United Rentals Q3 2023 Earnings Call Transcript

Participants

Corporate Executives

• Matthew J. Flannery, President and Chief Executive Officer
• William "Ted" Grace, Executive Vice President and Chief Financial Officer

Analysts

• David Raso, Evercore ISI
• Rob Wertheimer, Melius Research
• Steven Fisher, UBS Group AG
• Clay Williams, The Goldman Sachs Group, Inc.
• Timothy W. Thein, Citigroup Investment Research
• Neil Tyler, Redburn Atlantic
• Steven Ramsey, Thompson Research Group
• Seth Weber, Wells Fargo & Company
• Michael Feniger, Bank of America Merrill Lynch

Presentation

[Operator]

Good morning and welcome to the United Rentals Investor Conference Call. Please be advised that this call is being recorded.

Before we begin, please note that the company's press release, comments made on today's call and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control. And consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the Safe Harbor statement contained in the company's press release. For a more complete description of these and other possible risks, please refer to the company's Annual Report on Form 10-K for the year ended December 31, 2022, as well as to subsequent filings with the SEC. You can access these filings on the company's website at www.unitedrentals.com.

Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations. You should also note that the company's press release and todays call include references to non-GAAP terms such as free-cash flow, adjusted EPS, EBITDA and adjusted EBITDA. Please refer to the back of the company's recent investor presentations to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure.

Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer; and Ted Grace, Chief Financial Officer.

I will now turn the call over to Mr. Flannery. Mr Flannery, you may begin.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Thank you, operator, and good morning, everyone. Thanks for joining our call this morning. As you saw in our third quarter results, the team continues to raise the bar as evidenced by the new high watermarks we set across this quarter's revenue, adjusted EBITDA and returns. As you've heard me say many times, our employees are the key to our results. Their focus on safely supporting our customers is paramount to generating value for our shareholders and I am most thankful that our team again delivered a company-wide recordable rate below 1. This goes without saying that safety is not only a differentiator in the eyes of the customer, but it's also critical that we take care of our most valuable assets, our team.

Looking towards the rest of the year, our reaffirmed guidance for 2023 reflects our confidence in the outlook of our business. And as I'll touch more on later, this is driven by both what we hear from the field and the tailwinds we see on the horizon. More generally, we're confident in the strategy that we've developed. The competitive advantages we've created over the last decade, position us well to continue to outpace the industry as we drive towards our long-term goals.

Now, let's dig into the third quarter results. Total revenue rose by 23% year-over-year to $3.8 billion, a third quarter record. Within this, rental revenue was up 18% with broad-based growth across verticals, regions and customer segments. Fleet productivity increased 1.5% on a pro-forma basis. Adjusted EBITDA increased 22% to a third quarter record of $1.85 billion, translating to a margin of over 49%, while adjusted EPS grew by over 26% to a third quarter record. And finally, our return on invested capital expanded to a new record of 13.7%.

So, let's dive into a bit more of the details behind these results. Used equipment sales more than doubled year-over-year to $366 million, as we normalize volumes and rotated out older fleet after holding back in 2022. Rental capex was in line with expectations at just over $1 billion, reflecting a more normal quarterly cadence. Now as the supply chain has recovered nicely, our need to pull spend forward should be behind us.

And now to Ahern. As we approach the first anniversary of the deal, the integration remains on track and a highlight continues to be the quality of the team. As you know, people are one of the key components we add when we bring companies on-board and integrate them into United Rentals. Looking forward, this added capacity, combined with my comments on capex and supply chains should position us well to serve our customers as we enter 2024. Ahern is another great example of the strength we have in leveraging our balance sheet as a way to benefit both our customers and our shareholders.

Now, let's turn to customer activity and demand. Key verticals saw broad-based growth led by Industrial manufacturing, metal and mining and power. Non-res construction grew 9% year-over-year. And within this, our customers kicked-off new projects across the board including numerous EV and semiconductor-related jobs, solar power facilities, infrastructure projects, data centers and health care. Geographically, we continued to see growth across all gen rent regions. And our specialty business delivered another excellent quarter with organic rental revenue up 16% year-on-year and double-digit gains in most regions. Within specialty, we opened 14 cold starts during the quarter, resulting in 39 new specialty location openings this year.

Turning to capital allocation. In addition to the investments we've made in growth, we returned $350 million to shareholders through share buybacks and dividends this quarter and remain on track to return over $1.4 billion of cash to shareholders this year. As we look ahead, we feel confident in our outlook. This is supported by the ABC's Contractor Confidence Index, which remains strong across the third quarter as good as backlog indicator, the Dodge Momentum Index which advanced sequentially in September. Furthermore, non-res construction spending and non-res construction employment both remained solid and most importantly, our own Customer Confidence Index continues to reflect optimism, while early indications from our field team on their expectations for '24 are also encouraging.

Finally, I'd like to acknowledge our team for their efforts in earning our company's recent selection to the 2023 TIME magazine's World Best Companies and the U.S. News & World Report's Best Companies to Work For list. Recognition like this comes as no surprise when you see our employees' dedication and hard work in the field day-in and day-out.

So, to wrap-up my comments today. Q3 was a strong quarter. We remain very pleased with how the year is playing out. Looking-forward, the opportunity ahead of us around large projects is unlike anything in my career. And we're uniquely positioned in the rental industry to win more than our fair share of the $2 trillion-plus of investment we see on the horizon. Not only do we have the scale, technology and one-stop shop solutions to make us a preferred partner, but we have a history of execution our customers can rely on. We set high expectations for 2023 and I'm proud of the results we're delivering. We feel good about the rest of the year and what's ahead for United Rentals and our investors.

And with that, I'll hand the call over to Ted before we open the line to Q&A. Ted, over to you.

[William "Ted" Grace, Executive Vice President and Chief Financial Officer at United Rentals]

Thanks, Matt, and good morning, everyone. As you saw in our third quarter release, our team again delivered strong results that were consistent with our expectations and importantly, keep us on track for another record year. I'll add that we continue to feel very good about our prospects beyond 2023 based on our strategy and the tailwinds we discussed extensively. While it remains a little premature to say too much about next year, given where we sit in our planning cycle, I will say that 2024 is shaping up to be another year of growth. Certainly, more to come there in January with our focus today on our third quarter performance and the balance of the year.

Now, one quick reminder before I jump into the numbers. As usual the figures, I'll be discussing are as-reported except where I call them out as pro forma, which is to say the prior period's adjusted include Ahern's standalone results from the third quarter of last year. So with all that said, let's get into the numbers.

Third quarter rental revenue was a record at over $3.2 billion. That's a year-over-year increase of $492 million or 18%, supported by diverse strength across our end-markets as you heard Matt say. With rental revenue, OER increased by $413 million or 18.5%. An increase in our average fleet size contributed 22.2% to that growth, partially offset by a 2.2% decline in as-reported fleet productivity and assumed fleet inflation of 1.5%. Also within rental, ancillary revenues were higher by $83 million or 19.7%, while re-rent declined $4 million. On a pro forma basis, which as you know is how we look at our results, rental revenue increased by a robust 10.2% with fleet productivity up 1.5%, reflecting a healthy rate environment that continues to be supported by good industry discipline.

Turning to used results. Third quarter proceeds roughly doubled to $366 million, reflecting more normalized volumes as we continue to refresh our fleet. The decline in our third quarter adjusted used margins to 55.2% was largely due to expanded channel mix required to drive higher volumes, the impact of some cleanup actions we took on Ahern fleet and the normalization of supply-demand dynamics. Importantly, we continue to take advantage of a robust used market by driving strong volume growth in our retail sales at attractive pricing. I'll also note that our average fleet age was 51.6 months at the end of the quarter, which is essentially back to pre-pandemic levels.

Moving to EBITDA. Adjusted EBITDA in the quarter was a record $1.85 billion, reflecting an increase of $329 million or 22%. The dollar change includes a $264 million increase from rental within which OER contributed $252 million and ancillary added $19 million, while re-rent declined $7 million year-on-year. Outside of rental, used sales added about $85 million to adjusted EBITDA, while other non-rental lines of businesses contributed another $15 million. While SG&A in the quarter did increase $35 million year-on-year, as a percentage of sales, it declined 180 basis-points to 9.9% of total revenue, reflecting another quarter of very good cost efficiency.

Looking at third quarter profitability. Our adjusted EBITDA margin decreased 80 basis points on an as-reported basis, but increased 20 basis points on a pro forma basis to 49.1%. This translates to as-reported flow through of 46% and pro forma flow-through a better than 50%. Notably, if we excluded the impact of used in the quarter, our core flow through exceeded 53% and was in line with second quarter results. And finally, adjusted EPS increased 27% to a third quarter record of $11.73.

Shifting to capex. Gross rental capex was $1.03 billion versus net rental capex of $664 million. A $257 million decline in net rental capex largely reflects a return to more normalized used sales levels this year. Year-to-date, gross rental capex through the third quarter has totaled almost point $3.1 billion, representing about 90% of our full year capex plan, which is in line with both our expectations and historical year-to-date levels. At this point, it is our sense that the supply chains have largely normalized, which should enable us to return to more typical quarterly cadences going forward and better match the timing of deliveries with seasonal demand.

Turning to return on invested capital and free cash flow. ROIC set a new record at 13.7% on a trailing 12-month basis and remains well above our cost of capital, while free cash flow also remains a good story. The quarter came in at $339 million, translating to a trailing 12-month free cash margin of 12.8%, all while continuing to fund robust growth. Moving to the balance sheet. Our net leverage ratio at the end of the quarter was flat sequentially at 1.8 times, while our liquidity totaled $2.7 billion with no long-term note maturities until 2027. Notably, all of this was after returning $1.05 billion to shareholders year-to-date, including $750 million through share repurchases and $305 million via dividends.

So, let's shift to the guidance we shared last night. We reaffirmed within our ranges for total revenue, EBITDA and free cash flow, reflecting our continued confidence in delivering a record year. Within this, we raised the midpoint of total revenue by $50 million to a range of $14.1 billion to $14.3 billion, reflecting cleanup actions being taken to dispose of some older fleet acquired that comes with no margin benefit. Just to avoid any confusion, that is to say the fleet is being sold at the values they are recorded at on our balance sheet. You see this in our implied used sales guidance of $1.5 billion at midpoint, which is an increase of $50 million versus our prior guidance.

Adjusted EBITDA guidance is $6.775 billion to $6.875 billion, which maintains the midpoint at $6.825 billion. And finally, I'll point out that we expect to generate free cash flow $2.3 billion to $2.5 billion, of which we will return a little over $1.4 billion to our investors through repurchases and dividends. This equates to more than $20 per share or around a 5% yield on return of capital at current share price levels.

So with that, let me turn the call over to the operator. Operator, could you please open the line?

Questions and Answers

[Operator]

At this time, we will open the floor for questions. [Operator Instructions] Our first question will come from David Raso with Evercore ISI. Please go-ahead.

[David Raso, Analyst at Evercore ISI]

Hi, thank you for the time. I know you don't want to give '24 guidance, but can you help us with just two elements, at least how you're thinking about it. The productivity measure and let's just think of it as a as-reported basis. Ahern anniversaries in mid-December and the toughest part of the time U comps, we start to anniversary soon given peak supply-chain constraints about three or four quarters ago. How should we think about productivity with those two items, sort of anniversarying? How are you thinking about productivity's ability to go back to flat to maybe up all-in, as-reported?

And then also, any help you can be at all where if you noticed, you mentioned the supply-chain now is loose enough, you can go back to your normal cadence on capex. How are you thinking about the fleet going into next year? There is some carryover growth. But just curious how you're thinking about replacement capex next year or is there some growth capex. Just to help frame those two big building blocks for thinking about '24 as an up or down [Technical Issues]. I know you're saying up, but just wanted to get some of the pieces. Thank you.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Sure, David. Now, without giving guidance, I'll just try to help out. On your first part of the fleet productivity, I think you captured it well. We absolutely expect next year to have positive fleet productivity. We'll anniversary the very tough and even on a pro forma basis, when you think about this year, we still had tough comps from time utilization perspective. And we've talked about that over that unusual time that just we didn't feel was healthy and put way too much hand to mouth orders and customer relationships at-risk. So, we've run really strong time this year. As I told you guys in July back over what we were in '19 and we think this is a more appropriate level. And so we wouldn't expect time to be a headwind next year.

And with that being said, the industry still need to get right. So, when you think about the two largest contributors to fleet productivity, we call one flat and the other one positive and then mix will be what mix will be. We certainly expect to have positive fleet productivity next year. And as far as fleet capex cadence, we certainly, I think the supply-chain is not 100% back to normal, but probably close, probably about 90%. There's still a couple of categories and high timed assets that we can't get as quickly as we want. But frankly, I don't think we're going to able to front-load them either, because they're just in tough supply. So, I think a more normalized cadence is the right way to think about what we'll do from a capital perspective. And we're not going to give capex guidance right now. But think about off of our base of $21 billion of fleet, we usually want to sell 11% or 12% of the fleet a year, right, to keep it fresh. And as Ted mentioned in his comments, we're really pleased that we got back to pre-pandemic fleet aid and we want to keep that rolling.

So roughly, if you think about those numbers, you're talking about somewhere between $2.3 billion, $2.5 billion of fleet sold to get to that 11% to 12% and if we think about the replacement capex on that at this point, certainly higher than $15 billion, let's just round up to $20 billion and you're talking about somewhere between $2.8 billion, $3 billion of capex replacement next year depending on how much we sell and I use that as a baseline and anything over and above that, we'll obviously communicate in January that will be our growth capex. We do expect '24 to be a growth year. And we expect there will be some growth capex, but we're just not -- we just haven't worked through the planning process yet. We'll give you better guidance in January.

[David Raso, Analyst at Evercore ISI]

All right. Thank you. And lastly, with all that said, and how you are perceiving the world going into '24, I know I asked this last call too, but the leverage down at 1.6 times, the net-debt to EBITDA at the end of the year. Can you just give us some framework or how you're thinking about M&A versus other uses of that balance sheet and cash flow, or the leverage is expected to stay, continue to go down next year. Just trying to get a sense, how you're thinking about it? Thank you. I'll hop back.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

I'll let -- I'll answer a little bit of it and I'll let Ted jump in here. Certainly, we always talk about the use of our capital is going to be growth business. So, first and foremost feed the organic growth that ended to meet the demand that our customers expect us to meet. And then secondly, M&A. If we find opportunities where we can be a better owner of our business, we're certainly have shown a history of that and frankly, we're pretty good at it. So, why not utilize the balance sheet for that. That pipeline remains robust. But we have a high threshold. So, I'm not pointing to anything imminent, other than the fact that we'll always look and we'll have a specific lean to any new products we can add or specialty, but then also to add capacity like we did with with a couple of deals, including Ahern this past year.

As far as after we've used capital for growth, I'll let Ted take that.

[William "Ted" Grace, Executive Vice President and Chief Financial Officer at United Rentals]

Yeah, thanks for the question, David. So, as everybody saw we were at leverage about 1.8 at the end of this quarter and implied guidance would have us at around 1.60 [Phonetic] at year-end. So, a little bit below that. That bottom threshold we introduced in 2019 of 2. Would you think the strategy overall has served us very well and it's accomplished a lot of what it was intended to accomplish, which primarily was to allocate excess free-cash flow to reduce the equity volatility and improve valuation. And so when we measure kind of our absolute and relative beta, when we look at our absolute and relative multiples, we think that has been quite successful in delivering what we wanted. In terms of what's next, certainly that's something we've talked about that we're still working on. We would expect to have an update for the Street as we introduce our '24 guidance and all the related capital allocation programs that will be underpinned by that plan. So, more to come there in January.

[Operator]

Thank you. We'll take our next question from Rob Wertheimer with Melius Research. Please go-ahead.

[Rob Wertheimer, Analyst at Melius Research]

Thank you. So, my question is on rental gross margin and I think Ted mentioned that you saw some clean-up I guess activity on the Ahern fleet, which may be depressing gross margin. I think you have extra depreciation. But it seemed a little sequentially weaker than 2Q and I'm just wondering if there's any other driver or through incremental activity related to Ahern that drove that? And I guess, Ahern probably didn't have specialty. So, wondered if you could address the absolute gross margin as well. Thank you.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Yeah, so, if we look at that gen rental gross margin, I'd say in line with our expectations, while you did see the as-reported margin down 320 basis points versus 270 basis points last quarter. Pretty minor when you convert that into dollars, you'd be talking about just that 50 basis points being equivalent to about $12 million of cost on a revenue basis of about $2.3 billion. There's always puts and takes within cost structures, as everybody knows. Depreciation was part of that.

So, if you think about that 50 basis points, the incremental depreciation we recognized in the quarter as we go through final purchase accounting on Ahern was probably 30 of those basis points would have been captured in that. And otherwise, you have one-time costs or other cost dynamics that maybe hitting you. We don't think there's really much to be made of it. I think the question is very fair one to ask in the scheme of things given the numbers I just walked through, I think it's pretty, we would characterize that more as quarter-on-quarter noise. Within specialty, you saw flat margins, I guess year-on-year of record of 52.2%, so very strong performance there. There really wasn't much to call out. We did have some mix shifts within the different pieces of specialty that would have been relative headwinds. But again, if we can grow business at 16% and generate 52% margins, we feel really good about that.

[Rob Wertheimer, Analyst at Melius Research]

Perfect. That answers that. If I'm allowed. You guys have some experience with mega projects by now and I know there's a lot of different kinds of mega projects running from LNG to airport to semiconductors to whatever. But there is a lot of just questions if commercial or office or whatever construction declines and megas rise. Do you have a sense of on a dollar-for-dollar basis, you lose a dollar in one and you gain a dollar in the other. If that's materially different on mix and I'll stop there.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Materially different on what, Rob?

[Rob Wertheimer, Analyst at Melius Research]

On mix. So, if you lose a mix. So you lose a dollar of off construction, you lose a certain amount of revenue, you gain a dollar of mega constructions, you gain certain amount of revenue. How does that shift upward. Thank you.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Thanks. Rob, I'll take that. So, we're probably thinking more about if you're thinking about what that -- what's that larger customer, larger projects, longer duration rental does from a mix perspective. There is a bigger variance if you're thinking about just transactional business. So certainly, our largest customers get a little bit leverage out of their spend with us than Joe, the plumber walking in the store. So that's where the biggest gap is.

But one of the reasons why we built a go-to-market to make sure we specifically cater to these large customers, large projects and large plants is because when you could put those big block of revenues to work at one site, you could serve them much more efficiently. So, on the top line, there maybe some variance certainly between your transactional business in the top line rates that you charge but margin-wise we historically, don't see much of a difference because of that lower cost to serve and that's why we've built this go-to-market to cater to those those projects.

[Rob Wertheimer, Analyst at Melius Research]

Thanks.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

You're welcome.

[Operator]

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

[Steven Fisher, Analyst at UBS Group]

Thanks, good morning. Just to follow-up on the mega project discussion. I am curious if you could talk a little bit about what's happening beneath the surface there on the mega projects within your pipeline. Obviously there is some headlines about some projects are experiencing some delays. But I guess, to what extent are any new ones coming onto the radar screen as well or is it more like a just a known population at this point. Curious about just the flow of what you're seeing in the market opportunities there.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Sure, Steve. I would call the handful, and I think it's less than a handful, somewhere four or five projects that have hit the headlines are really not relevant to the whole pipeline that we're tracking and to be fair, I'd say the same about new ones coming on. We do find out about new things coming on all the-time, but the base is pretty robust and pretty well-known quantity. And we've been tracking that number. That number remains strong at a steady level. When we think about the other, about thinking about these handful of projects, none of them are macroeconomic-related, right. There are some delays that you'd call political, right. Maybe there was a Chinese partner that one of the plants was dealing, they got some noise about, others are permitting.

There was a job in South Carolina that got delayed, because some environmental potential issues that they have to work through. So, we're not seeing things that are slowed down because there is economic issues. It's really more just individual issues that are coming up for each of these projects. So, not anything that we're concerned about. There is still a robust pipeline of jobs, many of which we have fleet on today. And many of which we know are coming out of the ground in 2024.

[Steven Fisher, Analyst at UBS Group]

Great. And then just a bigger picture question about Ahern. When we think about next year, are there actual tailwinds in '24 from Ahern or is it more just kind of like a neutral, you said kind of just lapping the utilization? And what about the synergies. I know there have been some plans both synergies. I'm curious if it's actually going to be adding from Ahern next year just sort of like a neutral.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

I would call it more neutral. The egg is pretty well scrambled at this point other than some of the cleanup we're doing and certainly we'll be by year-end when we lap the anniversary. As far as the synergies, we did a good job. We will meet the the synergies that we had guided towards and that we had targeted by year-end. We're pretty close done with them now. So, we're in good shape there and I know it will be nice to have a little bit cleaner view to share with you all. No more pro forma as-reported. I know it's been confusing on some of the metrics specifically and all that be cleaned up by year-end.

[Steven Fisher, Analyst at UBS Group]

Terrific, thank you very much.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Thanks, Steve.

[Operator]

Thank you. Our next question comes from Jerry Revich with Goldman Sachs. Please go-ahead.

[Clay Williams, Analyst at The Goldman Sachs Group]

Yes, this is Clay Williams on for Jerry Revich. Quick question. One of the hallmarks of your acquisition strategy has been the ability to get acquired businesses to post utilization and margins that are typically with the base -- in line with the base business. As we approach the one year anniversary on Ahern, when do you -- this asset going to have comparable fleet productivity and margins as the base business or still work to do there?

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

So usually, we say as far as so as your differentiation. Right. So, the asset attributes, which would be more the fleet productivity will get there next year, right. Somewhere around, but you have to remember, it would be a like-for-like asset. They didn't have specialty, they didn't have some of the higher-valued items. But when you think about their assets we bought from them by next year, we expect them to look, the performance to look like the assets that we own in that category.

Now, when you think about margin, to get all of our processes implemented in their stores, it usually takes a little longer. Now, you're talking somewhere between 18 months to two years depending on how fast we move. So, there'll be a little bit of drag still on the operations of those stores as they implement all the new activity, the new tools, but from the fleet productivity, it should be mostly realized collection.

[William "Ted" Grace, Executive Vice President and Chief Financial Officer at United Rentals]

The one thing I might add and just for everybody's benefit. Each deal, certainly has its unique profile from a margin standpoint. Just for clarity sake, we've talked about this pretty extensively. But the deals we do tend to be margin-dilutive structurally. That's not to say they are not very good deals. Economically, the returns have clearly been very attractive. But if you think about Ahern they were doing 35% EBITDA margins LTM, fully synergized, they're going to be sub-40%, that was the same thing for BlueLine.

I think NES, fully synergized, they would have been 42%. Neff was closer, but certainly if you look at GFN, they were doing LTM EBITDA margins of 27%. They were in the low-30s synergized. And the same thing is true with Baker. So, we do, do a great job. We take pride in the fact that we're able to integrate these companies and extract a lot of value, including through cost synergies, but there has been that dynamic. Clay, I'm sure you appreciate that, but for other people's benefit, I just want to make sure we added that.

[Clay Williams, Analyst at The Goldman Sachs Group]

Thanks. Appreciate it. And on guidance, midpoint of guidance implies margins are slightly up sequentially in Q4 versus 3Q. This is better than a normal seasonality. What's improving versus normal seasonality or should we not be looking at it from midpoint to midpoint? Thanks.

[William "Ted" Grace, Executive Vice President and Chief Financial Officer at United Rentals]

Yeah, just we have always been consistent telling people don't anchor the midpoint. And it's not to kind of give a wink or not, which direction you should be thinking. But we've given that range kind of where we feel comfortable indicating fourth quarter, but beyond that, we don't give quarterly guidance, as you know.

[Clay Williams, Analyst at The Goldman Sachs Group]

Thanks.

[Operator]

Thank you. We'll take our next question from Tim Thein with Citigroup. Please go-ahead.

[Timothy W. Thein, Analyst at Citigroup Investment Research]

Thank you. Good morning, Matt. Back to your earlier comments on that you expect fleet productivity to be a positive in '24. Do you think that do you still believe that confident in terms of the ability to exceed inflation? I know you mentioned positive but is your expectation that can be positive in excess of inflation? And to that point, you mentioned the replacement, the dollars you'll be replacing upward of 20%. Is that just as you think about bringing in more fleet today that you dropping out some seven, eight years ago? Is that 1.5% number close to what you think actual inflation rate should be in this environment?

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Sure, Tim. So first-off, that will always be our goal to outpace inflation and we think we will. We feel confident that we will have positive fleet productivity and frankly, we need to outpace that inflation. Right? The whole point of fleet productivity was to make sure that we generate revenue growth higher than the fleet growth and that fleet growth, some of it's inflation. So, you got to exceed it. As far as the 1.5% bogey that we put out there couple of years ago. In reality, it's a little bit higher today. Where that extra inflation gets captured in mix which gets captured in the fleet productivity report.

So, whether we change that bogey to higher, if we make that 2%, 2.5% and then we added back into the fleet productivity looks better, it's really just right pocket, left pocket. We're keeping it at 1.5% for now just for simplicity sake and keeping it consistent. But we still absorb that extra inflation and that comes in as negative mix. So, you guys still see the whole picture and we will probably continue to do that going forward. We talked about it a little bit internally and we think it's easier to keep the metric consistent and we do expect to exceed that inflation even with the extra mix headwind.

[Timothy W. Thein, Analyst at Citigroup Investment Research]

Okay, understood. And then...

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Hopefully, that makes sense.

[Timothy W. Thein, Analyst at Citigroup Investment Research]

It does. Thank you, Matt. And then you guys have a good lens into that kind of the supply-demand balance in the industry from a number of sources, but including the Rouse data and it seems to us anyway that the -- you mentioned earlier supply chains are loosening up. And some of the OEM dealers that are -- seem to be getting more active in rental. Also seem to be catching-up in terms of product availability. I'm curious if that's coming through in terms of the -- that supply-demand data that you guys see and just how if at all it's influencing or informing you about your capex plans for '24?

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Sure, Tim. Well, it's certainly got better, right. So, supply-chain certainly got better and I think you're seeing. I think you'll see most of the industry run normalized time utilization. You've seen that this year and that's a good thing, right. Because you can run the business more efficiently and frankly, be more reliable partner to you customers. But I think the next big leg of growth from the OEMs is still going to be replacement. I don't think that as OEMs grow their volume, this is going to be all this extra fleet in the system. There's still a lot of replacement capex that needs to be served and especially in some of the areas that's been dragging.

So, I think that'll be more the characteristic of the next year or two. We're getting ahead of the curve. You see how much we're trying to focus on the used sales to get that fleet age right. So, we feel good about where we are and -- but we're still going to have a lot of replacement capex next year, just like the rest of the industry.

[Timothy W. Thein, Analyst at Citigroup Investment Research]

Okay. Thanks for the time Matt. Thanks, Tim.

[Operator]

Thank you. [Operator Instructions] Our next question comes from Neil Tyler with Redburn Atlantic. Please go ahead.

[Neil Tyler, Analyst at Redburn Atlantic]

Thank you, good morning. A couple of smaller questions left please. Firstly, on just going back to your comments Matt, about the Ahern synergies. I thought you've made comments at the previous couple of quarters that the revenue synergies might take a bit more time to crystallize and probably wouldn't be expected to come through in the first 12 months. So, I just wanted to just check where you stand on that and the thoughts? I understand that and to use your words, the egg is fairly well scrambled at the moment, but if you can just sort of help us understand how the cross-selling has been going there.

And then the second one, just a bit more specific. On the used proceeds. As you move into next year, first of all, it sounds as if you broadly sort of caught up in terms of exiting or shedding the fleet of the older assets. So presumably, the used fleet will be slightly younger, but I guess we're all expecting used prices to normalized downwards a bit. So, if you can help us sort of think about the percentage although you see perhaps of those proceeds will track through the next 12 months or so?

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Sure, Neil. Thanks for giving me a chance to clarify. Our cost synergies will be realized. You are absolutely right. Our revenue synergies will take longer. So, I'm so knowledgeable that I heard it as cost even if it wasn't asked that way. So, thanks for that clarity. But the cross-selling is going well and we're on schedule. And that usually takes a couple of years to fully bake and we're on track for that. I think the customer base and sales teams that come with that are very pleased to have a full portfolio to sell. So, that's working well.

And then as far as the used proceeds...

[William "Ted" Grace, Executive Vice President and Chief Financial Officer at United Rentals]

Yeah. I mean, certainly, we've talked about this dynamic for a while now and as the supply-chain normalize, the expectation would be that, that incremental buyer who couldn't buy new and who is left to only buy used fades. It's on a relative basis you see, not as much demand versus supply. That's something we've talked about and expected. In '24 that's likely is going to be a dynamic that people should be looking for. On the other hand, you still going to have fleet inflation and Matt alluded to kind of the cumulative 20%. That for us, in a very good position. I would say fleet inflation more broadly is higher and ultimately, that provides an umbrella for used pricing. So, these are kind of cross currents that we will be balancing next year.

We certainly would expect to have recovery rates well above historical levels. '22 set an unsustainable bar. I think everybody understood that there were some temporary benefit there that led to us getting $0.74 on the dollar if I am not mistaken, selling eight year-old equipment. That's not normal and that's not something anybody ever expected to be sustained. You're seeing normalization this year with that channel mix. Next year, I think you'll see us kind of normalize again. So ultimately, those recovery rates, they won't be at '22 levels, but they won't be back to those kind of pre-'20 levels either. And then the other part about fleet age, Neil, it won't be tremendously different. I mean, we still got -- listen, we just got back to more normalized fleet age. We've always had plenty of eight year-old equipment to sell. So, we don't think that, that seven to eight year-old average range that we've been hitting will be changing that much.

[Neil Tyler, Analyst at Redburn Atlantic]

Okay, that's very helpful. Thank you.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Neil, do you have a third question? I thought you said you had three. I don't know, two were within used.

[Neil Tyler, Analyst at Redburn Atlantic]

No, just the two at the moment. Thanks.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Okay.

[Operator]

Thank you. Our next question will come from Steven Ramsey with Thompson Research Group. Please go-ahead.

[Steven Ramsey, Analyst at Thompson Research Group]

Good morning. I know it's early days on mega projects getting ramped-up. I'm curious on the secondary effects that you're seeing there. If the rental market in those geographies is tighter and helping utilization and rates more broadly, besides just the project itself.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Yeah, just generally yes, but I think you're talking about mostly the larger companies that are going to be supplying these jobs and we'll all mobilize the fleet to get there to take care of the customers, but generally, it will tighten up in the surrounding areas. And then the other part of a lot of these plants, especially the ones that have built in more rural markets is you'll have infrastructure built around and whether that be feeder plants, whether that be residential and then the retail and the schools that go with it. So, these are big boon for these markets overall that we think the whole -- we certainly expect to get our fair share plus, but that's a whole area we'll benefit from.

[Steven Ramsey, Analyst at Thompson Research Group]

That's helpful. That's all from me. Thanks.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Thanks, Steven.

[Operator]

Thank you. Our next question will come from Jeff Weber [Phonetic] with Wells Fargo. Please go-ahead.

[Seth Weber, Analyst at Wells Fargo & Company]

Thanks. Hey guys, good morning, it's Seth. I just wanted to go back to the used equipment discussion again for a second, just to clarify. It sounds like you kind of tweaked your channel mix here to help get rid of some of the older fleet, the acquired fleet. Can you just talk to what you think your channel mix will be going forward? Whether it's more wholesale, less auction, what have you? Just how should we think about the channel mix to sell used equipment going forward relative to where it's been for the last couple of quarters? Thanks.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Sure, Seth. So, if you go back to pre-COVID levels, we're usually about two-thirds of our volume in retail and less than 5% auction and whatever fell in the middle there between trades and brokers varied a little bit on years just based on what kind of negotiations we did with the vendors, what were the assets we need to replace and so on. I think we expect it will get more normalized for that type of atmosphere.

Obviously, you saw 17% auction this past quarter. That might be the highest we've ever done, but that's certainly a large number for us and that was just blowing out some of the older assets from the $2.2 billion of acquired fleet that we had through M&A, right. Everybody had their 5% to 10% in the back, back of the lot that you had to either decided to work through or get rid of. So, we just decided to clean that up, but we'll get back to more normalized channel mix that what you saw pre-pandemic.

[Seth Weber, Analyst at Wells Fargo & Company]

Okay. That's all I had. Thank you guys.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Thanks.

[Operator]

Thank you. Our next question comes from Michael Feniger with Bank of America. Please go-ahead.

[Michael Feniger, Analyst at Bank of America Merrill Lynch]

Yes, thanks for taking my questions. Now, we haven't really seen how rental holds off in a higher for longer interest-rate environment. How does that kind of typically weigh on project activity, but also impact that rent versus own trade-off? How does this kind of higher for longer rate environment differ from other periods when we think of the impact to the rental equipment space?

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

From my 30-plus years of doing this, anytime capital becomes more expensive, it's logical to think that people pay more attention to what they spend their capital on. So, when you think about customers that were owning or wanted to own it adds another barrier thought to them to then think about the opportunity to try rental. And once they do, the math just works. When you think about the lack of even in a flat interest environment. When you think about once they get over the fact that, can I get what I want when I need it, our industry has come such a long way that we don't lose customers. They don't go the other way after that, because the rental experience is much better. They have flexibility to turn the assets when they don't need them. They don't want to deal with all the soft costs of storage, maintaining, transportation and the reliability. Right?

So, our mechanics are usually going to do a heck of a lot better job than somebody who is working on equipment once in a blue moon. So, all those variables mean greater rental penetration and I think a higher interest environment just adds another layer of that higher penetration. So, that's what would be our expectation. That's what history has taught us.

[Michael Feniger, Analyst at Bank of America Merrill Lynch]

Thank you. And my follow-up is just on clearly there some moving pieces for the construction cycle next year, offices, commercial versus infrastructure, industrial, upstream energy versus downstream. Just help us in the context of intensity, we saw this in 2015-'16, with years of the oil downturn. Just how much would come out of some of these weaker pockets compared to the fleet necessary service some of these other markets that are seeing tailwinds. If you could just kind of help us conceptualize some of those moving pieces. Thank you.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

And Michael, pockets you're talking about, are you referring to what areas, because I think you heard my opening comments, we're seeing pretty broad-based demand. All the verticals that we serve, ironically, other than oil and gas, I think we've all seen the rig count come down, have been -- were positive in Q3. So, we're not seeing a lot of the soft pockets here, a little more what you're thinking about.

[Michael Feniger, Analyst at Bank of America Merrill Lynch]

Well, I guess if those pockets do soften next year, Matt, how should we think about the business model reacting and the fleet that services maybe some of these pockets that the market is worried about, commercial real-estate, private office relative to the fleet that's required for some of these other end-markets that are seeing really strong verticals or strength on a multiyear basis?

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Okay, great. So, we have always somewhere between $3 billion and $3.5 billion, right at our disposal to reposition fleet profiles, if that's what necessary. But one of the great things to model, we have very fungible assets. Right? The fleet we use may vary a little bit depending on what type of constructions going on, maybe in some of these stadiums, you're going to need bigger booms and maybe on some of these mega projects, you're going to have a higher propensity for a full breadth of fleet from more dirt moving because they're bigger footprints.

But our fleet breadth can really account for that and it's one of the great parts of the rental model is as long as you don't get overly specialized which we don't, you don't -- that fungibility allows you to move it from different types of work to the other and that's a, that's something that on the margin if there some changes, we certainly have just within our replacement capex the opportunity to re-profile and send that fleet to the right place.

[William "Ted" Grace, Executive Vice President and Chief Financial Officer at United Rentals]

Mike, what I might add, it's really difficult to get into demand intensity by sub-vertical if you will. But the way we've kind of talked about this publicly, we look at it internally as just more from a top-down perspective. If you think about the verticals where certainly, we feel very good, things like manufacturing, power, infrastructure, transportation, healthcare, etc., if you look at the dollar value of those projects and those markets versus the areas you're alluding to which maybe it's aspects of office, it's aspects of commercial, just the absolute dollars are much greater in the areas seem to be opportunistic and so from a weighted basis, that's where we see our opportunity growing next year.

[Michael Feniger, Analyst at Bank of America Merrill Lynch]

Thank you.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Thank you, Mike.

[Operator]

Thank you, At this time we have no further questions in queue. I will turn the call back to Matt Flannery for closing remarks.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Great, thank you, operator. And that wraps it up for today and I want to thank everyone for joining us and remind you all, if you have any questions, please feel free to reach out to Elizabeth anytime.

Operator, you can now end the call.

[Operator]

[Operator Closing Remarks]