continuing to add sustainable solutions to our rental fleet while moving toward greener operations. We're proud of the progress we're making in many different areas of ESG, including environmental stewardship and social impact. Yesterday, we released our 10th Annual Corporate Responsibility Report with comprehensive data covering 2021 along with more recent developments. You can find it on our website if you'd like to download it. Another thing customers strongly care about is reliability.

Speaker 1

It's high on their list and we've got a very high bar in response. Our team is trained to deliver a caliber of service that earns the next opportunity. Our employees like that challenge and they love being a hero to our customers. That's a big part of our culture at United and it helps with retention And recruitment. Our net headcount at the end of June was 9% higher than a year ago, which is a solid gain in a tight labor market.

Speaker 1

Now repeat something I said before. We're fortunate to have a world class team standing behind our strategy. It gives us confidence in every target we put out there and that includes the updated guidance we released yesterday, which raised our outlook for total revenue, Adjusted EBITDA and free cash flow. We have strong visibility through the balance of the year, and the activity we're seeing will create a lot of demand to get equipment on rent. There are plenty of positive signs to support this view.

Speaker 1

Virtually all of the external indicators are favorable, including the Dodge Momentum Index, The ABI, contractor backlogs and customer sentiment and the used equipment market remains robust. In the Q2, we captured record recovery rates and margins on used sales. I spoke to all of these dynamics coming out of Q1, and they're all still true today. Now I'm going to pivot to look at demand at the ground level. Our Generant and Specialty segments both performed extremely well in the quarter.

Speaker 1

All of our regions company wide delivered double digit rental revenue growth. And in many ways, it's a continuation of what we spoke about in Q1. Broad based activity across regions stemming from a diversified mix of end markets and key verticals. Looking at it by end market, our rental revenue from non res construction was up 27% year over year and infrastructure was up 15%. And more broadly, almost every vertical showed year over year growth in rental revenue.

Speaker 1

In terms of project types, Large data centers are continuing to break ground along with infrastructure projects and distribution centers. Manufacturing is coming back. The power vertical is also accelerating and there are more tailwinds in the wings. With infrastructure, for example, The funding is now finalized in Washington, and we expect to start seeing a benefit in 2023 and beyond. With manufacturing, the resurgence of the industrial sector in North America is being driven in part by supply chain challenges in other parts of the world, and that's good for us.

Speaker 1

It's already evident in certain sectors. Companies are investing 100 of 1,000,000,000 of dollars in megaprojects in the U. S. And Canada to build plants across a variety of verticals like semiconductors and automotive. These projects will require equipment for years to come, and they play to our competitive advantage with large customers.

Speaker 1

On the Specialty side, the segment had another excellent quarter, led by our Power and Mobile Storage Businesses. The segment as a whole grew rental revenue by 39%, including the benefit from General Finance. Pro form a specialty was up a strong 29%. We opened 24 cold starts through June in specialty against target of about 45 openings by year end, and that's slightly higher than our original projection of 40 openings this year. So as you can see, 2022 continues to be a landmark year for our company, both financially and operationally.

Speaker 1

We delivered another record quarter in what we expect to be a record year. Our flow through in the quarter reflects the team's discipline in navigating a challenging cost environment. And we continue to have the benefit of a strong balance sheet, low leverage and robust cash generation. This gives us the flexibility to act opportunistically on many fronts. This year, we expect to make the largest investment in our history In fleet of about $3,000,000,000 Our suppliers are taking good care of us and our CapEx spend is tracking to plan.

Speaker 1

We'll also continue to explore growth through cold starts and acquisitions. We've made 7 bolt on acquisitions this year to date For a total consideration of over $300,000,000 Lastly, we expect to complete our share repurchase authorization this quarter. These are all prudent capital allocations to create long term shareholder value. And we know that the key to leveraging capital is relentless I'd like to take this opportunity to thank her personally for her many contributions over the past 7 years. As you all know, Jess will be leaving us to take on a new opportunity, And Ted has stepped in as we go through the CFO search process.

Speaker 1

And I know I speak for our entire leadership team when I say it's been a pleasure to work with Jess,

Speaker 2

Good morning, everyone, and thank you, Matt, for your kind words. It's definitely bittersweet to be on my last earnings call for United. My time here has been an incredible experience and not just with our amazing team United and our Board, but also working so closely with Ted and the investment community. We've accomplished a lot together, so I'm grateful to have this chance to publicly say thank you. As we look to the quarter, I'm especially pleased to be able to report such great results on my last call, record results actually.

Speaker 2

As Matt shared, the strength we've seen in demand across our end markets has exceeded our expectations for the quarter. It also underpins our increased guidance for revenue, adjusted EBITDA and free cash flow for the full year and more on that later. Let's start with a closer look at the Q2. Rental revenue for the 2nd quarter was a record $2,460,000,000 23%. Our average fleet size increased by 13.6%, which provided a $223,000,000 tailwind revenue.

Speaker 2

Fleet productivity was up a very healthy 11.3%, contributing $185,000,000 And rounding out OER was about a $25,000,000 reduction in rental revenue from fleet inflation, which we estimate to be a 1.5% drag. Also within rental, ancillary revenues in the quarter were higher by about $115,000,000 or 42%, which is mainly due to increased delivery and other pass through charges. And finally, re rent was up $13,000,000 in the quarter. Used sales for the quarter were 100 and $64,000,000 a decline of $30,000,000 or about 15% from the Q2 last year. We continue to manage used sales to help ensure we have adequate capacity to serve the robust demand we're seeing this year.

Speaker 2

We're focusing those sales in our most profitable retail channel And together with a strong market overall and better pricing, delivered a healthy 62.2% adjusted used margin for the quarter. Let's move to EBITDA. Adjusted EBITDA for the quarter was $1,310,000,000 another record for us and an increase of 31.2 percent year over year or $312,000,000 The dollar change includes a $324,000,000 increase from rental. In that, OER contributed $273,000,000 and ancillary was up $51,000,000 Used sales were a tailwind to adjusted EBITDA of $9,000,000 and other non rental lines of business provided $10,000,000 Other income also contributed $10,000,000 of year on year benefit, in part due to some of the onetime costs from acquisitions we called out in the Q2 of last year. SG and A was a headwind to adjusted EBITDA of $41,000,000 driven in large part by higher commissions on higher revenue.

Speaker 2

And as expected, we saw certain discretionary costs in SG and A continue to normalize. Adjusted EBITDA margin came in very strong at 47 point 3%, up 3 60 basis points year over year with excellent flow through of 64.5%. Excluding the benefit from used sales in the quarter, flow through would have been a healthy 59%. The strong performance across the core business reflects Better than expected growth in rental. It also reflects the impact of actions we've taken to pass through cost inflation in certain areas like delivery and fuel.

Speaker 2

Our team also did a great job managing costs across other areas of the business. Let's shift to adjusted EPS, which was another record for us at $7.86 That's up 68% or $3.66 versus last year. EPS this quarter includes about $0.55 from a onetime tax benefit. But even if we adjust for that benefit, I'm pleased to note our EPS would still have been a record this quarter. Looking at CapEx.

Speaker 2

Gross rental CapEx was a healthy $872,000,000 in the second quarter. From used equipment sales were $164,000,000 resulting in net CapEx of $708,000,000 which was similar to the quarter last year. Net CapEx through the first half of the year of $979,000,000 is up $232,000,000 or 31%. Now turning to ROIC and free cash flow. ROIC continues to run well above our weighted average cost of capital at a record 11.5 on a trailing 12 month basis.

Speaker 2

That's up 60 basis points sequentially and 2.30 basis points year over year. Free cash flow also continues to be very strong as we generated $392,000,000 in the second quarter and just under $1,000,000,000 for the first half of the year, all while continuing to invest in high levels of CapEx to grow our business. I'll share a few comments on our balance sheet. As I look back on my time here, I am especially proud of the work our team has done on the balance sheet. It is in fantastic shape.

Speaker 2

Our leverage ratio at the end of the second quarter remains at the lowest level in our history at 2.0x. That's flat sequentially and down 50 basis points from the Q2 of 2021. Liquidity at the end of the quarter was a very strong $2,800,000,000 With the vast majority of that coming from ABL capacity of just over $2,500,000,000 And notably, within the quarter, We took a number of actions to further bolster our positioning, including upsizing and extending both our ABL and AR facilities with improved terms, and I'd be remiss if I didn't also mention that our next long term note maturity isn't until 2027. The last thing I'll mention on our capital allocation relates to our current $1,000,000,000 share repurchase program. We leaned in a bit into the execution, Roughly $500,000,000 in shares during the Q2.

Speaker 2

Through June 30, we've spent $762,000,000 of the authorization, repurchasing a little more than 3.5 percent of our fully diluted share count. With 238,000,000 left to purchase, we expect which we shared in our press release last night. Total revenue is now expected in the range of $11,400,000,000 to $11,700,000,000 For an increase of $250,000,000 at the midpoint, implying full year growth of 18.9%. As I mentioned earlier, this increase is supported by robust demand that we continue to see broadly across our geographies and our end markets. We expect the profitability and flow through on that higher revenue to remain strong.

Speaker 2

Our adjusted EBITDA range is now $5,400,000,000 to 5 $550,000,000 up $175,000,000 from the midpoint of our previous guidance. This implies a 2 100 basis point increase in full year adjusted EBITDA margin and robust full year flow through of about 58%. Our range for gross and net CapEx is unchanged. We still expect to source about $3,000,000,000 of gross CapEx. We also expect the strength of the used equipment market will support used proceeds consistent with our original guidance even though we'll sell less fleet for the full year than originally planned.

Speaker 2

And finally, our free cash flow guidance has increased $150,000,000 at the midpoint Now as I pass the baton, I've asked Ted to jump in on Q and A. So let's get to your questions. Operator, please open the line.

Speaker 3

Our first question comes from David Russo from Evercore ISI. Your line is open.

Speaker 4

Hi. Thank you for the time and congratulations, Jess. Regarding just sort of big picture, I mean, we can dive into a lot of numbers, but needless to say, the results were pretty solid. So I'm I'm really just trying to think about 23 here, if you can indulge me. Matt, obviously, you've been doing this for many years.

Speaker 4

And the backlog that you're hearing from your contractors, When they speak of where they are in the project development, do they have financing, how committed they seem, something underpinning it, Be it infrastructure bill or whatever it may be, just curious, when you look at this backlog today, if you could maybe comp it versus where it was this time last year And just your history with this business, the comfort that you have in these backlog numbers that I guess we're still suggesting to you another year of solid growth in 'twenty three.

Speaker 1

Sure, David. So Obviously, we'll go through our whole planning process this fall, but we'll do a deeper dive and then update everybody at year end on what we expect 2023 to be, let's be clear, we expect to carry good momentum into 2023, whether that's the great fleet productivity, which there'll be some carryover effect as a And that hasn't changed. So we're not seeing any kind of deceleration in our customers' expectation. And additionally, as I mentioned in my prepared remarks, Mega projects are going to be long term for us. So they're breaking ground now and funded and we're talking 1,000,000,000 of dollars of potential work out there.

Speaker 1

And we haven't yet seen a couple of tailwinds that I mentioned, Shovel ready, meaning activated for our rental revenue, the funding for infrastructure and a lot more what we believe is going to be a manufacturing resurgence. So those are the tailwinds I call into play going into 2023. Some of it's structural for our larger and momentum that we're carrying And then some of the macro areas that we have yet to enjoy that we think are going to be tailwinds in 2023.

Speaker 4

Is there anything about what you're hearing For those projects that should influence our thought on the margins, be it it's going to be more national account or it's going to be more of a different vertical that you've historically have better or worse than average returns. Because right now, it looks like the incremental EBITDA you're getting on the owned Fleet, it's been over 70% now 2 quarters in a row, right? Obviously, the ancillary and the re rent drags it down a little bit The overall 65, but it just seems that the drop through has been so strong. I'm just trying to calibrate how much is it. Right now, we're just running at time use that You probably would have thought, were that possible?

Speaker 4

So the fixed cost absorption is great, but I'm also just trying to be thoughtful If I've got a different mix coming in 'twenty three to how to calibrate how to really think about the incremental margins from here.

Speaker 1

No. Operationally, we actually see some efficiencies on the large projects. Admittedly, some of the real large scale customers, our largest may have a little bit better pricing, but they kind of even off and the consistency and the longevity of rental For major projects is a positive offset for us. So I don't expect to see a big margin profile change based on the project sizes or duration. I think that was the basis of your question.

Speaker 4

Okay. Thank you very much for the time. I appreciate it.

Speaker 1

Thanks, David.

Speaker 3

And our next question comes from Tim Thean from Citigroup. Your line is open.

Speaker 5

Thank you. Good morning and congrats again, Jess. Thanks. It's pretty nice of you to hand the keys over to Ted with Leaving the balance sheet in such good shape.

Operator

Thank you, Tom. Thank you.

Speaker 5

Yes. And actually just I guess kind of continuing on that, Matt, just As you mentioned that accelerating the repo into the Q3, how are you thinking given where I mean, what you just outlined for potentially another strong year in 2023 and where the balance sheet likely sits heading into the year, you're thinking about the priorities beyond buybacks? Does M and A or just maybe updated View in terms of either M and A, does a dividend potentially come into the picture? Just maybe A few thoughts on that in terms of how you're thinking about capital returns.

Speaker 1

Sure, Tim. I'll categorize all this as our capital allocation Prioritization. So as you accurately depicted, we will finish a quarter in advance our $1,000,000,000 authorization and That was just a great opportunity for us to utilize excess cash that we have. And we'll still live in the bottom, if not below the bottom of our leverage range. So we're very comfortably operating in that range.

Speaker 1

And there's no magic to it. If we go below it for a little while, that's not a concern of ours either way. The bigger statement I'd like to make is our prioritization of our robust balance sheet usage As well as our free cash flow. And 1st and foremost, it's to support the business, whether that's organically, as we've done a lot of this year, Or through Smart M and A. And the opportunities we have to then disperse excess cash Not a or strategy.

Speaker 1

We're fortunate that the business is in great shape and the balance sheet, as Jess pointed out in her prepared remarks, is in shape that we can On the organic growth, we can do some deals and still return excess cash to shareholders. And I won't get ahead of our Board, but as we think about the Options in which we can do that, we'll update everybody maybe as soon as October.

Speaker 5

Got it. Okay. And then maybe, Matt, just a quick follow-up. From a fleet standpoint, how can we or how should we think about just given the strength in recovery values, What the fleet, kind of the composition from a to the extent you're ending you're selling fewer units than you thought, How do we think about the fleet from a value versus unit perspective, Just given how the net CapEx is playing out, assuming that makes sense, just how much larger is the fleet than it Really, yes.

Speaker 1

So first off, we'll be up somewhere around 10% range at year end with over $17,000,000,000 of fleet Approximation when we end the year in 'twenty three. So we'll have a larger fleet. And when we think about the value of that fleet, we haven't really seen a tremendous We haven't changed our plug for inflation in our fleet productivity. And even if that picks up a hair, and I know we're hearing a lot of noise about I think the opportunity that we've had and that we've executed on driving strong fleet productivity can offset that. When I think about What the supply chain is going to look like next year, which will kind of be the back half of that question, we're already for over a month now, Earlier this year than usual for sure, talking to our OEMs about what our needs are going to be as they try to forecast out what Get us the $3,000,000,000 that they've committed to us this year, which we're on track, which is great news, but also for the future.

Speaker 1

And so I know they're working hard and We have some that are doing better than others, but in aggregate, the vendor base is really doing a good job for us and we expect the same in 2023.

Speaker 5

Okay. Thanks for the time.

Speaker 1

Thanks, Tim.

Speaker 3

And our next question comes from Rob Wertheimer from Milas Research. Your line is open.

Speaker 6

Thanks and good morning everybody.

Speaker 1

Hey Rob.

Speaker 6

So Matt, you touched on this earlier, and I know you like to talk fleet productivity, and I'm not, I guess, asking for the level on time utilization. But it does seem like, Obviously, rate is going up, but it feels like there is more to the performance this quarter than just rental rates coming up. And I assume Time you just hitting new records. For 1, is that roughly accurate? And for 2, is that an operational shift where you've learned how to unlock a little bit more And keep it up or is it just a super hot market and people aren't taking stuff off rent and there's less turnover or something.

Speaker 6

I'm just wondering if that's a sustainable change Yes,

Speaker 1

in short Rob that's a yes and a yes, right? So certainly necessity is the mother of invention here. But all kidding aside, I guided in April and I was never so pleased to be wrong that we'd be somewhere in the mid single digits in fleet productivity. And All three components of fleet productivity, whether it be rate, mix or time exceeded our expectations. So that's why you see this Robustly productivity, but the one that was most surprising to me was time because I said publicly, we were in so hot last year in the back half of the year.

Speaker 1

I'd have been pleased if we repeated it and the team outdid it. So that was the one that was Surprise, not numerically the largest value in the 3. I'm not saying that. As you know, I'm not going to give numbers, but it was the most surprising to me because we had a real high bar to get over it. So that's how I would qualitatively talk about the really strong fleet productivity that we drove.

Speaker 6

And then the sustainability of that, have you learned new ways of getting there to pushing it to new levels? Any comments on how you got there, if you were Thanks.

Speaker 1

Yes. As you know, because you visited our branch and we talked a lot about it. The technology that we've been embedding in our operations and The efficiency and productivity that's borne out of that for many, many years, right, starting back as far as 10 years, Has really given us an advantage over all the data that we see throughout the industry after. So we've always enjoyed Time utilization gap to the positive and part of that scale, part of that network that we have and the density of that network, but it's also embedded technology and we've actually improved upon that. So we do think it's sustainable.

Speaker 1

Admittedly, the team surprised me and set new heights this year, but I don't think that it's not sustainable. At some point, the more interesting part is what is the level of off some time? Do we ever get a point where We want to make sure that we're still being as responsive as we are and all the metrics tell us that's still happening. So we're very pleased.

Speaker 5

Thank you.

Speaker 1

Operator, no questions.

Speaker 3

All right. Our next question comes from Steven Fisher from UBS. Your line is open.

Speaker 7

Thanks. Good morning. Just wanted to follow-up on M and A and maybe the smart M and A as you call them, Matt. And you're doing a bunch of bolt ons. I guess, in general, how are the prospects for larger deals?

Speaker 7

And related to the bolt ons, are you And I'm seeing increased desire from sellers. Are you doing more bolt ons because the larger deals are harder to get done? Is there more something Specific things you're targeting that it makes sense to do via bolt ons, just a little color there, please.

Speaker 1

Sure. Thanks, Steve. We've always had a pretty diverse robust pipeline of M and A and that has not changed. Matter of fact, it may have even increased a little bit as specifically in some of the bolt ons, as you call them, the smaller ones where people Have fully repaired their businesses from COVID and now there's probably a few people out there that would have sold just before COVID, but they weren't going to sell at those low levels. So Those are people who have repaired their business and have put themselves back on the market.

Speaker 1

And what you saw our execution on was really just spot In a given market where our local teams needed some more capacity, whether that's people, facility or fleet, right? And that's the way I categorize But there are still some big deals to be had and we're still working that pipeline. It's just a matter of which ones get over the trans And when I say smart M and A, it's because it's going to have to fit all three legs of our stool that we've talked about. And that last check on the smart is the financial. So we got to have a degree of both terms and a willing seller to get them over the final leg, but we're working the pipeline on both big and small deals.

Speaker 7

That's helpful. And then what on the CapEx front, what would you have to see to raise your CapEx guidance for this year on the growth side? Is it More near term demand strength, I mean, it sounds like it's kind of going all out there, or is it just more confidence that suppliers can deliver?

Speaker 1

Yes, it would be the latter. It's not a demand issue in any way shape or form. And as a matter of fact, Jess alluded to, we've even sold less used To help fill that demand since we in a normal year, we would have the OEMs pull forward have already had some CapEx Forward into Q2 and as you see, we're stuck to our original plan of around 900 and then another 1.1 Q3, we don't think we're going to have the opportunity to pull any more forward from those numbers. And I'm not Our suppliers are working real hard to fill that and I know the challenges they have and that's why you didn't see us raise our CapEx. In a normal supply environment, you probably would have seen some increased CapEx, But we are using the used sales lever and pulled out all the any broker and auction or trade in.

Speaker 1

We don't really do a lot of auction trade in sales To make sure we use that extra capacity to support the business.

Speaker 5

Perfect. Thanks. All the best, Jess.

Speaker 1

Thank you. Thank you.

Speaker 3

And our next question comes from Seth Weber from Wells Fargo. Your line is open.

Speaker 8

Hey, good morning and congrats, Jess,

Operator

It's a pleasure

Speaker 8

working with you. Yes. Matt, I'm sorry. You might have just addressed this, but And I might have missed it, but the CapEx cadence for the second half of the year, can you just Talk through that. Some of your suppliers are obviously talking about getting constraints, getting stuff out the door.

Speaker 8

I assume Q3 is meaningfully up from the Q2, but is there any way to frame just the cadence of 3rd quarter versus 4th Quarter on gross CapEx.

Speaker 1

Yes, sure. It will be and as we had stated in April, it really hasn't changed our plans. We We expected to do about $900,000,000 this year, which we're right about there. And then we do about $1,100,000 I'm sorry, in Q2 $900,000,000 and about $1,100,000,000 In Q3, and we think we're on track to do that. And then that leaves you another depending on where we end up in the range, let's say 5.5 for Q4.

Speaker 1

So our expectations haven't changed all year. And as I stated earlier, we just don't have The opportunity is not a lot of wiggle room for the vendors to accelerate or to increase that at this point. And if that changes, we'd update everybody. We do not expect that to change in the mid of the rental season, which is Q2 and Q3.

Speaker 8

Right. Okay. That's helpful. Thanks. And then just on the used sale margins Very, very strong.

Speaker 8

And I know you called out some mix benefit, just channel mix benefit. But can you just talk to I mean, there's obviously a lot of concerns around used equipment pricing, prices that we see, which seems to be inconsistent with the prices Thank you guys for capturing. So I don't

Speaker 1

know, can you just

Speaker 8

help people connect those dots as Your confidence in what you just put in pricing to stay high for the foreseeable future versus some of the concerns that are out In the market around pricing rolling over. Thanks.

Speaker 1

Yes. Seth, this is Ted. I'll take that one. Look, in the quarter itself, We saw really strong results. So we certainly are not seeing pricing headwinds.

Speaker 1

On a sequential basis, we are up high single digits. So it's certainly something we'd be keeping an eye on, but it's not something we'd seen in our own results. Yes, I'm quite confident, right? We're seeing now part of the great strength you see is that we're primarily selling the retail channel. We've built a unique engine In that way compared to the rest of the industry.

Speaker 1

So we're not going to stop that because that's driving great pricing. But even within retail, On your retail machine, strong pricing. So we've heard a little bit recently about people talk about that rollover. Maybe that's auction driven, but We're not seeing it in our experience or in the retail channels.

Speaker 8

Right. Okay. Very helpful. Thank you, guys. And

Speaker 3

And our next Question comes from Jerry Revich from Goldman Sachs. Your line is open.

Speaker 9

Hi. Yes, this is Clay Williams on behalf of Jerry. Good morning. Can you talk about how General Finance is performing and its supply availability of containers has eased? Thanks.

Speaker 1

Sure thing, Clay. Performing very well. If you recall, we had said when we Announced that deal, but we wanted to double the size of that business in the next 5 years, and we're ahead of schedule. The team is really doing a great job, And the supply chain has helped. And ironically, when we initially bought them, that was probably the toughest time for quite some time To get containers and the pricing was up, but things have remedied for that and the team's taken full advantage.

Speaker 1

And as you heard on my prepared remarks, such a great job that I wanted to call them out specifically for the growth they're doing. So we're excited to see that the thesis Around the deal and buying that platform and growing it organically is executing ahead of schedule. Yes.

Speaker 9

And just a follow-up there. Can you talk about what has enabled you to scale that business so quickly ahead of plan across your branches?

Speaker 1

Our network, right? So relationships with our customers. And these were products that we knew our existing customers where we had relationships with, wanted, and now we're able to supply them. And that was a big reason why we looked at adding that product to our mix. With a platform that was big enough so that we could support most of the network, but also small enough that we could grow it organically and then pay for the multiple that we paid for.

Speaker 1

It's really been a win win from the strategy perspective and the customer support. Thanks. Thank

Speaker 3

you. And our next question comes from Ken Newman from KeyBanc. Your line is open.

Speaker 10

Hey, good morning guys.

Speaker 1

Good morning.

Speaker 10

I was just curious, obviously there's been a lot more just talk a little bit about what you're hearing from customers in terms of whether or not you're seeing any changes in customer behavior?

Speaker 1

Yes. Ken, I'll take the first part of that for sure. The direct customer or consumer facing parts

Speaker 10

of our business are really

Speaker 1

small. I guess if you look at non res, which call it between public and private, it's probably 40% or so of our mix. Some Action of that might be the component of retail within commercial, but we certainly don't think it's very significant. And frankly, it hasn't been kind of a strong market for a number of years. Obviously, strip malls and businesses like that have been under assault from e commerce.

Speaker 1

Some of the aspects that might be more kind of consumer facing It could be things like entertainment, but there we focus on live sporting events that have been quite strong. So I think PGA events, auto racing, things of that sort. So the Does that answer the first part of the question?

Speaker 10

It does, yes. And then I think the second part was just around go ahead.

Speaker 1

Yes, as far as customer behavior, which I think what the second part was, Ken, We're actually because the market is so tight here, we always are about repeat customers, building loyalty, building partnerships, And I would say in a tight demand environment, I mean supply environment for the robust demand, our customers are really relying on that. Our team has done a great job leading the challenge, but it's in a tight environment, we've got to make sure we come through for those customers. And we think that bolsters Our relationship selling opportunity and the one stop shop value that we bring to these customers. And I would say if anything the relationship and appreciation of being able to be a one stop shop has improved. Got it.

Speaker 1

And then just for

Speaker 10

my follow-up real quickly, just to clarify, I know you guys talked a little bit, I think in You had guided to that mid single digits fleet productivity number. Just given all the commentary that you've given so far On the quarter, should we start thinking about fleet productivity in the high single digits here into the back half to kind of get to what's embedded in your in the midpoint of your guide?

Speaker 1

You beat me to it, Ken. Absolutely. So that's what's embedded. If you use the midpoint, that would imply a high

Speaker 5

J. Rice:]

Speaker 1

Got it. Thanks for the time. Thank you.

Speaker 3

And our next question comes from Scott Schneeberger from Oppenheimer.

Speaker 11

Thanks very much. Congrats on the quarter and Jess and Ted, congratulations and best wishes in your roles.

Operator

Thank you.

Speaker 11

You're welcome. The I guess that last question was a great segue to my first, which would be Clearly, a very strong year this year and in 2022, and it looks like you're going to be ending the year quite well. So as As we think about fleet productivity exiting 2022 and going into 2023, how should we think about the carryover impact? Just any thoughts and magnitude on what we can enter next year, Kerry? Thanks.

Speaker 1

Well, as you know, Scott, I'll be painfully consistent in not giving quantification of the metrics. But just qualitatively, You're seeing what our other peers are reporting. The whole industry is doing a good job driving fleet productivity, including rate. So Naturally, there'll be some carryover. I'm not going to quantify it, but there'll be some carryover just on the rate alone.

Speaker 1

And as far as mix And time, the team while we don't give the numbers, the team works really hard on making sure we're driving positive fleet productivity In every metric under their control and although the comps on time certainly and I'll sound like a broken record because I said that this year It will be a challenge, so we expect that to moderate. We still think that there'll be opportunity to well exceed Our expectations of that initial 1.5% for fleet productivity.

Speaker 11

Great. Thanks, Matt. I appreciate the qualitative response. And I guess, Jesse, I do working in here, the delivery expense, if you could speak to how in this inflationary environment, How that's trended in the first half? How you all have been managing that in a tough labor market?

Speaker 11

Internalizing transportation versus Maybe using 3rd party, just commentary on that and also how you're managing any pressures with fuel And any new lessons learned on the go forward? Thanks.

Speaker 1

Yes. Scott, this is Ted. So If you look at our results in the first half, both first and second quarter, it would be embedded in that ancillary line item that Jess called out in

Speaker 8

her script and you can

Speaker 1

see in our financials. From that standpoint, you can certainly see it's had kind of a it's been considerably positive, call it, contribution margin from the entire Ancillary line items would be running in, call it, probably the upper 30s. So certainly, we've been able to manage All that very effectively. And as a reminder, only a component of that entire line item that you'd see in ancillary would be isolated to Does that help with the fuel piece?

Speaker 11

Yes, that's great. Thanks. I'll turn it over.

Speaker 1

Thank you.

Speaker 3

And our next question comes from Ming Deboer from Baird. Your line is open.

Speaker 12

All right. Thank you. Good morning and congrats Jess and best of luck to you.

Operator

Thanks.

Speaker 12

So I'm going to try to kind of ask a question that a few folks have hinted at already. If we're Sort of looking at your revenue guidance for the back half of the year, the implied guidance assumes here About another $1,000,000,000 of revenue and you've been running quite well year to date, especially in the second quarter in terms of all the metrics surrounding the fleet. So I'm wondering how are you thinking about the moving pieces as to what generates this Sequential lift to revenue, is it time you'd still, is it maybe a little more rate, is it fleet, what are some of the moving pieces there?

Speaker 1

Yes. Mig, this is Ted. I would say it's all the above, right? I mean, It's certainly the expectation that we're going to have more fleet on rent as an example. It's the idea that we'll certainly have positive fleet productivity.

Speaker 1

Certainly, you'll see the used sales are obviously implied to also be up in the second half versus the first half, as we've held back in the first half to make sure we're satiating customer demand. So I don't know that I would pinpoint it to kind of 1 or 2 variables. It's really kind of a Continuation of the fact that the business is performing very well and matching the seasonal curve that we would usually see in our industry, right? So Q3 is always that lift up from Q2 and admittedly to your point off a high base, but we think a lot of that momentum will continue.

Speaker 12

And you anticipated where I was going to go with this. Is there a comment you want to make Q4 relative to Q3? Is there Should we expect Q4 to be high relative to Q3? And again, I'm just sort of asking as to what's baked into your assumptions, who knows how it's going to play out?

Speaker 1

Yes. What's baked into our assumptions is consider the normal seasonal patterns that we usually enjoy, But now at a higher level, partly driven by a little bit more fleet than we thought by selling less used, although the bigger needle mover is the strong fleet productivity. We've created a higher base off which to go to. But if you look at the curve overall, we expect the year and implied in this guidance is The standard seasonality just off a higher base.

Speaker 12

And I'm sorry to be a stickler for this. It's just that Seasonality has been kind of screwed up with COVID and everything else that came from that. So can you maybe remind me as to what the normal seasonality that you're referring

Speaker 1

Yes, Megha, I mean, I don't have those numbers off the top of my head, but certainly if you were to look at kind of the sequential revenue patterns Historically, that would be a reasonable way to think about normal seasonality.

Speaker 12

Okay. And then my final question, You obviously sound very optimistic about 2023. And within that context, I'm kind of curious as to how you're Approaching your CapEx discussions with your partners, is it reasonable for people to think that CapEx is going to be up in terms of demand for you in 2023 relative to 2022. And I'm curious, Are you getting OEMs to commit to firm pricing? Or is it just a discussion around production slots at this point?

Speaker 12

Thank you.

Speaker 1

Yes. So I'll take the latter part of your question. We're simply talking about the production slots right now. I don't to be fair to our partners, I don't think they know what their costs are going to be At the time, it's ready to prepare all the raw material to get ready to build these assets. So we're focused on production.

Speaker 1

We'll expect to get win wins with our partners As usual, Ted, I don't know if you want to take the first part of the question. Sorry, Nick, could you repeat it again?

Speaker 12

Yes. You guys obviously We sound really good about 2023, and I'm wondering if we should be expecting CapEx to be up at this point.

Speaker 1

Look, I think it's early to kind of get ahead of Guidance on 23, but certainly from our tone, you can hear we feel pretty good about the outlook looking certainly through the end of 2022. In In terms of what that translates to, we'll have an update in January, and certainly And we'll be working on the 2023 plan as we get into the Q4. So certainly more to come there. Yes. But to be clear, we do expect 2023 to be growth year.

Speaker 1

We're just not ready to Details on that, we've got a whole lot of work to do from ground up, planning process that will start this fall and we'll finalize in the 4th quarter. Okay. Thanks for your question.

Speaker 3

And with that, it appears there are no further questions. I'd like to turn it back to the speakers for any closing remarks.

Speaker 1

Thank you, operator, and thank you, everyone, for joining us. We're happy to share such a strong midyear outlook and we'll have more when we talk again in October. And in the meantime, you can reach out to Ted anytime with your questions or Operator, please go ahead and end the call.

Speaker 3

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

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Earnings Conference Call
United Rentals Q2 2022
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