Q2 2022 United Rentals Inc Earnings Call

July 28, 2022

[music].

Please standby your program is about to begin.

Sure.

Okay.

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.

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 Dot United Rentals Dotcom.

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 Jessica Graziano, Chief Financial Officer.

I'll now turn the call over to Mr. Flannery.

Mr. Flannery you may begin.

Thank you operator, and good morning, everyone. Thanks for joining our call.

I'll start with the main takeaways from yesterday's release.

In the second quarter, our team executed extremely well in a robust demand environment.

And as a result, we delivered very strong performance by any measure.

Our rental revenue increased by 26% year over year to a second quarter record.

Almost $2 5 billion well above expectations.

Adjusted EBITDA grew faster than the top line up 31% to a record $1 3 billion.

We also demonstrated good cost discipline.

Adjusted EBIT margin expanded 360 basis points to 47, 3%.

This contributed to a strong flow through of about 65% and importantly, we delivered a 230 basis point improvement in return on invested capital to a record 11, 5%.

The free tailwind as we saw at the start of the year continued to fuel our momentum.

The macro environment remains favorable which created more demand in the quarter and you can see that in our rental revenue growth, which included fleet productivity a better than 11%.

In addition, the customer trend toward renting equipment is alive and well.

We see this as a secular shifts that will continue to move the market from owning equipment to renting it overtime.

And lastly, we're confident that our growth is outpacing our industry as we continue to take share both in our core markets and with key customers.

One reason, we're gaining share as our positioning as a one stop shop.

Customers place a lot of value on it being productive and our combination of scale job site solutions Superior service.

Technology is unique in our industry.

Customers also care about safety.

And we prioritize safety on and off the job site.

And this was another area, where our team delivered in Q2 by keeping our recordable rate well below one.

And increasingly customers place a value on sustainability.

In May we announced an initial agreement to purchase over 500, all electric trucks and vans from Ford, including the F 150 lightning pick ups.

And this partnership is a good example of how we're continuing to add sustainable solutions to our rental fleet, while moving toward greener operations.

While we're proud of the progress, we're making in many different areas of ESG, including environmental stewardship and social impact.

Yesterday, we released our 10th annual corporate responsibility report with comprehensive data covering 2021, along with more recent developments and you can find it on our website, if you'd like to download it.

Another things customers strongly care about is reliability.

It's high on their list and we've got a very high bar in response.

Our team is trained to deliver a caliber service that earns the next opportunity and are always liked that challenge and they love being arrow to our customers.

So that's a big part of our culture at United and it helps with retention and recruitment.

Our net head count at the end of June was 9% higher than a year ago, which is a solid gain in a tight labor market.

Now I'll repeat something I've said before.

We're fortunate to have a world class team standing behind our strategy.

It gives us confidence in every target we put out there and that includes the updated guidance, we released yesterday, which raised our outlook for total revenue adjusted EBITDA and free cash flow.

We have strong visibility through the balance of the year and the activity were seeing will create a lot of demand to get equipment on rent.

There are plenty of positive signs to support this view.

Virtually all of the external indicators are favorable including the Dodge momentum index, the Abi contracted backlog and customer sentiment.

And we used equipment market remains robust.

In the second quarter, we captured record recovery rates and margins on used sales.

When I spoke to all of these dynamics coming out of Q1 and Theyre all still true today.

Now I'm going to pivot to look at demand at the ground level.

Our gen rent and specialty segments, both performed extremely well in the quarter.

All of our regions companywide delivered double digit rental revenue growth.

In many ways, it's a continuation of what we spoke about in Q1.

Broad based activity across regions stemming from a diversified mix of end markets and key verticals.

Looking at it by end market, our rental revenue from non res construction was up 27% year over year and infrastructure was up 15%.

And more broadly almost every vertical showed year over year growth in rental revenue.

In terms of project types large data centers are continuing to break ground, along with infrastructure projects and distribution centers and manufacturing is coming back.

Paolo vertical is also accelerating and there are more tailwind in the wings.

With infrastructure for example, the funding is now finalized in Washington, and we expect to start seeing a benefit in 2023 and beyond.

With manufacturing the resurgence of the industrial sector in North America is being driven in part by supply chain challenges in other parts of the world and Thats. Good for US it is already evident in certain sectors.

Companies are investing hundreds of billions of dollars in Mega projects in the U S and Canada to build plants across a variety of verticals like semiconductors and automotive.

These projects will require equipment for years to come and they play to our competitive advantage with large customers.

On the specialty side the segment had another excellent quarter led by our power and mobile storage businesses.

The segment as a whole grew rental revenue by 39%, including the benefit from General Finance.

Pro forma specialty was up a strong 29%.

We opened 24 cold starts through June and specialty against the revised target of about 45 openings by year end and that's slightly higher than our original projection of 40 openings. This year.

So as you can see 2022 continues to be a landmark year for our company both financially and operationally.

We delivered another record quarter, and what we expect to be a record year.

Our flow through in the quarter reflects the team's disciplined and navigating a challenging cost environment.

And we continue to have the benefit of a strong balance sheet low leverage and robust cash generation.

This gives us the flexibility to act opportunistically on many fronts.

This year, we expect to make the largest investment in our history in fleet of about $3 billion.

Our suppliers are taking good care of us and our Capex spend is tracking to plan.

We will also continue to explore growth through cold starts and acquisitions. We've made seven bolt on acquisitions. This year to date for a total consideration of over $300 million.

Lastly, we expect to complete our share repurchase authorization this quarter.

These are all prudent capital allocations to create long term shareholder value.

And we know that the key to leveraging capital is relentless execution.

And Thats, what youre seeing from us in our results.

Now before I hand, it over to Jessica I'd like to take this opportunity to thank her personally for her many contributions over the past seven years as you all know jets will be leaving us to take on a new opportunity and Ted has stepped in as we go through the CFO search process.

And I know I speak for our entire leadership team when I say, it's been a pleasure to work with Jess and we wish you all the best in her new endeavor and now with that Jess you've got encore.

Good morning, everyone and thank you Matt for your kind words, it's definitely bitter sweet 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, so let's start with a closer look at the second quarter.

Rental revenue for the second quarter was a record $2 $4 6 billion, that's up $511 million or 26, 2% year over year.

Within rental revenue 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 <unk> was about a $25 million reduction in rental revenue from fleet inflation, which we estimate to be a one 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.

New 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 were 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 three 1 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.

In that <unk> contributed $273 million in 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.

Other income also contributed $10 million a 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 and 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% excluding.

The benefit from new sales in the quarter flow through would have been a healthy 59%.

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 55 from a onetime tax benefit, but even if we adjust for that benefit I am pleased to note. Our EPS would still has 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.

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.

Rex continues to run well above our weighted average cost of capital at a record 11, 5% on a trailing 12 month basis.

It is 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 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.

With the vast majority of that coming from ABL capacity of just over two 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 our facilities with improved terms and I'd be remiss. If I didn't also mentioned 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.

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 three 5% of our fully diluted share count with.

With $238 million left to purchase we expect we will 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, four 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 was 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 five four to 555 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 will 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, and $2 <unk> 5 billion.

That's mainly from higher operating profit, we expect to deliver this year.

Now as I pass the Baton I have asked Ted to jump in on Q&A, So let's get to your questions. Operator. Please open the line.

Certainly at this time, if you'd like to ask a question. Please press star and one on your Touchtone phone you may withdraw yourself from the question queue at any time by pressing the pound key and once again that is star one to join the question queue.

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

Hi, Thanks for your time and congratulations Jeff.

Regarding just sort of big picture, but we can dive into a lot of numbers, but needless to say the results.

Solid so I'm really just trying to think about 23 here. If you can indulge me.

Obviously, you've been doing this for many years.

Backlog that youre hearing from your contractors when they when they speak of where they are in the project development today of financing how committed they seem.

Something underpinning it.

An 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 another year of solid growth in 'twenty three.

Sure David So.

Obviously, we'll go through our whole planning process. This fall, we will do a deeper dive and then update everybody at year end on what we expect.

2023 to be let's be clear, we expect to carry good momentum into 'twenty three.

Whether thats the <unk>.

Great fleet productivity, which there'll be some carryover effect as a positive into 2023 or the larger fleet size. So just structurally we will have some momentum going into 'twenty three and additionally to your point about the backlog remains pretty consistent on our CCI, where our customers at a high level has been consistent.

Six quarters in and that Hasnt changed so we are not seeing any kind of deceleration in our customers' expectation and additionally, as I mentioned in my prepared remarks Mega projects are going to be long term for us so while they're breaking ground now and funded and we're talking.

Billions of dollars of potential work out there and we haven't yet seen in couple of tailwind that I mentioned.

Shovel ready, meaning activated for our rental revenue the funding for infrastructure and a lot more what we believe is going to be a manufacturing resurgence. So those are the tailwind as I fall into play.

Going into 2000 2030, some of its structural for our larger.

And momentum that we're carrying into 2003 and then some of the some of the macro areas that we have yet to enjoy that we think are going to be <unk> 23.

So anything about what youre hearing for those projects that should influence our thoughts on the on the margins.

Would it be more national account or it's going to be more of a different vertical that you have historically.

Or a worse than average 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 re rent drags it down a little bit.

Overall 65.

The drop through has been so strong I'm just trying to calibrate how much is it.

Right now we're just running at a time you said you probably wouldn't have thought were that possible.

So the fixed cost absorptions, great, but I'm also just trying to be thoughtful.

If I have got a different mix coming in 'twenty three to the <unk>.

Calibrate how to really think about the year.

The incremental margins from here.

No.

Operationally, we actually see some efficiencies on the large project admittedly some of the real large scale customers our largest national accounts may have a little bit better pricing, but they kind of even off and.

The consistency and the longevity of rental for major projects is a positive offset for us. So I don't expect to see a big margin profile change based on the project sizes or duration.

That was the basis for your questions.

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

Thanks, David.

Okay.

And our next question comes from Tim Thein from Citigroup.

Your line is open.

Thank you good morning, and congrats again Jess thank you.

Pretty nice Nike.

Okay.

And the balance sheet in such good shape. So thank you Tom Thank you.

And actually just kind.

Kind of continuing on that Matt.

You mentioned that accelerating the repo.

In the third quarter, how are you thinking given where we're at.

This outlines for potentially another strong year in 2003.

And when the balance sheet likely sits heading into the year, how youre thinking about the priority beyond.

Buybacks.

It does.

M&A, we just maybe updating.

In terms of either M&A.

Does the dividend potentially come into the picture and just maybe.

A few thoughts on that in terms of how you're thinking about capital returns.

Sure Tim.

<unk> categorized all of this is our capital allocation prioritization, so as you accurately depicted.

We will finish a quarter in advance of $1 billion authorization that was just a great opportunity for us to utilize excess cash that we have.

We'll still is in the bottom if not below the bottom of our leverage range. So we're very comfortably operating in that range and there is no magic to it if we go below it for a little while thats not a concern of ours either way the bigger statement I would like to make is our prioritization of our 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.

We're fortunate that the business is in great shape, the balance sheet as Jeff pointed out in our prepared remarks is in shape that we can fund.

On the organic growth, we can do some deals and still return excess cash to shareholders and I won't get ahead of our board, but as we think about the options in which we can do that we'll update everybody maybe as soon as October .

Got it Okay, and then Matt just a quick follow up just from a fleet standpoint.

Can we or how should we think about.

Just given the strength in recovery values, what the fleet kind of the composition from a.

To the extent you anything youre selling fewer units than you thought how do we think about that.

Fleet from a.

Value versus unit perspective, just given how that net capex is playing out.

That makes sense.

Yes larger is the fleet minute.

Yes.

So first of all I hope it will be up.

Somewhere around 10% range at year end with over $17 billion of fleet approximation. When we end the year in 'twenty. Three so we will have a larger state and when we think about the value of that fleet, we havent really seen a tremendous increase we havent changed our plug for inflation in our fleet productivity and even if that takes.

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 would kind of be the back half of that question. We're ready for <unk> for over a month now early this year earlier this year that unusual for sure talking to our Oems.

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 to $3 billion Dave.

And they've committed to us this year, which we're on track just 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 really doing a good job for us and we expect the same in 'twenty three.

Okay. Thanks for the time thanks.

Thanks, Tim.

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

Thanks, and good morning, everybody.

Yep.

So you touched on this earlier and I know you'd like to talk to fleet productivity.

I guess asking them to the level on time utilization, but it does seem like obviously rate is going up but it feels like there is more to the performance this quarter than just rental rates coming up I assume.

You that's hitting new records for one is that roughly accurate and for too 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 people are taking stuff off running as much turnover something I'm just wondering if that's a sustainable change.

Yes, sure and short.

Rob that's a yesterday yesterday, so certainly necessity is the mother of invention here, but all kidding aside.

I did in April and I was never so pleased to be wrong that we'd be somewhere in the mid single digits and fleet productivity and all three components of fleet productivity, whether it be raised Mitch for time exceeded our expectations. So that's why you see this robust fleet productivity, but the one that was most surprising to me was time because.

<unk> said publicly we ran so hot last year in the back half of the year I have been pleased if we repeated it and the team did it so that was the one that will surprise not numerically the largest value with a free I'm not saying that as you know I'm not going to give numbers, but it was the most surprising to me because we had a real high BARDA to get over it so.

That's how I would.

Qualitatively talk about really strong fleet productivity that we drove.

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 will.

Thanks.

Yes, as you know because you visit our branch and we talked a lot about it with technology that we've been embedding in our operations.

The efficiency and productivity.

Thats borne out of that for many many years rates starting back as far as 10 years.

<unk> has really given us.

An advantage over all of the data that we see throughout the industry actors. So we've always enjoyed time utilization gap to the positive.

And part of that scale part of that network that we have and the density of that network, but it's also embedded <unk> technology and we've actually improved upon that so we do think it's sustainable.

Admittedly the team surprise me and set new highs this year, but I.

I don't think that it's not sustainable at some point the more interesting part is what is the level of off entirely do we ever get a point, where we want to make sure that we are still being as responsive as we are and all the metrics tell us that's that's still happening. So we're very pleased.

Thank you.

Okay.

Operator, no questions Alright. Our next question comes from Steven Fisher from UBS. Your line is open.

Great. Thanks. Good morning, just wanted to follow up on M&A and maybe the smart M&A as you call them that when Youre doing a bunch of bolt ons I guess in general how are the prospects for larger deals and related to the bolt ons are you.

Increased desire from sellers are you doing more bolt ons because the larger deals are harder to get done is.

Or is there more something specific things youre targeting that it makes sense to do via bolt ons, just a little color there. Please sure.

Sure. Thanks, Steve we've always had a pretty diverse and robust pipeline of M&A and that has not changed.

EBIT increased a little bit as specifically in some of the bolt ons as you call them with smaller ones, where people have fully repaired their businesses from Covid and now.

It's probably a few people out there that would have sold just before COVID-19, but they werent 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 thats people facility for fleet right.

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 is going to have to fit all three legs of our stool that we've talked about and that latter Chuck on the smart as the financial so we got to have a degree.

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.

That's helpful and then on the Capex front, what would you have to see to raise your capex guidance for this year on the growth side of it.

More near term demand strength I mean, it sounds like Thats kind of go on all out there.

Or is it just more confidence that suppliers can deliver.

Yes, it would be the latter is not a demand issue in any way shape or form and as a matter of fact, Jeff 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 portfolio into Q2 and as you see we're stuck to our original plan of <unk>.

900, and then another one one in Q3, we don't think we're going to have the opportunity to pull any more forward from those numbers.

Our suppliers are working real hard to fill that and I know the challenges they have and Thats why you didnt see us raise our capex in a normal supply environment, you probably would've seen some increased capex, but.

But we are using the new sales lever and pulled out all the any broker and.

Auctions are traded we don't really do a lot of arts in trade and sales to make sure we use that extra capacity to support the business.

Perfect. Thanks, all the best.

Okay. Thank you.

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

Hi, good morning, and congrats as well.

Thank you pleasure working with you.

I'm sorry.

I'm sorry, you might have just addressed this.

I might have missed it but the.

The capex cadence for the second half of the year can you just.

Talk through that.

Some of your suppliers are obviously talking about getting constraints getting stuff out the door.

Assume third quarter as meetings.

Meaningfully up from the second quarter, but is there any way to frame it.

The third.

Third quarter versus fourth quarter on gross Capex, yes, sure it will be and as we had stated.

In April it really Hasnt changed our plans, we expect to do about 900, this year, which were right right about there and then we do about $1. One I'm sorry in Q2 900 and about one one in Q3 and we think we're on track to do that and then that leaves you another depending on where we ended up in the range of.

Say five five for.

For fourth quarter, so our expectations haven't changed all year and as I stated earlier, we did just don't have.

The opportunity there is not a lot of wiggle room for the vendors to accelerate or to increase that at this point.

That changes, we would update everybody, we do not expect that to change in the meat of the rental season, which Q2 and Q3.

Right. Okay. That's helpful. Thanks, and then just on the.

The used sale margins very very strong and I know you've called out some mix benefit just channel mix benefit, but can you just talk to I mean, there's obviously a lot of concerns around.

Pricing.

Yes.

Which seems to be a consistent with the prices.

You guys are capturing so I.

I don't know if you could just help people.

Connect those dots as to your confidence.

Prices stay high.

Good afternoon.

For the foreseeable future versus some of the concerns that are out there in the market around.

Pricing rolling over.

Yes, Jeff This is Todd I'll take that one.

Look in the quarter itself, we saw really strong results.

So we certainly are not seeing pricing.

Headwinds.

On a sequential basis, we were up high single digits.

So certainly something we'd be keeping an eye on but it's not something we've seen in our own results.

Yeah quite concentrate right, we're seeing that part of the great strength you see is that we are primarily selling in the retail channel and we've built a unique engine and that way compared to the rest of the industry. So we're not we're not going to stop that because that drives great pricing, but even within retail on some year on year retail we're seeing strong price.

So we've heard a little bit recently about people talk about that rollover, maybe that's auction driven but we're not seeing it in the <unk>.

In our experience or in the retail channel.

Alright, Okay very helpful. Thank you guys and again just good luck.

Thank you. Thank you very much.

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

Hi, Yes. This is clay Williams on behalf of Jerry Good morning.

Good morning.

Can you talk about how general finance is performing and it's a supply availability of containers as these.

Sure thing.

Performing very well if you recall, we had said when we announced that deal, but we wanted to double the size of that business in the next five years and we're ahead of schedule. The team is really doing a great job and the supply chain has helped ironically when we initially bought them that was probably the toughest time for quite some time.

To get containers and the pricing was up but things have have remedies for that and the team is taking full advantage.

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

Yes, and just to follow up there can you talk about what enabled you to scale that business. So quickly ahead of plan across your branches.

Our network right, so our relationships with our customers.

These are products that we knew are existing customers, where we had deep relationships with.

Wanted and now we're able to supply them and that was a big reason why we looked at adding that product to our mix with a platform that was big enough. So that we could support most of the network, but also small enough that we could grow it organically and then pay for the multiple that we that we paid for it. So it's really been a win win from a strategy perspective and the customer.

Support.

Thanks.

Thank you.

Okay.

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

Hey, good morning, guys.

Got it.

I'm just curious obviously theres been a lot more concerns around consumer facing end markets as inflation ramps.

I know that that's.

Probably a much smaller part of your business, but maybe just remind us how much of your sales are consumer facing whether it be from entertainment or within the commercial segment and then just talk a little bit about what youre hearing from customers in terms of whether or not youre seeing any changes in customer behavior.

Yes, again I'll take the first part of that for sure.

The direct customer or consumer facing parts of our business are really small.

I guess, if you look at non res, which call it between public and private is probably.

40% or so of our mix some fraction of that might be the component of retail within commercial but we certainly don't think it's very significant and frankly, it hasnt been kind of a strong market for number of years, obviously strip malls and businesses like that have been under assault from E Commerce.

Some of the aspects that might be more kind of consumer facing could be things like entertainment, but there we focus on live sporting events that have been quite strong so think PGA events.

Auto racing things of that sort so the direct piece.

<unk> is very small and I would say even the indirect piece is pretty small.

Does that answer the first part of the question.

It does yes, and then as far as I can follow up with just over one go ahead.

Yes, as far as customer behavior, which I think what the second part was Ken.

We're actually because the market is so tight here. We're always are about repeat customers building loyalty building partnerships and I would say in a tight demand environment, having supply environment for the robust demand our customers are really relying on that so we've our team has done a great job meeting the challenge for this.

In a tight environment, we've got to make sure we come through for those customers and we think that bolsters our relationship selling opportunity in the one stop shop value that we bring to these customers.

I would say if anything the.

The relationship and appreciation of being able to be a one stop shop has improved.

Got it.

And then just for my follow up real quickly just to clarify I know you guys talked a little bit I think you.

You had guided to that mid single digits fleet productivity number just given all the commentary that you've given so far on the on the corner should we start thinking about fleet productivity in the high single digits here into the back half to kind of get to what's embedded in your in the midpoint of your guidance.

You beat me to it can absolutely so.

That's what's embedded if you use the midpoint.

That would imply a high single digit fleet productivity for full year.

So we think we'll end up.

Got it.

Thanks for your time thank.

Thank you.

And our next question comes from Scott Schneeberger from Oppenheimer. Your line is open.

Thanks, very much congrats on the quarter, and Geoff and Ted Congratulations and best wishes in the new roles.

Thank you.

Youre welcome.

I guess that last question is a great segue to my my first which would be.

Clearly a very strong year this year in 2022, and it looks like youre going to be ending the year quite well. So as we think about fleet productivity exiting 'twenty, two and going into 2023, how should we think about the carryover impact.

Just any and any thoughts in magnitude on what we can under next year carrying thanks Kurt.

We as you know Scott I'll be painfully consistent in not giving quantification of the metrics, but just qualitatively you're seeing what our other peers are reporting as the whole industry is doing a good job driving.

Fleet productivity, including right. So naturally there'll be some carryover I'm not going to quantify it but there'll be some carryover just on the rate alone and as far as mix and time that team. Although we don't give the numbers of team works really hard on making sure we're driving positive fleet productivity and every metric under their control.

Although the comps on time, certainly and I'll sound like a broken record because I said that this year will be will be a challenge. So we expect that to moderate we still think that there'll be opportunity to well exceed.

Our our expectations of that initial one 5% for fleet productivity.

Got it great. Thanks, Matt I appreciate the qualitative response.

And I guess.

We're getting in here.

The delivery expense.

If you could speak to how this inflationary environment, how that's trended in the first half how you all have been managing that in a in a tough labor market.

Internalizing transportation versus maybe using third party just commentary on that and also how youre managing any pressures with with fuel.

Any new lessons learned on.

On the go forward. Thanks.

Yes, Scott this is Ted so certainly if you look at our results in the first half both first and second quarter.

It will be embedded in that ancillary line item the test called out in our script and you can see in our financials and from that standpoint, you can certainly see it had kind of a it's been considerably positive contribution.

Contribution margin from the Thai entire ancillary line items would be running in call. It the.

But probably the upper thirties.

Certainly we've been able to manage all of that very effectively and as a reminder, only a component of that entire line item that you'd seen ancillary would be isolated to to the fuel component of pickup and delivery, but I think it makes the point that the team has done a great job of passing that through to customers.

Making sure that we've been able to at a minimum protect margin.

Does that help with.

The fuel piece.

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

Thank you.

And our next question comes from Ben <unk> from Baird. Your line is open.

Alright, Thank you good morning.

Congrats Jeff Best of luck to you.

Thanks, Mike.

So.

I'm going to try to kind of ask a question that if you folks have.

Hinted at already.

We're sort of looking at your <unk>.

Revenue guidance for the back half of the year the implied guidance.

Since here.

Another $1 billion of revenue and you've been you've been running.

Quite well year to date, especially in the second quarter.

In terms of.

All the metrics surrounding the fleet. So I'm wondering how are you thinking about the moving pieces as to what generates.

One should lift the revenue is it.

Time, you still is it maybe a little more rate is it fleet what are some of the moving pieces there.

Yes, Mike this is Ted.

I would say it is all of the above right.

It's certainly the expectation that we're going to have more fleet on rent as an example, it's the idea that will certainly have positive fleet productivity.

It certainly youll see the used sales are obviously implied to also be up in the second half versus the first half.

As we've held back fleet in the first half to make sure. We're associating customer demand. So I don't know that I would pinpoint at the kind of one or two variables. It's really kind of the continuation of the fact that the business is performing very well and matching the seasonal curve that we would usually see in our industry right. So Q3 is always that that lift up from Q2 and admittedly to your point all five.

But we think a lot of that momentum will continue.

And you anticipated where I was going to go with this is there.

Comment you want to make Q4 relative to Q3 is there.

Should we expect Q4 to be to be high relative to Q3, and again I'm just sort of asking as to what's baked into your assumptions, who knows how it's going to play out.

What's baked into our assumptions is.

Consider the normal seasonal patterns that we usually enjoy but now at a higher level, partly driven by a.

A little bit more fleet than we thought by selling let's use although the bigger needle mover is the strong fleet productivity. So we've created a higher base off which to go to but if you look at the curve overall, we expect the year and implied in this guidance is the standard seasonality just off a higher base.

Yes.

And I'm, sorry to be a stickler for this it's.

Does that seasonality has been kind of screwed up with Covid and everything else that came from that so can you can you maybe remind me as to what the normal seasonality that you're referring to would look like.

Yes, I mean, I don't have those numbers off top my head, but certainly if you were to look at kind of the sequential.

Revenue patterns, historically that would be a reasonable way to think about normal seasonality.

Okay.

And then my final question.

You obviously sound.

I'm very optimistic about 2023 and within that context, I'm kind of curious as to how you're approaching.

Your capex discussions with your partners.

Is it reasonable for people to think that Capex is going to be up in terms of demand for you 'twenty three relative to 'twenty two.

And I'm curious.

Are you.

Are you getting Oems to commit the firm pricing or is it just the discussion around production slots at this point. Thank you yes.

So I'll take the latter part of your question, we're simply talking about production slots right now to be fair to our partners I don't think they know what their costs are going to be.

At the time, it's ready to prepare the all the all the raw material, we get ready to build these assets. So we're focused on production.

We will expect to get win wins with our partners as usual.

Ted I know it won't take first part of your question.

Sorry could you repeat it again.

Yes.

You guys, obviously sound really good about 'twenty, three and I am wondering if we should be expecting capex to be up at this point.

Look I think it's early to kind of get ahead of guidance on 'twenty three but certainly from our tone you can hear we feel pretty good about the outlook looking certainly through the end of 'twenty two in terms of what that translates to.

As an update in January .

Certainly.

And we'll be working on the 'twenty three plan as we get into the fourth quarter. So certainly more to come there yet but to be clear. We do expect 2023 to be growth here. We're just not ready to give details on that we've got a whole lot of work to do from a ground up planning process that will start this fall and we'll finalize in the fourth quarter.

Okay. Thanks for your question.

Okay.

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

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

Operator, Please go ahead and end the call.

Yes.

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

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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.

A summary of these uncertainties is included in the Safe Harbor statement contained in the Companys 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.

Can access these filings on the company's website at Www dot United Rentals Dot com.

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.

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.

<unk> and Chief Executive Officer, and Jessica Cusano, Chief Financial Officer.

I will now turn the call over to Mr. Flannery Mrs.

Mr. Flannery you may begin.

Thank you operator, and good morning, everyone. Thanks for joining our call.

I'll start with the main takeaways from yesterday's release.

In the second quarter, our team executed extremely well in a robust demand environment.

And as a result, we delivered very strong performance by any measure.

Our rental revenue increased by 26% year over year to a second quarter record of almost $2 5 billion well above expectations.

And adjusted EBITDA grew faster than the top line up 31% to a record $1 3 billion.

We also demonstrated good cost discipline.

Our adjusted EBIT margin expanded 360 basis points to 47, 3%.

This contributed to a strong flow through of about 65% and importantly, we delivered a 230 basis point improvement in return on invested capital to a record 11, 5%.

The free tailwind as we saw at the start of the year continued to fuel our momentum.

The macro environment remains favorable which created more demand in the quarter and you can see that in our rental revenue growth, which included fleet productivity a better than 11%.

In addition, the customer trend toward renting equipment is alive and well we.

We see this as a secular shifts that will continue to move the market from owning equipment to renting it overtime.

And lastly, we're confident that our growth is outpacing our industry as we continue to take share both in our core markets and with key customers.

One reason, we're gaining share as our positioning as a one stop shop.

Customers place a lot of value on it being productive and our combination of scale job site solutions Superior service and technology is unique in our industry.

Q2 2022 United Rentals Inc Earnings Call

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