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, 2023, as well as to subsequent filings with the SEC. You can access these filings on the Company's website at www.unitedrentals.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances, or changes in expectations. You should also note that the Company's press release and today's call include references to non-GAAP terms such as free cash flow, adjusted EPS, EBITDA, and adjusted EBITDA. Please refer to the back of the Company's recent investor presentations to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. 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.

William Ted Grace:

Thanks, Matt. Good morning, everyone. As Matt highlighted, Q2 played out as expected with healthy demand and strong execution, driving record second quarter revenue, EBITDA, and EPS. Looking forward, our reaffirmed guidance at the midpoint for total revenue, EBITDA, CapEx, and free cash flow reflects our continued confidence in delivering another year of solid growth, strong profitability, healthy returns, and significant free cash flow. As importantly, we remain focused on prudently allocating capital to drive shareholder value. So with that, let's jump into the numbers. Second quarter rental revenue was a record $3.215 billion. That's a year-on-year increase of $234 million, or 7.8%, supported by growth in key verticals and large projects. Within rental revenue, OER increased by $143 million, or 5.8%. Growth in our average fleet size contributed 2.7% to OER, while fleet productivity added 4.6%, partially offset by soon fleet inflation of 1.5%. Also within rental, ancillary and re-rent revenues were hired by $91 million, or 17.5%. Turning to our used results, second quarter proceeds of $365 million were in line with expectations at a healthy adjusted margin of 51.8%. The strength and depth of the market were evident in the fact that we sold a second quarter record amount of OEC at a robust recovery rate of 59%, in line with first quarter levels. Moving to EBITDA, adjusted EBITDA was a second quarter record at $1.77 billion, translating to an increase of $74 million, or 4.4%. Within this, rental contributed $127 million year-on-year. Outside of rental, and similar to the first quarter, used sales were a $30 million headwind to adjusted EBITDA, driven by the ongoing normalization of the used market that we've discussed over the last several quarters. SG&A increased $23 million year-on-year, reflecting a larger business, but was consistent with year ago levels as a percentage of sales. And finally, the EBITDA contribution from other lines of non-rental business were flat year-on-year. Looking at second quarter profitability, our adjusted EBITDA margin was in line with expectations at 46.9%. The 80 basis points of year-on-year compression was almost entirely due to the use dynamics I just discussed. Excluding the impact to use, our second quarter margin was down just 10 basis points with an implied flow-through of 44%. And finally, our adjusted earnings per share increased 8% to a second quarter record of $10.70. Shifting to CapEx, gross rental CapEx was $1.4 billion, which is in line with our forecast and historical seasonality. Turning to returns and free cash flow, our return on invested capital of 13.5% remained well above our weighted average cost of capital while year-to-date free cash flow totaled $1.065 billion. Our balance sheet remains very strong with net leverage of 1.8 times at the end of June and total liquidity of almost $3.3 billion. I'll add that we continue to have no long-term note maturities until 2027 and a very distributed tower thereafter. And all this was after returning a record $969 million to shareholders year-to-date, including $219 million via dividends and $750 million through repurchases. I'll add this has reduced our share account by over 1.1 million shares since January. Now, let's shift to the updated guidance we shared last night, which reflects our confidence in delivering another year of solid results. As previously mentioned, we are maintaining the midpoints for all metrics while narrowing the ranges for both revenue and EBITDA as we normally do at this time of the year. In terms of specifics, for total revenue, we've narrowed our guidance to a range of $15.05 to $15.35 billion, implying total revenue full-year growth of just over 6% at midpoint. Within this, I'll note that our used sales guidance is unchanged at roughly $1.5 billion in proceeds on approximately $2.5 billion FOEC sold. On Adjusted EBITDA, we've narrowed the range to $7.09 to $7.24 billion. I'll note that our guidance for gross CapEx, net CapEx, and free cash flow are all unchanged. And, importantly, we are still committed to returning a record $1.9 billion to shareholders this year, which translates to almost $30 per share or a current return of capital yield of about 4%. So, with that, let me turn the call over to the operator for Q&A. Operator, please open the line.

David Raso:

Thank you for the time. The question relates to the interplay between GenRent rental revenue growth versus Specialty. It caught my ear when you said thinking about growth further out, right, kind of beyond this year. So just thinking about Specialty has gone just in the last 5 years from 20% of total rental revenues to now over 30%, right? And GenRent this quarter, even year-to-date, right, it's pretty much flat widening. So I'm just trying to think about how much GenRent could fall and Specialty can offset it, right, the simple math of if GenRent is 70%, Specialty is 30%. GenRent can fall 5% as long as Specialty is growing 10%, we're still flat, right? So that's sort of the spirit of the question. So I guess directly, gen rental revenues, do we expect those to go negative in the second half of the year now that we're sort of flat lining in 2Q, in Specialties, the offset I know Specialty has some Yak in it, but even just kind of thinking of it organically, right? Because you have implied in the second half rental revenues probably still growing, call it, 7.5%, 8% in the context of the whole company growing 6% revenues in the back half. So can you speak to GenRent trends? Should we expect those to go negative and Specialty kind of carries the ship? Just curious how you're thinking about that. Thank you.

David Raso:

Well, that's what I'm trying to think through, right? Everybody's just trying to figure out, Matt, like how much does the sort of softness in the underbelly of the market from typical rate impact lag now starting to slow some general projects, and how large you are now in specialty. The visibility on specialty, I assume it's also pretty tethered as well to some of the mega projects, your confidence in your visibility and Specialty can kind of carry the show. And at the same time, the gross margins are a lot higher in specialty, right? Could we actually see a mix shift that helps your gross margin? So, it's sort of a, like you're lined up better to serve the mega project specialty, it's bigger, so that's how you can kind of offset GenRent being down. And does that actually translate into a better mix just given the gross margin profile?

David Raso:

All right. I appreciate the conversation. Thank you.

Operator:

Thank you. Our next question will come from Rob Wertheimer with Melius Research. Please go ahead.

Matthew Flannery:

Yes, we certainly don't believe that we're giving up any market share. But frankly, we don't set market share goals, but just by definition, you'd have to believe that we think there are certainly some markets that are down in the local market business. Fortunately, because we saw this in advance, we didn't burden those branches with extra fleet. And I actually think the industry is doing a good job managing through this, and I think you see that in the metrics that are playing through. So, we're really pleased with our level of support for the work that is there in every market, including some local markets that are growing. The fungibility of our assets allows us to flex that, which has really been good. So, we don't set market share goals, but we certainly don't think we're seeding any market share. And the most important thing is with the targeted customers that we focus on, we do feel we're gaining share.

Matthew Flannery:

Yes. So, when we think about local market growth, we're not including the mega projects in that, right? So, as we're talking about that dynamic, but as you can imagine, where there's a lot of activity going on, there's going to be feeder plants, there's going to be other work going on around there, which supports it. And then the opposite, if you're in an oil and gas market right now, there's probably not a lot of activity, extra activity going around the local market because we all know oil and gas is one of the examples of an area that continues to struggle. So, it ties, Rob, but the way we look at it, we look at our large projects and large customers in a different segmentation than we do the local market.

Matthew Flannery:

Thanks.

Timothy Thein :

Thank you. Good morning. Matt, maybe I'll start with the kind of thinking about the components of fleet productivity and specifically the expectation coming into the year that maybe you could hold time flat and I don't remember if that was on a pro forma or an as reported comp versus 2023. But just going back to the comments on GenRent and if GenRent revenues were up just under 1%, but the fleet grew in total, closer to 3%, obviously, that suggests some component of time, rate and/or inflation acting as a headwind. So maybe just your -- any change to the expectation for the full year, again, just given the -- a little bit of softness on the local market dynamics that we've discussed.

Timothy Thein :

Okay, got it. And then maybe just a comment on the M&A pipeline and just given the prospects of some potential change in tax policy on the horizon, I'm just curious, a domestically, what you've seen in terms of just discussions and how the M&A pipeline is shaping up here. And then, the international story has never been one of significance. But I've noticed two smaller deals, in the last, I know, a couple months. Has the thought process changed around international growth more broadly?

Timothy Thein :

Got it. Thank you, Matt.

Operator:

Thank you. Our next question will come from Jamie Cook with Truist Securities. Please go ahead.

William Ted Grace:

Sure. Thanks for the question, Jamie. So there's obviously a lot that goes into incrementals. So without saying the obvious or stating the obvious, obviously, relative growth does matter, right, growing whether you want to say 5, 10 or 15 drives different levels of fixed cost absorption. But obviously, the composition of that growth matters a lot if you think about rate versus volume. And so it's hard to say what kind of growth you need to kind of drive lift in flow through. And there's obviously the consideration of costs on top of that. If you think about this year, we're looking at what we think is healthy growth, mid-single digits overall. You'd point to flat margins in a year where, frankly, we're making some important investments that we've talked about, both on the cold start side and technology. So that kind of illustrates the importance of how you think about costs. So we absolutely task ourselves to driving kind of strong cost discipline, margin lift in some environments and under some conditions depending on where you're making investments that can be easier or not as easy. So I don't know that we want to get pinned down on what kind of top line growth you need to see for all the reasons I just went through, but what I can say is we have and we'll always have an incredible focus on driving as efficient operations as possible to drive attractive profitability.

Operator:

Thank you. Our next question will come from Jerry Revich with Goldman Sachs. Please go ahead.

Matthew Flannery:

Hey, morning, Jeff.

Matthew Flannery:

Yes, sure, Jerry. We're pleased. And I said in my opening remarks, we saw growth across all the product offerings and specialty, right? You can imagine the couple that have been the largest growers, let's leave the Yak aside for now, right? But even in the or 18% standalone growth without the Yak influence, we've mobile storage where we talked about our commitment to doubling the size of that business within five years is growing strong. Power continues to be strong growth, but we're seeing it in our trench and fluid businesses as well. So it's across the board. And I think that's really important. And I think it also points to the cross-sell opportunities that we have on large projects and large customers. Like I said in the opening remarks, every business unit's accounted for on these big jobs. And we do a really good job making sure we're selling that full value prop. And I think that's helped drive a lot of this growth.

Matthew Flannery:

Yes. So the first surprise, and not really surprise, but great pleased to acknowledge that this was a really strong team. We understand why they were a leader in the space of this product. And we believe what we really bring to the table is our network, right? Our ability to fund their growth, distribute their growth across our network and our customer base. So they were, they're a little bit capital constrained for their growth. And frankly, really good. Have a lot of technology built in to support the customer already in that business, in logistics. And we think bringing in some of our tools and our network can help grow that business. So, but I don't want to, this was not a broken business. Actually, they're quite good at what they do. They just need more support. And we're looking forward to double in this business over the next five years as well.

Matthew Flannery:

Thanks, Jerry.

Michael Feniger:

Yeah. Hey, good morning, everyone. Thanks for taking my question. Just Matt, obviously, the last few weeks, there's been some incremental negative data points around nonres construction in the industrial economy. You guys have kept the midpoint of your guide. Some of your peers had to revise our outlook. Are you guys observing that incremental weakness? Or are you guys just being more nimble, kind of moving fleet from weak areas to stronger areas? Is that fleet movement higher than normal that you guys have seen in the past?

William Ted Grace:

And Mike, the one thing I might add is, obviously, there are data points that everybody is looking at. And I know people struggle to make heads or tails of them. When we think about what our customers are telling us, they continue to be positive, right? And to us, that's much more telling than a given data point that tends to have a lot of volatility. So when we talk to our customers and we talk to the field, that's really what underpins kind of our outlook.

William Ted Grace:

I think, our thought is sentiment matters as much as anything. And so the anticipation of, a more constructive rate environment likely helps for activity in terms of trying to calculate a lag. I'm not sure anybody's got a model that does that effectively, but certainly if you look at how equity and credit markets have traded the last month or so, there's certainly the expectation that the Fed is going to start easing, right? If you think about how the market started to discount rate cuts in the U.S., you're looking at about 2.7 cuts between now and year end. That number was probably 1.6 even a month and a half ago. And if you look at next year, the expectation is you're going to get north of a point of cuts in Fed funds. And obviously in Canada, I'm sure everybody's seen, but Canada has now started to cut. They've cut half a point in the last two months. So, I think when you think about customers thinking about cost of capital and the direction of the economy, we're becoming more encouraged. And that to us is positive.

Michael Feniger:

Thank you.

Tami Zakaria:

Hi. Good morning, Tim. You are I great to be on the call and thanks for the time. So I just wanted to confirm, I know you discussed time utilization rate and mix to Tim's question earlier, but overall fleet productivity, do you still expect that to remain positive for the year? And related to that, should we expect the Yak to be adding about 160 basis points to productivity for the rest of the year? Or is there seasonality to think about?

Tami Zakaria:

Got it. One more question. Thank you for the answer. For used equipment margin weakness this quarter, can you speak to what you're seeing in the third quarter, quarter-to-date, have things stabilized or remains sort of under pressure? And how much headwind should we think about from this in the second half versus the $30 million you called out in 2Q?

Tami Zakaria:

Got it. That's very helpful. Thank you.

Operator:

Thank you. Our next question will come from Kyle Menges with Citigroup. Please go ahead.

Matthew Flannery:

So, taking the first question, Kyle, I think a big part of business confidence is obviously that year-to-date resulting in line with our expectations, knowing kind of what customer activity is. And so, there's nothing that would suggest we're kind of deviating from our expectations. And you come back to customer confidence and their own expectations looking out as we ask them. So, certainly, if we saw a deviation there, we start to ask questions why we're not. And so, I think those things come together to support our views of the used market. In terms of the mix, there's just a natural ebb and flow. I don't know that we want to get into kind of trying to forecast one variable or another, but obviously, we've been very pleased with the results.

Matthew Flannery:

Sure. So I think we're a little over 51 months in the quarter. So that's -- from the peak during COVID, it's probably down 4 months. I'll remind people that when you look at that 51, there are a couple of structural changes there versus pre-COVID levels. One was the acquisition of General Finance, which added about 2 months and the other was the acquisition of Baker right ahead of the COVID period that added about 1 month, 1.5 months. So if you were to adjust for structural changes to product mix, that average age is probably something in the 47, 48 months, which is very comfortable. We've long talked about fleet age as really more of a risk management strategy. In a prospective downturn, we'd want to be able to age the fleet 12 months, right? It's just kind of a way to hedge ourselves and protect cash flow. So we are now at the point where we feel like we could very comfortably age the fleet 12 months in that kind of scenario, not the plan. But we're not trying to engineer for a given fleet age. It's really an output of decisions we make. So I don't know if that helps, Kyle, we can dig in deeper there, if you'd like.

Operator:

Thank you. Our next question will come from Angel Castillo with Morgan Stanley. Please go ahead.

Matthew Flannery:

Yes. So, first let me clarify. We have no goal to age our fleet. What Ted was pointing to is we have that opportunity when thinking about is your fleet age at the right place. We always like to leave that dry powder. We have no expectation of needing to use that dry powder anytime soon. And the reason that we're continuing on with our CapEx is because the team's putting it to work. As we stated earlier, our fleet productivity is positive. The demand, as you can see from our guide, we expect to be as expected. So there's really not a reason why we would then try to age our fleet forcefully and cut CapEx because we believe in the future growth prospects of the business and the CapEx is warranted because that's what the customer's demand is. As you can imagine, a big portion of that is replacement CapEx. We talked about that. About 3 billion of the CapEx is inflation adjusted to replace a 2.5-week spec to sell. And then on top of that, you can imagine that within the growth CapEx, that's really feeding the cold starts and the growth of Specialty primarily, which continues to be a good story for us.

Matthew Flannery:

Yes, what we said in January maintained. We expect time utilization, our goal is to match last year's time utilization, which got to a good strong rate and at a healthy level, and that will remain our goal. We don't really see -- we're not going to forecast it numerically by half, but we don't see any need to adjust our thoughts. And therefore, that's why we're able to reiterate our guidance.

Matthew Flannery:

Thank you.

Steven Fisher:

Thanks, good morning. So your positioning on large projects is clearly providing a variety of benefits this year. I'm just curious how active is the bid pipeline for the next round of large projects? Wondering how much visibility you have on those projects for the next year or so at this point? And how do you think those next projects are going to be different from what we've seen so far in terms of maybe the verticals or the size or duration or anything like that? Thanks.

Steven Fisher:

Okay. That's helpful. And then the 44% flow-through ex use, I think, compared to about 54% in Q1, just curious what drove the reduction in that flow-through in Q2 versus Q1? Was it the impact of going from 15 cold starts in Q1 to 27%? Or are there extra logistics costs to redirect fleet around and how should we think about the kind of the flow-through that you have implied an embedded in the second half of the year relative to the 44% in Q2?

Steven Fisher:

Perfect. Thank you.

Operator:

Thank you. Our next question will come from Neil Tyler with Redburn. Please go ahead.

Matthew Flannery:

Neil, I'll take a cold start question and Ted can talk to you sale some more. But a little bit accelerated, right? So whether they fell in Q3 or Q2 was probably more a function of where they're able to find the right real estate. So we were pleased we were able to co-locate a couple in existing real estate that helped accelerate that. So we had some real estate capacity that probably accelerated that a little bit, not tremendously so, but certainly a little bit more. And that's not something we really try to manage by quarter. We don't manage the business really by quarter. It's not the way we look at it. So we are pleased that the team is a little bit ahead of schedule and on cold starts and feel good about our target for the year.

Neil Tyler:

Got it. That’s helpful. Thanks very much.

Operator:

Our next question will come from Scott Schneeberger with Oppenheimer. Please go ahead.

Matthew Flannery:

Yes. So our infrastructure business has been growing for a while, right? I think the first time we started talking about was the Neff acquisition in 2016. We talked about we needed to bolster our fleet to start to serve the infrastructure needs. So we are long on this. We do think that there's more work to be coming. Some of the funding is hard to track about when it's coming out. And I think it's almost more postmortem than predictable in my opinion. But we are seeing -- continuing to see green shoots in infrastructure opportunities. I drive around this weekend, I was pleased to see a lot of our gear around on road and bridge projects. So -- and I think we all see about the airport work that's been going on as you travel. So we do feel good about infrastructure. I'd still say we're in the early innings of this. I do think there's more opportunity ahead than funding that's been -- that's gone on up to date.

William Ted Grace:

In terms of the growth from ancillary and re-rent?

William Ted Grace:

The biggest thing is Yak, right? So when we bought Yak, we talked about they've got a slightly different kind of composition of revenue. They've got the OER piece, which is the more traditional rental revenue. And then a bigger portion of the revenue coming from ancillary and re-rent and ancillary more specifically. You heard that in my prepared remarks, being up 17.5%. That substantially reflects the impact of Yak.

William Ted Grace:

Thanks, Scott.

Kenneth Newman:

Hey good morning guys. Thanks for squeezing me in. Maybe just real quickly, I mean, I know you don't give time, but we can back into dollar utilization. I think the maintain guide implies we're getting back to dollars up high in the back half that we haven't seen since 2014. And obviously, I know that mix from Specialty has been a positive driver here for the last, call it, decade now. But I am curious just on how much more headroom you think there is for dollar utilization expansion from here?

Kenneth Newman:

Got it. Maybe just to -- as my follow-up, I just want to clarify a question that was asked at the beginning of the Q&A session. The GenRent growth for the second half is kind of expected. To clarify, I mean I know you're not expecting that growth to be necessarily negative year-over-year. But is it -- is the expectation that the decoupling that we've seen between Specialty and GenRent is probably going to be similar that we see in the second half versus the first half?

Kenneth Newman:

Thank you.

Operator:

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

Operator:

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

Operator:

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

Matthew Flannery:

Thank you, operator, and good morning, everyone. Thanks for joining our call. As you saw yesterday afternoon, 2024 is off to a strong start and playing out as expected, and I'm pleased with our results across growth, margins and fleet productivity, all executed through the lens of putting the customer-first and with an unwavering focus on safety.

William Grace:

Thanks, Matt, and good morning, everyone. As Matt highlighted, the year is off to a strong start as healthy demand and strong execution supported first quarter records across revenue, EBITDA and EPS. Consistent with our strategy, we remain focused on allocating capital both rental CapEx and M&A investment to drive profitable growth while also returning excess cash to our shareholders. Combined, this supports the solid earnings growth, free cash flow and returns, you see embedded in our updated 2024 guidance.

Steven Fisher:

I just wanted to start off on CapEx. I know you said it was in line with your expectations, but it seemed to be maybe at the low end of your target range for the quarter. Can you talk about some of the factors keeping it on the low end there? Was it sort of weather or project timing or any other factors? And I guess related to that, have you made any changes in your thinking about the level of growth CapEx embedded in your plan for the year, either kind of mix of GenRent or specialty rent any changes around that growth CapEx?

Steven Fisher:

Okay. Terrific. And then maybe just one on a vertical. I know there's been a lot of focus this year about power generation, and you have included that in your positive commentary for a number of quarters now. I guess, I'm just curious, given that the theme around power generation has intensified. I'm curious if you could give us a sense if you have any direct color on the types of projects that you're seeing in this -- in your pipeline of power generation in 2024, relative to what you've been seeing in, say, 2023?

Operator:

Our next question will come from Jerry Revich with Goldman Sachs.

Matthew Flannery:

Sure, Clay. So we don't actually set targets nor do we even set plans or budgets for M&A, right? That's just a belief of ours that I think that could force people to feel the need to do M&A, and we're actually very opportunistic here. But to be clear, we work the pipeline regularly. And we have a robust pipeline. We really have a lean towards things that you just saw us execute on, like, Yak, where we can add new products that we think we could be a better owner of by significantly growing them when we introduce them into our network.

Clay Williams:

And as a follow-up, can you talk about the opportunities you see for Yak access given the shorter useful life and higher depreciation load of the product versus the base business, we were curious what the path is to get the business to URI levels of returns.

Stanley Elliott:

Can you talk a little bit about the category class. You've done a nice job of expanding it over the years, moved kind of the one-stop shop. How much larger is this an opportunity for you all and maybe what would be the limiting factor, I don't know if it's real estate or workforce or anything like that?

William Grace:

Was that in context of Yak, Stanley, just to be sure we understand the question?

Matthew Flannery:

Yes, exactly. So we view anything that's temporary on a project or on a plant as a potential right of way for us, right? So anything that doesn't stay with the fixed plant is, by definition, an opportunity for us to serve the customer. And we've continued to expand upon that.

William Grace:

I guess things I might add that we've shared, Stanley. I mean, mobile storage, we talked about a goal of doubling that business in 5 years. We're well on our way. That's obviously a huge market. So even as assuming we're able to do that, there's still plenty of white space beyond that to grow the business, penetrate existing customers. And obviously, we've talked about the opportunity to expand the footprint of that business.

Stanley Elliott:

Perfect. And then I guess just a follow-up or second question, rather. Could you talk about kind of anything you saw from a regional basis. And I'm curious, I know you don't like to talk about weather, Matt, but did that have any impact on kind of the progression as the quarter went through?

Stanley Elliott:

Perfect. Congratulations with the great start.

Operator:

[Operator Instructions] Our next question comes from Ken Newman with KeyBanc Capital Markets.

Matthew Flannery:

Sure. So it played out as expected for us, quite frankly. When we came out in January, I went out a little further than I usually would because we don't like to forecast these individual metrics and certainly not the overall component. But we said we'd have positive fleet productivity each quarter in the year. And we still expect that to play out that way.

Matthew Flannery:

Yes. I mean we did expect slower growth. As you could imagine, the GenRent business versus the specialty business, the growth -- the headroom for specialty was much greater. And probably more importantly, the specialty business has a great opportunity with large customers and large projects to cross-sell into some of those that weren't using these products. So we called out specifically the double-digit growth in every one of our specialty segment product lines, which was great.

Operator:

And with no further questions in queue, I would like to turn the call back to Matt Flannery for any additional or closing remarks.

Operator:

Thank you. This does conclude the United Rentals First Quarter 2024 Earnings Call. You may disconnect your line at this time, and have a wonderful day.

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, 2023, as well as to subsequent filings with the SEC. You can access these filings on the Company's website at www.unitedrentals.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances, or changes in expectations. You should also note that the Company's press release and today's call include references to non-GAAP terms such as free cash flow, adjusted EPS, EBITDA, and adjusted EBITDA. Please refer to the back of the Company's recent investor presentations to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. 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.

William Ted Grace:

Thanks, Matt. And good morning, everyone. I'm going to start my comments by adding some more color on our record fourth quarter results before pivoting toward 2024 guidance, which points to another strong year for the company. 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 is adjusted to include Ahern's standalone results. So with that said, let's get into the numbers. Fourth quarter rental revenue was a record $3.12 billion, that's a year-over-year increase of $372 million, or 13.5% supported by diverse strength across our end markets and our strong positioning on large projects. Within rental revenue, OER increased by $313 million or 13.9%. An increase in our average fleet size contributed 15.1%, while as reported fleet productivity added 0.3%, partially offset by assumed fleet inflation of 1.5%. Also within rental, ancillary revenues were higher by $61 million or 14.2%, which was consistent with rental revenue growth. I'll add that re-rent declined $2 million year-on-year. On a pro forma basis, which as you know is how we look at our results, rental revenue increased 7.6% year-on-year, with fleet productivity up 2.4%, reflecting a healthy rate environment that continues to be supported by good industry discipline. Turning to used results, fourth quarter proceeds increased better than 7% to $438 million as we continue to take advantage of a strong retail market to refresh our fleet at attractive returns by recovering roughly 62% for our original fleet cost. Our adjusted use margin was flat sequentially at 55.3% while the year-over-year decline in margin reflected the ongoing normalization of the use market we have been talking about for the last several quarters. Moving to EBITDA, adjusted EBITDA for the quarter was a record of $1.81 billion, reflecting an increase of $162 million or 10%. The year-on-year dollar change includes a $197 million increase from rental. The year-on-year dollar change includes a $197 million increase from rental, within which OER contributed $195 million, while ancillary and re-rent added $2 million on a combined basis. Outside of rental, used sales were a headwind of about $10 million to adjusted EBITDA, while other non-rental lines of businesses were up $4 million. SG&A in the quarter increased $29 million due primarily to increases in variable costs. As a percentage of sales, however, SG&A declined about 100 basis points to 10.5% of total revenue. Looking at fourth quarter profitability, our adjusted EBITDA margin decreased 150 basis points year-on-year to 48.5% due largely to the combined impact of Ahern and used margins. When looked at pro forma, our EBITDA margin, X used, was down just 20 basis points, translated to flow through of 46%, versus the 38% you can see on an as-reported basis. And finally, our adjusted earnings per share increased 16% to $11.26. Shifting to CAPEX, gross rental CAPEX was $430 million, reflecting a return to a more normalized seasonal cadence, supported by improvements in the supply chain. You can also see this in our net rental CAPEX, which declined $8 million. Turning to return on invested capital and free cash flow, ROIC increased 90 basis points year-on-year to 13.6%, exceeding our weighted average cost of capital by over 260 basis points. Free cash flow also remains a good story with the year coming in at just over $2.3 billion, translating to a free cash margin of 16.1%, even as we continue to fund significant organic growth. The business continues to generate very strong free cash flow on both an absolute and relative basis. As Matt said, this provides us with a lot of flexibility to drive shareholder value across the cycle, through both investment and growth, and the return of excess capital to our investors, more on this in a bit. Moving to the balance sheet, our net leverage ratio at the end of the quarter improved two-tenths of a turn sequentially to 1.6 times, while our total liquidity exceeded $3.3 billion at year's end. And as a reminder, we continue to have no long-term note maturities until 2027. Notably, all of this was after returning over $1.4 billion to shareholders in 2023. This included $1 billion through share repurchases and $406 million via dividends. Combined, this translated to the return of over $20 per share during the year. Now let's look forward and talk more about our 2024 guidance. Total revenues is expected in the range of $14.65 billion to $15.15 billion, implying full year growth of about 4% at midpoint. Within total revenue, I'll note that our used sales guidance is implied at roughly $1.5 billion were down mid-single-digits year-on-year on a percentage basis, which implies slightly better growth within our core rental revenue. Within used, I'll add that we expect to sell around $2.5 billion of OEC, translating to a recovery rate of about 60% versus roughly 66% in 2023, but historical norms that are more in the 50% to 55% range. Our adjusted EBITDA range is $6.9 to $7.15 billion. At midpoint, excluding the impact of use, this implies flow-through in the 40s and flattish adjusted EBITDA margins versus as reported flow through of around 30% at approximately 70 basis points of year-on-year margin compression at the midpoint of guidance. On the fleet side, our gross CAPEX guidance is $3.4 billion to $3.7 billion with net CAPEX of $1.9 billion to $2.2 billion. And finally, we are guiding to another strong year of free cash flow in the range of $2 billion to $2.2 billion. Now, let's shift to our updated balance sheet and capital allocation strategy. First and foremost, we remain focused on funding growth where we can generate attractive returns, both organically and through acquisitions. Beyond that, our goal is to allocate excess free cash flow to drive shareholder value and to this end, last night we announced several exciting things. First, consistent with the intentions we shared a year ago when we introduced our dividend, we are increasing our quarterly payment by 10% to $1.63 per share, or $6.52 per share annualized. I'll add that it remains our plan to consistently grow our dividend in line with long-term earnings. Second, we plan to repurchase $1.5 billion of common stock in 2024, an increase of $500 million versus what we bought in 2023. So, in total, we intend to return over $1.9 billion to shareholders this year, equating to almost $30 per share, or a return of capital yield of over 5% based on our current share price. Lastly, and importantly, we are able to do this while also lowering our targeted full cycle leverage range by half turn to 1.5 to 2.5 times. As a reminder, this production follows the similar half turn reduction we announced in mid-2019. As most of you know, this is something we've been working towards with the idea of building an even stronger company and critically driving shareholder value. What's more, this has all been achieved after fully funding growth. Just to provide some perspective, since 2019 when we introduced the first leg of our enhanced capital allocation strategy, our revenue has increased by more than 50%, our EBITDA has increased closer to 60%, and our earnings per share has grown more than 130%, while at the same time averaged leverage ratio has declined from 2.6 times at the end of 2019 to 1.6 times at the end of 2023. This combination of results has supported very strong shareholder value creation that our team is very proud of and remains very focused on sustaining. So with that, let me turn the call over to the operator for Q&A. Operator, please open the line.

David Raso:

Hi. Thank you. I wanted to look into the fleet growth that you appear to have planned for this year and also how to think about fleet productivity on top of that growth. With some carryover from 2023 and the roughly billion plus you look to add this year, right, the 3.5 billion plus a gross minus the OEC you expect to sell, the 2.5, it looks like you're roughly say, 4% or 5% fleet growth you're looking for in 2024. So just given some of the demand concerns some people have out there, I'm just trying to calibrate how much of the fleet growth would you argue is earmarked for projects that are essentially lined up versus the natural, you have to take some assumptions into how you manage the fleet generally? And then on top of that, how should we think about fleet productivity with that type of fleet growth? Thank you.

David Raso:

Well, that's helpful. And then lastly free cash flow, a large majority last year return to shareholders, the guide for this year is a very large majority to shareholders. How should we think about the balance sheet usage, the M&A landscape, but also appreciating the lower target range, can you give us an update on the M&A thoughts? Thank you.

William Ted Grace:

No, I think Matt touched on the key points, but certainly we feel great about where we sit within the range currently just because it's tremendous flexibility, optionality, and puts us in a great position to, as we said, kind of return excess capital to investors to augment shareholder value. And that's always going to be our goal.

William Ted Grace:

Yeah, of course. And David, that's a fair observation. I think ex-used we'd be looking for flow through in the 40s and call it flat margins. The key thing to think about here is we are getting to a point of modestly slower growth than what we've experienced the last several years. I think we were up 23% last year, we're up 20% the year before that, and 14% the year before that. So if you think about the nature of fixed cost absorption, obviously when you're talking about double-digit growth, that really kind of supports pretty good absorption in those environments. As you kind of get to this year, which we view more as a transition year and you're looking at mid-single-digit core growth. And still, it's a somewhat inflationary environment. It obviously creates new dynamics that you didn't have in the prior three years. At the same time, you heard Matt talk about kind of the optimism we have on a multi-year outlook. We think it's critical to make key investments in the business, things like cold starts and specialty. We'll be targeting 50 plus this year. Those are great long-term investments. At the margin, do they kind of weigh on incrementals, they do. I don't think that's a surprise to anybody. And there are other investments we want to continue to make core to the business. Think about areas like technology, that's long been an area, whether you want to talk about aspects of telematics, you want to talk about different aspects of performance optimization, and those are areas where we continue to be very focused. And in the current environment, which again is this modestly slower environment, we don't want to forego those investments that have very strong ROIs to hit respectfully kind of an arbitrary target, if you will, a flow through of some number. So we're going to continue investing in the business because we feel really good about our outlook. So Matt, I don't know what else.

David Raso:

Thank you.

Operator:

Our next question will come from Rob Wertheimer with Melius Research. Please go ahead.

William Ted Grace:

Yes, thanks for the question, Rob. So the idea is obviously to live within that range. As was the case with the prior range, nothing religious about that low end at the margin. We set our capital allocation plans for the year, obviously, in January. And so hypothetically, if EBITDA were to outperform and you ended up getting -- for the sake of argument at 1.4, I don't think you should look for us to suddenly step in and just for the sake of staying within that boundary do something that we otherwise hadn't planned to do. We focus on being very disciplined when we go through these programs. That said, we do have every intention of living in that 1% to 2.5%, sorry, 1.5% to 2.5% range. And I'll remind people, there is a cyclical overlay. So the concept is obviously at around the peak, you want to be at the lower end of that range and conversely, when you're at trough EBITDA, you want to be within the upper boundary. So please remember there's a cyclical overlay. Even with all that said, it leaves us with tremendous firepower that we can use to augment earnings through acquisitions and other growth initiatives, whether it's more organic growth through M&A.

William Ted Grace:

Yes, so the idea, as we said a year ago was to grow it in line with long-term earnings. We don't want to get algorithmic, if you will. But certainly, we think that we've got the growth capacity and the cash flow growth capacity to support a growing dividend, which we recognize as an attractive aspect of the share profile. So what I would say is we look at companies that really benefited from dividends, call it that dividend aristocrat list. We've long said we aspire to be part of that group. That's the intent. So I don't want to kind of get too caught up in a formula of what dividend growth will look like, but our intent is absolutely to grow consistent with how we think about the long-term earnings power of the company. Matt, anything you'd add there?

Robert Wertheimer:

Thank you.

Jerry Revich:

Yes, hi, good morning everyone. I'm wondering if you could just update us on how the Ahern integration is trending versus plan and within the guidance for 2024, what's the magnitude of margin uplift that's embedded from that in integration and on a separate note on GFN, now that we're halfway through the five-year plan for that asset, I'm wondering if you could just update us on where we are on the OEC and EBITDA growth plan that you folks laid out to double that business over five years when you made the acquisition?

William Ted Grace:

No, no. I just said we're ahead of target. The business has really complemented the rest of our business exceptionally well. The one thing I'll add on the -- I think Jerry asked specifically about some of the Ahern margin uplift in 2024 versus 2023, I guess now that we've lapped the deal, we can say we've really reached the targeted synergies and frankly, we gave ourselves 18 months. We probably got a super majority of the way there within 12. So there isn't that much kind of carryover incremental benefit. It would be really deminimus because we were able to realize the synergies pretty quickly in 2023.

Matthew J. Flannery:

Yes, it's pretty broad. I mean we have different maturity levels. But you could imagine, whether it's a reliable on-site business, right, affordable sensation, some of the additional products that we're adding to our Power HVAC team and the mobile storage, right, as part of that continued footprint. Rollout would be the three largest areas, ironically, not trench. Trench is continuing to get penetration, but don't necessarily need geographic distribution growth for their penetration. So all -- as I said in my opening remarks, all the specialty businesses, all those product lines grew by double-digits in the quarter. So we're really pleased with that continued headroom for growth in specialty.

Matthew J. Flannery:

Thanks Jerry.

Michael Feniger:

Yeah, thank you. Thanks for taking my question. Matt and Ted, if we look back at the last big downturn in construction, after rates were cut it took some time for nonresidential to really come back. Do you believe your portfolio of business mix and the environment is different now, if we see some easing of financial conditions, how do you see that kind of flowing through your business mix with MRO exposure, different verticals, versus maybe the path or is this a much more gradual longer recovery?

Michael Feniger:

Right. Great. And Matt, just a follow-up. I mean you just delivered $2.3 billion of free cash flow in 2023. You're guiding another $2 billion in 2024. In a year that you're saying it's a transition year and you're still investing in the fleet, is it safe to say that the new baseline free cash flow level for URI going forward is this $2 billion marker. I mean 2024 is a transition year, 2025 you still see some growth. Like any reason why we shouldn't be thinking that maybe this $2 billion line is kind of a new baseline going forward?

Matthew J. Flannery:

Yes. I would agree. And Ted just said he doesn't want to make sure -- he doesn't want us to be given a five to 10-year future cash flow forecast, and I don't disagree. But I think the way you're thinking about what's been the evolution of the business and the change in the business is something we talked about a while back about driving positive free cash flow through the cycle. And I feel like we've been proving that out. And I agree with Ted's sentiment and the sentiment of your question, we're just not going to forecast that all the way.

Matthew J. Flannery:

Yes, it is a great question. We actually feel really good about where the fleet age is. I think we're technically at -- we're just over 52 months right now. But when you adjust for tanks, mobile storage, some of the longer-lived assets that we've mixed into the fleet, we look at this from a mix perspective, we're back to pre-COVID levels. So we're back to a healthy level of fleet age. It doesn't mean that we still don't want to refresh and keep turning some of the assets. But net-net, we feel really good about where we are and back to pre-COVID levels when you adjust for mix of fleet.

Operator:

Thank you. Our next question will come from Tim Thein with Citigroup. Please go ahead.

Matthew J. Flannery:

You should think about that our goal as it is, is to exceed that 1.5 target every quarter. Whether we achieve it or not, right, even if you look at our pro forma this past year, which is how we looked at it, we actually did achieve that this past year. So we get -- we didn't as a reported level, but we did from a pro forma, which is how we kind of manage the business. So that's our goal, that's what we'll be marching towards. And we think the end market is conducive to doing that.

William Ted Grace:

Yes, yes. So I'll take those in reverse order. If, and it's obviously a big if, but if that were to pass our understanding is it would actually even be retroactive. So in 2023, that would be worth certainly several hundred million dollars of incremental cash flow to us given the benefit it would have to our cash taxes. Taking the first part of the question, as you think about cash taxes going forward, you obviously see a significant step up in 2024 versus 2023. I think if you look at our investor presentation, the guidance is cash taxes of about $990 million. We paid about $500 million in 2023. So you see a $500 million step-up. That number is not at all representative of how to think about this on a go-forward basis. I would remind people, one of the benefits we had in 2023 from a cash tax perspective was the expensing of the Ahern fleet acquisition. So that was worth about $300 million of benefit. So apples-to-apples, you would say the step up 2024 versus 2023 is more like $200 million. And so as you think about that going forward, as you see this assuming you don't have that bill passed and we're stuck with this sun setting provision within 2017 tax reform. You would see, depending on your assumptions on obviously, pretax income growth and CAPEX, you would see a gradual increase in our cash taxes that's there. But we think is obviously very manageable and something that has been known since the legislation was passed in 2017. So from a planning perspective, it's something that we've been aware of and obviously built into all of our expectations from a forecasting a capital allocation and balance sheet strategy perspective. Does that help, Tim? I'm happy to get to you if you want.

William Ted Grace:

I think it's much more the latter. Yes, just more the latter. I mean there's nothing that's changed structurally.

William Ted Grace:

Thanks Tim.

Steven Fisher:

Thanks, good morning. So it seems like you've put yourself in a pretty good position to make some of these long-term investments even while the growth is slowing. I'm wondering if you can just kind of quantify the investments you're making in 2024, either in dollar terms or what the impact on the flow-through is? And then are these going to be kind of like ongoing investments through 2025 or is it more just sort of a onetime headwind in 2024?

Matthew J. Flannery:

Yes. No, I think well said. I think the real tone of why we make the conversation, there's a difference between 46% and 50% flow-through in a transition year, so to say, is not something that would cause us to have an austerity program, right. We're going to run the business as we run it continue to improve the systems that we have, the tools that we have and grow the footprint for future growth. That's really it. If we were in a different environment, we have the playbook, you guys saw a little bit of it during COVID. Then you'd run a different play, and we're nowhere near that world nor do we expect to be for a few years.

Matthew J. Flannery:

Well, I think it will continue to be strong, and I think it will carry a good part of the growth this year, specifically a big part of the mega projects. When you're thinking about the plants we talked about and the on shoring of manufacturing. We saw it play through all the way in Q4, where that was our largest growing vertical that we track in Q4 in the industrial sector, it was industrial manufacturing. We haven't even really touched on LNG nor has it kicked off in a big way yet. That's yet another opportunity in the industrial space. So we feel really good about the industrial end markets. I mean outside of oil and gas and really the upstream which was down. You guys all probably see that in the rig count. That was down in Q4, and we expect to be down next year. Outside of that, we think it's going to continue to be another strong year in the industrial end markets.

Matthew J. Flannery:

Thanks Steve.

Seth Weber:

Hey guys, good morning. Matt, I appreciate the comment about normalizing CAPEX. I just wanted to dig in on that a little bit. So I think historically, first quarter CAPEX is sort of like low double-digit percentages of your total. Is that kind of the right number we should be thinking about because that would suggest the down year in the first quarter for CAPEX -- for gross CAPEX, is that how you're thinking about it?

William Ted Grace:

So Seth, just to your question on the first quarter, if you go back to the strategy we had to implement last year, we took down certainly 20-plus percent of our full year CAPEX in the first quarter. I think it was 22%, 23%. It's about $800 million. So if you think the CAPEX is fractionally up this year, but you're going to have a smaller fraction. People should be thinking the CAPEX landed will be down because of the unusual actions we had to make in the fourth quarter of 2022 and the first quarter of 2023, given the supply chain challenges we faced.

Matthew J. Flannery:

Yes, certainly. Yes. And first of, there's not any skepticism from our perspective. So we're [Multiple Speakers]. No, no, no. These jobs -- because we have more visibility to this because of the planning that's required, frankly, than we do the local market business. So we actually feel really solid about our prospects on the large projects. And I think most of our peers that can participate in that, I think the nationals do as well. And I think you'll continue to hear that commentary. But their projects are ongoing right now. Some of the largest projects we've ever been on. I have gear on them today and did in at least back half 2023, but this is a multiyear tailwind. I know we'll use, for example, people talk, there've been a lot of talk about EVs. There hasn't been an EV cancellation yet. So I think one project was rescoped, a little smaller and one was paused because environmental needs and now is back online. So we really aren't seeing a few delays for just idiosyncratic reasons, but we're not seeing cancellations at all in the major projects. And then as I mentioned earlier, there's a lot of LNG work that's coming. We think the Infrastructure Bill isn't at risk. That was regardless of what happens with the election. That was bipartisan support fully and more importantly, we really need it as a country. And then the IRA, which is more longer-term, I guess that's the one you could debate, but that's got a longer tail to it and one that hasn't even manifested yet. But the tailwinds that we've been discussing are showing up in our business today, and we expect to for multiple years.

Matthew J. Flannery:

No. We view that as competitive, and it's not something that we will discuss. All I can say is we've been the largest provider of equipment to national accounts and the people that do these type of jobs for many, many, many years, long before mega projects became a new term. So we feel good about our position.

Operator:

Thank you. Our next question comes from Nicole DeBlase with Deutsche Bank. Please go ahead.

William Ted Grace:

Yes. So not knowing the context exactly how you think about that data. I mean, to us, that replacement that OEC sold is right in line with where it should be from an RUL perspective. So while the numbers are bigger, it's on a bigger base. So that replacement cycle is driven by a very systematic approach to how we manage the fleet and returns. So I'm not sure -- we can dig into this further, Nicole, but it's tough to know exactly how to interpret that question on that basis. So we feel good about that. In terms of channel mix, we'd expect to kind of go back to that normal distribution. These are rough numbers. But over time, you'd see something like two thirds going through retail, you would see something like 20-ish or so going to trade packages, you'd see low doubles in broker, and that would leave auction in kind of that mid-single digit. If you compare that to 2023, really, the big difference was we used auction to clear out some of that Ahern inventory we talked about, especially in the second half. You would have seen that margins. You would have seen that in the recovery rates too. So I don't know if that helps answer the second part. Did I miss anything?

William Ted Grace:

It's never good to correct your boss, but more like 50 to 55.

Operator:

Thank you. Our next question comes from Ken Newman with KeyBanc Capital Markets. Please go ahead.

William Ted Grace:

Yes, I'll start there. I mean, I guess, we have kiddingly talked about this term mega projects, and no one's even sure what it really means and use different definitions. What I would -- I'm not trying to get caught up specifically on whatever mega projects means. We've talked about a number of verticals where we think there's growth opportunity. Certainly, manufacturing is at the top of that list. Power is very strong. But then you look at elements of infrastructure, which may or may not be “mega projects”. If you think about health care, you think about education, these are all areas where we've seen good momentum in 2023, and the indications are from our field team and customers that, that will sustain itself into 2024. So maybe some of those are mega projects, but many of them are kind of areas that could be -- maybe they don't qualify as this term, but they're still important verticals where we've got very strong strategies that benefit us. Matt I don't know if there is anything you would add.

Ken Newman:

Okay. No, that's helpful. And then, Matt, I think at the beginning of the call, you talked about optimism for rental rates maybe being a good guide for fleet productivity this year. I don't disagree with you, but I'm curious if you could just help us square us with that comment because, obviously, the guide is assuming supply chains are normalizing and used equipment sales were going to be a drag on margins this year. So where is the support for rates kind of staying here positive for the year?

Ken Newman:

Yes, that makes sense. Appreciate it.

Scott Schneeberger:

Thanks guys. Good morning. I had two, the first kind of two parter. So the -- Matt, you referenced earlier your surveys. I thought you've always done surveys with your maybe 300 largest customers. I assume you do surveys with smaller customers, and you talked about a little bit weakness being local when I mean that. Could you talk about just compare and contrast those two categories? And the second part of this demand question is Infrastructure Bill, where do you -- do you see funds flowing at per your customers, I know there's a lot of projects let but are you seeing those funds flow?

William Ted Grace:

Yes. So Scott, the way the survey is constructed as we can look at different customer slices and certainly, we can look at what we call national and strategic accounts, and then we kind of look at the total responses. And the responses are on trailing three-week average more like 800 to 900. So it's a pretty large survey size. We think it's pretty representative of the world that our customers are living in. I would say, certainly, on a relative basis, the strongest results, those are -- it's a diffusion-based index. So those would fall into the categories pointing to growth are definitely going to be the bigger customers. I think that's a lot of what underpins what you've heard us talk about today. But people should not infer this to mean that the other accounts are what would be in the total composite are negative. They're still positive, just not as positive. We continue to see an exceptionally small fraction that actually see the world going down. We've talked about that being in the very low single-digit ranges. That's still true. So we're not seeing any kind of like bearish indications from our customer confidence indication. It's just kind of you are seeing kind of responses that are more -- are consistent with the way we've talked about our expectations for 2024.

William Ted Grace:

So we've seen those awards, too. So it's been good to see a lot of those big awards made in 2023. If you look at the top 10 list that's on the White House website, very few of those have broken ground. You've obviously got an exceptionally large tunnel project between New York and New Jersey that I assume would be a 2024 event, maybe it's 2025. I suspect there's an awful lot of engineering there and permitting. But we've definitely seen anecdotally more dollars flow into that world in 2023, than in 2022. We said this. We really didn't see much in 2022, very late in the year we saw some. But across 2023 we started to see certainly rodent highway projects where you could see that attribution to the II JA. We saw a number of airports break ground. It wasn't just the big ones, but it was secondary and tertiary airports. You've heard us talk about that. You've seen some restoration projects in the Everglades and elsewhere that we've won. So again, it ends up being more anecdotal feedback from the team. There isn't some great summary or audit that the government has provided that we're aware of. But certainly gaining momentum.

Scott Schneeberger:

Great, thanks guys. Good color. Appreciate that. For the follow-up, Ted, probably more for you. Just a summary of what we've heard on this call, your guidance for revenue, a little higher than the guidance for EBITDA growth. I think I heard hey, same level of cold starts on a little less revenue growth and a lot of technology investment. That's kind of my summary takeaway, but anything you'd add and is that accurate? Thanks.

Matthew J. Flannery:

Very thorough. We are good. Thanks.

Operator:

Thank you. And this does conclude our question-and-answer session. I will now turn the call back to Matt Flannery for any additional or closing remarks.

Operator:

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

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 risk 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 Ten 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.unitedreynolds.com. Please note that United Reynolds has no obligation and makes no commitment to update or publicly release any revisions to forward looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations. You should also note that the Company's press release and today's call include references to non-GAAP terms such as free cash flow, adjusted EPS EBITDA and adjusted EBITDA. Please refer to the back of the Company's recent investor presentations to see the reconciliation from each non GAAP financial measure to the most comparable GAAP financial measure. Speaking today for United Reynolds is Matt Flannery, President and Chief Executive Officer, and Ted Grace, Chief Financial Officer. I will now turn the call over to Mr. Flannery, you may begin.

Ted Grace:

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've 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 months 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 is 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, within 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 one and a half percent. Also, within rental ancillary revenues were higher by $83 million, or 19.7%, while 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 one and a half percent, 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 margin 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 continued 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 rent declined $7 million year on year. Outside of rental, used sales added about 85 million to adjust EBITDA, while other nonrental lines of businesses contributed another $15 million. While SGNA 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 of 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 $1.3 billion versus net rental Capex of $664 million The $257 million decline in net rental CapEx largely reflects our return to more normalized use sales levels this year. Year to date, gross rental CapEx through the third quarter has totaled almost $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, reich [ph] set a new record at 13.7% on a trailing twelve 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 twelve 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 $1.5 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 14.1 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 6.75 billion to 6.87 5 billion, which maintains the midpoint at $6.825 billion. And finally, I'll point out that we expect to generate free cash flow of which will return a little over 1.4 billion to our investors for your 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?

David Raso:

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 reported basis ahern [ph] anniversaries in mid December and the toughest part of the time [indiscernible] 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 anniversary? 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 with. You notice 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's 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 year? I know you're saying up, but just want to get some of the pieces. Thank you.

Rob Wertheimer:

So my question is on rental gross margin. And I think Ted mentioned that you still have some cleanup, I guess, activity on the [indiscernible] 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 if it was incremental activity related to Ahern that drove that. And I guess Ahern probably didn't have specialty. So I wonder if you could address the s three gross margin as well. Thank you.

Rob Wertheimer:

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

Rob Wertheimer:

How does that shift out for you? Thank you. Thanks Rob. Take that. So we're probably thinking more about if you're thinking about what that larger customer, larger project, longer duration rental does from a mixed perspective there's 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 may be some variance certainly between your transactional business in the top line rate that you charge but margin wise, we historically don't see much of a difference because of that lower cost serve and that's why we've built this go to market to cater to those projects. Thanks.

Stephen Fisher:

Thanks. Good morning. Just to follow up on the megaproject discussion, I'm curious if you could talk a little bit about what's happening beneath the surface there on the megaprojects within your pipeline. Obviously there's some headlines about some projects 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 just a known population at this point? Curious about just the flow of what you're seeing in the market opportunities there.

Stephen Fisher:

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 about synergies, so I'm curious if it's actually going to be adding from Ahern next year. Just sort of like a neutral. I would call it more neutral.

Stephen Fisher:

Terrific. Thank you very much.

Clay Williams:

Hi. 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 in line with the base business. As we approach the one year anniversary on Ahern, when do you this asset can have comparable fleet productivity and margins as the base business or still work to do there.

Ted Grace:

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's 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're 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 were going to be sub 40. That was the same thing for Blue Line, I think NES fully synergized, they would have been 42. NEF was closer. But certainly if you look at GFN, they were doing LTM EBITDA margins at 27. They were in the low 30s synergized. And that same thing was true with Baker. So we 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 energies. But there has been that just Greg, I'm sure you appreciate that, but for other people's benefit, I just want to make sure we added that.

Matthew Flannery:

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

Tim Thein:

Thank you. Good morning, Matt. back to your earlier comments on that. You expect fleet productivity to be positive in 24. Do you still believe that or 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 dollars you'll be replacing upwards of 20%. Is that just as you think about bringing in more fleet today, that you're dropping out from seven, eight years ago? Is that one and a half percent number close to what you think actual inflation rate should be in this environment?

Tim Thein:

Okay, understood. And then hopefully that makes sense. It does- thank you, Matt. And then you guys have a good lens into the 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 you mentioned earlier, supply chains are loosening up, and some of the OEM dealers that 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 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.

Tim Thein:

Okay, thanks for time.

Neil Tyler:

Yeah. Good morning. A couple of small questions left please. Firstly, just going back to your comments, Matt, Ted, about the ahern synergies. I thought you'd 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 twelve months. So I just wanted to just check where you stand on that and the thoughts. And I understand that to use your word, 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've 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 normalize downwards a bit. So if you can help us sort of think about the percentage of OEC perhaps at those proceeds we'll track through the next twelve months or so.

Matthew Flannery:

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

Stephen Ramsey:

Good morning. I know it's early days on megaproject 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.

Stephen Ramsey:

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

Q – Unidentified Analyst:

Hey. 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.

Q – Unidentified Analyst:

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

Michael Feniger:

Yes. Thanks for taking my questions, Matt,we haven't really seen how rental holds up 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?

Michael Feniger:

Thank you. And my follow up is just clearly there's 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 fleet intensity. We saw this in 2015, 16 with fears of the oil downturn. Just how much fleet would come out of some of these weaker pockets compared to the fleet necessary to 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.

Michael Feniger:

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 multi year basis.

Michael Feniger:

Thank you.

Matthew Flannery:

Great. Thank you, operator and that wraps it up for today. And I want to thank everyone for joining us and remind you all that if you have any questions, please feel free to reach out to Elizabeth anytime. Operator you can now end 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, 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 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 today's call include references to non-GAAP terms, such as free cash flow, adjusted EPS, EBITDA and adjusted EBITDA. Please refer to the back of the Company's recent investor presentations to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. 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.

William Grace:

Thanks Matt, and good morning, everyone. As you saw in our second quarter release, our team produced strong results that were consistent with our expectations and keep us on-track for another record year. And as we shared at our Investor Day, we continue to feel very good about our prospects beyond 2023 based on the tailwinds we have discussed extensively. One quick reminder before I jump into the numbers. As usual, the figures I will be discussing are as reported, except where I call them out as pro forma, which are adjusted to include Ahern standalone results from last year. So with that said, let's get into the details. Second quarter rental revenue was a record $2.98 billion. That is a year-over-year increase of $519 million or 21% supported by diverse strength across our end markets. Within rental revenue, OER increased by $443 million or 22%. Our average fleet size increased by 25.5%, providing a $514 million benefit, which was partially offset by a decline in as reported fleet productivity of 2% or $41 million. And our usual fleet inflation of 1.5% or $30 million. Also, within rental, ancillary revenues were higher by $75 million or 19.3% and re-rent provided an additional $1 million. I will note that on a pro forma basis, rental revenue was up a robust 12.4% year-over-year, and fleet productivity increased 2.1% as industry discipline continues to support a healthy rate environment. Turning to used results, our second quarter revenue increased 133% to $382 million as we continue to return to more normalized volumes, while our second quarter adjusted used margin of 57.3% reflected healthy pricing. Notably, as we said we would, we have expanded our channel mix to support these higher used volumes. During the quarter retail accounted for 65% of our mix consistent with its longer term proportion versus 90% last year. Within the shift, we doubled our retail volume, it remains a very strong demand environment. Moving to EBITDA, adjusted EBITDA for the quarter was just under $1.7 billion, another second quarter record reflecting the increase of $384 million or 29%. The dollar change includes a $310 million increase from rental within which OER contributed $298 million. Ancillary added $15 million and re-rent was down three million. Outside of rental, use sales added $117 million to adjusted EBITDA, while other non-real lines of businesses contributed another $8 million. SG&A increased $51 million due primarily to increases in variable costs, such as higher commissions. As a percentage of sales, however, SG&A declined 180 basis points year-on-year to a second quarter record low of 10.6% of total revenue. Some nice efficiency there. Looking at second quarter profitability, our adjusted EBITDA margin increased 40 basis points on an as reported basis and increased 130 basis points on a pro forma basis to 47.7%. This translates to an as reported flow through of 49% in pro forma flow through of better than 54%. And finally, adjusted EPS increased 26% to a second quarter record of $9.88. Shifting to CapEx, gross rental CapEx was $1.25 billion, and net rental CapEx was $869 million. This represents an increase of $161 million in net CapEx year-over-year, supporting our continued growth in 2023. Year-to-date, gross CapEx is totaled roughly $2.05 billion. This equates to about 60% of the midpoint of our full-year rental CapEx guidance, which is where we expect it to be at this time of the year. Turning into return on invested capital and free cash flow ROIC, which as you know is a critical metric for us, set a new record at 13.4% on a trailing 12-month basis. That is 30 basis points sequentially and 190 basis points year-on-year, and remains well above our weighted average cost of capital. Free cash flow also remains a good story with a quarter coming in at $340 million or a trailing 12-month free cash margin of 12.3%, all while continuing to fund significant growth. Moving to the balance sheet, our net leverage ratio at the end of the quarter improved to an all-time low of 1.8 times or a decline of 10 basis points sequentially and 20 basis points year-over-year. And our liquidity at the end of June exceeded $2.7 billion with no long-term maturities until 2027. Notably, this was after returning $352 million to shareholders in the quarter, including $250 million through share repurchases and 102 million via dividends. So let's look forward and talk about our increased guidance, which reflects our continued confidence that 2023 will be a record year. Total revenue is now expected in the range of $14 billion to $14.3 billion, implying a $200 million increase at midpoint and full-year growth of around 21.5%, and pro forma growth of roughly 13.5%. Within total revenue, our used sales guidance is now implied at around $1.45 billion or an increase of $150 million reflecting better than expected pricing and stronger than expected retail demands. We have increased our guidance for adjusted EBITDA by $100 million at midpoint to a range of $6.75 billion to $6.9 billion. This continues to imply as reported flow through of around 48% and pro forma flow through in the mid fifties. On the fleet side, we have narrowed our gross CapEx range by $50 million between $3.35 billion and $3.55 billion given the increase in our used sales expectations. This now implies net CapEx between $1.9 billion and $2.1 billion. And finally, we are increasing our free cash flow guidance by $175 million at midpoint to between $2.3 billion in $2.5 billion, which is before repurchases and dividends that together should return over $1.4 billion of cash to our investors or better than $20 per share. So with that, let me turn the call over to the operator for Q&A. Operator, please open the line.

David Raso:

Just wondering if you could help us with how you are thinking about fleet productivity the rest of the year and maybe a little more color on what drove the pro forma decline from five nine down to two for the second quarter.

David Raso:

And regarding the rest of the year, how should we think about year-over-year fleet productivity that is baked into the guide?

David Raso:

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

William Grace:

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

William Grace:

Yes. So I would say a couple of things there, David. One, we always caution people against anchoring with the midpoint. But Ahern, it is really kind of the factor that people need to be thinking about, as they think about first half and second half dynamics year-on-year. We have been clear to talk about pro forma flow through in the mid-50s. We have been delivering that and we would expect that to be true in the back half of this year, which will be driving margin expansion on a pro forma basis, which as Matt said is the way we think about our business.

Matthew Flannery:

Correct, it does. And this is one of the things we have been working on internally and we will work on it further as the year progresses. For 2023, kind of our allocation of capital is committed as you know. As it relates to next year, we will have decisions to make. And certainly, we will have an update for where we end up come January, I would expect. But we are left with a couple options, and we have talked about these publicly. On one hand, there is the potential that we could lower the range, which is something we talked about when we introduced the new capital allocation strategy in 2019, or you could keep it where it is. That is one of those things we are working on, trying to figure out what is the best way to allocate capital to drive shareholder value. So there is not much more specific I can add right now, but certainly, you know, that is how we are thinking about it.

Matthew Flannery:

Thanks David.

Rob Wertheimer:

Hi. Good morning, everybody. So I had a question on Ahern and just the maturation of acquisitions in general. And I know you talk about how you sort of scramble the egg and you can't always unscramble it, but I assume that you have still got some ongoing repair and maintenance as you sort of fix up a fleet that was presumably under invested in. And then I assume there is also a process just cause you guys have so much, you have so much process, you have so many SKUs and so forth of training people up and so forth. So I just wonder if you have any comments on how long or how big that margin differential is and how that maturation that acquisition drags up margins. Are we there now or is it going to take two or three or is it going to be, you know, a tailwind for two or three years or any commentary around that would be helpful.

William Grace:

Yes, Rob, it is a good question and it kind of gets to some of the margin dynamics in the quarter that this is a good chance to kind of get those out there. So if you were to look at the equipment rental gross margin, on an as reported basis, it would look like it was down 140 basis points year on year. That is a slight improvement from the down 170 in the first quarter. So you can see some of those benefits playing through there. But importantly on a pro forma basis, our gross margin actually expanded 20 basis points. So you can see that impact of Ahern and just putting the year ago period into the numbers. So we have got margin expansion there and if you adjust for the increase in depreciation related to the assets, the valuation of the acquired assets, gross margins were actually up 80 basis points in the equipment rental gross margin line that includes the drag that we are talking about from this ongoing investment in fleet, which we have talked about last quarter continuing this quarter. I think it is reasonable to assume it will continue in the second half as we get that fleet up to our standards and other investments we are making that do get expensed and things like facilities. So to us things are playing out very well, even in spite of these additional costs that are hitting us from P&L perspective. And you can see that in these numbers I just shared.

Matthew Flannery:

Yes, sure. Thanks. So first off, let's get clear. Supply chain is not fully remedied, which is why we front load CapEx so much in the first half of this year, right. So at 60% of our full-year spend, we are at the top end of the range. We had talked about in that 55 to 60. And if we could have pulled in some more upfront in specific categories, we probably would have. We had said in the beginning of the year, we didn't really think there was an opportunity to pull CapEx forward, that this is a decision that probably we would make in Q4. If we were going to raise CapEx, that would really have to say more about what next year's slots look like, and if we can get back to more normalized cadence when the supply chain hopefully remedies in its entirety. So this change in net CapEx is just strictly about us having the opportunity to sell more fleet through the retail channel. And we are talking 90-month old fleet at $0.07 on the dollars, just smart business. It is time for that stuff to rotate out, and we wanted to normalize that. So if we could have pulled some more forward to maybe make that net CapEx number more whole, we may have done it in the right categories. We just didn't really have that option, because the supply chains getting better, but not a 100% there yet. Hopefully that answers your question.

Operator:

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

Matthew Flannery:

No, I think we are at a comfortable level. Listen, we want to continue to improve utilization over the long-term trend. It was just - we haven't had a normal year in three years, right. So when you think about the COVID year, which was just goofy overall, and then the two years of just not being able to get fleet at the proper cadence, we will revert back to continuing to try to drive better metrics from 19 on as we had always done. So I'm not saying we are capped out, I'm just saying right now with, especially with continuing to work through the Ahern fleet, we are on a pretty healthy time utilization and we are being able to be responsive to these major opportunities we have with big customers on big projects. So that is how I categorize that, Steve.

William Grace:

Yes. So we do our best not to guide to kind of gross margins, but certainly directionally we would expect it to continue heading in the right direction. There is going to be a gap there structurally, because that was a less profitable business then what we would have on a legacy basis, right. So - and we have talked about that. I think on an LTM basis there, EBITDA margins were 35%, whereas ours were 48%. And so that'll obviously be a dynamic in these as reported numbers, but certainly that cap should narrow. And then as we get to next year, I think it would definitely be reasonable to assume that we would be looking for margin expansion across the business.

Operator:

Thank you. We will take our next question from Seth Weber with Wells Fargo Securities.

William Grace:

So here, again, this is an example of things we don't typically guide towards. So I want to be careful there. It is all embedded within the EBITDA and EBITDA margin and flow through guidance we have given. So certainly we would expect to continue driving. Very good efficiency there. But in terms of kind of trying to give people more precise handholding, it is just not something we have done. So, I don’t know if that helps, Seth, but we feel really good about it and certainly we would expect to continue to be very efficient.

Matthew Flannery:

Yes, I think so let's talk about the large companies, which we all get a little more information from. I think we are in a similar boat. I think you will hear from most of them that this is still a good demand environment, still a good solid rate environment. And I think that points to the industry discipline. And I think not everybody's reported yet, but I think everybody's had the same challenge of that time you was just running a little too hot. And I think you are seeing people remedy that. And I think a lot of us that had the ability to, so specifically the big guys that had some scale to leverage front load their capital to try to bring it in ahead of the demand curve. So you didn't get stuck in that same box we were in for the last year or two. So, I think the dynamics of the industry are really solid, and I think you are going to hear - we already have heard a couple report similar trends to what we are talking about. So we think the industry is in good shape, think supply demand is in good shape, historically, strong time utilizations and that it is a solid rate environment so good all the way around.

Operator:

We will take our next question from Jerry Revich with Goldman Sachs.

Matthew Flannery:

Sure. Well, to be specific. If you remember that 2015 was that oil and gas dislocation, right. Which really drove kind of a double dip, we will, call of rate problem because it was the highest value of rate just about every company's portfolio that was serving it. Rates were really high there and it went away quickly across the board. But your point is still fair. That was what happened when there was too much fleet in the system. The time you then dropped to levels that made people have to make different decisions. The time now in the industry is very healthy. So even though it is dropped from inflated time utilization, the reason why you are seeing different behavior is part industry discipline, but also everybody is running at healthy time utilizations. People are able to make good returns, good margins at these utilization levels and price of goods is higher so people understand the necessity for rate. So I think it is a totally different dynamic, and that is important to note because some people may be reading through the drop in time utilizations that are reported is a demand problem. That is not the case whatsoever. So thanks for help to make that point.

Matthew Flannery:

Maybe normalized cadence. I wouldn’t say lower, but we are not even sure of that yet, right. We have got to get these slots from the OEMs. They have to be able to make the commitments. I know they are working hard. I know you talk to these folks as well. They are hopeful. That slide channel remedy, but I wouldn't go all the way there yet. But, hopefully, hopefully, that is what happens, and we can get a little more of a normalized cadence and not have to hold stuff through the winter because we are afraid we can't get it in the spring. But either way, we are going to do what we need to do for our customers, right, not manage the metric more than the business and the output through the P&L.

Operator:

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

Matthew Flannery:

I will take the first part of that, Jamie, and Ted could talk to the specialty side. So big customers are still concerned, especially major projects, still concerned about making sure they have surety of supply, right, even though it is a small amount spend, right, couple of percentage points of spend on the project, it has major applications, when they can't get the material and the labor activated. So we are having those conversations, and a lot of the projects we are talking about today kick-off this year and will carry in through next year and they all hit different phases. So we are in regular planning with our large customers on these mega projects, because it is really important to them. And they have felt the crunch over the last couple of years, and they want to make sure that, surety of supply is there. So it is definitely more that way than thinking they can wait. I think the last two-years some ways, it is better for us planning more with our big customers, because they realize it is an important, it is an important factor to making sure we both have a win-win situation. Ted, do you want to touch on the second part?

Jamie Cook:

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

Matthew Flannery:

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

William Grace:

Thank you.

Tim Thein:

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

Tim Thein:

Okay. Alright. And then maybe just to get a bigger picture, you know, a fair amount of disruption, you know, that is occurred to the regional or the, you know, banking system over the last several months and, you know, there is more concerns around just lending availability and do some of these regional banks tighten up, again nothing that you haven't heard, but I'm just curious as your conversations with, you know, fellow, you know, C-Suite folks, is that, are you hearing or seeing much from the standpoint of, you know, projects that, maybe were on your drawing board that are pushing out or anything that you would flag along those lines. Obviously, it is been a concern for some recently. I'm just curious if that is if it is something that you are seeing or hearing much about. Thanks.

William Grace:

Yes, Tim. I guess things I add, you said regional banks, but I think it is more specific to the local smaller banks, but frankly we are not seeing it either level. I mean, as best we can tell, capital availability remains abundant for our customers. Cost of capital remains reasonable. And so if we look at our customer confidence, really going back to the middle March when all this started, it is really unaffected. And if we look at our performance by customer segment, right. So you look at national account, strategic assigned, local, et cetera, but you are not seeing any real difference in how those are performing. So certainly, on a - through the second quarter there is no discernible impact and in terms of what the potential may be going forward or customers aren't really talking about it and we are not sensing it is an issue, but it is something we are obviously watching closely as you would expect.

Matthew Flannery:

Thanks Tim.

Ken Newman:

Matt, so obviously it sounds like you feel very confident in the demand environment here. I am curious if you just give a little bit of color on what you are seeing between your two customer sets, right? Because obviously your internal sentiment survey seems like it is still pretty strong or in line with last quarter, which is I think more tied to your national accounts. But any signs of material moves between your national accounts and your local accounts?

Ken Newman:

Got it. And then just to follow-up on that non-res comment, obviously you talked about industrial manufacturing demand being strong here in the quarter, non-res, I think you said was up double digits. I'm curious if you could just dissect that a little bit. I mean, I didn't hear too much about civil infrastructure projects. My understanding is that starting to accelerate here in these last couple of months. Is that a category that you are expecting to accelerate here into the back half? And if so, how do we think about the margin impact on some of those projects, if any? Here for the back half of 2023.

Ken Newman:

Makes sense. Thanks for your time.

Scott Schneeberger:

I'm going to follow-up that last non-res question. A common question we feel is about weak spots within non-res and everything, we have heard on this call. Sounds very, very good across non-res. So one of the areas of concern is commercial real estate, non-manufacturing and office buildings, any insight you can share there or any other areas of weakness? Matt, it just sounds like it is very broad based and very good. I just want to hone in on any trouble points that you might be seeing.

William Grace:

Yes, certainly if we look at what we call non-res, it continues to grow quite nicely. We don't get as granular as the questions you are asking. So if you were to look at the construction put in place data, Scott, certainly you would look - looking at office and commercial whether it is year to date or I think June, which is the most recent data, they both continued to, so show growth. Now I think you were asking more on a forward-looking basis. And when we think about that, and we have, in total, those two verticals are about 20% of total non-res construction put in place. And I would say the office part is one, people worry about given return to office and work from home and those things. Commercial is a huge segment, so it is not strip malls wherever people live. It is much broader. But I think those are the two areas that we have talked about being reasonably at risk. Now then you talk about the areas where we are optimistic, where we see strong pipelines and where you continue to see strong growth. And the ones you would highlight would be manufacturing as we have talked about public road and highway power communication, transportation and healthcare all of which are performing well in total, those are 55% of total non-res. And our contention would be the growth in those markets is really going to offset any headwinds we would reasonably anticipate in the office commercial combination. So that is logically what drives our optimism looking out across the back half of this year and going forward.

William Grace:

Yes. So for the first part of your question, nobody's fallen behind. As I said, prepared remarks, specialty had 17% organic growth and all the business segments were in double-digits, which is great. Now, certainly, the GFN, which you pointed to, growing a little bit faster than the rest, but we would expect that. And as far as that goal to double the size of the business in five years, I think we shared this earlier in the year that we are ahead of schedule. Whether we are a year ahead of schedule or two years ahead of schedule, the time will tell. But we are we are very pleased with where they are and we are continuing to open cold start to continuing to grow that sector as well. But we are growing all of our specialty segments. We are really pleased with the work the team is doing there.

Operator:

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

Matthew Flannery:

Sure. So we don't talk about our negotiations on open mic. Just we are one of the good partners with our vendors. But the comment of some of the surcharges and the costs associated with creating those surcharges is certainly a fair comment when we are discussing with our partners. So I don't think that characterization is wrong. We just don't really talk about our negotiations with our partners publicly. But the capitalization is fair enough.

Matthew Flannery:

Yes. I mean, the first enabled us to do the second, right. If we can bring in the fleet, we wouldn't even be able camp it down. So they are very much going hand-in-hand. But just by definition of how much capital we have left for the year for growth, we are going to bring in a good amount of our CapEx in Q3 here as you would expect for the balance of the - what is left of the balance of the year. And I think, like I said earlier, when people trying to see if we could forecast the productivity number. We will sequentially grow, but we think they are going to see similar year over year dynamics to what saw in Q2. So we feel good about it, we feel good about demand, and we will continue to have CapEx rolling here in Q3.

Operator:

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

William Grace:

Yes, it is a good question, Megan. It is something we go through every year, so of course we are talking in nominal dollar, so you have really got to convert this all to volume, but that is how we approach the forward year as it relates to CapEx. As we get into the fall and into the fourth quarter, we will start our bottoms up planning process. That process will help us get a much better sense for what our customers think their growth will look like at 2024. At that point, we can then think about what our replacement CapEx needs will be, based on the OEC we would plan to sell next year, and then the incremental fleet we would need to support growth in that environment. As Matt said, we think we have kind of reset the baseline back to where we want to be this year. So as we think about next year, you know, let's just say we are kind of at that steady state, then there is less of a time dynamic that comes into this. And then it is more a function of how do you manage the growth in your OEC. Matt, is that fair?

William Grace:

Okay. And does that hypothetically answer your question?

Matthew Flannery:

Yes, and it is a fair question, but it will depend on what we see as a demand as we go through our planning process. But we are certainly not as negative on the growth as maybe your, the tone you are sharing, but you know what time will tell and, and we are going to adjust and manage the business appropriately for whatever environment we have. All that being said, we do expect, and I think you are seeing this with most of the big players for us to outpace overall industry growth, we think the big is getting bigger is a dynamic that'll continue to play. And I would say the type of work that we have talked a lot about to everyone lends itself to the larger players. So I wouldn't even - even if there is a slower growth in the overall industry, we think we will have the ability to outpace that. But I do get your point and we will manage through it.

Mig Dobre:

Understood. Thank you, gentlemen.

Operator:

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

Matthew Flannery:

Thanks operator. And no additional remarks that wraps it up for today. So I want to thank everyone for joining us and we look forward to speaking with you all again in late October and in the meantime, please feel free to reach out to Elizabeth at any time if you have any questions. Thanks again. Operator, please go ahead and end 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, 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 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 today's call include references to non-GAAP terms such as free cash flow, adjusted EPS, EBITDA and adjusted EBITDA. Please refer to the back of the company's recent investor presentations to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. 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.

Ted Grace:

Thanks, Matt, and good morning, everyone. As you saw in our first quarter press release, our team again produced excellent results that were consistent with our expectations and importantly, position us well for the full year. And I think Matt framed things well in saying that we continue to feel good about both 2023 and beyond, given the market opportunity we see, our strategy, our team's consistently strong execution and our customers' knowledge that we are here to serve them with unmatched capabilities. One quick note before I jump into the numbers. The figures I'll be discussing are as reported, except in a few instances where I'll call them out as pro forma, which are adjusted to include Ahern's first quarter 2022 stand-alone results in the year ago period. So with that said, first quarter rental revenue was a record at $2.74 billion. That's an increase of $565 million or 26% year-over-year. Within rental revenue, OER increased by $469 million or 26.1%. Our average fleet size increased by 25.6%, providing a $460 million benefit and fleet productivity increased by 2% as reported, adding another $36 million. This was partially offset by our usual fleet inflation of 1.5% or $27 million. Also within rental, ancillary revenues were higher by $93 million or 28.3%, and re-rent provided an additional $3 million or 6.1%. I'll note that on a pro forma basis, rental revenue is up a robust 16.6%, and fleet productivity increased by a healthy 5.9%. First quarter used sales increased by 84% to $388 million as we return to a more normalized volume after holding on the fleet throughout much of 2022. Adjusted used margins increased by 170 basis points to 59.5%, supported by continued strong retail pricing. Moving to EBITDA. Adjusted EBITDA in the quarter exceeded $1.5 billion, another first quarter record, reflecting an increase of $364 million or 32%. The dollar change includes a $313 million increase from rental, within which OER contributed $285 million. Ancillary added $29 million and re-rent was down $1 million. Outside of rental, used sales added about $109 million to adjusted EBITDA, while other non-rental lines of businesses contributed another $5 million. SG&A increased by $63 million due primarily to higher commissions and the continued normalization of certain discretionary costs. As a percentage of sales, however, SG&A declined by 120 basis points year-on-year to 11.6% of total revenue. Looking at first quarter profitability. Our adjusted EBITDA margin increased 70 basis points on an as-reported basis and 160 basis points on a pro forma basis to a first quarter record of 45.8%. This translates to 48% flow-through on an as-reported basis and better than 53% on a pro forma basis. And finally, adjusted EPS was 5, another first quarter record. That's a year-over-year increase of $2.22 per share or almost 39%. Turning to CapEx. Gross rental CapEx was $797 million, and net rental CapEx was $409 million. This represents an increase million in net CapEx year-over-year and positions us well for the growth we see in 2023. We -- looking at return on invested capital and free cash flow -- set a new record at 13.1% on a trailing 12-month basis. That's up 40 basis points sequentially and 220 basis points year-on-year. I'll add that was 310 basis points above our current weighted average cost of capital. Free cash flow was another good story with the quarter coming in at $478 million or an LTM free cash margin of 13.5%, all while continuing to fund significant growth. Turning to the balance sheet. Our leverage ratio at the end of the quarter improved to 1.9x, representing a 10 basis point reduction both sequentially and year-over-year. And our liquidity at the end of March exceeded $2.65 billion with no long-term note maturities until 2027. Notably, all of this was after returning $353 million to shareholders in the quarter, including $103 million via dividends and $250 million through share repurchases. Looking forward, you saw last night that we reaffirmed our guidance across all metrics. Based on the diverse momentum we see across our markets and what we hear from our customers, we remain confident that 2023 will be a record year for the company. Just to review, total revenue is expected in the range of $13.7 billion to $14.2 billion, implying full year growth of approximately 20% at midpoint and pro forma growth of 12%. Within total revenue, I'll remind you that our used guidance is implied at $1.3 billion. Our adjusted EBITDA range remains $6.6 billion to $6.85 billion. On an as-reported basis, at midpoint, this implies roughly flat full year adjusted EBITDA margins and flow-through of around 48%. The -- on a pro forma basis, however, which we think is the appropriate way to think about it, our guidance continues to imply about 80 basis points of EBITDA margin expansion and flow through in the mid-50s. On the fleet side, our gross CapEx guidance remains $3.3 billion to $3.55 billion, with net CapEx of $2 billion to $2.25 billion. And finally, our free cash guidance is $2.1 billion to $2.35 billion, which is before dividends, repurchases and bolt-on M&A. So with that, let me turn the call over to the operator for Q&A. Operator, please open the line.

Rob Wertheimer:

So my first question is basically on demand. And you gave a pretty good overview. But if we just leave aside the Dodge and all the surveys and everything and just think about what you're seeing on the ground and hearing from your customers. Are you seeing the mega project funding start to flow through? Are you seeing lots of activity in sort of quoting or proposals on loans? And does it give you any differential, I guess, versus other years look into supply/demand as we move through the year? Does it continue to look tight does pricing continue to look well supported by supply-demand dynamic as we go through the balance of the year?

Rob Wertheimer:

So that's pretty responsive. And then just on gen rent gross margins, is that any indication of rate versus cost balance? Or is that largely explained by Ahern coming in or other factors? And I'll stop there.

Operator:

Our next question comes from David Raso with Evercore ISI.

Matt Flannery:

Yes. So let me help you with. So first off, I will start by urging everybody look at the pro forma, right? That puts the Ahern base in there. That's how we manage the business. It's how we're taking that asset base, putting the base of that into the base year that we're comparing to. So not having in that base year creates that disconnect of, let's call it, about 4 points. That point gap between pro forma and as reported, we believe will continue. And I'll just -- I'll try to explain it simply. If you think about the amount of capital that Ahern had that we're adding to the base year, and the amount of revenue -- rent revenue they generated on it, it was about 40%, about $0.40 on every dollar. When you roll that into our experience, which is more like 60% on the dollar, that's that dilutive effect. And we think it's going to be somewhere in that 4% gap between what we report as reported and what we report pro forma for the rest of the year. So that's just -- that baseline of what we add into the baseline is not the change because it already happened. It's baseline. Now any improvement that we can get on those assets, that will show up in our improvement in our fleet productivity. As you all know by this time, the egg scramble, that fleets in our overall business. We consolidate stores. We have one single go-to-market. So all that, we consolidate customer statements that were overlapping. So that's all going to be in the improvement that we'll continue to report on as reported and pro forma basis. Does that explain that gap for you well enough, David?

Ted Grace:

But that would be added back in [Indiscernible].

Ted Grace:

Over time, certainly, the idea is we will narrow the gap. I mean, that was part of the opportunity, right? We talked about being a better owner of assets, and it -- but it takes time, right? So certainly, when we look at that kind of crude calculation of dollar you we don't think they'll be at 40% forever. Our intent is to get them closer to something appropriate over time, but it will take time. And that's sort of every acquisition so.

David Raso:

[Indiscernible]

David Raso:

I was going to ask just kind of what trying to think about 2024 a little bit. You hear some of your suppliers having -- taking orders for 24 people are curious about projects starting to hit the ground that have kind of a multiyear aspect to them. By no means am I asking for '24 guidance, but I'm just trying to get a sense of when you went through your CapEx thoughts for the year, what you're hearing from suppliers business beyond '23. Can you give us a little color on kind of what you're sitting on right now when you think about 24 projects, willingness to order earlier working with kind of 3-year kind of conversations, which we haven't historically heard in the industry. I think they were just trying to figure out how to think about beyond '23 .

David Raso:

On the demand side as well, though too. Anything you can tell us about multiyear projects, how are we thinking about it? Or please go ahead.

Ted Grace:

Yes, David, I think we talked about this at your conference to some degree. But certainly, when we think about infrastructure, as an example, right, at run rate, that legislation is intended to produce about $100 billion a year of infrastructure spend. We're still in that ramp phase. So obviously, we're not going to get anything close to that in 2023. But that provides a tailwind in 2024, right, so just to dimensionalize numbers. If you thought that you got half of that spend in 2023, that's an incremental $50 billion of infrastructure in the context of a $900 billion total nonres construction market in the U.S. When you get to 2024, you get the second half of that as you get to an annualized run rate, right? And we thought about this logic across IRA, auto, semis and LNG is just kind of 5 key tailwinds. So certainly, those are, at a high level, the tailwinds we think about Coming back to the CapEx question, the visibility and the trajectory those will imply to '24 will be critical to dictating, how we think about CapEx in the back half of this year because that will determine obviously how we want to have the fleet positioned. Is there anything you'd add? Does that help, David?

Operator:

Our next question comes from Steven Fisher with UBS.

Ted Grace:

Yes, it will be. And just as a reminder, if you look at their business, on an LTM basis, when we bought them, they had a reported EBITDA margin in the mid-30s. So obviously, that's considerably below where we were even synergized, they would be below that. So that will be an effect that lasts until we lap them. To put it in perspective, if you look at the gross margin reported down 170 year-on-year, Steve. On a pro forma basis, it was up 10 basis points. And that really dimensionalizes what that impact of Ahern was in the quarter. That will be a lasting effect as we kind of progress through 2023. And where you see that really specifically is in the rental -- the gen rent segment gross margin. So does that help kind of answer the question?

Ted Grace:

So certainly -- I mean the big delta aside from the fact that it's lower margin as you get the synergies coming in, that's one thing to consider. But we're talking about this in isolation.

Ted Grace:

No. I mean, if you isolate it, it's -- I mean there's always ebbs and flows to the cost. So -- but it's really a herd, where you can see that is if you look at the gen rent gross margin, right? That would go from, let's say, down 320 year-on-year to down 100 pro forma. The pro forma only includes Ahern in the year ago period but there are other accounting adjustments, fair market value on the fleet, as an example, that explained the majority of that 100 basis point pro forma number. Another, call it, shorter-term onetime expenses as we get the fleet and shape as we get their facilities integrated, that really explains the difference.

Matt Flannery:

Yes, your observation is right. When you think about the cadence, normally, the first quarter and fourth quarter are larger, right, with fourth usually being the largest historically, We think we'll return to a more normalized cadence as we open up other channels as opposed to the last couple of years where we've been primarily retail. So think about a little bit less in two and three and then ramping it back up again in four, as the fleet comes off rent, right? It makes sense. Q1 and 4, your lower utilization period. So it's when you have the opportunity to sell the fleet a little easier.

Jamie Cook:

I guess just two follow-up questions. Just back on the margin again, Ted, when do you expect to get back to more normalized incremental margin in the mid-50s? Can we expect that sort of by 2024 as we integrate Ahern? And then just my follow-up question. I know you're seeing broad-based strength sort of everywhere. Is there any difference in the type of customer or the size of customer? Maybe the larger customers are stronger just because they might have more visibility into some of these larger infrastructure projects you're talking about? So anything on the customer side as well?

Ted Grace:

Sure. So Jamie, on flow-through, we look at things pro forma, as Matt mentioned, in the first quarter, pro forma flow through 53%. We would view that as right in line with the full year guidance in the mid-50s. And so we don't give kind of sequential guidance or quarterly guidance, but certainly, we remain very confident that the flow-through is intact and as expected at the beginning of the year. So we don't view the first quarter as any deviation from that. And as we talk about flow through, and like many things, there's an ebb and flow. But we talk about targeting 50% to 60% flow through across the course of the cycle. And at some point, they're going to be at the upper end of that band and some in the lower -- but we think this is right in the middle of the fairway of where you want to be in the growth phase of the cycle. So yes, and it's consistent with the guidance

Ted Grace:

Yes.

Operator:

Our next question will come from Jerry Revich with Goldman Sachs.

Ted Grace:

So I guess what I'd say is we feel very confident about the ability of the business and that this is a structural gain. In terms of what the business would do in a downturn, it's critical to dimensionalize what kind of downturn you're talking about for multiple reasons, including that will dictate the actions you take. I think if you look at the performance we had during COVID in the face of a 9% decline in rental revenue, we had 50 basis points of margin compression, EBITDA margin. So in that kind of scenario, you've seen what we can do, we will lean hard on costs. So I guess what I'd say is we feel very confident that the structural improvement, call it, 1,500 to 2,000 basis points is absolutely sustainable. In terms of giving kind of a threshold of where you would get, that's harder to say simply because it is assumptive. I would also just remind people, when you look at the margins, what we've done actually understates what the core business has done. Matt and I talked about this a lot. But if you were to back out the acquisitions we've done since 2014, our EBITDA margin would be in the 51% to 52% range. So we've integrated those businesses. They've benefited us strategically. Financially, they've been home runs from a returns perspective and the benefits they've delivered to the shareholders, frankly. But they have been dilutive to margins as we've always talked about when we've done them. So I bring that up only because I think when you look at that chart, Jerry, and it's a great chart, it does even understate how strong the profitability improvement has been in the core business. Matt, anything you'd add there?

Jerry Revich:

And Ted, can I just pull on that M&A part of the conversation? Can you talk about what the specialty pipeline looks like for you folks? Any interesting meaningful opportunities to structurally increase specialty as a percent of total from here based on the types of businesses you're looking at?

Operator:

Our next question comes from Seth Weber with Wells Fargo.

Matt Flannery:

Sure. As you can see in our guidance, we're not planning on a lot of variability in there at all. And part of it is because the point you just made, yes, your largest customers are going to get a little bit better pricing relative to your spot pricing. But if we can put $100 million on a project and service it with a couple of -- and its long-term rentals, so high utilization rates, and that's going to come in at a lower cost to serve, whether I have to split $1 million per smaller job over across 100 different jobs, right? So just the logistics, everything a little bit lower cost to serve. And that balances out to we're not expecting any meaningful change in the margin profile, whether it be gross margin or EBITDA margin.

Ted Grace:

I guess the thing I'd say is we have consistently been a very comfortable and consistent buyer of our stock. So we feel very good about that philosophically. From the standpoint of changing our strategy, it's certainly not something that we're contemplating at this point. . We've consistently been kind of a believer in dollar cost averaging systematic execution. So you saw us buy back $250 million in the quarter, which is obviously exactly one quarter of the full year in 10. So we have not historically kind of leaned in or been tactical. Some people call it opportunistic. We think that it served us well. And we think, frankly, when you look at most of these studies on the most effective way to execute buybacks, this is the right strategy.

Ken Newman:

Most of my questions have been asked, but maybe just a couple of quick ones here. Sorry if I missed this, Ted, but could you talk about where the internal customer survey ended up moving this order versus last?

Ken Newman:

And then I know you've talked a little bit about return on invested capital and that continuing to improve. Maybe this is more of a conversation for when you do your Investor Day, but any kind of broad thoughts on how you think about driving that number up over the longer term? And what are the levers you can pull, especially as you kind of work through some of these margin impacts on Ahern?

Matt Flannery:

No, no. Just once again -- you look at our guidance, we're not expecting to not be able to overcome that.

Ken Newman:

Maybe one last one if I could just squeeze it in. Relative to the proceeds on OEC for fleet sales that's implied for the full year, can you just remind us where did proceeds this quarter end up? And what's kind of embedding that point of the guide for the full year?

Operator:

Yes. Helpful. Our next question comes from Neil Tyler with Redburn.

Matt Flannery:

Sure. I'll take the Ahern part of that, and then Ted can backfill in with some of the exposure to commercial and specifically office. I think, it's probably one of the areas people are most thinking about, which I'll foreshadow isn't much. But when we think about the Ahern integration, as I said in the prepared remarks, on track. And I'll remind everybody, this deal was all about capacity and capacity in fleet, real estate and people. We're right on track with the fleet and real estate, working through that. We've got the plans on how we're going to consolidate the go-to-market into one go-to-market. And in a few instances, that means repurposing some of the real estate to support some of the 40 cold starts that we're talking about. So we still have capacity even where we're consolidating in a market because one of our stores had plenty of capacity to consolidate into. We're utilizing that other real estate to help grow some of the specialty business. So that's from the real estate perspective. The fleet we've talked about already, we'll continue to work towards making that fleet look more like ours, work towards that and probably move some of the older stuff out as we go through the year, and that was Ted's point about opening other channels. The people side has been the real positive surprise. We always had the hope that we'd be able to do well with people, that they'd integrate into our organization well, and that's exceeded our expectation. And they have quite a bit higher turnover in that business stand-alone, and we're glad to see that we remedied that, made that turnover level look like ours -- more like ours, which is really the important part of that. And once again, that final piece of capacity, that's we're very, very pleased with.

Operator:

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

Operator:

Thank you. This concludes today's call. We appreciate your participation. You may disconnect at any time.

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

Ted Grace:

Thanks, Matt, and good morning, everyone. As you saw in the results we reported last night, the team did a great job delivering across the board, both in the quarter and for the full year. And importantly, as you can see in our guidance, we expect these trends to continue in 2023. Combined with the enhancements to our capital allocation strategy that we’ve announced this quarter, we are confident that we will continue to drive meaningful long-term value creation for our shareholders. I’ll dig into this more in a bit, but first, let’s dive into the quarter. Fourth quarter rental revenue was a record $2.74 billion. That’s an increase of $435 million or nearly 19% year-over-year. Within rental revenue, OER increased by $354 million or 18.6%. Our fleet average – our average fleet size increased by 14.2%, which provided a $270 million benefit to revenue and fleet productivity increased by healthy 5.9%, which added another $113 million. This was partially offset by our usual fleet inflation of 1.5% or roughly $29 million. Also within rental, ancillary revenues were higher by $81 million or 23.1% year-over-year. While re-rent was essentially flat. Outside of rental, fourth quarter used sales increased by roughly 26% to $409 million as we sold some fleet we’ve held back on selling earlier in the year. To help accomplish this, we brought in our channel mix for used sales in Q4 to something closer to normalized levels. The net of this was our adjusted use margins increased by 940 basis points year-over-year to 61.6% supported by strong pricing. Let’s move to EBITDA. Adjusted EBITDA for the quarter was $1.65 billion, another record and an increase of $338 million or 25.8% year-on-year. The dollar change included a $291 million increase from rental within, which OER contributed $256 million. Ancillary added $34 million and re-rent was up $1 million. Outside of rental, used sales added about $83 million to adjusted EBITDA, while other non-rental lines of businesses contributed another $18 million. SG&A was a $54 million headwind to adjusted EBITDA due primarily to higher commissions and the continued normalization of certain discretionary costs. As a percentage of sales, however, SG&A was down slightly year-over-year. Looking at fourth quarter profitability, our adjusted EBITDA margin increased 280 basis points to 50.0%. Excluding the benefit of used sales, flow-through was in line with recent quarters at a healthy 59%. I’ll add that within the fourth quarter results, in the roughly three weeks we owned Ahern, the business contributed about $54 million of total revenue, the vast majority of which was rental and roughly $20 million of EBITDA. And finally, fourth quarter adjusted EPS was $9.74 per share. That’s an increase of $2.35 per share or almost 32% year-on-year. Turning to CapEx. Fourth quarter gross rental CapEx was $980 million, and net rental CapEx was $571 million. This represents an increase of $205 million in net CapEx year-over-year, which positions us well for the growth we see in 2023. Now, let’s look at return on invested capital and free cash flow. ROIC was another highlight at a record 12.7% on a trailing 12-month basis. That’s up 50 basis points sequentially and an increase of 240 basis points year-on-year. Free cash flow also continues to be very strong, with the year coming in at $1.76 billion or a free cash margin of better than 15%, all while continuing to fund growth. Turning to the balance sheet. Our leverage ratio at the end of the quarter was 2.0 times on an as-reported basis, including the impact of the Ahern acquisition. More importantly, on a pro forma basis, our year-end leverage ratio was flat sequentially at 1.9 times. And finally, our liquidity at the end of the quarter was a very robust $2.9 billion with no long-term note maturities until 2027. Now, let’s look forward and talk about our 2023 guidance. Total revenue is expected in the range of $13.7 billion to $14.2 billion, implying full year growth of about 20% at midpoint and pro forma growth of roughly 12%. This increase is supported by the momentum we’ve carried into the New Year, particularly within rental revenue and the contribution from Ahern. Within total revenue, I’ll note that our used sales guidance is implied at $1.3 billion, with the expectation that we’ll sell roughly $2 billion of OEC. This 35% increase in used sales year-over-year primarily reflects two things. First, is the normalization of our used sales as the supply chain continues to improve. And second, a substantially larger fleet, including the addition of Ahern to our business. We remain focused on efficiently converting this growth to our bottom line. Our adjusted EBITDA range is $6.6 billion to $6.85 billion. On an as-reported basis, including the impact of Ahern, at midpoint, this implies roughly flat full year adjusted EBITDA margins and flow-through of about 48%. On a pro forma basis, however, which we think is the more appropriate way to think about it, our guidance would imply at roughly 80 basis points of margin expansion and flow through in the mid-50s. On the fleet side, our initial gross CapEx guidance is $3.3 billion to $3.55 billion, with net CapEx of $2 billion to $2.25 billion. And finally, our free cash guidance is $2.1 billion to $2.35 billion. To be clear, this is before dividends and repurchases. Assuming these two factors are a use of cash of roughly $1.4 billion that leaves $825 million of remaining free cash flow to fund additional growth or reduce net debt. Now before we go to Q&A, I want to make some additional comments on our updated capital allocation strategy. Specifically around our plans to return excess cash to our investors. As you heard Matt say, we are very pleased to be adding a dividend program to our mix. Based on an initial yield of 1.5%, we expect to pay $5.92 in dividends per share in 2023. This will translate to approximately $400 million this year or roughly 18% of free cash flow. We expect that our first quarterly dividend payment of $1.48 will be made on February 22, with all four payments expected within the calendar year. Following the transformation of the company over the last decade or so, we feel that it’s the appropriate time to add this last element to our capital return strategy to help drive greater shareholder value. Not only will this help expand the universe of potential investors, we expect that it will also provide another means of enhancing total returns for our investors over time. It also reflects the confidence we have in our operating model to consistently generate considerable excess free cash flow after investing in growth. We’re also very pleased to announce the restart of our share repurchase program, which we paused in November with the announcement of Ahern. The restart is probably a bit ahead of schedule, but the integration is off to a great start and the decision is well supported by the financial performance we expect this year. It’s our intention to repurchase $1 billion of the $1.25 billion authorization in calendar 2023. As Matt said, these two programs combined, should return approximately $1.4 billion to our shareholders this year or about $20 per share at the same time that we continue to see substantial growth in our earnings. Finally, I want to be clear that these announcements are being made in the context of our continued commitment to a disciplined balance sheet strategy. Our financial strength has served the company and its shareholders very well, and we’re not planning any changes there. So with that, we’ll turn to Q&A. Operator, could you please open the line?

David Raso:

Hi, thank you for the time. Two questions. One, where there’s some worry by investors and another where there’s a clear cementing of a structural improvement on people’s minds about the business model. First, in the area of [indiscernible], equipment availability, I think, Matt, you had mentioned earlier about maybe taking some market share this year. Can you let us know what you’re seeing and hearing regarding competitors and even include OEM dealers, rental fleets in this comment? What are you hearing about their incremental ability to get equipment? What are you hearing about their adding fleet for the year? Just the overall availability from that side? And what are your equipment suppliers suggesting about increased availability versus last year? And I’ll follow up the other question.

David Raso:

Yes. Can I asked one question related to what you just said the first quarter, a little larger than normal. I’m just curious, just the cadence for the CapEx for the year, I’m talking gross, the 3.425 [ph] midpoint. Can you give us some sense of cadence is – I know you pulled forward, but on the idea of roughly flat gross for the year. Is the down quarter more the fourth quarter because of the pull forward in the fourth quarter?

David Raso:

It’s pretty interesting. That’s taking about $1.6 billion of fleet in the fourth quarter and the first quarter when you combine the two. I assume you’re seeing project backlogs that are really focused on we need this equipment for certain projects. This is not a presumption of demand? I mean, is that just a pretty big first quarter number to follow the fourth quarter, is that…

David Raso:

Just a strong – obviously, you’re seeing very strong demand in the year is going to start very strongly with that much fleet over the six months even with the used sales as well. Second question. So if we do the dividend, we do the repo if you look at the guide, it implies net debt-to-EBITDA at the end of the year at 1.55 [ph], which is almost a half turn below the low end of your range. Can you give us a sense of the capital allocation, how we should think about that? Where would you be comfortable with the leverage? Or should we think of it as you want to get the leverage back to the low end of the range and thus, M&A?

David Raso:

I appreciate it guys. Thanks for the time.

Operator:

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

Matt Flannery:

I think that’s – first of all, this is an output, right? So, we’re going to manage the heck out of rate and time even though we don’t report it out individually. And I’m very pleased that the whole industry is doing that, and we see the discipline shown in the industry from that perspective. But I think the way you characterize it is fair, we were pleased with our Q4 fleet productivity. It was what we expected. And just for clarity for those that may not have picked it up, the 5.9% as reported when you take out Ahern, that would be 6.5%. So that’s about three weeks of Ahern built into the fourth quarter. So, we will report next year fleet productivity on as reported and on a pro forma basis, so you could see that impact. And what we’ll really be focused on is making sure we take the entirety of the fleet and drive more value out of it. And any time this number exceeds our threshold we expect to comfortably do next year will – that’s a net gain. And we’ll be measuring that on a pro forma basis for you see what we’re doing with the Ahern fleet against their baseline as well.

Matt Flannery:

Yes. We’ll stay away from quarterly cadence, but obviously, it gets held by our pulp that we expect to need more fleet come the spring build up. We’re not – Q1 is always going to be the slowest quarter seasonally, but we see strong demand here today, and we expect that to continue to ramp up from big projects. And then once you really get to the peak season, once you get past May, June and even all the local market stuff starts popping. So when you hear about this pull forward, we don’t feel the fleet that we would normally have had ready is going to be enough when we get to the real build season in April. And that’s really more what that pretends to be in Q1, isn’t really the focus, the focus in is, are we going to be ready for the build, all these projects that are scratching dirt or coming out of the ground that we’re going to need, we’re going to need to mobilize fleet for in the spring.

Matt Flannery:

Yes. Steve, that one is harder to speak to just because of the way we integrate acquisitions, especially in gen rent, and that’s why it’s easier to frame as a function of pro forma. So I think you hit the nail on the head, certainly as reported, flow-through would look like 48 – or excuse me, as reported looks like 48% pro forma 55%, but it’s hard to kind of discretely break apart the businesses. The one thing I would note, just to remind people of, we do think we’ll achieve about $30 million of the cost savings out of the $40 million we talked about. So we can certainly share that. Yes, in 2023, we’ll hold $40 million, but we only get about $30 million of it in 2023 as to our expectations.

Rob Wertheimer:

Hi, thanks. Good morning everybody. I wanted to kind of circle back to the demand side or at least the end market support that’s out there in the short and the long-term. And so if you look at the dynamics, I guess, we have the mega projects that people talk about you have the fear or the risk that rising interest rates and the potential recession will cause project delays or cancellations? And then you have the infrastructure bill, which is kind of different from some of the chips and semiconductors and stuff that will flow in. So, I wonder if you could level set us on those. Are you seeing any delays, cancellations, et cetera? The mega projects I assume are flowing in? And are you seeing any of the infrastructure bill starting to flow? And I assume there’s pretty good duration on some of the stuff. So, I wonder if you have any comments on what your visibility is now versus past errors in the history.

Ted Grace:

Yes. No. I mean we really have not seen anything along those lines, Rob. Probably the one area where maybe we’ve seen some delays just as we’ve talked about it, has been more in the alternative power side, and I think there’s been some stuff written about this publicly. Solar has had some supply chain issues. And within wind, we’ve seen a couple of permitting issues. All that said, our Power business in the quarter was up about 9%. And for the year, we’re up about 10%. So while we’re seeing kind of reports that you’re seeing delays on project starts. That business for us has continued to be very robust. And just for clarity on the broadness that we’ve been talking about, right, in just the mega projects, the mega projects are really the kicker, while you hear us this strong tone and guidance that we’re coming out with, but we have seen this breadth growth throughout all geographies. So it’s not mega project reliant, but they’re kind of a kicker that maybe could offset if the commercial retail is going to drop or you think office space is going to drop. So we really feel that the balance is appropriate for this type of guide and the bullishness – you here in October.

Matt Flannery:

We are, yes. I mean if you really go through all the verticals with the exception of midstream, which throughout the years, you’ve been the only vertical down for us, everything is up and even though the rate of change across those verticals has been negligible. I mean, it’s really been very consistent across the year.

Matt Flannery:

Thanks, Rob.

Seth Weber:

Hey guys. Good morning. You guys are obviously planning to sell a lot more fleet used fleet this year. And Matt, I think I heard you reference something about a broad mix or something different channel mix or whatnot. Can you just give us some more details on what your – kind of how you’re selling this used fleet? I mean there’s obviously some concerns about used pricing starting kind of rolling over. And what your expectations are? What’s embedded in your expectations for used equipment pricing for 2023? Thanks.

Seth Weber:

Got it. Okay. That’s helpful. Thanks. And then just on the strength in the specialty margin in particular was pretty notable is – I think it was 400 basis points year-to-year. Is there something – is there some step changes happened there? Is it the general finance business, it’s clicking or anything you’d call out that is supporting that big jump year-over-year? Thanks.

Seth Weber:

Okay. All right guys. Thank you very much.

Operator:

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

Matt Flannery:

Sure, Tim. On the fleet productivity, we still feel that the environment is going to be very constructive to drive positive fleet productivity. But you pointed out, the reality of our time may have been running so hot, but at some point, you have to look at it, are we running the appropriate level of time? Can we continue to raise it? Or does it become a bit of a headwind. With that being said, even if time becomes a headwind just because we’re running so hot in some key categories, and we need to make sure we have availability for our customers. We still have ample opportunity to drive positive fleet productivity. And we think the end market is constructive for that. We’ll feel comfortable that both in as reported and pro forma basis will exceed our hurdle rate that we talk about that 1.5% even if that goes up to 2%. So, we feel good about it. And Ted, you can take the EBITDA question.

Timothy Thein:

Got it. Thanks, Ted. And did you – usually you speak to a merit increase as we think about an SG&A kind of bridge year-over-year. Any – have you quantified that as to how we should think about that for this year?

Timothy Thein:

All right. Fair enough. Thank you.

Operator:

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

Matt Flannery:

Sure. Well, number one, this would be more across the board, and we feel comfortable, I talk about it in used pricing as replacement CapEx gets increased. That’s kind of an umbrella on the used pricing, residuals, which is a positive. And I think to your point about the whole industry having absorbed some inflation has been – has bolstered the discipline that we’ve been seeing. But to be fair, we saw it even before the price increases, and I think this is just the maturity of the industry. You’ve heard us talking about the bigs – getting bigger and just more sophistication and information in the industry. I think all those are helping and certainly increased OEM pricing makes that even more important. And so I think your point is well taken. It will probably bolster some of the behavior in the industry.

Matt Flannery:

Yes. So one of the biggest differences is the information that access – everybody has access to, right, whether it’s the route data, whether it’s now that over a third of the industry is covered by top three public companies, right? These type information gives everybody more understanding and visibility of the important metrics to focus on and the opportunities that exist in the industry. So – and the scale – so specifically for us, and let’s say, our next largest competitor, scale allows us to get through things in a different way. And so I don’t really wouldn’t draw a comparison. I think the industry changed significantly in my 32 years, but even in the last 10, we do things differently, and I’m sure some of our peers do. And I think you’re seeing that manifest in better performance overall for the customer and for the shareholder.

Ted Grace:

Yes. In terms of the inflation that’s built into our expectations, certainly probably elevated versus historical levels, probably not as significant as what we saw in 2022. And yet, we’ve been able to manage it very effectively, right? So if you look at that flow through last year, as an example, when you back out use across the full year, flow-through would have been 56%, 57%. So clearly indicative of our ability to manage that inflation very effectively. And when you think about what we’re pointing towards in 2023, a similar level of flow-through on that pro forma basis. So – it’s not to say that we’re in a benign cost environment. There’s still elements of inflation that we’re managing and all companies are managing, but we feel very comfortable in our ability to manage it effectively. In terms of pickup and delivery, that’s an area where, frankly, we’re not trying to make money. So as you see, the price of diesel, as an example, ebb and flow, the impact on our margins is relatively de minimis. So it’s something the team has done a great job managing through in 2022 when obviously, diesel prices were a substantial headwind to companies. But if you think about that dynamic in 2023, I don’t think it will be very appreciable.

Operator:

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

Matt Flannery:

Yes. Michael, the type of projects vary so much that would be pretty hard to do. I mean outside if you’re thinking about towers, right, large towers, office building, which may be more limited in what type of fleet you would rent on it. All these projects have different needs. And the great thing about our product line is whether it’s early when they’re scratching dirt, whether he needs trench places from creating the infrastructure to then creating the structure to then finishing off the building. We’ve got the opportunity to cross-sell into all those needs. But as far as the volume needs, we do attribute models, they’re really hard to be predictive. I wouldn’t really say that it’s something that you can rely on. I think the speed and the time to do the project and the sensitivity probably drives more variation of how much men, material and fleet they’re going to put on there, right? And it seems like nowadays everything is a fast-track project. That used to be a term 10 years ago, that meant they were going to do something quicker now it’s every project is fast-track. So, I think that has implications of driving more rental than anything else.

Matt Flannery:

Yes, I mean, you see what’s embedded in our guidance on as reported basis, right? And within that range would be a different number anywhere. I won’t even say the number. You could do the work. But I think really the most important thing is that the environment’s good for us to continue to drive positive fleet productivity, even if time utilization doesn’t go up. And that’s really what matters. That’s the important part of it. And we will report this on a pro forma basis. They’ll be a little bit as reported drag from the 800 – bringing in the 800 fleet, but we’ll report that out and that’ll be a couple of points differentiation there, even between as reported and pro forma is what our expectation is. So, we’ll – it’s an output that we really don’t want to try to predict. But what our expectations are for [indiscernible] are all embedded within our guidance.

Matt Flannery:

Yes. It’s bit pretty consistent in terms of that progression. Hold on, I’m just turning something quickly, Mike. Give me one sec. So certainly continue to see strong momentum in upstream. I mentioned midstream has been kind of the one sector that has been a headwind for us this year. They’re – it’s relatively small, call it 2% of our total mix and downstream has been pretty steady as well. Chemical processing would be the same. So if we look at the business, it’s consistently been about 13% of our total business across the year.

Matt Flannery:

Thank you, Mike.

Ken Newman:

Hey, good morning, guys. Thanks for squeezing me in here.

Ken Newman:

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

Ken Newman:

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

Ken Newman:

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

Ken Newman:

Very helpful. Congrats.

Operator:

Thank you. We’ll take our next question from Stanley Elliott with Stifel.

Matt Flannery:

Well, certainly yes, because that’s what our guidance implies. I think you’d have to think that that 4% number would be locked in as well. So, I don’t know what the coming out number for ARA was last year, but I know they raised it throughout the year. But we don’t focus on that as a barometer limiting ourself. We focus on what we see in front of us, what we do during our planning process and what we hear from our customers as well as our people in the field. But implied in this guide is 3x. And we do think we could do that. I think, I’ve talked about this before, how the top end of the business, the biggest getting bigger is a trend that we think is going to continue. And we think scale gives you some opportunities and options as well as adding additional product lines and cross selling that are – gives better service to the customers and gives you an opportunity to grow faster than the industry. And I think we’ll see that continue.

Matt Flannery:

Thanks.

Scott Schneeberger:

Thanks, guys. Good morning. My first question, in gen rent specifically, I guess, probably, Ted you may be the best to speak to this, but how is rental duration performed over the last few years? Have you seen an expansion of your equipment staying out on rent and with mega projects coming and infrastructure bill feels like 2023 is going to be a lot of that should, is it likely that we may see that expand? I know we’re talking a matter of days here. But might the length of period that assets are out on rent expand and could that have a positive margin benefit for the company? Thanks.

Scott Schneeberger:

Great. Thanks. Appreciate that. And then, Ted still for you, kind of your thoughts and kind of how the Board is looking at with the new dividend program, should we anticipate United Rentals to be a dividend growth story? I think you referenced about an 18% payout. If you want to quantify this, but is there a comfort going higher on payout ratio? Is that kind of a direction we’d expect to take vis-a-vis share repurchase, just high level thoughts there? Thanks.

Scott Schneeberger:

Fair enough. Thanks a lot guys.

Operator:

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

Operator:

Thank you. This concludes today’s call. Thank you for your participation. You may disconnect at any time.

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. 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, 2021 as well as to subsequent filings with the SEC. You can access the 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 and 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 back to the company's recent investor presentation to see the reconciliation for 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, Interim Chief Financial Officer. I will now turn the call over to Mr. Flannery. Mr. Flannery , you may begin.

William Grace:

Thanks, Matt. Good morning, everybody. As you saw in the results we reported last night, the team did a great job delivering across the board. We continue to take advantage of the market by supporting our customers with the fleet they need, driving healthy productivity and converting that growth to our bottom line. This performance, combined with our updated outlook for the remainder of the year, is reflected in our new guidance, which I'll touch on later. But first, let's dive into the quarter. Rental revenue was a record $2.73 billion. That's up $455 million or 20% year-over-year, with strong contribution from both general rental and specialty. Within rental revenue, OER increased by $341 million or 18%. Our average fleet size increased by 10.6%, which provided a $201 million benefit to revenue, while fleet productivity increased a healthy 8.9%, adding $168 million. This was partially offset by our usual fleet inflation of about 1.5 points or roughly $28 million. Also within rental, ancillary revenues were higher by $103 million or 32%. This is due mainly to increased delivery fees and other pass-through charges. And finally, re-rent increased $11 million. Outside of rental, third quarter used sales were essentially flat at $181 million as we intentionally held on to fleet to ensure we could support stronger-than-expected rental demand in our peak season. The vast majority of these sales were in the high-margin retail channel. This, together with improved pricing, helped deliver a very healthy 64.6% adjusted use margin for the quarter and record proceeds as a percent of OEC of 83%. Let's move to EBITDA. Adjusted EBITDA for the quarter was $1.52 billion, another record and an increase of $288 million or 23.4% year-on-year. The dollar change includes a $288 million increase from rental, within which OER contributed $245 million, ancillary contributed $37 million and re-rent contributed $6 million. Outside of rental, used sales added about $25 million to adjusted EBITDA, while other non-rental lines of businesses contributed another $3 million. SG&A increased $28 million, primarily due to higher commissions related to volume and the normalization of certain discretionary costs. As a percent of revenue, however, SG&A showed good leverage declining 90 basis points to 11.7% of sales. Looking at third quarter profitability. Our adjusted EBITDA margin increased 240 basis points to 49.9%, implying very healthy flow-through of around 63%. Excluding the benefit of used sales, flow-through was a still solid 58% supported by robust rental growth, good fleet productivity and vigilant cost management. And finally, third quarter adjusted EPS was a record at $9.27. That's an increase of $2.69 per share or almost 41% year-on-year. Turning to CapEx. Third quarter gross rental CapEx of $1.1 billion and net rental CapEx of $921 million were both in line with year-ago levels. Now let's look at return on invested capital and free cash flow. As Matt mentioned, ROIC was another highlight of the quarter at a record 12.2% on a trailing 12-month basis. That's up 70 basis points sequentially and an increase of 270 basis points year-on-year. Free cash flow also continues to be very strong with $176 million generated in the quarter, reflecting normal seasonality and over $1.1 billion generated through the first 9 months of the year, all while continuing to fund growth. Flipping to the balance sheet. Our leverage ratio declined 10 basis points sequentially and 50 basis points year-on-year to 1.9x its lowest level in our history. Additionally, our liquidity at the end of the quarter was a very robust $2.8 billion with no long-term note maturities until 2027. Combined with our cash generation, this provides us with tremendous strength and flexibility to run the company and support shareholder value in any environment. Now let's look forward and talk about our updated guidance for the year. Total revenue is now expected in the range of $11.5 billion to $11.7 billion, or an increase of $50 million at midpoint and implying full year growth of better than 19%. This increase is supported by the momentum we've seen across our business, particularly within rental revenue that we expect to carry into next year. Within total revenue, I'll note that we've reduced our used sales guidance by $50 million to $1 billion. As part of this change, we now expect to sell between $1.3 billion and $1.4 billion of OEC. As evident in our updated guidance, we remain focused on efficiently converting that additional rental revenue to the bottom line. Our adjusted EBITDA range is now $5.5 billion to $5.6 billion, which at midpoint to $75 million above the midpoint of our prior guidance. This implies a roughly 240 basis point increase in full year adjusted EBITDA margins and flow-through of about 60%. As Matt highlighted, we have also revised our outlook for gross CapEx by $350 million as we land delayed orders placed earlier in the year in select high-demand cat classes. In total, we now expect gross CapEx of between $3.25 billion and $3.45 billion. With these changes, we still expect to generate a very healthy $1.6 billion to $1.8 billion of free cash flow translating to a free cash margin of around 15%. Now before we go to Q&A, I'll finish with a few comments on our new share repurchase authorization. We view the $1.25 billion program as an indication of our confidence in our business, the strength of our balance sheet and the durability of our cash generation. And we're proud of the fact that we've already returned $5 billion of excess capital to our investors since 2012 to support shareholder value while simultaneously getting our balance sheet to its strongest position in our 25 years. So with that, we'll turn to Q&A. Operator, could you please open the line?

Timothy Thein:

Just a bit of an echo, hope it's triggered by me. But Matt, maybe just first one on this notion of these mega projects. We're clearly seeing that show up in the starts data -- the construction starts data and it looks to be an increase in just percentage of just overall spend in these coming years. As we think about here in late October, as looking into next year, is there a way to kind of size up how you sit just from kind of an overall visibility standpoint in terms of what's -- obviously, you don't operate with a backlog, but just from kind of a project visibility or project backlog standpoint, is there a way to kind of size up how United is -- a position is as we go into '23 just from essentially work already in hand or forthcoming, if you can help on that at all?

Timothy Thein:

Yes. Got it. Okay. And then your point on the leverage range and what a change from, say, a decade or so ago and just in terms of how the balance sheet has evolved. But how are you thinking about the Board thinking about the 2 to 3x target? Obviously, I'm sure you want to preserve some flexibility for M&A or other capital return opportunities. But obviously, with the cash flows continuing to build the potential for that to go even lower. So how are you and the Board thinking about that overall 2 to 3x range?

William Grace:

Yes, Tim, thanks for the question. Certainly, something we talk about frequently both as a management team and with the Board. And I guess if you rewind back to 2019, when we introduced the new balance sheet strategy, obviously, a key rationale was to ensure we had financial strength across the cycle. And where we sit today at 1.9x, as you heard us talk about in the call, we absolutely feel very well positioned from that standpoint. It gives us a lot of freedom and flexibility to run the business as we see fit. We also said there was nothing religious about that low end of 2x that we were comfortable going below to some degree. So again, kind of stockpile firepower, if you will. I think if we were to decide to live structurally in a lower ZIP code, choose the number you want, 1.5 to 2.5 as an example. At that point, I think we'd absolutely feel obligated to just update the Street. But for the time being, we feel like this range and the flexibility we have around it remain appropriate.

Steven Fisher:

Great. Just, Ted, you mentioned that the CapEx increase is targeted at select cat classes, but it sounds like you guys have a pretty broadly positive view about a lot of end markets. Curious why it's only in select cat classes then, if I heard that correctly?

Steven Fisher:

Yes. That makes perfect sense. And then on the cold starts, I think you said you've done 25 cold starts with another 11 or so in the fourth quarter. I think that's a bit less than the 45 you had mentioned in Q2. I guess, do I have those numbers right? And what's caused the reduction in that cold start number? Is that, again, just equipment availability? And then are you just planning to push those into '23?

William Grace:

Yes. If there's anything that would hold it up, it'd probably be more getting the right facilities and people really than fleet in those sectors, specifically at specialty.

Jerry Revich:

I'm wondering if you could talk about how you're seeing performance at general finance, just give us an update for those asset classes and how do you view cyclicality considering that's not an asset class that United had in prior cycles? Would love to see how you're thinking about the opportunity for penetration for that category. And similarly, are there any other specialty cross-selling opportunities that could be emerging for additional categories as a result of general finance building out across your footprint?

Jerry Revich:

Super. And just to shift gears, I know you folks look at scenario planning a lot in the COVID recession, margin degradation was really minimal in your business. Can you just talk about your scenarios for the next downturn, given the uncertainty in the market? How do you folks think about the leverage you would pull? And any updated thoughts on whether the level of performance we saw in that very different cycle is repeatable to what extent?

Matthew Flannery:

Yes. And I would agree. And the nice thing is when you do that in-sourcing, utilizing our own labor, you're getting your highest cost out of there. So it worked really well in COVID and Ted explained it well. Something that we would definitely wasn't learning from COVID, but both sides of it. The reason we kept that capacity was for the ramp-up and it really gave us a great opportunity to move forward on the other side of whatever kind of cycle you deal.

David Raso:

I was just curious, just trying to think about '23, and I'm not looking for exact guidance, just trying to think through the growth drivers. Where are your fleet is going to end the year? If we just assume the fleet doesn't grow at all, the fleet will be on average about 5% bigger than it was in '22. So when we think of the drivers for '23, nothing inorganic, but when we think about further expansion of the fleet, rate and you, curious, can you just give us some sense of where do you still see room for growth, be it contracts coming due -- that are due for a price increase, kind of where you see rates? Just for a sense, I'm not trying to get exact -- but just trying to get some prioritization here of how do we grow across those 3 major buckets as we sit here today?

David Raso:

When it comes to the rate momentum, do we see further rate increases for '23? Again, I know you don't like speaking about exact rates. I'm not looking for a percentage. But just from where we sit today, there's some carryover of course. But how are you thinking about rate -- the ability to raise rates to start '23?

Operator:

And our next question comes from Seth Weber from Wells Fargo.

Matthew Flannery:

Sure. So 2 points to that. As far as a governor on growth, would you see it as a net of where we end up in CapEx planning? Absolutely. And we'll flex that as always, with demand. What this really does is let us not have to worry about how quick the supply-and-demand pipeline meet each other by getting a little bit of a headstart on these assets that were tougher to get this year. So that's number one. So there will be some netting effect once we finish our planning process. But because we'll have it in hand already, hopefully, it will almost be part of the planning process. So we'll give that new number to everybody. As far as the used sales, we would as long as the supply/demand can be an appropriate level as opposed to a little almost 2 in balance this year, and we had to hold on to fleet because we frankly couldn't sell because it was on rent. We hope to get to more normalized fleet rotation next year. And the kind of used sales that you would have seen pre-COVID and we hope to get that kind of cadence in new sales. And first -- fourth quarter and first quarter usually are the heaviest months and we'd expect that to continue on as we sit here today.

Matthew Flannery:

Well, I think everybody across the board has an opportunity to grow. And I think most strong solid companies that have the financial wherewithal to do that are doing that. As you can imagine, the OEMs are going to sell out their inventory anyway. So they're probably being pretty disciplined by who they sell to. With that being said, I don't want to paint or homogenize the whole independent group, but some are better capitalized than others and those that aren't well capitalized, I've got to imagine the inflationary environment is going to be a challenge for them. For us, and specifically the nationals, this is one of the reasons why we think this environment will continue to drive the bigs getting bigger, so to speak, and put a value on scale to continue to be able to overcome whatever challenges the economy has for you.

Robert Wertheimer:

So I wanted to ask on a question that Matt touched on earlier. You guys -- on megaprojects. You guys have spent a lot of years focusing on National Accounts and serving big clients. The market is shifting towards big projects in a way that we maybe have never seen before, and I wondered if you'd be willing to give like a 2-minute teaching on what you've done, what market share looks like in a big project serviced by a big national contractor who can provide the capabilities, what the capabilities are. And if you wanted to get tangible, I assume your market share is something like LaGuardia was higher than 15%. Just wonder if you can give us any help on that.

Robert Wertheimer:

And if you could just add into that discussion briefly, technology? You touched on it earlier. I know you've invested a lot in tech. Do big projects use it a lot more aggressively? You mentioned a couple of margins with productivity and so forth. What is most attractive to the projects on the tech front? And I will stop there.

Operator:

And our next question comes from Ken Newman from KeyBanc Capital Markets.

Matthew Flannery:

Yes. Kenneth, good question. Simply, it's trying to remarkably in line. There really hasn't been any deviation in our customer optimism looking forward. And as a reminder to everybody else, that's something we do as part of our Net Promoter Scores, and we ask them on a forward 12-month basis how they feel about their revenue prospects. And I guess the other thing I would add is very -- sorry, also very consistent with the feedback we get from the field. So we're constantly making sure that those 2 data points, if you will, do align. And the good news is they continue to align.

Matthew Flannery:

Yes. Certainly, when the market is running as high as it has this year and you have the supply-demand dynamic we had, I got to imagine that peak season, everyone's missing a little bit of business. And it's part of it. Customers learn to plan better. Part of it, customers didn't turn in fleet as quickly. Some even moved a job to job. So with our key accounts and the people that we're strategically aligned with and focused on, we got through it all. But on the outside of that, the transactional business, we absolutely going to put more fleet to work. We had to stay very focused on prioritizing our key accounts and making sure we took care of our key relationships and supported them in a manner they expect United Rentals. So we should certainly lost some hard to quantify, but net-net, we're very pleased with the 20% growth. So I won't get too far out there on that.

Stephen Volkmann:

A lot of discussion about these mega projects and some of the tailwinds from infrastructure, et cetera. I'm just trying to kind of get a sense of how you think about sizing that? I mean how much of your business in 2 or 3 years when these things are really ramped up, how much of it comes from those types of projects?

Stephen Volkmann:

Yes. No, that's great. You guys have definitely thought that through. Appreciate it. Maybe my follow-up a little bit closer term, maybe more of a Ted question. I'm trying to think about how to think about SG&A in 2023. And I'm guessing that there's a fair amount of kind of incentive comp of various types that's in there that probably resets and maybe doesn't recur in '23. Just any way to think about those trends?

Stephen Volkmann:

Okay. I'll wait for that then.

Matthew Flannery:

Thank you, operator, and thanks, everyone, for joining the call. We're very proud to deliver such strong profitable growth in our busiest season. But now we got to look forward. We're deep into the planning process for '23. So stay tuned for our new guidance on the January call. And until then, if you have any questions, feel free to reach out to Ted any time, and it will be very helpful. So with that, operator, please end 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. 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, 2021 as well as to subsequent filings with the SEC. You can access these filings on the company's website at www.unitedrentals.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations. You should also note that the company's press release and today's call include references to non-GAAP terms such as free cash flow, adjusted EPS, EBITDA and adjusted EBITDA. Please refer to the back of the company's recent investor presentation 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 Jessica Graziano, Chief Financial Officer. I will now turn the call over to Mr. Flannery. Mr. Flannery you may begin.

Jessica Graziano:

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. 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 second quarter. Rental revenue for the second quarter was a record $2.46 billion. That's up $511 million or 26.2% year-over-year. Within rental revenue, OER increased $383 million or about 23%. Our average fleet size increased by 13.6%, which provided a $223 million tailwind to revenue. Fleet productivity was up a very healthy 11.3%, contributing $185 million. And rounding out OER was about a $25 million 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 million or 42%, which is mainly due to increased delivery fees and other pass-through charges. And finally re-rent was up $13 million in the quarter. Used sales for the quarter were $164 million, a decline of $30 million or about 15% from the second quarter 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. 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. That represents sequential improvement of about 440 basis points and year-over-year improvement of just over 1400 basis points. Let's move to EBITDA. Adjusted EBITDA for the quarter was $1.31 billion another record for us and an increase of 31.2% year-over-year or $312 million. The dollar change includes a $324 million increase from rental. Now in that OER contributed $273 million and ancillary was up $51 million. Used sales were a tailwind to adjusted EBITDA of $9 million and other non-rental lines of business provided $10 million. Other income also contributed $10 million of year-on-year benefit, in part due to some of the onetime costs from acquisitions we called out in the second quarter of last year. SG&A was a headwind to adjusted EBITDA of $41 million driven in large part by higher commissions on higher revenue. And as expected, we saw certain discretionary costs in SG&A continue to normalize. Adjusted EBITDA margin came in very strong at 47.3%, up 360 basis points year-over-year with excellent flow-through of 64.5%. And 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. 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 one-time 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. Gross rental CapEx was a healthy $872 million in the second quarter. Proceeds from used equipment sales were $164 million resulting in net CapEx of $708 million, which was similar to the second quarter last year. Net CapEx for the first half of the year of $979 million is up $232 million 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. That's up 60 basis points sequentially and 230 basis points year-over-year. Free cash flow also continues to be very strong as we generated $392 million in the second quarter and just under $1 billion 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. Our leverage ratio at the end of the second quarter remains at the lowest level in our history at 2.0 times. That's flat sequentially and down 50 basis points from the second quarter of 2021. Liquidity at the end of the quarter was a very strong $2.8 billion with the vast majority of that coming from ABL capacity of just over $2.5 billion. 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 billion share repurchase program. We leaned in a bit into the execution acquiring roughly $500 million in shares during the second quarter. Through June 30, we've spent $762 million of the authorization, repurchasing a little more than 3.5% of our fully diluted share count. With $238 million left to purchase, we expect we'll finish this program in the third quarter. Let's look forward and talk about our updated guidance for 2022, which we shared in our press release last night. Total revenue is now expected in the range of $11.4 billion to $11.7 billion or an increase of $250 million 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. Our adjusted EBITDA range is now $5.4 billion to $5.55 billion, up $175 million from the midpoint of our previous guidance. This implies a 200 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 billion 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. And finally, our free cash flow guidance has increased $150 million at the midpoint as we now look to generate between $1.85 billion and $2.05 billion. That's mainly from higher operating profit we expect to deliver this year. Now as I pass the baton, I've asked Ted to jump in on Q&A. So let's get to your questions. Operator, please open the line.

David Raso:

Hi. Thanks 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 really just trying to think about 2023 here if you can indulge me. Matt obviously you've been doing this for many years. 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 are still suggesting to you another year of solid growth in 2023.

David Raso:

Anything about what you're hearing for those projects that should influence our thought on the margins, be it is 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 two quarters in a row right? Obviously, the ancillary and the re-rent drags it down a little bit to 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 but that you probably wouldn't have thought were that possible. 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 2023 to show how to calibrate how to really think about the incremental margins from here.

David Raso:

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

Operator:

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

Jessica Graziano:

Thank you.

Jessica Graziano:

Thank you, Tim. Thank you.

Matt Flannery:

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 billion 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 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 first 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&A. And the opportunities we have to then disperse excess cash is not in any way indicative or a replacement for those first two opportunities. We absolutely can do -- this is an and strategy not an or strategy. We're fortunate that the business is in great shape and the balance sheet as Jess pointed out in our prepared remarks is in shape that we can -- on 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.

Matt Flannery:

So, first off, we'll be up somewhere around 10% range at year-end with over $17 billion of fleet approximation when we end the year in 2023. So we'll have a larger fleet. And when we think about the value of that fleet we haven't really seen a tremendous increase. 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 that I think the opportunity that we've had and that we've executed on driving strong fleet productivity can offset that. And 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 early this year 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 kind of capacity they're going to need to fill the demand. So we're way ahead of the ballgame on planning with our OEMs. I know they're working their tails off not only just to get us the $3 billion that they've committed to us this year which we're on track which is great news, but also for the future. 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.

Matt Flannery:

Thanks Tim.

Rob Wertheimer:

Thanks and good morning everybody.

Rob Wertheimer:

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's more to the performance this quarter than just rental rates coming up. And I assume time is hitting new records. For one is that roughly accurate? And for two, is that an operational shift where you've learned how to unlock a little bit more productivity and keep it up, or is it just a super-hot market and people aren't taking top off rent and there's less turnover or something? I'm just wondering if that's a sustainable change if it's there.

Rob Wertheimer:

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 could?

Rob Wertheimer:

Thank you.

Operator:

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

Matt Flannery:

Sure. Thanks, Steve. And we've always had a pretty diverse and robust pipeline of M&A, and that has not changed. As a matter of fact, it may have even increased a little bit, 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 people have repaired their business and have put themselves back on the market. And what you saw our execution on was really just spot opportunities 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'd categorize capacity. But there are some big deals to be had and we're still working that pipeline. It's just a matter of which ones get over the transom right? And when I say smart M&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 agreeable terms and a willing seller to get them over the final leg. But we're working the pipeline on both big and small deals.

Matt Flannery:

Yes, it would be the latter. There'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 pull-forward into Q2. And as you see, we're stuck to our original plan of around 900 and then another 1.1 in 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 auctions or trade-in. We don't really do a lot of auction and trade-in sales to make sure we use that extra capacity to support the business.

Matt Flannery:

Thanks, Steve.