Q4 2022 United Rentals Inc Earnings Call
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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 please note that the company's press release comments made on today's call and responses to your questions to 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.
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 Ted Grace Chief Financial Officer.
Now I'll turn the call over to Mr. Flannery, Mr. Flannery you may begin.
Thank you operator, and good morning, everyone. Thanks for joining our call.
Yesterday, we reported record fourth quarter results to cap the best full year financial performance in our history.
Well, we definitely raised the bar in 'twenty, two and we intend to raise it again in 2023.
We're moving forward with a larger sales and service team.
A more expansive footprint and.
And our fleets are significantly larger than a year ago. So that's a lot of tailwind at our back and another year of high demand.
I'll start with a recap of fourth quarter results, which kept us on a strong trajectory.
We grew both rental revenue and total revenue by a solid 19% compared with fourth quarter last year.
And we grew adjusted EBITDA by 26% with a 280 basis point improvement in margin.
Brought our margin to 50% in the quarter and that came in at a very strong flow through of 65%.
We also continued to generate significant cash for.
For the full year, we delivered $1 76 billion of free cash flow, that's after investing over $3 $4 billion in fleet.
And none of this would've been possible without our people.
First off as you know our top priority is always safety.
And our team delivered another first class recordable rate in 'twenty two in a year when we on boarded over 6000 new employees.
On the financial side.
You can look at every metric I, just mentioned and see the quality of team United behind the results.
For example.
Our revenue growth comes from keeping our customers front and center in the field. Our people are laser focused on helping our customers succeed.
And our flow through comes from the team's ability to leverage our growth.
And maintained good cost discipline.
Inflation was a factor, but that didn't stop us from delivering very good margins.
We also reported a record return on invested capital of 12, 7% year end.
And on the ESG front, we made good progress with sustainability, including new investments in zero emission vehicles and fleet.
And the customer adoption of our new emissions tracking tool is an excellent and this is a technology, we launched our total control platform and it's an industry first.
Another highlight of the quarter was the 800 acquisition.
And I am pleased to say the integration is going very well.
We closed the deal on December seven.
And then by the 16th our new team members were already operating with the rest of the company on the same technology system.
This means our branches are sharing fleet and customer information seamlessly.
One of the main reasons, we like M&A is a capacity we gain and.
And that comes in three forms people.
<unk> and facilities.
We always focus on the people first because it's critical to get that right.
And we're really bullish about the talent, we on board of the NES acquisition.
We had over 100 of the 800 managers at our annual meeting earlier this month and makes it like a hand in glove, they're excited to be part of United and they're Raring to go.
Now we're focused on optimizing the fleet and facilities were.
We're running on schedule.
And it's boosting our resources at an ideal time to capture share.
The diversity of demand that we pointed to a year ago. It turned out to be a major tailwind in our operating environment and that continues to be true.
Now I'll share some fourth quarter data to underscore how we translated this opportunity into topline growth.
Demand in our key verticals was broad based with total construction up 19% year over year, and non res up 22% and industrial up 11%.
We leaned into that opportunity across the board and grew rental revenue by solid double digits in all of our gen rent regions as well as all of our specialty businesses.
Our specialty segment delivered another strong performance with an 18% increase in rental revenue year over year.
And it's notable that every line of business in that segment reported solid gains led by our mobile storage business.
Our greenfield investments in specialty are highly strategic and targeted by geography and line of business to generate attractive returns.
Opening 35 of these locations in the past 12 months and our plan calls for at least another 40 cold starts in 2023.
So that brings us to 2023. So there are plenty of reasons to feel confident about our operating environment.
We have terrific internal and external momentum with good visibility into revenue.
And the team has done a great job of driving strong fleet productivity to help offset that offset the cost inflation we've experienced.
Contractor backlogs are growing and not surprisingly the employment reports indicate that use contractors continue to be an expansion mode.
Industry indicators like Dodge momentum index show healthy growth trends in commercial construction.
And this includes the planning trends for future projects.
There is also a strong institutional components to the trends, which we see in our business.
A number of our multi year projects are in sectors like healthcare and education.
And the industrial indicators like the PMI still have room for improvement.
But the construction activity in manufacturing is going strong.
We're winning business on a wide range of new plant construction, including automotive and batteries semiconductors and Petro Chem.
And importantly, our own survey shows that customer sentiment remains strong with the majority of our customers pointing to growth over the next 12 months.
We had over 2000 field leaders with us in Houston, two weeks ago, and they are take was extremely positive and.
And I'm throwing that into the mix because this is coming directly from people on the front lines.
We took all of this into consideration when we developed our 'twenty three guidance and as you saw yesterday, we expect our revenue and adjusted EBIT of the hit New high watermarks, including free cash flow of more than $2 1 billion, while our return on invested capital should be another milestone for us.
In addition to the capacity we carried into January we plan to invest more than $3 4 billion in gross Capex this year.
At the same time, we'll continue to take advantage of a strong used equipment market to optimize our fleet.
Longer term outlook for our industry continues to be very favorable driven.
Driven by several tailwind is that we believe are largely independent of macro conditions. When we've talked about these before things like infrastructure spending the inflation reduction and the return of manufacturing to North America as well as investments in both energy and power.
Now before I wrap up.
I want to mention two important announcements, we made yesterday regarding capital allocation.
First off we're reactivating the $1 $25 billion share repurchase program that we pause when we announced the 800 deal.
We plan to buyback $1 billion of stock this year.
And we will also be instituting quarterly dividends for our shareholders totaling $5 92 per share this year.
These two decisions underscore our confidence in the durability of our cash generation and the strength of our balance sheet.
And together they will return $1 4 billion of capital to our shareholders in 2023.
So to come full circle.
2022 was a demand environment that through the door wide open for a record year and we ran with it.
But to quote Babe Ruth we also know that yesterday's homeruns don't win Tomorrow's games.
So now it's onwards and upwards.
2023 is officially the start of the next quarter century in business for United Rentals and by all accounts this will be another memorable year.
So with that I'll ask Ted to cover the results and then we'll go to Q&A Ted over to you.
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 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 will 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 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 a healthy five 9%, which added another $113 million.
This was partially offset by our usual fleet inflation of one 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 us 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 to accomplish this we broadened our channel mix for <unk> sales in Q4 to something closer to normalized levels.
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 <unk> 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 benefits of new sales flow through was in line with recent quarters at a healthy 59%.
I'll add that within the fourth quarter results and the roughly three weeks, we owned a earn 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.
<unk>, an increase of $205 million in net capex year over year, which positions positions us well for the growth we see in 2023.
Now, let's look at return on invested capital and free cash flow ROIC.
<unk> was another highlight at a record 12, 7% on a trailing 12 month basis.
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.
We're 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. It was 2.0 times on an as reported basis, including the impact of the <unk> acquisition.
More importantly on a pro forma basis, our year end leverage ratio was flat sequentially at one nine times.
And finally, our liquidity at the end of the quarter. It 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 seven 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 have carried into the new year, particularly within rental revenue and the contribution from <unk>.
Within total revenue I'll note that our used sales guidance is implied at $1 3 billion.
With the expectation that will sell roughly $2 billion of OTC.
This 35% increase in <unk> sales year over year, primarily reflects two things first.
As the normalization of our us sales as the supply chain continues to improve.
And second a substantially larger fleet, including the addition of <unk> to our business.
We remain focused on efficiently converting this growth to our bottom line or.
Our adjusted EBITDA range of $6 six to $6 85 billion.
On an as reported basis, including the impact of de earn at mid point. 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 roughly 80 basis points of margin expansion and flow through in the mid fifties.
On the fleet side, our initial gross Capex guidance is three three to $3 55 billion with net capex of two to $2 25 billion.
And finally, our free cash guidance is two 1% to $2 35 billion.
To be clear this is before dividends and repurchases.
Assuming these two factors our use of cash of roughly $1 4 billion debt.
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 me say, we are very pleased to be adding a dividend program to our mix.
Just on an initial yield of one 5%, we expect to take $5 92 and dividends per share in 2023.
This will translate to approximately $400 million. This year, we're roughly 18% of free cash flow.
We expect that our first quarterly dividend payment of $1 48 will be made on February 20 <unk>.
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 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 pause in November with the announcements of Aegon the.
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 returned 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 wanted 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.
Yes, Sir at this time, if you would like to ask a question. Please press the star and one on your Touchtone phone.
You may remove yourself from the queue at any time by pressing star two.
Again to ask a question please press star one.
We'll take our first question from David Raso with Evercore ISI.
Hi, Thank you for the time two questions one where there is some some worry by investors and another where there's a clear cementing of our structural improvement.
On People's minds about the business model. So first on the on the area of some angst equipment availability I think Matt you had mentioned earlier about maybe taking some market share. This year can you, let us know what youre 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 there 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 I don't know I'll follow up the other the other question.
Yeah sure so let's.
Still a tight market I'm, hoping it will be a little better as far as delivery slots than we than we got last year, but we don't expect the supply chain to be fully back to normal this year, maybe to the back half but to be fair I thought maybe the back half of last year would have been we still saw slippage there some niche products that are being quoted out.
The 2024 now that's the exception not the rule, but I think that that kind of underlies another year of some supply chain challenges and we're mitigating that by as you saw we brought in some fleet in Q4, and you'll probably see us do a little bit more in Q1 than usual to make sure we're ready for the build season.
And then from there, we'll adjust according to demand and appropriately so.
I think it will still be a little bit of a challenge I think our vendors work hard David to get US a fleet. They did in 'twenty, two and we think they'll work hard to get this number im not seeing I'm not seeing a remedy to the supply chain challenges.
Okay ask 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 three four to five mid point can be can you give us some sense of cadence is.
You pull forward, but on the on the idea of roughly flat growth for the year is.
Is the down quarter more of the fourth quarter because of the pull forward.
In the fourth.
That's our expectations as we sit here today, David what I really wanted to referred to as Youll, probably because it's the one that we feel pretty sure of is that Youll, probably see us do more about 20% of our capital spend here in Q1 as opposed to maybe in a standard year. It would be 12% to 15 net pull forward is really just to get ready for the spring <unk>.
<unk> and making sure specifically in these high time categories that have been the most challenged in the supply chain that we are ready to respond for the customers. So that's really what I was referring to as far as the cadence for the rest of the year.
Q2, and Q3 really will depend on how fast we are absorbing the fleet that we brought in as well as how well we're doing with the 800 fleet. So we'll adjust as we had in the past three years accordingly.
It's pretty interesting that's taken about $1 six a fleet in the fourth quarter and the first quarter. When you combine the two I assume youre seeing project backlogs that are really focused on we need this equipment for certain projects. This is not a.
No presumption of demand I mean, that's a pretty big first quarter number to follow the fourth quarter.
Yes, absolutely there is in that and that is and that is because we see the underlying demand in and we've talked a lot right in last quarter as well about the mega projects. So.
They will require a lot of this high time utilization assets. Additionally, we'll also get more to a more normal cadence of.
<unk> sales than we had we held back and we hope we don't have through this year, we're planning on selling about 35% more used sales to get back to a normal fleet rotation. So that some of that capital will be to make sure that we have the ability to sell and we don't have the team losing confidence in their ability to rotate fleet out so that we can.
We can still meet demand.
Just a strong.
Obviously, you've seen 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.
Question, So even 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 155, 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.
M&A.
David This is Dan I'll take that one.
There is no change to that longer term framework, we've provided of two to three times being that optimal level.
We'd always said there was nothing religious about the low end and so living there for some amount of time to US is something that is consistent with what we've articulated.
It really would be the kind of stockpile dry powder for potential growth opportunities. If we were to kind of decided to live in a different ZIP code entirely we would certainly update the street, but certainly for the immediate future we're comfortable at these levels.
I appreciate it guys. Thanks for the time.
Thanks, David.
Okay.
Thank you. Our next question comes from Steven Fisher of UBS.
Thanks, Good morning, so just.
I'm curious.
How the fleet productivity you reported in Q4, how does that compare to what you thought you could do going in.
Some of the investors wechat with kind of seem to note the moderation in <unk>.
Fleet productivity as the year progressed, I guess whats the message you want to give to them about how they should think about sort of a lower level of fleet productivity. In 2023 is it just more that it's settling into a more normalized level still above your hurdle rate, but just kind of moving beyond these unusual dynamics of.
Of utilization and inflation in 'twenty, one and 'twenty, two and it's just sort of settling into a more normalized path is that what message you would give or how would you frame that.
Well I think first of all this is an output right. So we're going to we're going to manage the heck out of at a rate in 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 the.
<unk> disciplined shown in the industry from that perspective, but I think the way you characterize it as fair. We're pleased with our Q4 fleet productivity. It was it was what we expected and just for clarity for those that may not have picked it up the $5 nine as reported when you take out <unk> and that would be six five so that's about three.
Weeks of <unk> built into the fourth quarter. So we will report next year fleet productivity on an as reported and on a pro forma basis. So you can see that impact will really be focused on is making sure. We take the entirety of the fleet and drive more value out of it.
And anytime this number.
Our threshold, we expect to comfortably do next year well.
That's a net gain and we'll be measuring that on a pro forma basis for UCT, what we're doing with the 800 fleet against their baseline as well.
Okay, and then I'm wondering about the general cadence of project activity that you expect during the year and where you are with these large projects such as you talked about taking.
All the extra Capex more front end loaded I guess I'm wondering how you compare what's in the still in the planning stages on these large projects compared to what you have on rent at the moment.
Because there are some investors that I think your business is slowing down but im wondering if theres actually if youre seeing more large projects in the planning stages and what's on rent I'm wondering if that could actually lead to some type of acceleration.
The next year or two plays out.
Yes, we will stay away from quarterly cadence, but obviously you can tell by our powerful that we expect to need more fleet.
On the spring buildup.
Q1 is always going to be the slowest quarter seasonally, but 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 markets, thus far to pop and so when you hear about this pull forward, we don't feel the fleet that we would nor.
<unk> had ready is going to be enough for when we get to the real built season in April and that's that's really more what that pretends to be in Q1 isn't really the focus will 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 the spring.
Okay, just a quick clarification, if I could what's the embedded flow through that you have on.
The <unk> business in 2023, compared to 2022, and you've got a 55% pro forma for legacy or what's the flow through.
Yes, Steve that one's 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.
On a pro forma so.
I think you hit the nail on the head certainly as reported flow through would look like 48.
Excuse me as reported it looks like 48 pro forma 55.
But it's hard to kind of discretely break apart the businesses.
Okay. Thanks, sorry, but one thing I would note just to remind people. We do think we'll achieve about $30 million of the cost savings out of the $40 million we've talked about.
So we can certainly share that.
<unk>.
Yes, 23, alright, so its a whole 40, but we only get about 30 of it in 'twenty three and to our expectations.
Thank you. Our next question comes from Rob Wertheimer with Melius research.
Hi, Thanks, good morning, everybody.
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.
People people talk about you have the the fear or the risk of rising interest rates and a potential recession will cost project delays or cancellations.
The infrastructure, Bill, which is kind of different from some of the chips in semiconductors and stuff that will slow and 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 is starting to flow in.
I assume thats pretty good duration on some of the stuff. So I wonder if you have any comments on what your visibility is now versus past arrows in history.
Yeah sure Rob So broadly where we believe that these many of these projects are not macro relying and you heard me say that in our opening comments and we're talking about the type of Mega projects. We're talking about we feel really good about that as far as infrastructure, we've been saying all along we expected this to be at 23 event and I'm pleased to say.
That we are seeing in projects coming out of the ground and projects that are taking fleet as we speak.
So youre looking at bridges airports, whether it be expansions or remodels. So we're pleased and we think that will.
Carryout and accelerate through this year and beyond.
Multiyear event. So we're very pleased with that Ted I don't know if you have anything to add yes, no. I mean, we really have not seen anything along those lines Rob.
The one area, where maybe we have seen some delays as we've talked about it has been more on the alternative power side and I think theres been some some separate about this publicly solar.
<unk> has had some supply chain issues and within when we've seen a couple of permitting issues all of that said our power business in the quarter was up about 9% and for the year were up about 10% so well see.
Being kind of reports that you are 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 and just the Mega projects. The Mega projects are are really the kicker or why you hear us.
Strong tone and guidance that were coming out with but we have seen this broad breadth growth throughout all geographies. So it's not mega project reliant, but they're kind of the kicker that maybe could offset if you think commercial retail when it's Rob I can think office space will drop so we really really feel the balance.
As appropriate for this type of guide and the bullish machine here in October .
And then just to clarify on that I was going to ask anyway, but we all talk construction do you have a lot of non construction verticals youre seeing strength throughout the industrial side.
We are yes.
I mean, if you really go through all the verticals with the exception of midstream, which throughout the year has been the only vertical down for us everything's 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.
Perfect. Thank you.
Thanks, Rob.
Thank you next question comes from Seth Weber with Wells Fargo.
Hey, guys good morning.
You guys are obviously planning so a lot more fleet used fleet this year.
And Matt I think I heard you referenced something about a broad mix or something different channel mix or whatnot can you just give us some more details on.
Whats your kind of how you are selling this used fleet I mean, theres, 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.
Sure. So we feel good about the end market, including pricing.
Will fall off of historic highs that we have set over the last two years, maybe a little bit, but we'll find out and I think one of the things we're going to see is that the increase of replacement capital cost could definitely have a halo effect on used pricing, but when you. When we think about what channels were going to open up as what we were talking about we've been stripped.
<unk> or 90% retail all the way in the first three quarters of 'twenty. Two and then you saw we leased it up a little bit to get to do some more volume in Q4 and that wasn't because there werent options. It was to retain fleet correct because the supply chain just wasn't getting fleet towards fast enough for our customers.
We're hoping our expectation is that we can go back to a more normalized channel mix in 'twenty three and that's what's embedded in our guidance. So we will open up the broker chain, we will do some trades.
Probably won't do much options unless you have something that's that's really in disrepair, we're not really a big auction player, but just opening up that channel mix over and above the retail and that will allow us to rotate out about $2 billion worth of hopefully.
Got it Okay. That's helpful. Thanks, and then just on the.
To strengthen the specialty margin in particular was pretty notable.
I think it was 400 basis points year to year is there something.
Is there some step change that's happened there is general finance business Thats clicking or anything you would call out.
Is supporting that.
Big jump year over year, Yes, I think there are a couple of things there Seth I mean, certainly growth has been good. So thats helped drive fixed cost absorption, but beyond that you had really good cost control in the quarter and you also had some beneficial mix both within the specialty segments and on a project basis that benefited that flow through.
Okay, Alright, guys. Thank you very much.
Thanks, Ed.
Thank you. Our next question comes from Timothy Thein with Citigroup.
Thanks. Good morning, just maybe group two together here, maybe first is just on fleet productivity and just how you think about the components within that.
In 2003.
Just thinking of maybe time and rate.
Given that you held onto fleet longer.
In this year.
Make sure you met the demand of them.
Presume you're running pretty hot on on time, so potentially that starts to run against you, but maybe I'm wrong on that and then just kind of the interplay on rate.
And then the second question maybe for Ted.
Any help in terms of <unk>.
EBITDA and operating cash flows.
Should we think about cash interest and cash taxes any help you have on that thank you.
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 time may have.
<unk> been running so hot that at some point you have to look at are we running the appropriate level of time can we continue to raise it or does it become a bit of a headwind was that being said, even if time becomes a headwind just because were 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's constructive for that will will feel comfortable that both on an as reported and pro forma basis will exceed our hurdle rate that we talk about that one and a half even if that goes up to 2%. So we feel good about it tells you can take the EBITDA question.
Yeah, So Tim just in the absolute we would look for cash taxes in 2023 to be about $565 million, that's an increase roughly.
About $240 million cash interest at about 600 million, which would be an increase of 195% or so.
And so when you bridge kind of that $1 $1 billion increase in EBITDA against a roughly $460 million increase in free.
Free cash flow really that the delta is going to be the change in working capital.
Got it thanks, Ted did you usually.
Can you speak to our merit increases as we think about in SG&A.
Kind of a bridge year over year any have you quantified that.
You should think about that for this year.
Yes, I don't know that were ready to quantify it but certainly we've got that built into our guidance and built into our operating plan.
Always talked about the importance of supporting our employees and taking care of them and that's that's an important aspect of doing just that so there is absolutely a merit increase built into this guidance.
But in terms of quantifying it thats not something I think we're prepared to do.
Alright fair enough. Thank you.
Thanks, Jeff.
Thank you. Our next question comes from Jerry Revich with Goldman Sachs.
Yes, hi, good morning, everyone.
Good morning, Jay.
Can you just talk about the.
Impact of the new higher pricing on new equipment on the marketplace. When we saw a tier four higher pricing pull through that had a nice pricing umbrella on the rental industry for the entire fleet and I'm wondering I know it's early post the January one.
Price increases by the Oems.
To what extent is that.
A pricing opportunity for the industry as you folks here.
Would you.
Compare and contrast, those transition versus the tier four transition in terms of driving pricing upside. Thanks.
Sure well number one this would be more across the board.
We feel comfortable I talked about it in used pricing as replacement Capex gets increased that's kind of an umbrella on the used pricing.
Residuals.
A positive and I think to your point about the whole industry haven't 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 big is getting bigger and just more sophistication of information.
In the industry I think all of those are helping and certainly.
Increased OEM pricing mix that makes that even even more important.
So I think your point's well taken it will we'll probably bolster.
Some of the some of the behavior in the industry.
Okay Super.
Just curious lots of cross currents in the cycle.
We've discussed I'm wondering if you look at the.
111 through 2015 environment.
Any analog that you would draw in terms of the industry's ability to match supply and demand today versus that cycle, where early on despite demand match pretty well, but obviously 2015 touch from oversupply could you just talk about how you view the industry's position today between availability and data et cetera.
You are managing the supply demand balance.
Yeah. So one of the biggest differences is the information that access everybody has access to right whether it's the rouse data whether it's you know.
Now that over a third of the industry is covered by the top three public companies right. These type information gets 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 in let's say our next largest compare.
This scale allows us to get through things in a different way and so I don't really wouldnt 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 youre seeing that manifest in better performance overall for the customer and for shareholders.
And lastly, if I could just sneak one more in I'm wondering if you just talk about what level of inflation is.
Is embedded in guidance overall, and if you can just touch on transportation, specifically, where it feels like there might be some tailwind for you folks third party. Thanks.
Yeah.
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 flowed through last year. As an example, when you back out used across the full year flow through would have been 50, 657%. So clearly indicative of our ability to manage that inflation very effectively and when you think of.
About what we're pointing towards in 2003, 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 in all companies are managing but we feel very comfortable in our ability to manage it effectively in terms of <unk>.
Pickup and delivery, that's an area where.
Frankly, we're not trying to make money. So as you see the price of diesel is 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 the companies.
But as you think about that dynamic in 'twenty three I don't think it'll be very appreciable.
Super Thanks.
Thank you. Our next question comes from Michael Feniger with Bank of America.
Hey, guys. Thanks for taking my questions.
I know there's been a lot of talk of Mega projects.
We see Tesla announcing a $3 $6 billion of new investments in two battery plants in Nevada, just we think about the economically sensitive areas of non res like office and retail can you just help us understand we think of these mega projects, how much more fleet on rent for these projects versus your typical office or retail or the terms are struck.
<unk> different.
In terms of the multiyear visibility there on the different type of fleet required just curious if we see that trade off over the next 12 18 months, how we should kind of view that.
Yes, Michael the type of projects very so much that would be pretty hard to do I mean outside if youre thinking about towers right large towers office building.
Which may may be more limited in what type of a fleet you would read on it all of these projects have different <unk>.
And the great thing about our product line is whether it's early when theyre scratching dirt or whether the tranche place.
From.
From creating the infrastructure to then creating the structure does that finishing off the building we've got the opportunity to cross sell into all those needs, but as far as the volume of needs. We do attribute models. They are really hard to be predictive.
I wouldn't really say that it's something that you can rely on.
The speed and the time to do the project and the sensitivity problem drive more variation of how much men material and fleet, they're going to put out there right and it seems like nowadays everything so fast track project.
10 years ago, they were going to do something quicker now now now it's every project's fast track. So I think that has implications for driving more rental than anything else.
Thanks, and you guys highlighted all year that that fleet productivity number was going to decelerate.
I know you kind of gave us some puts and takes for 2023, but.
Is the view that then that number continues to decelerate through 2023 or five finds more stability at some point.
Could you guys were kind of clear through the year, how we should kind of prepare for that throughout the quarter. Just curious if theres anything we should kind of prepare.
As we go through 2023, there directionally.
Yeah, I mean, you see whats embedded in our guidance on an as reported basis right in within that range would be a different number anywhere.
I won't even say there's nothing you can do the work, but I think really the most important thing is that the environment is good for us to continue to drive positive fleet productivity, even if time utilization doesn't go up and that's really what matters and that's the important part of it and we will report this on a pro forma basis, there will be a little bit as reported drag.
From the 800, bringing in the 800 fleet, but we'll report that out and that will be a couple of points of differentiation there even between as reported and pro forma is what our expectation is so well.
As an output that we really don't want to try to predict but what our expectations are for rate and time are all embedded within our guidance.
Great and just I'll sneak one last one just I know, we talked about power exposure alternative energy just on the traditional side upstream midstream downstream just are you seeing more activity. There is that actually accelerating just curious you kind of touch on the traditional side.
Yes.
It's been pretty consistent in terms of that progression.
Although im just turning to something quickly Mike.
And once that.
Alright.
So certainly continue to see strong momentum in upstream.
I mentioned midstream has been kind of the one sector that has been a.
And for US this year.
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.
Thank you.
Thank you Michael.
Thank you. Our next question comes from Ken Newman with Keybanc capital markets.
Hey, good morning, guys. Thanks for squeezing me in here.
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 <unk>.
May.
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 re shoring or your visibility on infrastructure projects.
I haven't I don't really have it broken out that way, we really look frankly when were planning, but more by region.
The verticals that we track the verticals as we assigned capital. After the fact, so I actually don't have that number of Franklin. We can we'll do a little work and get back to you on that but just generally right without without.
Without trying to get to pegged on numbers that I have embedded.
Generally it's <unk>.
We view infrastructure is something that's accelerating right. We view that we're seeing the beginnings of it of the spend and we think that will accelerate through 'twenty three and beyond.
Multi years as far as the manufacturing someone mentioned earlier there is some big plants going on right now that have a lot of fleet on rent as we speak but theres also some projects coming out of the ground that we think are multiyear mega projects I don't really know how to lay those against each other but I'd say overall.
The Mega projects work will will certainly outpace infrastructure work in totality, but the acceleration infrastructure will continue throughout the year.
Understood.
For the follow up and you touched on this a little bit but obviously.
We've seen some crack starts 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 into the bottom end of the guide range, what's embedded there in the assumption.
If we really do see a sharp return in the industrial MRO.
Demand environment.
Yes, Ken I'll take that one as Matt mentioned, when we do our forecasting it's really built by the.
The branches up to districts regions divisions, and corporate ultimately so it's really kind of set by the field.
We don't look at it kind of top down looking by vertical so.
As I mentioned, our industrial business has held in very well.
We're not seeing any signs of cracks and I know people have looked at whether it's PMI or other metrics and thats raised concerns.
We're not seeing signs of those and as Matt mentioned in his prepared remarks, we also see a lot of these industrial projects kicking off this year, we've talked about autos and related stuff. We've talked about some of these but frankly, it's even broader than that and so if there is an offset from this if there is a headwind on the MRO side and we're very.
Youll see within industrial kind of offsets on the construction side, but just to answer the question pointedly we don't.
<unk> forecast.
Our business based on these industrial verticals.
Got it maybe.
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 theres enough management capacity to go after M&A here in the near term.
Yeah, Ken so outside of anything that has.
A significant overlap with a hung right. So in those markets, where they're integrating the teams together right getting the sales reps together a lot of work on the ground. So we're going to pause for a little bit on anything that would have a large overlap, but if we have opportunities and we continue to work the pipeline as we have for the past couple of years.
That don't have a big overlap and we have capacity in the field we're absolutely.
If they clear that final hurdle of finance makes financial sense.
We have the dry powder, we have the capability and we certainly will consider.
M&A, whether it be a tuck in gen rent deal in the market at 800 and wasn't in or specialty product line, where they're not dealing with any integration issues right now so.
Integration work rather than issues. So I would say, absolutely we would and just to touch on the capital allocation.
One of the reasons why it was the right time for us to do a dividend now because this is not at the expense of growth. When you look at the past few years and what kind of growth, we drove including significant M&A.
We still have the capacity and free cash flow to give a dividend. So we had actually had asked that question by someone earlier.
You're giving a dividend because of that.
Less growth prospects know quite contrary, it's because even after.
Supporting growth, we have excess cash to return.
And that pushed quite to the resiliency of our strong free cash flow through the cycle.
Very helpful. Congrats.
Thank you Ken.
Thank you we'll take our next question from Stanley Elliott with Stifel.
Hey, guys. Thank you guys put me in.
And that in the past you guys have talked about the big getting bigger in the K, you mentioned, 4% North American rental growth.
And about 12% sort of growth right now I mean, do you guys have consistently outgrown the broader industry, but are we seeing a step up now.
Collection point with the scale that you have the specialty that now.
Now it's reasonable to think that you guys might be able to put up three X what the industry is growing at.
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 IRR 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 guidance three times and we do think we.
We can do that.
I think I've talked about this before how the top end of the business. The biggest getting bigger is 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.
It gives a better service to the customers and it gives you an opportunity to grow faster than the industry and I think we'll see that continue.
Great guys Thats it from me thanks.
Best of luck.
Thank you. Our next question comes from Scott Schneeberger with Oppenheimer.
Alright, thanks, guys good morning.
Yes.
First question in Gen rent.
Specifically.
I guess I'd, probably peg it may be the best to speak to this but how is how is rental duration.
Performed over the last few.
Few years have you seen an expansion of your equipment staying out on rent and with <unk>.
Meg of projects coming in an infrastructure bill it feels like 2023 is going to be a lot of that issue.
Is it likely that we may see that expand I know, we're talking a matter of days here, but might be.
<unk>.
<unk>.
Period that assets are out on rent expand and could that have a positive.
Margin benefit for the company. Thanks.
Yes, so the first part of the question.
But I'll start there in terms of the mix between daily weekly monthly, which is really the way we would look at this we don't kind of measure contract duration than maybe the way youre asking Scott, but those numbers have not moved meaningfully you've seen the very modest shift between daily and monthly to the point of.
To the tune of about a point so we'd be kind of mid single digits on a daily and would be about 80% on monthly and those numbers have been remarkably consistent for a long time and there really hasnt been an appreciable change in terms of 22 versus 21 or prior years in terms of the margin impact.
Certainly what we're always trying to do is be mindful of getting more of your volume and serve you more efficiently.
And so certainly.
I don't know that Theres, a huge change there, but we do have that benefit as we do get larger projects that last longer and we get more fleet on those projects, we're able to serve that customer more efficiently and that certainly benefits.
Margins to some degree and importantly returns.
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 the new dividend program should we anticipate.
United rentals to be a dividend growth story, I think you referenced about an 18% payout.
Don't know if you want to quantify this but is there a comfort going higher on payout ratio is that is that kind of a direction, we'd expect to take vis vis share repurchase just high level thoughts there. Thanks.
Yes, absolutely don't want to get ahead of the board, but absolutely we have the intention of growing the dividend over time in terms of what that relative growth looks like relative to net income because you're asking about a payout ratio I don't know that wed get locked in there just yet but absolutely. The intent is to continue to grow the dividend over time.
Our expectation will continue to grow the company over time will continue to expand margins will continue to generate more cash and so one of the things that dividend allows us to do is have another tool to return that excess cash to investors as we keep growing.
So yes, I think it's very fair to assume that we will grow the dividend over time and in terms of what that rate looks like.
Stay tuned.
Fair enough. Thanks, a lot guys.
Thanks.
Thank you that concludes our question and answer session I will now turn the call back to Matt Flannery for any additional or closing remarks.
Thanks, operator, and that wraps it up for today I don't want to say, thank you to everyone for joining us as we kick off another year of growth for our shareholders and we look forward to reporting a strong quarter for you in April until then if you have any questions. Please feel free to reach out to Ted have a great day. Operator. Please go ahead and end the call.
Thank you. This concludes today's call. Thank you for your participation you may disconnect at any time.
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