Q1 2023 United Rentals Inc Earnings Call

April 27, 2023

[music].

Please standby your program is about to begin.

Good morning, and welcome to the United Rentals Investor Conference call.

Please be advised that this call is being recorded.

Before we begin please note that the company's press release comments made on today's call and responses to your questions contain forward looking statements.

The company's business and operations are subject to a variety of risks and uncertainties many of which are beyond its control.

And consequently, actual results may differ materially from those projected.

A summary of these uncertainties is included in the Safe Harbor statement contained in the company's press release.

For a more complete description of these and other possible risks. Please refer to the company's annual report on Form 10-K for the year ended December 31 2022.

As well as to subsequent filings with the SEC.

You can access these filings on the company's website at Www 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.

Is it 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.

<unk> financial officer.

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

Flannery you may begin.

Thank you.

And good morning, everyone. Thanks for joining our call.

Three months ago after our record full year financial performance in 2022, we told you that we continue raising the bar in 2023.

And I'm pleased to say that the year is off to a strong start which you can see in the results that we shared last night.

The integration of <unk> is on track and our team's doing a great job of executing our plan and delivering for our customers and as always we're very pleased that we did this safely with another recordable rate below one.

This execution and the continued strength of our end markets give us the confidence to reaffirm our full year 2023 guidance for substantial growth solid margin expansion and significant free cash generation.

Let's start by digging into our first quarter results.

Total revenue grew by 30% to a first quarter record $3 3 billion.

Within this rental revenue increased by 26%.

EBITDA increased 32% to $1 5 billion, while margins expanded to 45, 8% both first quarter Records.

And finally, our return on invested capital set a new high watermark at 13, 1%.

During the first quarter, we invested $797 million in gross Capex and year to date, we've closed two local acquisitions that nicely complement our strategy.

Combined with the actions that we took during the first quarter and fourth quarter of last year, we are well positioned to support the demand our customers see it.

Yeah.

Looking more closely at the first quarter demand key vertical saw growth across the board led by non res construction industrial manufacturing and power.

Geographically, we saw much of the same including double digit growth in all of our regions.

Our specialty business delivered another excellent quarter with rental revenue up 24% year on year and.

Strong growth across all lines of business led by our mobile storage team.

Within specialty we opened six new locations and are on track for around 40 cold starts this year.

These sales were another positive in the quarter with revenue up 84% year on year, largely due to the normalized volumes after holding back on sales in 2022.

And not only where we see recovery rates and margin strong but.

But the level of demand provides another positive indication of how our customers are feeling about their outlook and the need for equipment.

Turning to capital allocation, our focus remains on driving profitable growth and returning excess cash to our shareholders.

We view this as a hallmark of a good company and a means of maximizing value.

During the quarter, we returned over $350 million to our shareholders supported by the strength of our balance sheet and free cash flow generation.

Looking ahead, we see continued reasons for optimism regarding our business and the balance of 'twenty three and beyond.

Near term, we're encouraged by the momentum we're carrying into our busy season combined with a variety of positive industry indicators.

First off both internal and external measurements of customer confidence continue to point towards growth in 2023.

This is underpinned by current activity as well as the strength of customer backlogs.

Additionally, non res construction starts increased over 30% in March.

And the Dodge momentum index was up 24% year over year.

And the Abi points to growth as well, where the forward looking inquiries component continues in the right direction.

Together these factors support our reaffirmed full year 2023 guidance.

Longer term, we remain confident in our ability to capitalize on several significant multi year tailwind for our industry that we view as resilient in any economic environment.

First is infrastructure.

<unk> early but we continue to see a ramp in spending from the federal infrastructure Bill across a variety of project types, including airports bridges and road and highway.

We're also well positioned to support our customers as they undertake projects across clean energy and advanced manufacturing funded by the inflation reduction Act.

Within private construction, we continue to see strong investments across manufacturing led by autos semi conductors and energy and power.

Combined reports indicate that these tailwind is hold the potential for over two trillion dollars of project spend in the U S over the next decade.

We're very well positioned to leverage our competitive advantages on these projects whether through the size of our network, where the breadth and depth of our products and services.

Our team is prepared to serve our customers.

And drive value creation cross shareholders.

Before I wrap up I want to highlight some of the other significant achievements obtained United had in the first quarter.

You've long heard us talk about doing well by doing good.

<unk> continues to be recognized for their efforts in this area.

<unk> recent wins from the Wall Street Journal, where we made their management top 250, less recognizing companies for doing the right things well and the just 100, which recognizes companies that are doing right.

By all of their stakeholders, while also generating strong performance for shareholders.

So to sum it up we continue to feel good about 2023 and beyond.

As our long term strategy has us well positioned.

Our team is executing and our customers know, we're there to support them with unmatched capabilities.

And as we've consistently demonstrated we know how to manage the flexibility of our business model, while leveraging the strength of our balance sheet and the durability of our cash flow and this gives us multiple options for creating value.

Lastly, before I hand, it over to Ted I want to quickly highlight that we will be hosting an investor day on May 31, during which we'll provide an in depth review of our strategy key initiatives.

Financial performance with a Q&A session to follow.

The event will be held both virtually and in person in New York City, and we hope that you can join us.

With that I'll hand, the call over to Ted to review our financial results and then we'll take your questions over to you Ted.

Yes, Matt and good morning, everyone. As you saw in our first quarter press release, our team again produced excellent results that were consistent with our expectations and importantly position us well for the full year.

And I think Matt framed things well in saying that we continue to feel good about 2023 and beyond given the market opportunity, we see our strategy our teams consistently strong execution and our customers' knowledge that we are here to serve them with unmatched capabilities.

One quick note before I jump into the numbers the figures I'll be discussing are as reported except in the few instances, where I'll call them out as pro forma.

Adjusted to include <unk> first quarter 2022, Standalone results in the year ago period.

So with that said first quarter rental revenue was a record at $2 74 billion.

That's an increase of $565 million or 26% year over year.

Within rental revenue increased by $469 million or 26, 1%.

Our average fleet size increased by 25, 6%, providing a $460 million benefit and fleet productivity increased by 2% as reported adding another $36 million.

This was partially offset by our usual fleet inflation of one 5% or $27 million.

Also within rental and ancillary revenues were higher by $93 million or 28, 3% and re rent provided an additional $3 million or six 1%.

I'll note that on a pro forma basis rental revenue was up a robust 16, 6% and fleet productivity increased by a healthy five 9%.

First quarter <unk> sales increased by 84% to $388 million as we returned to a more normalized volume after holding onto fleet throughout much of 2022.

Adjusted used margins increased by 170 basis points to 59, 5% supported by continued strong retail pricing.

Moving to EBITDA adjusted EBITDA in the quarter exceeded $1 5 billion, another first quarter record, reflecting an increase of $364 million or 32%.

The dollar change includes a $313 million increase from rental within which <unk> contributed $285 million.

Ancillary added $29 million and re rent was down $1 million.

Outside of rental used sales added about $109 million to adjusted EBITDA, while other non rental lines of businesses contributed another $5 million.

SG&A increased by $63 million due primarily to higher commissions and the continued normalization of certain discretionary costs.

As a percentage of sales however, SG&A declined by 120 basis points year on year to 11, 6% of total revenue.

Looking at first quarter profitability, our adjusted EBITDA margin increased 70 basis points on an as reported basis and 160 basis points on a pro forma basis to a first quarter record of 45, 8%.

This translates to 48% flow through on an as reported basis and better than 53% on a pro forma basis.

And finally, adjusted EPS was $7 95.

Another first quarter record, that's a year over year increase of $2 22 per share were almost 39%.

Turning to Capex gross rental Capex was.

$797 million and net rental capex was $409 million.

This represents an increase of $138 million and net capex year over year and positions us well for the growth we see in 2023.

Looking at return on invested capital and free cash flow break set a new record at 13, 1% on a trailing 12 month basis.

40 basis points sequentially, and 220 basis points year on year.

I'll add that was 310 basis points above our current weighted average cost of capital.

Free cash flow. It was another good story, but the quarter coming in at $478 million or an LTM free cash margin of 13, 5% all while continuing to fund significant growth.

Turning to the balance sheet, our leverage ratio at the end of the quarter improved to one nine times, representing a 10 basis point reduction both sequentially and year over year.

And our liquidity at the end of March exceeded $2 65 billion with no long term note maturities until 2027, notably.

Notably all of this was after returning $353 million to shareholders in the quarter, including 103 million via dividends and $250 million through share repurchases.

Looking forward you saw last night, we reaffirmed our guidance across all metrics.

Based on the diverse momentum, we see across our markets and what we hear from our customers. We remain confident that 2023, it will be a record year for the company.

Just to review total revenue is expected in the range of $13 seven to $14 2 billion.

<unk> full year growth of approximately 20% at midpoint and pro forma growth of 12%.

Within total revenue I'll remind you that our used guidance is implied at $1 3 billion.

Our adjusted EBITDA range remains six six to $6 85 billion.

On an as reported basis at mid point this implies roughly flat full year, adjusted EBITDA margins and flow through of around 48%.

On a pro forma basis, however, which we think is the appropriate way to think about it our guidance continues to imply about 80 basis points of EBITDA margin expansion and flow through in the mid fifties.

On the fleet side, our gross Capex guidance remains 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 three 5 billion.

Which is before dividends, we purchases and bolt on M&A.

So with that let me turn the call over to the operator for Q&A operator, Please open the line.

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.

Once again that is star one to ask a question.

Our first question comes from Rob Wertheimer with Melius research.

Hi, Thanks, and good morning, everybody.

Hey, Rob.

My first question is basically on demand and you gave a pretty good overview, but if we just leave aside the Dodge and all the surveys and everything and just think about what you're seeing on the ground and hearing from your customers are you seeing the Mega project funding start to flow through are you seeing lots of activity and sort of quoting or proposals on one.

And does it give you any differential I guess versus other years look into supply demand as we move through the year does that continue to look tightest pricing continue to look well supported by supply demand dynamic as we go through the balance of the year.

Sure So I'll start with the demand portion.

Whether it be through the broad based demand that I discussed in the opening comments, where every one of our business units geographically and now all of our specialty businesses showed double digit growth in the quarter and that's a continued momentum from what we've been saying for quite a while now.

And all the verticals that we cover remained positive in the quarter Theres actually one to be technically correct disaster recovery was down a little bit, but that was coming off of a 132% comp growth in the <unk>.

First quarter last year, and it's 1% of our business. So basically all the verticals all the geographies all the product lines.

<unk> remain strong very strong demand so we feel good about that.

When I think about the supply demand dynamics, partly driven by the Mega projects, partly driven by the broad based demand I just I just talked about we see it to be a very constructive market for continued strength for the industry overall tax along with the disciplined I mean, we're not going to get into the individual components.

But we feel good about right we feel good about the constructive environment and we feel good about being able to reaffirm our guidance because of that demand.

Alright, perfect. So that's pretty responsive and then just on Gen rent gross margins is that any indication of rate versus cost balance or is that largely explained by a earned coming in or other factors and I'll stop there. Thank you.

Yes, Rob this is Todd I'll take that one that is an indication of the impact of <unk> and just to be clear that was in line with expectations. When you look at it.

Those margins that reflects the fact that we bought a business that we knew had lower margins.

We integrate it.

That's the effect you see.

Thanks, guys.

Thanks, Rob.

Thank you. Our next question comes from David Raso with Evercore ISI ISI.

Thank you Yeah, I think for most people the drag that <unk> brought to the reported numbers was a bit of a surprise the magnitude of it and I'm just trying to get a sense of.

Productivity going forward and I know the right comp gets harder.

But the improvement you would think you'd have around an acorn and the smaller acquisition Abel, but particularly a Han can you tell us about why the drag is that much and.

The implications for productivity the rest of the year can you improve that mix or whatever they're dragging on the reported numbers and then I know you have the offset though of course, the right comp gets harder I think we're all just trying to figure out.

And the reported numbers the whole year or is it going to be sub two because the base case had been productivity would slow through the year, but now that we have a reported number of two <unk>.

I think we're just trying to figure out is productivity flat to down by the end of the year.

Yes, So let me yes.

So let me help you with so first off I will I'll start by urging everybody look at the pro forma alright that puts the 800 basis. That's how we manage the business with how we're taking that asset base, putting the base of that into the.

Base here that we're comparing to so not having that base you create that disconnect of what's called about four points.

<unk> four <unk>.

GAAP between pro forma and as reported we believe will continue on and I'll just I'll try to explain it simply if you think about the amount of capital that <unk> had that were adding to the base year.

And the amount of revenue rent revenue they generated on it it was about 40.

<unk>, 40% about 40 cents on every dollar when you roll that into our experience, which is more like 60% on the dollar that's not dilutive.

And we think it's going to be somewhere in that 4% gap between what we report as reported and what we report pro forma for the rest of the year.

So that's just that baseline of what we add into the baseline as market change because it already has its baseline now any improvement that we can get on those assets that will show up in an improvement in our fleet productivity as you all know by this time the X scrambled rights at fleets.

In our overall business, we consolidate stores, we have one single go to market. So all of that we consolidate customer statements that were overlapping so that's all going to be in the improvement that will continue to report on as reported and pro forma basis does that explain that gap for you well enough David.

It does maybe for one quarter, but the idea that the GAAP has to be that wide throughout the year, you would think you'd be able to position the fleet sell off some inefficient fleet may be the rates. They were getting now under your umbrella you'd get better rates.

But that wouldn't be added back in the.

First out of the fleet.

Yes, 10% of your fleet now right. So it's not immaterial, but it's not.

It's not a massive acquisition I think the idea of the first quarter was the challenge of modeling a big acquisition coming in fine, but thats, a GAAP won't be able to close throughout the year is a bit interesting. When you would think you'd be able to improve that dragged make it less.

Overtime certainly the idea is we will narrow the gap that was part of the opportunity right, we talked about being a better owner of assets.

And it is.

But it takes time right. So certainly when we looked at that kind of crude calculation of $1 eight.

We don't think there'll be at 40% forever, our intent is to get them closer to something appropriate over time, but it will take time.

That's true of every acquisition so.

Yes, so where we'll start to see improvements as we get timing is better as we get.

Cross selling better.

Not all going to show up in that that will create will create a little bit better pro forma but it's all going to be mixed into your point only 10% of our overall performance the real needle mover LP improvements that we get on our own asset base right and the other 90%. So we can walk through the math, but it's.

I was hoping to be exactly four but it's going to be somewhere.

Somewhere between three five and four for the balance of the year is our expectation.

And once again.

Yes.

Yes sure.

I would just ask kind of what you're trying to think about 2024, a little bit.

You hear some of your suppliers, having taking orders for 24.

You know people are curious about projects starting to hit the ground that have kind of a multiyear aspect to them.

By no means am I asking for 'twenty for guidance, but I'm, just trying to get a sense of when you went through your capex thoughts for the year, what youre hearing from suppliers business beyond 'twenty. Three can you give us a little color on kind of what you're what you're sitting on right. Now when you think about 24 projects willingness to order earlier working with kind of.

Three year.

Conversations, which we haven't historically heard in the industry I think they were just trying to figure out how to think about beyond 'twenty three.

Yes, we think that the supply chain will get better next year. So we don't think we will need to pull forward as much as we did if you remember we brought in.

Probably 700 extra in Q4, and another 400, let's say extra in Q1, so we still feel that we needed to do that this year, we're not expecting that for next year.

What would change that if we started to see a lot of slippage throughout the peak season. This year than maybe we would have to revisit with the vendors, but we think we'll get back to more normalized talk about this in the end of the third quarter fourth quarter type conversation, making sure. We're securing slots now we're talking to them all along but as far as trying to put hard numbers down we don't we don't.

Feel that the supply chain will be in a position for us to have to do that today.

But on the demand side as well so two things.

You can tell us about multiyear projects, how we should be asking about it or.

Please go ahead.

Yes, I mean, there are projects that I just had a couple of EV I also had a couple of electric car plants. Just last month myself, where these are going to be multi year projects require a lot of equipment. So not only do we see it in our reporting and in the starch, but we expect as I said in the opening remarks.

A lot of these mega projects youre going to be multi year projects, we think infrastructure is going to be.

Most of the year spend we don't really think the IRI has even started to model. So that's all future tailwind tariff yet anything that yes, David I think we talked about this at your conference to some degree, but certainly when we think about infrastructure. As an example, alright at run rate that legislation is intended to produce about $100 billion a year of construction of infrastructure.

<unk> spend.

We're still in that ramp phase. So obviously, we're not going to get anything close to that in 2023.

That provides a tailwind in 2024 right so just to.

Dimensionalize numbers, if you thought that you got half of that spend in 2023.

It's an incremental $50 billion of infrastructure in the context of a 900 billion total non res construction market in the U S. When you get to 2024, you get the second half of that as you get to an annualized run rate right and we've thought about this largest across IRI.

Auto semis and LNG is kind of five key tailwind. So certainly those are at a high level. The tailwind as we think about coming back to the Capex question.

The visibility and the trajectory those will imply that 'twenty four will be critical to dictating how do we think about capex in the back half of this year.

Because that will determine obviously, how we want to have the fleet positioned.

Not anything you'd add.

Does that help David.

Yes, I appreciate the time I'll circle back with any any further questions. Thank you.

Thanks, Nick.

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

Thanks.

Good morning wanted to just come back to the margins for a minute. So the rental gross margin drags from <unk> that we had in the quarter. How one time ish would you say are those drags.

Other words as we model those gross margins year over year for the rest of the year is that still a reported year over year drag.

Yes, it will be and just as a reminder.

At their business.

On an LTM basis, when we bought them they had a reported EBITDA margin in the mid <unk>. So obviously, that's considerably below where we were.

Even synergize they would be below that so that will be an effect that lasts until we lap them.

It in perspective, if you look at the gross margin reported down 170 year on year, Steve on a pro forma basis. It was up 10 basis points, not really dimensionalize, what that impact of <unk> was in the quarter that will be a lasting effect as we kind of progress through 2023, and where you see that really specifically is in the rental the gen rent segment.

Gross margin.

So does that help kind of answer the question.

Yes, it does but.

Does that 1% to 70 kind of get smaller over the course of the year or that's a kind of a steady 170.

So certainly as the big Delta aside from the fact that lower margin as you get the synergies coming in Thats, one thing to consider but we're talking about this in isolation.

Right. Okay. So I guess then we're there.

May have answered this before but were there any other drags on gross margins outside of a hearne, unlike lower utilization or anything else.

No I mean, if you isolate it and.

And there is always ebbs and flows of the Costco, but it's it's.

It really hurt when where you can see that is if you look at the Gen rent gross margin that would go from let's.

Let's say down $3 20 year on year to down 100 pro forma the pro forma only includes eight earned in the year ago period, but there are other accounting adjustments fair market value on our fleet as an example that that explain the majority of that 100 basis point pro forma number.

Another call it shorter term onetime expenses as we get the fleet in shape as we get their facilities integrator that really explain the difference.

Okay, and then just one quick follow up how should we think about the cadence of used sales would you say, it's more front end loaded because the prices are still good right now, but typical seasonality would suggest you would.

<unk> likely to sell used equipment at the backend of the year.

So how do we think about that cadence for the rest of the year.

Yes.

Your observation is right. When you think about the cadence normally first quarter and fourth quarter are larger right with fourth usually being the largest historically, we think we'll return to a more normalized cadence as we open up other channels as opposed to the last couple of years, where we've been primarily retail so.

Think about a little bit less than in two and three and then ramping it back up again and for as a fleet comes off ramp right. It makes sense Q1 and for your lower utilization period. So it's when you have the opportunity to sell the fleet a little easier.

Perfect. Thank you.

Thank you.

Yes.

Our next question comes from Jamie Cook with Credit Suisse.

Hi, Good morning, I guess, just two follow up questions just back on the margin again CAD.

When do you expect to get back to more normalized incremental margin and Mr. Keith can we expect that sort of by 2020 as far as as we integrate <unk> and then just my follow up question I know, you're seeing broad based strength sort of everywhere is there any difference in the type of customer or the size of customer maybe the larger customer.

Our stronger just because they might have.

More visibility into some of these larger infrastructure projects you are talking about so anything on that on the customer side as well.

Sure Matt I'll take the first one you take the setup sure so Jamie on flow through.

Yes.

Look at things pro forma as Matt mentioned in the first quarter pro forma flow through 53%. We review that is right in line with our full year guidance in the mid fifties.

And so we don't give kind of sequential guidance or quarterly guidance, but certainly we remain very confident that the flow through is intact and as expected at the beginning of the year. So we don't view the first quarter as any deviation from that.

And as we talk about flow through and like many things there.

There is an ebb and flow, but we talked about targeting 50% to 60% flow through across the course of the cycle and at some point theyre going to be at the upper end of that band and some lower but we think this is right in the middle of the fairway of where you want to be in.

And the growth phase of the cycle so.

Yes, and is consistent with the guidance.

Our guidance that we just reaffirmed so yes, but we view this as very healthy kind of pull through if you will.

And then as far as on the customer side, a little bit more skewed towards larger customers, which is in our wheelhouse, but overall the demand is coming probably in the pre planning because of the size of some of these projects.

We're having more conversations.

Throughout the first quarter and continue today and even the fourth quarter last year about making sure we're ramped up for their needs because it's.

It's one of the reasons why we feel that the larger companies are going to fare well from this mega project trend because you really have to have the resources and fleet people and capabilities too.

To be ready for these big jobs and Thats more of the conversations that we're having so a little bit more skewed towards our larger accounts, which as you. All know is a big part of our business.

Okay.

Thank you.

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

Yes, hi, good morning, everyone.

Good morning, Jeff Hey, Gerry.

Slide 34 in your slide deck is pretty interesting. So your margins have been above.

Above 45% for the past decade through a range of economic environments. I'm wondering if you could just talk about what's your level of confidence that you can maintain above 45% margins.

In the next downturn.

Obviously different views on the macro out there whether it's two quarters from now a year from now two years from now.

Can you maintain that level of performance that you've had over the past decade in the downturn.

So I guess, what I'd say is we feel very confident about the profitability of the business and that this is a structural game in terms of what the business would do in a downturn.

Critical to Dimensionalize, what kind of downturn youre talking about for multiple reasons, including that will dictate. The actions you take I think if you look at the performance we had during COVID-19.

On the face of a 9% decline in rental revenue, we had 50 basis points of margin compression EBITDA margin.

So in that kind of scenario you have seen what we can do we will lean hard on costs.

So I guess, what I'd say is we.

Feel very confident that the structural improvement call. It 500 to 2000 basis points is absolutely sustainable in terms of giving kind of a threshold of where you would get.

That's harder to say simply because it is assumptive I would also just remind people when you look at the margins, but we've done actually understates, what the core business has done that and I talk about this a lot, but if you were to back out the acquisitions, we've done since 2014.

EBITDA margin would be 51% to 52% range. So we've integrated those businesses.

Benefited us strategically financially they have been home runs from a returns perspective and the benefits of <unk>.

Delivered to the shareholders frankly, but.

They have been dilutive to margins as we've always talked about when we've done them. So I bring that up only because I think when you look at that chart Gerry It's a great chart. It does even understate how strong the profitability improvement has been in the core business not anything you'd add there no you said it well that's the only thing I would add.

Can I just pull on that M&A part of the conversation can you talk about what the specialty pipeline looks like for you folks any interesting meaningful opportunities too.

Structurally increase specialty as a percent of total from here based on the types of businesses you're looking at.

Yes, I mean, after 24% organic growth they might not need it but we are still looking and we'll link towards anything that is a new product offering as a first sector, but even creating some scaling.

And filling up the coverage model for for some of the businesses is an opportunity. We continue to look at a pretty robust pipeline, but as you can see it takes a lot to get to get one over the transom.

To make financial sense.

That doesn't mean, we're not work on the pipeline. So we don't really have anything imminent and Theres certainly nothing that we have discussed on open Mike, but we do continue to look we believe it's a strength of ours and we believe M&A and integrating M&A more importantly on cross selling products as a real real opportunity for us. So we'll continue to work that pipeline here.

I appreciate it thank you.

Thanks Jerry.

Thank you. Our next question comes from Seth Weber with Wells Fargo.

Hey, guys good morning.

I was hoping maybe just to talk a little bit about how you think about the interplay between.

Your model is shifting more towards these bigger customers in longer term contracts. How you think about the impact how we should be thinking about the impact on.

I guess, both gross margin and EBITDA margin.

I assumed rate is a little bit more competitive, but maybe there is maybe you pick up some of the margin on the backend with.

Less dropping off equipment picking up what have you less maintenance or whatever.

Are you guys thinking about longer term margins with this interplay towards more.

Bigger customers longer term projects. Thanks.

Sure as you can see in our guidance, we're not we're not planning on a lot of variability in there at all and part of it is because the point you just made yes. Your largest customers are going to get a little bit better pricing.

Relative to your spot pricing, but if we can put $100 million on a project in service it with a couple of tax and its long term rentals. So high utilization rates, that's going to come in at a lower cost to serve whether I have to split.

$1 million per smaller job over across 100 different jobs. So just the logistics everything a little bit lower cost to serve and that balances out. So we're not expecting any meaningful change in the margin profile, whether it be gross margin or EBITDA margin.

Okay. Thanks, Matt and then maybe Ted or Matt.

Your leverage is.

Below the low end of your range. The stock is obviously under pressure here or is there any.

Updated thoughts as to share buyback I know you addressed it in the press release that Youre going to complete the $1 billion. This year, but is there any.

Incremental.

Message that you would add on capital allocation towards that.

I guess the thing I'd say is we have consistently been a very comfortable and consistent buyer of our stock. So we feel very good about that philosophically from the standpoint of changing our strategy certainly not something that.

We were contemplating at this point, we've consistently been kind of a believer in dollar cost averaging systematic execution. So you saw buyback $250 million in the quarter.

Honestly exactly one quarter of the full year and 10, so we have not historically kind of leaned in are been tactical.

Some people call. It opportunistic we think that it served us well and we think frankly when you look at most of the studies on the most effective way to execute buybacks. This is the right strategy.

That's helpful guys. Thank you I appreciate it great. Thanks, Jeff.

Thank you. Our next question comes from Ken Newman with Keybanc capital markets.

Hey, good morning, guys.

Good morning, Ken.

Good morning, most of my questions have been asked but maybe just a couple of quick ones here sorry, if I missed this but did you talk about where the internal customer survey ended up moving this quarter versus last.

So we don't get too specific on it but I will say that it remains very encouraging customer confidence is not showing.

Any deviation in the last number of weeks or months. So yes. We've gotten this question and certainly people are obviously wondered about what's happens in some of the issues with small banks et cetera. I can tell you that we have not seen that manifest itself in any indicator, but including our customer confidence index.

Yes.

And then I know you've talked a little bit about.

Return on invested capital and that continuing to improve maybe.

Maybe this is more of a conversation for when you're doing your investor day, but.

Any kind of broad thoughts on how you think about driving that number up over the longer term and what are the levers you can pull especially as you kind of work through some of these margin impacts on Eric.

Yeah, No that's something we've talked about his leadership team often.

So really when we think about it and there are a lot of different ways to decompose returns, but you've got margins times capital philosophy. We think we can continue to drive improving margins for the business.

We talked about targeting 50% to 60% flow through if and as you do that is naturally accretive to your margins on the capital philosophy side, a lot of ways, we try to improve this but obviously, we've tasked ourselves with driving higher fleet productivity as Matt talked about it improving dollar you that is another way to think about capital turnover and so yes.

It is fully our expectation that we should continue to drive.

Higher margins.

And higher returns over time.

Anything you'd add I don't know just yet once again competitive.

If you look at our guidance, we're not expecting to not be able to overcome them.

Yes.

I think that answers the question.

Yeah, maybe one last one if I could just squeeze it in relative to the proceeds on OSB for fleet sales.

<unk> for the full year.

Can you just remind us where it had proceeds this quarter ended up and what's kind of embedded at the midpoint of the guide for the full year.

So for the quarter 71, 5% I think we sold $543 million of OTC proceeds were $3 88.

In terms of the full year guide, we continue to expect to sell about $2 billion of OFC. We continue to expect to generate about $1 3 billion.

Proceeds so that would translate to about 65 on the dollar as we talked about in January and those are unchanged since January .

We get into the year and you talked about increasing the volume of use we will lean on other channels that we didn't lean on in 2022 wholesale most specifically those are not as efficient means of recycling capital.

But.

We'll lean on them and as we introduce more 800 sales that will also have an effect. So that's what's kind of contemplated in that 65% versus 71%.

I guess, what I'd say in the first quarter I think very indicative of strength right. We got 71 five cents on the dollar selling 92 month old equipment.

Which.

And frankly, a lot more of it which speaks to the demand for this equipment, which we think speaks to the end markets.

I don't know if that helps but those are some of the perspectives we chair.

Yes.

I appreciate it thanks Ken.

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

Yes. Thank you good morning.

Couple from me, please firstly back to the end market and customer mix and.

Understandably the component of the nonresidential market that tends to be this tool makes things slow down.

As I said the housing commercial real estate are you able to frame just even in very broad terms how much.

Of your current base business those sorts of projects in lodging offices.

Physical retail.

Comprise.

That's the first question and then.

I'm wondering if you could talk a little bit symbol.

More detail will give some examples around.

Hum.

And the integration and I know, it's early days, but some insight into how you how is the tool yo altering sort of commercial practices that company, you talked about sort of branch consolidation and the like but.

If you could fill in some of the gaps there that would be.

Very much appreciate it thank you.

Sure I'll take the 800 part of that and then Ted can come back fill in with some of the exposure to commercial.

Specifically office I think is probably one of the areas people in most thinking about which I'll foreshadow much but when we when we think about the 800 integration as I said in the prepared remarks on track and I'll remind everybody. This deal was all about capacity and capacity and fleet real estate and people.

We're right on track with the fleet in real estate working through that we've we've got the plans on how we're going to consolidate the go to market into one go to market and in a few instances that means repurposing some of the real estate to support some of the 40 cold starts that we're talking about so still have capacity, even where we're consolidating in the market.

Because one of our stores had plenty of capacity to consolidate into we're utilizing that other real estate to help grow some of the specialty business. So that's from a real estate perspective. The fleet. We've talked about already we'll continue to work towards making that fleet look more like cars work towards that and.

And probably move some of the older stuff out as we go through the year and that was Ted pointed out open in other channels. The people side, it's been a real positive surprise.

<unk> always had the hope that we'd be able to do well as people that they integrate into our organization well and thats exceeded our expectation and they had they have quite a bit higher turnover in that business Standalone and we're glad to see that we remedied that made that turnover level look like ours.

More like ours, which is really really important part of that and once again that final piece of capacity. That's that's we're very very pleased with.

Yeah, Neil I'll take the other piece so.

Just to try to dimensionalize it I'm going to use the census bureau's construction put in place data, we don't track verticals as Granularly as Youre asking.

Easier to talk about it in the context of <unk>.

<unk> data, but on that basis. If you looked at what is defined as total commercial which is a very broad segment. It would be about 12% of total non res about $110 billion of the $900 billion market and.

In office would be a separate vertical which is about 75 billion or about 8%. So that would dimensionalize. It is about 20% now that runs the entire gamut from office buildings as I mentioned, the grocery stores gas stations et cetera et cetera.

I do think it's important to add other context to that if you look at manufacturing manufacturing is also $110 billion market about 12% of the total.

Power is a $100 billion itself at 11% and public is a $355 billion market, which is 40%. So when you think about these areas that I think people have some concerns.

Compared to the areas, where we've talked about seeing a lot of multi year economically insulated relatively insulated opportunity.

That's where that's what drives a lot of our optimism is when we look at kind of.

As I said manufacturing power public that is over 60% of total construction in areas that you are asking about or call. It 20.

That's really helpful. Thank you very much.

Yeah.

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

Thanks, operator that wraps it up for today I want to thank everyone for joining us and we look forward to our Investor day in about six weeks and speaking with you all again in late July in the meantime, if you have any questions. Please feel free to reach out to Ted at any time.

Operator, you can now end the call.

Okay.

Thank you this concludes today's call.

Appreciate 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 please note that the company's press release comments made on today's call and responses to your questions contain forward looking statements.

The company's business and operations are subject to a variety of risks and uncertainties many of which are beyond its control.

And consequently, actual results may differ materially from those projected.

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

At EPS EBITDA and adjusted EBITDA.

Please refer to the back of the company's recent investor presentations to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure.

Speaking today for United Rentals is Matt Flannery.

President and Chief Executive Officer, and Ted Grace Chief Financial Officer.

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

Mr. Flannery you may begin.

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

Three months ago after our record full year financial performance in 2022, we told you that we continue raising the bar in 2023.

And I'm pleased to say that the year is off to a strong start which you can see in the results that we shared last night.

The integration of <unk> is on track and our team's doing a great job of executing our plan and delivering for our customers.

And as always we're very pleased that we did this safely with another recordable rate below one.

Let's start by digging into our first quarter results.

Total revenue grew by 30% to a first quarter record $3 3 billion.

Within this rental revenue increased by 26%.

EBITDA increased 32% to $1 5 billion, while margins expanded to 45, 8% both first quarter Records.

And finally, our return on invested capital set a new high watermark at 13, 1%.

During the first quarter, we invested $797 million in gross Capex and year to date, we've closed two local acquisitions that nicely complement our strategy.

Combined with the actions that we took during the first quarter or fourth quarter of last year, we are well positioned to support the demand our customers see it.

Looking more closely at the first quarter demand key vertical saw growth across the board led by non res construction.

<unk> manufacturing and power.

Geographically, we saw much of the same including double digit growth in all of our regions.

Our specialty business delivered another excellent quarter with rental revenue up 24% year on year and strong growth across all lines of business led by our mobile storage team.

Within specialty we opened six new locations and are on track for around 40 cold starts this year.

These sales were another positive in the quarter with revenue up 84% year on year, largely due to the normalized volumes after holding back on sales in 2022.

And not only where we see recovery rates and margins strong but.

But the level of demand provides another positive indication of how our customers are feeling about their outlook and the need for equipment.

Turning to capital allocation, our focus remains on driving profitable growth and returning excess cash to our shareholders.

We view this as a hallmark of a good company and a means of maximizing value.

During the quarter, we returned over $350 million to our shareholders supported by the strength of our balance sheet and free cash flow generation.

Looking ahead, we see continued reasons for optimism regarding our business and the balance of 'twenty three and beyond.

Near term, we are encouraged by the momentum we're carrying into our busy season combined with a variety of positive industry indicators.

First off both internal and external measurements of customer confidence continue to point towards growth in 2023.

This is underpinned by current activity as well as the strength of customer backlogs.

Additionally, non res construction starts increased over 30% in March.

And the Dodge momentum index was up 24% year over year.

And the Abi points to growth as well, where the forward looking inquiries component continues in the right direction.

Together these factors support our reaffirmed full year 2023 guidance.

Longer term, we remain confident in our ability to capitalize on several significant multi year tailwind for our industry that we view as resilient in any economic environment.

First is infrastructure.

Early but we continue to see a ramp in spending from the federal infrastructure Bill across a variety of project types, including airports bridges and road and highway.

We're also well positioned to support our customers as they undertake projects across clean energy and advanced manufacturing funded by the inflation reduction Act.

Within private construction, we continue to see strong investments across manufacturing led by autos semi conductors and energy and power.

Combined reports indicate that these tailwind is hold the potential for over two trillion dollars of project spend in the U S over the next decade.

We're very well positioned to leverage our competitive advantages on these projects whether through the size of our network with the breadth and depth of our products and services.

Our team is prepared to serve our customers.

And drive value creation cross shareholders.

Before I wrap up I want to highlight some of the other significant achievements with team United had in the first quarter.

<unk> heard us talk about doing well by doing good.

<unk> continues to be recognized for their efforts in this area.

By all of their stakeholders, while also generating strong performance for shareholders.

So to sum it up we continue to feel good about 2023 and beyond.

As our long term strategy has us well positioned.

Our team is executing and our customers know, we're there to support them with unmatched capabilities.

Lastly, before I hand, it over to Ted I want to quickly highlight that we'll be hosting an investor day on May 31, during which we'll provide an in depth review of our strategy key initiatives.

Financial performance with a Q&A session to follow.

The event will be held both virtually and in person in New York City, and we hope that you can join us.

With that I'll hand, the call over to Ted to review our financial results and then we'll take your questions over to you Ted.

Thanks, Matt and good morning, everyone. As you saw in our first quarter press release, our team again produced excellent results that were consistent with our expectations and importantly position us well for the full year.

And I think Matt framed things well in saying that we continue to feel good about the 2023 and beyond given the market opportunity, we see our strategy our teams consistently strong execution and our customers knowledge that we are here to serve them with unmatched capabilities.

One quick note before I jump into the numbers the figures I'll be discussing are as reported except in the few instances, where I'll call them out as pro forma.

Adjusted to include the <unk> first quarter 2022, Standalone results in the year ago period.

So with that said first quarter rental revenue was a record at $2 74 billion.

That's an increase of $565 million or 26% year over year.

Within rental revenue increased by $469 million or 26, 1%.

Our average fleet size increased by 25, 6%, providing a $460 million benefit and fleet productivity increased by 2% as reported adding another $36 million.

This was partially offset by our usual fleet inflation of one 5% or $27 million.

Also within rental ancillary revenues were higher by $93 million or 28, 3% and re rent provided an additional $3 million or six 1%.

I'll note that on a pro forma basis rental revenue was up a robust 16, 6% and fleet productivity increased by a healthy five 9%.

First quarter <unk> sales increased by 84% to $388 million as we returned to a more normalized volume after holding onto fleet throughout much of 2022.

Adjusted <unk> margins increased by 170 basis points to 59, 5% supported by continued strong retail pricing.

Moving to EBITDA adjusted EBITDA in the quarter exceeded $1 5 billion.

Another first quarter record, reflecting an increase of $364 million or 32%.

The dollar change includes a $313 million increase from rental within which <unk> contributed $285 million.

So Larry added $29 million and re rent was down $1 million.

Outside of rental used sales added about $109 million to adjusted EBITDA, while other non rental lines of businesses contributed another $5 million.

SG&A increased by $63 million due primarily to higher commissions and the continued normalization of certain discretionary costs as a percentage of sales. However, SG&A declined by 120 basis points year on year to 11, 6% of total revenue.

Looking at first quarter profitability, our adjusted EBITDA margin increased 70 basis points on an as reported basis and 160 basis points on a pro forma basis to a first quarter record of 45, 8%.

This translates to 48% flow through on an as reported basis and better than 53% on a pro forma basis.

And finally, adjusted EPS was $7 95, another first quarter record.

The year over year increase of $2 22 per share were almost 39%.

Turning to Capex gross rental Capex was.

$797 million and net rental Capex was $409 million. This represents.

<unk>, an increase of $138 million and net capex year over year and positions us well for the growth we see in 2023.

Looking at return on invested capital and free cash flow break set a new record at 13, 1% on a trailing 12 month basis.

40 basis points sequentially, and 220 basis points year on year.

I'll add that was 310 basis points above our current weighted average cost of capital.

Free cash flow it was another good story, but the quarter coming in at $478 million.

Our LTM free cash margin of 13, 5%.

All while continuing to fund significant growth.

Turning to the balance sheet, our leverage ratio at the end of the quarter improved to one nine times, representing a 10 basis point reduction both sequentially and year over year.

And our liquidity at the end of March exceeded $2 $65 billion.

With no long term note maturities until 2027.

Notably all of this was after returning $353 million to shareholders in the quarter, including 103 million via dividends and $250 million through share repurchases.

Yes.

Looking forward you saw last night, we reaffirmed our guidance across all metrics.

Just on the diverse momentum, we see across our markets and what we hear from our customers. We remain confident that 2023, it will be a record year for the company.

Just to review total revenue is expected in the range of $13 7 million to $14 2 billion implying.

Implying full year growth of approximately 20% at midpoint and pro forma growth of 12%.

Within total revenue I'll remind you that our used guidance is implied at $1 3 billion.

Our adjusted.

<unk> EBITDA range remains six six to $6 85 billion.

On an as reported basis at mid point this implies roughly flat full year, adjusted EBITDA margins and flow through of around 48%.

On the fleet side, our gross Capex guidance remains three three to $3 $55 billion.

With net Capex of two to two 5 billion.

And finally, our free cash guidance is two 1% to three 5 billion, which.

Which is before dividends repurchases and bolt on M&A.

So with that let me turn the call over to the operator for Q&A operator, Please open the line.

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.

Once again that is star one to ask a question.

Our first question comes from Rob Wertheimer with Melius research.

Hi, Thanks, and good morning, everybody.

Hey, Rob.

So my first question is basically on demand and you gave a pretty good overview, but if we just leave aside the Dodge and all the surveys and everything and just think about what you're seeing on the ground and hearing from your customers are you seeing the Mega project funding start to flow through are you seeing lots of activity and sort of quoting or proposals on.

And does it give you any differential I guess versus other years look into supply demand as we move through the year does that continue to look tight pricing continue to look well supported by supply demand dynamic as we go through the balance of the year.

Sure So I'll start with the demand portion.

Whether it be through the broad based demand that I discussed in the opening comments, where every one of our business units geographically and now all of our specialty businesses showed double digit growth in the quarter and Thats a continued momentum from what we've been saying for quite a while now.

And all of the verticals that we cover remained positive in the quarter Theres actually one to be technically correct disaster recovery was down a little bit, but that was coming off of a 132% comp growth in the <unk>.

First quarter last year, so and it's 1% of our business. So basically all the verticals all the geographies all the product lines.

<unk> remain strong very strong demand so we feel good about that.

We're not going to get into individual components of it but we feel good about right. We feel good about the constructive environment and we feel good about being able to reaffirm our guidance because of that demand.

Yes, Rob this is Todd I'll take that one that is an indication of the impact of <unk> and just to be clear that was in line with expectations. When you look at it.

Those margins that reflects the fact that we bought a business that we knew had lower margins.

We integrate it.

That's the effect you see.

Thanks, Ed.

Thanks, Rob.

Thank you. Our next question comes from David Raso with Evercore ISI ISI.

Thank you, yes, I think.

For most people the drag that <unk> brought to the reported numbers was a bit of a surprise the magnitude of it and I'm just trying to get a sense of.

Productivity going forward and I know the rate comp gets harder.

But the improvement you would think you'd have around an acorn and the smaller acquisition Abel So, particularly <unk> can you tell us about why the drag is that much and.

And the reported numbers the whole year is it going to be sub two because the base case had been productivity would slow through the year, but now that we have a reported number of two.

I think we're just trying to figure out is productivity flat to down by the end of the year.

Yes, So let me.

So let me help you with so first off I will I'll start by urging everybody look pro forma right that puts the 800 base in there that's how we manage the business with how we're taking that asset base, putting the base of that into the.

Base here that we're comparing to so not having that basically it creates that disconnect of let's call. It about four points.

<unk> four <unk>.

Gap between pro forma and as reported we believe will continue on and I'll just I'll try to explain it simply if you think about the amount of capital that <unk> had that were adding to the base year.

And the amount of revenue rent revenue they generated on it it was about.

<unk>, 40% about 40 cents on every dollar when you roll that into our experience, which is more like 60% on the dollar Thats dilutive effect and we think it's going to be somewhere in that 4% gap between what we report as reported and what we report pro forma for the rest of the year. So that's.

Yes that baseline of what we add and what a baseline as market change because it already happened its baseline now any improvement that we can get on those assets that will show up in our improvement in our fleet productivity as you all know by this time the X scrambled right that fleet.

In our overall business, we consolidate stores, we have one single go to market. So all of that we consolidate customer statements that were overlapping so that's all going to be in the improvement that will continue to report on an as reported and pro forma basis does that explain that gap for you well enough David.

That wouldn't be added back yes, they bought a bank.

Out of the fleet.

Alright, yes, 10% of your fleet now right. So it's not immaterial, but it's not.

Overtime certainly the idea is we will narrow the gap I mean that was part of the opportunity right, we talked about being a better owner of assets.

And it is.

But it takes time right. So certainly when we looked at that kind of crude calculation of $1 eight.

We don't think there'll be at 40% forever, our intent is to get them closer to something appropriate over time, but it will take time.

That is true of every acquisition so.

Yes, so where we'll start to see improvements as we get time you'd better as we get.

Cross selling better that's not all going to show up in that that it will create will create a little bit better pro forma but it's all going to be mixed into your point only 10% of our overall performance the real needle mover LP improvements that we get on our own asset base right and the other 90%. So we can walk through the math, but it's.

It's not going to be exactly four but it's going to be somewhere between three five and four for the balance of the year is our expectation.

And once again.

Yes sure.

I was just kind of trying to think about 2024, a little bit.

You hear some of your suppliers, having taking orders for 24.

People are curious about projects starting to hit the ground that have kind of a multiyear aspect to them.

By no means am I asking for 'twenty for guidance, but I'm, just trying to get a sense of when you went through your capex thoughts for the year, what youre hearing from suppliers business beyond 'twenty three could you give us a little color on kind of what youre, what youre sitting on right now when you think about 24 projects willingness to order earlier working with kind of thing.

Three year kind of conversations, which we haven't historically heard in the industry. I think they were just trying to figure out how to think about beyond 'twenty three.

Yes, we think that the supply chain will get better next year. So we don't think we will need to pull forward as much as we did if you remember we brought in.

Probably 700 extra in Q4, and another 400, let's say extra in Q1, so we still feel that we needed to do that this year, we're not expecting that for next year.

What would change that if we started to see a lot of slippage throughout the peak season. This year than maybe we would have to revisit with vendors, but we think we'll get back to more normalized talk about this in the end of the third quarter fourth quarter type conversation, making sure. We're securing slots now we're talking to them all along but as far as trying to put hard numbers down we don't we don't.

The supply chain will be in a position for us to have to do that today.

On the demand side as well, though to anything you can tell us about multiyear projects.

Yeah, I think about it or.

Please go ahead, yes.

Yes, I mean, if projects I just had a couple of EV outside of a couple of electric car plants. Just last month myself, where these are going to be multiyear projects require a lot of equipment. So not only do we see it in our reporting and in the starch, but we expect as I said in the opening remarks.

A lot of these mega projects youre going to be multi year projects, we think infrastructure is going to be.

<unk> spend and we don't really think the IRI has even started to manifest. So that's all future tailwind tariff yet anything that yes, David I think we talked about this at your conference and to some degree, but certainly when we think about infrastructure. As an example, alright at run rate that legislation is intended to produce about $100 billion a year of construction of infrastructure.

<unk> spend.

We're still in that ramp phase. So obviously, we're not going to get anything close to that in 2023.

That provides a tailwind in 2024 right so just to.

Dimensionalize numbers, if you thought that you got half of that spend in 2023.

An incremental $50 billion of infrastructure in the context of a $900 total non res construction market in the U S. When you get to 2024, you get the second half of that as you get to an annualized run rate right and we've talked about this largest across IRI.

<unk> and LNG is kind of five key tailwind. So certainly those are at a high level. The tailwind as we think about coming back to the Capex question.

The visibility in the trajectory of those will imply that 'twenty four will be critical to dictating how do we think about capex in the back half of this year.

Because that will determine obviously, how we want to have the fleet positioned.

Not anything you'd add.

While <unk> does that help David.

Yes, I appreciate the time I'll circle back with any further questions. Thank you.

Nick.

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

Thanks, Good morning wanted to just come back to the margins for a minute. So the rental gross margin drags from <unk> that we had in the quarter. How one time ish would you say are those drags in other words as we model those gross margins year over year for the rest of the year is that still a reported year over.

For year drag.

Yes, it will be and just as a reminder, if you look at their business.

On an LTM basis, when we bought them they had a reported EBITDA margin in the mid <unk>. So obviously, that's considerably below where we were.

Even synergize they would be below that so that will be a.

Fact that lasts until we lap them to put it in perspective, if you look at the gross margin reported down 170 million year on year, Steve on a pro forma basis. It was up 10 basis points, not really dimensionalize, what that impact of <unk> was in the quarter that'll be a lasting effect as we kind of progressed through 2023.

Where you see that really specifically is in the rental the gen rent segment gross margin.

So does that help kind of answer the question.

Yes, it does but so does that 170 kind of get smaller over the course of the year or that's a kind of a steady 170.

So certainly as the big Delta aside from the fact that it's lower margin as you get the synergies coming in.

One thing to consider but we're talking about this in isolation.

Right. Okay. So I guess then we're there and you may have answered this before but were there any other drags on gross margins outside of a hearne unlike lower.

Elevation or anything else.

No.

If you isolate it and there is always ebbs and flows of the cost so.

It's really a hard where you can see that is.

The Gen rent gross margin that would go from.

Let's say down $3 20 year on year to down 100 pro forma the pro forma only includes <unk> in the year ago period, but there are other accounting adjustments fair market value on the fleet as an example that that explain the majority of that 100 basis point pro forma number.

Another call. It shorter term one time expenses as we get the fleet in shape as we get their facilities integrator that really explain the difference.

Used equipment at the backend of the year.

So how do we think about that cadence for the rest of the year.

Yes.

Think about a little bit less in two and three and then ramping it back up again and for as it comes off Brian Brian and makes sense Q1 and for your lower utilization periods. So it's when you have the opportunity to sell the fleet a little easier.

Perfect. Thank you.

Thank you.

Yes.

Our next question comes from Jamie Cook with Credit Suisse.

Hi, Good morning, I guess, just two follow up questions just back on the margin again CAD.

When do you expect to get back to more normalized incremental margin and the MS. Vickie can we expect that sort of by 2024 as we integrate <unk>.

And then just my follow up question I know you are seeing broad based strength sort of everywhere is there any difference in the type of customer or the size of customer maybe the larger customers are stronger just because they might have.

More visibility into some of these larger <unk>.

Restructure projects Youre talking about so anything on the customer side as well thanks.

Sure Matt I'll take the first one I'll take the second sure so Jamie on flow through.

We look at things pro forma as Matt mentioned in the first quarter pro forma flow through 53%. We would view that is right in line with our full year guidance in the mid fifties.

And as we talk about flow through and like many things.

There is an ebb and flow, but we talked about targeting 50% to 60% flow through across the course of the cycle and at some point, they're going to be at the upper end of that band and some lower but we think this is right in the middle of the fairway of where you want to be in.

And the growth phase of the cycle so.

Yes, and is consistent with the guidance.

The guidance that we just reaffirmed so yes, but we view this as very healthy kind of pull through if you will.

We're having more conversations.

Throughout the first quarter and continue today and even the fourth quarter last year about making sure we're ramped up for their needs because it's.

It's one of the reasons why we feel that the larger companies are going to fare well from this mega project trend because you really have to have the resources and fleet people and capabilities too.

To be ready for these big jobs and as with more of the conversations that we're having so a little bit more skewed towards our larger accounts, which as you. All know is a big part of our business.

Jim.

Thank you.

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

Yes, hi, good morning, everyone.

Good morning, Jeff Hey, Gerry.

Slide 34 in your slide deck is pretty interesting. So your margins have been.

45% for the past decade through a range of economic environments. I'm wondering if you could just talk about what's your level of confidence that you can maintain above 45% margins in the next downturn.

Now ill turn.

Obviously different views on the macro out there whether it's two quarters from now a year from now two years from now.

Can you maintain that level of performance that you've had over the past decade in the downturn.

So I guess, what I'd say is we feel very confident about the profitability of the business and that this is a structural game in terms of what the business would do in a downturn.

On the face of a 9% decline in rental revenue, we had 50 basis points of margin compression EBITDA margin.

So in that kind of scenario you have seen what we can do will lean hard on costs.

So I guess, what I'd say is we.

We feel very confident that the structural improvement call. It 500 to 2000 basis points is absolutely sustainable in terms of giving kind of a threshold of where you would get that that's harder to say simply because it is assumptive.

I would also just remind people when you look at the margins.

John actually understates, what the core business has done that and I talk about this a lot, but if you were to back out the acquisitions, we've done since 2014.

Our EBITDA margin would be 51% to 52% range. So we've integrated those businesses.

It benefited us strategically financially they've been home runs from a returns perspective and the benefits are delivered to the shareholders frankly, but.

No.

Well, that's the only thing I would add.

Can I just pull on that M&A part of the conversation can you talk about what the specialty pipeline looks like for you folks.

Interesting meaningful opportunities to structurally.

Structurally increase specialty as a percent of total from here based on the types of businesses you're looking at.

Yes, I mean, after 24% organic growth they might not need it but we are still looking and we'll link towards anything that is a new product offering as our first filter, but even creating some scaling.

Make financial sense.

That doesn't mean, we're not work on the pipeline. So we don't really have anything imminent and Theres certainly a thing that we have discussed on open Mike, but we do continue to look we believe it's a strength of ours and we believe M&A and integrating M&A more importantly on cross selling products as a real real opportunity for us. So we'll continue to work that pipeline here.

I appreciate it thank you.

Thanks Jerry.

Thank you. Our next question comes from Seth Weber with Wells Fargo.

Hey, guys good morning.

I was hoping maybe just to talk a little bit about how you think about the interplay between.

Your model is shifting more towards these bigger customers in longer term contracts and how you think about the impact how we should be thinking about the impact on.

I guess, both gross margin and EBITDA margin.

I assumed rate is a little bit more competitive, but maybe there's maybe you pick up some of the margin on the backend with.

Less dropping off equipment picking up what have you less maintenance or whatever just how are you guys thinking about longer term margins with this interplay towards more.

Bigger customers longer term projects. Thanks.

Relative to your spot pricing, but if we can put $100 million on a project and services with a couple of tax and its long term rentals. So high utilization rates, that's going to come in at a lower cost to serve whether I've split.

$1 million per smaller job over across 100 different jobs right. So just the logistics everything a little bit lower cost to serve and that balances out. So we're not expecting any meaningful change in the margin profile, whether it be gross margin or EBITDA margin.

Okay. Thanks, Matt and then maybe Ted or Matt.

Your leverage is.

Below the low end of your range. The stock is obviously under pressure here or is there any.

Updated thoughts as to share buyback I know you addressed it in the press release that Youre going to complete the $1 billion. This year, but is there any.

Incremental.

Message that you would add on capital allocation towards that.

I guess the thing I'd say is we have consistently been a very comfortable we consistent buyer of our stock. So we feel very good about that philosophically from the standpoint of changing our strategy certainly not something that.

We were contemplating at this point, we've consistently been kind of a believer in dollar cost averaging systematic execution. So you saw us buyback $250 million in the quarter, obviously exactly one quarter of the full year and 10. So we have not historically kind of leaned in are been tactical simply.

We'll call it opportunistic we think that it served us well and we think frankly when you look at most of the studies on the most effective way to execute buybacks. This is the right strategy.

That's helpful guys. Thank you I appreciate it great. Thanks, Jeff.

Thank you. Our next question comes from Ken Newman with Keybanc capital markets.

Hey, good morning, guys.

Good morning, Ken.

So we don't get too specific on it but I will say that it remains very encouraging and customer confidence is not showing.

Any deviation in the last number of weeks or months.

We've gotten this question and certainly.

Obviously wonder about what's happens in some of the issues with small banks et cetera, I can tell you that we've not seen that manifest itself in any indicator, but including our customer confidence index.

Yes.

And then I know you've talked a little bit about.

Return on invested capital in that.

Moving to improve maybe.

Maybe this is more of a conversation for when you're doing your investor day, but.

Yeah, No that's something we've talked about his leadership team often.

So really when we think about it in a lot of different ways decomposed returns, but you've got margins times capital philosophy. We think we can continue to drive improving margins for the business.

That is another way to think about capital turnover and so yes. It is fully our expectation that we should continue to drive.

Higher margins.

And higher returns over time.

Anything you'd add I'll just once again, if you look at our guidance, we're not expecting that might be able to overcome them.

Yes.

I think that answers the question.

Yeah, maybe one last one if I could just squeeze it in relative to the proceeds on OSB for fleet sales.

For the full year.

Can you just remind us where it had proceeds this quarter ended up and what's kind of embedded at the midpoint of the guide for the full year.

So for the quarter 71, 5% I think we sold $543 million of OFC proceeds were $3 88.

In terms of the full year guide, we continue to expect to sell about $2 billion of OFC. We continue to expect to generate about $1 3 billion.

Proceeds so that would translate to about 65 from the dollar as we talked about in January and those are unchanged since January .

But yes.

We will lean on them and as we introduce more <unk> sales that will also have an effect. So that's what's kind of contemplated in that 65% versus 71%.

I guess, what I'd say in the first quarter I think very indicative of strength right. We got 71 five cents on the dollar selling 92 month old equipment.

Which.

And frankly, a lot more of it which speaks to the demand for this equipment, which we think speaks to the end market. So I.

I don't know if that helps but those are some of the perspectives we chair.

Yes.

I appreciate it thanks Ken.

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

Yes. Thank you good morning.

Couple from me please.

Back to the end market and customer mix and.

Understandably the component of the nonresidential market that tends to be the only this tool makes things slow down.

<unk> sort of housed in commercial real estate.

Are you able to frame just even in very broad terms how much.

Of your current base business those sorts of projects in lodging offices physical retail those might comprise.

The first question and then I'm wondering if you could talk a little bit.

Some more detail I'll give some examples around.

Hum.

And the integration and I know, it's early days, but some insights into how you how is the tool yo altering sort of commercial practices that company, you talked about sort of branch consolidations and the like but.

But if you could fill in some of the gaps there that would be.

Very much appreciate it thank you.

Sure I'll take the 800 part of that and then Ted can come back fill in with some of the exposure to commercial.

Specifically office I think is probably one of the areas people in most thinking about which which I'll foreshadow much but when we when we think about the <unk> integration as I said in the prepared remarks on track and I'll remind everybody. This deal was all about capacity and capacity and fleet real estate and people.

We're right on track with the fleet in real estate working through that we've got the plans on how we're going to consolidate the go to market to one go to market and in few instances that means repurposing some of the real estate to support some of the 40 cold starts that we're talking about so still have capacity, even where we're consolidating in a market.

And probably move some of the older stuff out as we go through the year and that was Ted pointed out opened in other channels. The people side, it's been a real positive surprise.

<unk> always had the hope that we'd be able to do well as people that they integrate into our organization well and thats exceeded our expectation.

I haven't quite a bit higher turnover in that business Standalone and we're glad to see that we remedied that made that turnover level look like ours.

More like ours, which is really really important part of that and once again that final piece of capacity. That's that's we're very very pleased with.

Yes, Neil I will take the other piece so.

Just to try to dimensionalize it I'm going to use the census bureau's construction put in place data, we don't track verticals as Granularly as Youre asking.

Easier to talk about it in the context of government data, but on that basis. If you looked at what is defined as total commercial which is a very broad segment. It would be about 12% of total non res about $110 billion of the $900 billion market.

And office will be a separate vertical which is about 75 billion or about 8%.

That would dimensionalize. It is about 20% now that runs the entire gamut from office buildings as I mentioned, the grocery stores gas stations et cetera et cetera.

I do think it's important to add other context to that if you look at manufacturing manufacturing is also $110 billion market about 12% of the total.

Power is $100 billion itself at 11% and public is a $355 billion market, which is 40%. So when you think about these areas that I think people have some concerns.

Compared to the areas, where we've talked about seeing a lot of multi year economically insulated relatively insulated opportunity.

That's where that's what drives a lot of our optimism is when we look at kind of.

As I said manufacturing power public that is over 60% of total construction in areas that you are asking about or call. It 20.

That's really helpful. Thank you very much.

Yeah.

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

Operator, you can now end the call.

Yeah.

Okay.

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

Q1 2023 United Rentals Inc Earnings Call

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