Q2 2023 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 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 Dot com.
Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward looking statements in order to reflect new information or subsequent events circumstances or changes in expectations.
You should also note that the company's press release and today's call include references to non-GAAP terms, such as free cash flow.
At EPS EBITDA and adjusted EBITDA.
Please refer to the back of the company's recent investor presentation.
To see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure.
Speaking today for United Rentals is Matt Flannery.
President and Chief Executive Officer, and Ted Grace Chief Financial Officer.
I will now turn the call over to Mr. Flannery.
Flannery you may begin.
Thank you operator, and good morning, everyone. Thanks for joining our call.
As you've heard us say since the beginning of the year.
2023 it's about raising the bar off of last year's record results in our second quarter performance across growth profitability.
And returns provides evidence of that.
I'm pleased with how the year's playing out including the adherent integration, which remains on track.
Of course key to all of this is our employees who are doing exceptional job supporting our customers every day.
Without them, we wouldn't be able to generate the results we consistently deliver.
And I'm pleased to report that once again, they've done this with safety at the forefront.
Our companywide recordable rate remained well below one in the second quarter.
Importantly, our growth shows that we continue to outpace our underlying markets as we leverage our competitive advantages to provide a ceria level superior level of customer service.
So let's dig into the results.
Total revenue rose by 28% year on year to a second quarter record of almost $3 $6 billion.
Within this rental revenue grew 21% as reported with broad based demand across verticals regions and customer segments while.
While fleet productivity increased two 1% on a pro forma basis.
Adjusted EBITDA increased 29% to a second quarter record $1 $7 billion driving solid margin expansion.
Adjusted EPS grew by 26% to a second quarter record of $9.88 and critically our return on invested capital set another new high watermark at 13, 4%.
In short we're on track for another record year, driven by robust customer activity.
The increases to our full year guidance reflect our continued confidence in customer demand.
Used equipment sales were another highlight in the quarter.
We generated a record second quarter proceeds of $382 million.
The retail market remains very strong and we also broadened our channel mix as we discussed we would last quarter.
Combined with the improvements we've seen across most of the supply chain. This has allowed us to refresh our fleet by rotating some of the older assets out.
As you saw rental Capex totaled one point to $5 billion in the quarter in line with our expectations and helping to make sure that we have the capacity our customers need to support their projects today and going forward.
And as I alluded to earlier the integration of AIT her and remains on track.
Teams have come together, especially well in our second quarter results reflect the ongoing improvements in the efficiency of their business. At this point, we're focused on optimizing the combined branch network and fleet, which should be completed by year end.
Now, let's take a closer look at the second quarter demand.
Key vertical saw broad based growth led by industrial manufacturing metals and minerals empower now.
Non res construction was also up double digits.
Within this our.
Our customers kicked off new projects across the board, including numerous C V plants semiconductor plants solar power facilities infrastructure projects and for the Buffalo Bill fans out there a new stadium.
Geographically, we saw growth in all of our regions on both the reported.
And pro forma basis, and our specialty business delivered another excellent quarter with rental revenue up 17% year on year organically.
And double digit gains across all major categories.
Within specialty we opened 19, new locations in the second quarter and are on track for the 40 cold starts this year.
Turning to capital allocation.
We returned over $350 million to shareholders during the quarter through share buybacks and dividends are on track to return over $1 $4 billion of cash to shareholders. This year and.
Our balance sheet remains in excellent shape.
Looking ahead to 2020 2023 is on track to be another record year across a variety of kpis, including revenue EBITDA EPS and returns.
We're encouraged by the customer sentiment and external indicators.
Which point to growth and give us confidence in our updated guidance.
For example, the a b c's contractor confidence index remains strong across the second quarter as did its backlog index.
The Dodge momentum index was up 19% year over year in June well non res construction employment growth also remained solid.
And most importantly, our own customer confidence index continues to reflect their optimism.
Beyond 2023, we remain positive on the longer term outlook, driven by key tail wins, including infrastructure industrial manufacturing and energy and power.
As we shared at our Investor day in May we spent the last decade building unique and diverse capabilities that position us very well for the two trillion plus dollars of construction projects underpinned by these tailwind over the next decade.
Put simply our advantages across scale complex solutions technology and people put us in a first call position.
We believe this provides a platform for leveraging our resilient business model and pursuing continued growth both organically and through M&A.
Finally, I want to highlight our new sustainability report, which we released yesterday, while theres a lot of great content in that report and we're very proud of this year at especially pointed out to the work our team has done quantifying how the rental business model aligns with key aspects of sustainability.
For example, less equipment needs to be manufactured because of rental which has clear benefits while the equipment that we have in our fleet also helps our customers reduce their emissions intensity based on its younger age and greater fuel efficiency.
Not only does this benefit our customers. We believe that will also benefits our employees the communities, we're operating in and our shareholders.
Before I hand, the call over to Ted I'll sum up today by saying I'm very pleased with how the year is playing out we entered 2023 with high expectations and as you can see through our results and that's what we're delivering.
We feel good about the rest of the year and what's ahead for United rentals, and our investors and with that I'll hand, the call over to Ted before we open the line for Q&A over to you.
Thanks, Matt and good morning, everyone.
You saw in our second quarter release, our team produced strong results that were consistent with our expectations and keeps us on track for another record year.
And as we shared at our Investor Day, we continue to feel very good about our prospects beyond 2023 based on the tailwind we've discussed extensively.
One quick reminder, before I jump into the numbers as usual the figures I'll be discussing are as reported except where I called them out as pro forma which are adjusted to include 800 Standalone results from last year.
So with that said, let's get into the details.
Quarter rental revenue was a record $2 $98 billion, that's a year over year increase of $519 million or 21% supported by diverse strength across our end markets.
Within rental revenue increased by $443 million or 22%.
Our average fleet size increased by 25, 5%, providing a $514 million benefit which was partially offset by a decline in as reported fleet productivity with 2% or $41 million and our usual fleet inflation of one 5% or $30 million.
Also within rental ancillary revenues were higher by $75 million or 19, 3% and re rent provided an additional $1 million.
I'll note that on a pro forma basis rental revenue was up a robust 12, 4% year over year and fleet productivity increased two 1% as industry discipline continues continues to support a healthy rate environment.
Turning to use results, our second quarter revenue increased 133% to $382 million as we continued to return to more normalized volumes, while our second quarter adjusted use margin of 57, 3% reflected healthy pricing.
Notably as we said we would we've expanded our channel mix to support these higher used volumes.
During the quarter retail accounted for 65% of our mix consistent with its longer term proportion versus 90% last year.
Within this shift we doubled our retail volume and remains a very strong demand environment.
Moving to EBITDA adjusted EBITDA for the quarter was just under $1 $7 billion, another second quarter record, reflecting the increase of $384 million or 29%.
The dollar change includes a $310 million increase from rental within which <unk> contributed $298 million ancillary added $15 million and re rent was down $3 million.
Outside of rental used sales added $117 million to adjusted EBITDA, while other non rental lines of businesses contributed another $8 million.
SG&A increased $51 million due primarily to increases in variable costs, such as higher commissions.
As a percentage of sales however, SG&A declined 180 basis points year on year to a second quarter record low of 10, 6% of total revenue so nice efficiency there.
Looking at second quarter profitability, our adjusted EBITDA margin increased 40 basis basis points on an as reported basis and increased 130 basis points on a pro forma basis is 47, 7%.
This translates to an as reported flow through of 49% and pro forma flow through of better than 54%.
And finally, adjusted EPS increased 26% to a second quarter record of $9 88.
Shifting to Capex gross rental Capex was one point to $5 billion in net rental capex was $869 million.
That's an increase of $161 million and net capex year over year supporting our continued growth in 2023.
Year to date gross Capex has totaled roughly $2.05 billion. This equates to about 60% at the midpoint of our full year rental capex guidance, which is where we expect it to be at this time of the year.
Turning to return on invested capital and free cash flow right, which as you know is a critical metric for us set a new record at 13, 4% on a trailing 12 month basis.
That's the 30 basis points sequentially, and 190 basis points year on year and remains well above our weighted average cost of capital.
Free cash flow also remains a good story, but the quarter coming in at $340 million or a trailing 12 month free cash margin of 12, 3%.
All while continuing to fund significant growth.
Moving to the balance sheet, our net leverage ratio at the end of the quarter improved to an all time low of one eight times or a decline of 10 basis points sequentially and 20 basis points year over year.
Our liquidity at the end of June exceeded $2 $7 billion with no long term maturities until 2027.
Notably this was after returning $352 million to shareholders in the quarter, including $250 million through share repurchases and $102 million via dividends.
So, let's look forward and talk about our increased guidance, which reflects our continued confidence that 2023 will be a record year.
Total revenue is now expected in the range of 14 to $14 3 billion.
Implying a $200 million increase at midpoint and full year growth of around 21, 5% and pro forma growth of roughly 13, 5%.
Within total revenue are you sales guidance is now implied around 1.4 of $5 billion or an increase of $115 million, reflecting better than expected pricing and stronger than expected retail demand.
We've increased our guidance for adjusted EBITDA by $100 million at midpoint to a range of $6 75 to $6 $9 billion.
This continues to imply as reported flow through of around 48% and promo pro forma flow through in the mid fifties.
On the fleet side, we've narrowed our gross capex range by $50 million, it's between 335 and $3 $55 billion.
Given the increase in our used sales expectations. This now implies net capex of between 1.9 and $2 $1 billion.
And finally, we are increasing our free cash flow guidance by $175 million at midpoint to between 2.3, and $2 5 billion, which is before repurchases and dividends that together should return over $1 $4 billion of cash to our investors or better than $20 per share.
So with that let me turn the call over to the operator for Q&A operator, Please open the line.
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Scott are you there.
Yeah.
Hi can you hear us.
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We'll take our first question from David Raso Evercore ISI.
I was wondering if you could help us with how you're thinking about fleet productivity the.
The rest of the year and maybe a little more color on what drove the pro forma decline from $5 nine down to two for the second quarter.
Sure David its Matt How're you doing.
So as far as what drove the pro forma down I mean, it's.
We're pleased with pro forma being up two 1% we understand some of the concern out there is that telling the street something so I'll be clear I'll be clear about a few things since we don't actually give you the whole numbers.
We'd said, we talked to you qualitatively about it this is not a demand or a rate issue. The industry still remains in really good shape I think you're seeing that through the others that report the actual numbers race race environment is strong and frankly the discipline in the industry is strong and demand is supporting that so that's first off this is Rick.
A time issue for US we made the decision to Frontload fleet. This year to tamper down the very very aggressive time utilization, we've been running frankly for a couple of years.
And we didn't really think it was responsive to our customers' needs and we were doing a little bit too much hand to mouth, putting putting big relationships at risk, we werent comfortable with that so we front loaded our fleet you remember back in the fourth quarter last year and that's on top of bringing in the 800 fleet.
We're very pleased with how it's working out and just to put it in context, although I'm not going to.
Revert to giving back haul numbers are actual time utilization in Q2.
It was higher than pre COVID-19 averages and higher than the last time. We gave you guys time utilization in 2019. So this is still strong time utilization just compared to the very frothy almost inflated timing that we ran last year, because we couldn't get to sleep finally enough.
It's it's dragging a comp issue and that's that's all this is.
Okay.
And regarding the rest of the year, how should we think about year over year fleet productivity, that's baked into the guide.
Yeah, I think you'll see these dynamics play through in Q3 similar to what they did and in Q2, we'll continue to have seasonal bell, but they were seasonal build into comps as well. So we think these dynamics will play through and.
Very comfortable we we continue to see strong rate environment. We continue to we'll continue to bring in fleet to support this demand in Q3, and so we think the dynamics will be similar.
So it's a fleet productivity similar in the back half of the year as the second quarter.
Where does that leave you at the end of the year as we think about 'twenty for you you made the comment just now about time Ute on a historical basis are still sort of above above average is that how you see the full year time, you just trying to think about your confidence in starting the conversations for rates for 24, where are we exiting.
You know our thoughts on this time you level versus history.
Yeah, I'd be clear, we want we don't want to get into forecasting ahead that far but I will tell you. When we said this in magazine Investor Day, We do view 24, as a broker and if you do the math on the capital Guide, we gave in and where we started the year, we're going to start the year with more more fleet.
To support growth, we do think the end markets will come out on an exit rate. This year at strong you know strong end market demand, we still believe that so and then from there we will build up our plant through our planning process towards the end of this year, we'll build up what we what we think we need some more growth Capex. We do expect that will continue this will be a more.
Normalized replacement Capex youre seeing that in this quarter as well, we expect to do that next year as well we want a place you know somewhere around 10% to 12% of our fleet per year and I think this new number puts us right in the center of that of that target.
David This is Sam the one thing I might add is Matt made the comment about second quarter tiny relative to history just to be clear for the full year. We would expect the same to be true relative to history 2023 will be a strong time Ut air.
Okay. That's that's helpful and on the rest of the year a guide the implied I'm talking reported deep and wide EBITDA margins are down a little bit from the second half of last year.
But in the first half of this year. Your EBITDA margins were 50 bps higher than a year ago. So just curious why the margins would be down year over year in the second half, but having been up in the first half of this year.
Yeah, So I'd say a couple of things there David one we always caution people against anchoring the midpoint, but hey.
<unk> is really kind of the factor that people need to be thinking about because they think about first half and second half dynamics year on year.
You know we've been clear to talk about pro forma flow through in the mid fifties, we've been delivering that and we would expect that to be true in the back half of this year, which will be driving margin expansion on a pro forma basis, which as Matt said it the way we think about our business.
And last quick one sorry to hog the call here apologies, but your implied free cash flow the rest of the year and your EBITDA. It would imply that the leverage the financial leverage at the end of the year is at one six.
So to get back to even the low end of your target of two to three for leverage would imply you have about $2.8 billion to put to work just to get to the low end just curious how you're thinking about deploying that and again that already counts for $500 million repo. The rest of the year and a couple hundred million of dividend. So this is above and beyond that.
You are.
Correct. It does and this is one of the things we've been working on internally and we'll work on it further as the year progresses.
For 2023 kind of our allocation of capital is committed as you know as it relates to next year, we will have decisions to make.
Certainly we'll have an update for where we end up come January I would expect.
We're left with a couple of options and we've talked about this publicly.
On one hand, there's the potential that we could lower the range, which is something we talked about when we introduced the new capital allocation strategy in 2019 or you could.
Keep it where it is that's one of the things we're working on trying to figure out what's the best way to allocate capital to drive shareholder value. So there's not much more specific I can add right now but certainly.
We're thinking about it.
Alright, Thank you very much I appreciate it thanks David.
We'll take our next question from Rob Wertheimer with Melius research.
Hi, good morning, everybody so.
So I had a question on her and him just a maturation of acquisitions in general and I know you talk about how you sort of scrambled the egg and cant always unscramble, it but I assume that you've still got some ongoing repair and maintenance as you sort of fix up a fleet. It was presumably underinvested in and then I assume Theres also a process just because you guys have so much.
So much process you have so many skus and so forth are training people off and so forth. So I just wonder if you have any comments on how long or how big that margin differential is and how about that.
Maturation that acquisition drag.
Drags up margins are we there now or is it going to take two or three years are going to be a tailwind for two or three years or any commentary around that would be helpful.
Sure Rob it's Matt.
To your point you know it takes time to get everything that we always start with a people first and foremost make sure we secure everybody get them comfortable with their jobs and then we train them on our systems make sure everybody's working off the same operating system. All of that's been done. So that's the front end and it always is in any deal. We do from there we start working through the fleet and then any kind of branch changes whether their child.
Ations, whether we're repurposing any facilities will continue to work through fleet and facilities through the balance of this year. So you know we've got the game plan is just a matter of execution and we're working through that and then as far as margins in the maturation I'll, let Ted talk to it but I wouldn't expect us to be fully mature.
By year, one we've done some work in this in the past with with other deals with testing you might want to ask Paul Yes, Rob. It's a good question and it kind of gets to some of the margin dynamics in the quarter that this is a good chance to kind of get those out there. So if you were to look at the equipment rental gross margin on an as reported basis. It would look like it was down 140 basis points year on year.
That's a slight improvement from the down 170 in the first quarter. So you can see some of those benefits playing through there, but importantly on a pro forma basis, our gross margin actually expanded 20 basis points. So you can see that impact of Aaron just putting the year ago period into the numbers.
So we've got margin expansion, there and if you adjust for the increase in depreciation related to the asset that the valuation of the acquired assets gross margins were actually up 80 basis points in the equipment rental gross margin line that includes the drag that we're talking about from this ongoing investment in fleet.
Which we've talked about last quarter, continuing this quarter I think it's reasonable to model you know continue in the second half as we get that fleet up to our standards and other investments, we're making that do get expensed in things like facilities. So to us things are playing out very well even in spite of these additional costs that are.
Hitting us from P&L perspective, and you can see that in these numbers I just shared.
Okay, perfect and if I can sneak in one more I guess the normal is it.
Excuse me the normalization of supply chain means you and others are able to get to the kind of more when you want it versus what you thought.
<unk> and <unk>.
Maybe some of that plus some of the better margins you're getting on on.
Daily use equipment has led to the net rental capex coming in a little bit.
Any relation of that to end market demand I mean are you still seeing strength in every vertical and every everything is there any tie between those two those two ideas, thanks and I'll stop there yes.
Yeah sure. Thanks, So first off.
Let's be clear the supply chain is not fully remedied, which is why we frontloaded capex. So much in the first half of this year I used to work at 60% of our full year spend we're at the top end of the range. We had talked about in that $55 60, and if we could have pulled in some more.
<unk> categories, we probably would add we have said in the beginning here. We didn't really think there was an opportunity to pull capex forward that this is a decision that probably we'd making Q4, if we're gonna raised capex.
That would really have to say more about what next year's slots looked like and if we can get back to a more normalized cadence when the supply chain hopefully remedies.
Its entirety. So this change in net Capex, it's just strictly about us having the opportunity to sell more fleet through the retail channel and we're talking 90 months old fleet at seven cents on the dollar is just just smart business, it's time for that stuff to rotate out and we wanted to normalize that so there if we could.
To put some more forward to maybe make that net capex number more hole, we may have done it in the right categories. We just we just didn't really have that option because the supply chains getting better, but not 100% there yet hopefully that answers your question.
Thank you.
Thanks, Rob.
Thank you we'll take our next question from Steven Fisher with UBS.
Thanks, Good morning, so I understand that some of the lower utilization Youre seeing is by design, because you're running too hot.
Product availability wasn't where you wanted to be to serve some of those key customers you mentioned, but would you say to what extent are your service levels now back to where you like them to be and so that sort of intentional lower utilization has now run its course or do you still think you need to have more more slack in the system.
By design.
No I think we're at a comfortable level at less than a week, we want to continue to improve utilization over the long term trend. It was just we haven't had a normal here in three years right. So when you think about the Covid here, which was just goofy overall and then the two years of just not being able to get the proper cadence.
We'll revert back to continuing to try to drive better metrics from 19 on as we had always done so I'm not saying, we're capped out I'm, just saying right now.
Especially with with continuing to work through the 800 fleet, we're on a pretty healthy time utilization and we are being able to be responsive to these these major opportunities we have with big customers are big project. So that's how I'd categorize.
Categorize that.
Okay. That's helpful. And then in terms of the rental gross margin trajectory. So you had a 170 basis point year over year decline in Q1 on a reported basis and 140 basis points in Q2, so a little narrower decline should we.
Extrapolate that piece.
Or should that drag it get smaller at a faster pace and maybe you didn't really kind of just ends this year and so that you know by the start of next year, you're you're growing your your gross margins on a year over year basis, how should we think about that sort of trajectory.
Yeah. So we do our best not to guide to kind of gross margins, but certainly directionally. We would expect it to continue heading in the right direction, there's going to be a gap there structurally because that was a less profitable business.
Then what we would have on a legacy basis right. So we've we've talked about that I think on an LTM basis their EBITDA margins were 35%, whereas ours were 48%.
And so that will obviously be a dynamic in these as reported numbers, but certainly.
That gap should narrow and then as we get to next year I think it would definitely be reasonable to assume that we'd be looking for margin expansion across the business.
Terrific. Thank you.
Okay.
Thank you we'll take our next question from Seth Weber with Wells Fargo Securities.
Hey, guys good morning.
Ted just following up on your <unk>.
Margin comment answer SG&A was surprisingly good this quarter it was down sequentially on a dollar basis, great great leverage as a percentage of revenue can you is there still more operating leverage to come on the SG&A line.
So the company here going forward or is this.
Yes.
So here again. This is an example of things we don't typically guide towards so I want to be careful there, it's all embedded within the EBITA EBITA.
EBITDA and EBITDA margin and flow through of guidance we've given.
So certainly we would expect to continue driving very good efficiency, there, but in terms of kind of trying to get people more precise and holding its just not something we've.
We've done so.
I don't know if that helps.
<unk>.
But but we feel really good about it and certainly we would expect to continue to be very efficient.
Okay.
Matt.
I appreciate all the Colorado.
Todd you know, maybe just a bigger picture question on the screen.
Why.
Yes.
Can you do differently.
Some of your competitors have reported recently.
He was raising capex some are moderating capex.
Can you just talk to what you think.
Industry supply looks like industry utilization looks like.
Yeah, just leave it there I guess, yeah, I think so let's talk about the large companies, which which we all get a little more.
Information from I think we're in a similar boat I think you'll hear promotion that this is still a good demand environment. It's still a good solid rate environment, and I think that points to the industry discipline and I think not everybody has reported yet, but I think everybody had the same challenge because that time, you with just running a little too hot and I think you're seeing people remedy that I think a lot of us that have.
The ability to specifically the big guys that had some scale to leverage.
But a lot of their capital to try to bring it in but bringing in ahead of the demand curve. So you didn't get stuck in that same box. We're in for the last year or two so I think the dynamics of the industry are really solid and I think you're gonna here. We already have heard couple report similar trends to what we're talking about so we think the industry is in good shape.
I think supply demand is in good shape, historically strong time utilization and and that's it's a celebrate environment. So good all the way around.
I appreciate it guys. Thank you.
Thanks Pat.
Thank you we'll take our next question from Jerry Revich with Goldman Sachs.
Yes, hi, good morning, everyone.
Hey, Jack.
I'm wondering if we'd just to expand on the comment you made a moment ago. So if we look back you know 2015, and 16, where there was a time utilization soft spot and rising used equipment inventories of new equipment inventories in.
The industry gave back some price and what we're seeing from you folks and others is actually better price in <unk> than in <unk>. So can you just talk about the distinctions and now versus then how big of a factor is its availability of ralph's market by market information any other.
Significant distinctions that are driving the much better industry discipline today versus seven years ago.
To be specific if you remember that 2015 was that oil and gas dislocation right, which really drove it.
Kind of a double dip will call a great problem because it was the highest.
You are right in just about every company's portfolio that was serving at rates were really high there and it went away quickly.
Across the board.
Your point is still fair.
That was what happened when there was too much fleet in the system.
The time is then.
Dropped to levels that made people have to make different decisions. The timing now in the industry is very healthy so even though it's dropped from inflated time utilization and the reason why youre seeing different behavior is quite industry discipline, but also everybody is running that healthy time utilizations people are able to make good returns good margins at these <unk>.
Utilization levels and.
The price of goods is higher so people understand the necessity right. So I think it's a totally different dynamic and that's important to note because some people may be reading through the drop in time Utilizations that are reported is a demand problem. That's not the case whatsoever. So yeah.
Thanks, Rob to make that point.
And in terms of.
The natural implication of that right, if we're not going to be looking to gear up and in the first quarter as hard as an industry in 24, obviously, you're not giving 'twenty guidance, yet, but just the implication of that is lower year over year capex for the industry in the first half of 'twenty four just mathematically to tie all that together given how hot we are run.
In first half 'twenty three is that a reasonable way to.
All these pieces together.
Uh huh.
Maybe normalized cadence I wouldn't say lower but we're not even sure of that yet right. We've got to get the slots from the Oems as they used to be able to make the commitments I know, they're working hard I know you talked to these folks as well, they're hopeful that supply chain will remedy, but I wouldn't go all the way there yet, but hopefully hopefully that's what happens and we can get a little more.
Or a normalized cadence and not have the old stuff through the winter because we're afraid who can't get it in the spring.
But either way, we're going to do what we need to do for our customers right.
That manage the metric more than the business in the output through the P&L.
Yeah.
I appreciate the discussion thanks.
Yes.
Thank you. Our next question will come from Jamie Cook with credit Suisse.
I mean, a nice clutter I mean, most of my questions have been asked the first just on you know what your customers are saying about 'twenty 'twenty four and any implications for how they're how what would you have gone for itself. We have above average visibility do they want to lock in.
Now locking business with you earlier and have sort of longer term contracts to make sure they're able to capitalize on the multi year spend that's out there or we had supply chain getting better or do you feel like customers potentially could get less sticky because they know there's going to be more equipment out there in the market and then my second.
Jim on specialty margins continue to improve you know year over year I'm, assuming that's the trajectory for the back half of the year and is there any opportunity you know on the M&A fine specialty that would be up more minutes. Thank you.
I'll take the first part of that game and Ted can talk to the specialty side. So.
The customers are still concerned, especially major projects still concerned about making sure. They have surety of supply right, even though it's a small amount of spend right couple of percentage points of spend on the project, but it has a major applications when they can't get the material and labor activated so we're having those conversations and a lot of private for talking about today.
Hey.
Kick off this year and will carry on through next year and they all had different phases. So we're in regular planning with our with our large customers and these mega projects, because it's really important to them and they they felt the crunch over the last couple of years and they want to make sure that a surety of supply is there. So it's definitely more that way than.
And I'm thinking they can wait I think the last two years in some ways, it's better for us planning more without big customers because they realize it's an important it's an important factor to making sure. We both have a win win situations that you want to touch on the second part, yes quickly Jamie I just wanted to be sure I understood. The question, but it sounded like there are three and that answered the first I heard of a second half margins.
No if that was a general question or specific to specialty and the third it sounded like the outlook for specialty M&A and yeah. It was supposed to it. The question was specific especially both in terms of margin and both in terms of M&A opportunity.
So here again, it's all kind of embedded in the guidance. We've given so we do our best not to get into kind of giving specific guidance by segment or per unit. So certainly.
As you've heard US say, we feel very good about the way the business is performing and the outlook for margins in the second half and that would be true on both sides of the business.
Sure it can be any more specific in terms of the outlook for M&A, both broadly and within specialty it remains a very robust market.
You've seen kind of what we've done year to date and we continue to be active shoppers.
Shoppers.
In terms of success, that's harder to say discipline as always job number one for us when we're allocating capital.
We're hopeful and optimistic that we'll have some things to do in the back half in M&A more generally, but certainly within specialty as well.
Matt anything you'd add on that front no no I think he covered it I mean.
You folks all know, we're very we're very acquisitive and opportunistic, but we're going to make sure. It meets that are that high bar that we have.
Thank you.
Thank you.
Yeah.
Thank you. Our next question comes from Tim Thein with Citigroup.
Thanks, Good morning, I, just start first to Matt I wanted to just follow up on the earlier discussion on on fleet productivity.
I realize you don't love Dissecting, all these pieces, but I just wanted to.
To follow up just from a mix perspective.
Can you talk about I realize there are multiple.
Pieces and components that go into it but.
As you.
You know as you cycle more of that 800 fleet.
Out of the business and in your refreshing the fleet you talked about.
Does that continue to be resumed will be that.
It was just given the inflation that we've seen recently in that product category that they were so big in <unk> and aerials does that act as a.
As a headwind.
You know in the 'twenty four or we're just and again I know, we're not I'm not looking for you know.
Super granularity on this but I'm just thinking from a high level, but does that continue to drag on on that fleet productivity or does that start to fade away.
No not not not more significant than what we deal within our own fleet right. So we're always going to manage in place and that's why we track fleet productivity, but I think you'd have to imagine that our buying power. It was a little bit better. So some of those always sees and that's why you have part of the difference between as reported and pro forma some of it was always sees a little pumped up alive.
And by as well as us so there's a little bit of a trade off there is a replace so it won't be incrementally the replacement won't be incrementally as high as it would be maybe one of our old that's our own assets that was you know nine years old or eight years old. So nothing that were call out nothing that we can't manage through in the normal course of business.
Alright, and then maybe just to get a bigger picture.
No.
Fair amount of disruption.
It's occurred to the the regional bank.
Banking system here over the last several months.
It was more concerns around yes.
Lending availability in and do some of these regional banks tighten up again, nothing that you havent heard but I'm just curious.
And as your conversations with your fellow.
C suite folks it is that you're hearing or seeing much from the standpoint of.
Projects that maybe were on your drawing board that are pushing out or anything that you would flag you know along those lines how do you see it.
It's been a concern for some recently English.
Yes.
And it's something that you're seeing or hearing much of that thanks.
No as a matter of fact, our project pipeline remains robust we're not we're not seeing cancellations, we talked about delays on some solar projects that was more supply chain related and we actually think those are coming back on.
Quicker than they worse, which is good news, but when we look at Mega projects overall, right and you can decide how you find a mega project because it.
Whether it's 400 million 500 million $600 million worth of value. These are all up significantly and we're talking you know depending on which cut to use somewhere between 70 and over 100%. So doubling the size of these amount of projects and and and that's what the pipeline looks like right. Now so we actually feel really good about the pipeline, we havent seen any deterioration because of.
And then kind of.
Financing or or interest issue that might want to add something yeah, Tim I guess, the things that you said regional banks, but I think it's more specific to the local smaller banks.
Frankly, we're not seeing it either level I mean, the best we can tell capital availability remains abundant for our customers cost of capital remains reasonable.
And so if we look at our customer confidence really going back to the middle of March when all this started it's really unaffected and if we look at our performance by customer segment right. So you look at national accounts strategic assigned local et cetera, but youre not seeing any.
Real difference in how those are performing so certainly on a year through the second quarter.
No discernible impact and in terms of what the potential might be going forward, our customers aren't really talking about it and what I'm, saying, it's an issue, but it's something we're obviously watching closely as you would expect.
Very good thank you. Thanks.
Thanks Kipp.
Thank you we'll take our next question from.
<unk> with Keybanc capital markets.
Hey, good morning, guys.
Matt So obviously it sounds like you feel very confident in the demand environment here.
I am curious if you could just give a little bit of color.
And what you're seeing between your two customer sets right because obviously your internal.
And it's real strong sentiment survey seems like it's still pretty strong or in line with last quarter.
Which is I think more tied to your national accounts, but.
Any signs of a material moves between your national accounts here local accounts.
No not not anything that we're seeing now you know we don't do you know a lot of.
Harry helpful. Hittite weekend Warrior type work. So I don't know what that segment is doing well, we definitely skew more towards the contractor and enlarge contracted but we're not seeing any delineation in our local market business versus our big job business, we're actually in pretty good shape, we'll talk about that when we were talking about the non res numbers earlier, so where that's one of the areas.
You would think it would show up and it's not we're actually not seeing any delineation and we're not seeing it in our customer confidence index.
<unk> as well.
Got it.
And then just to follow up on that non res comment you know, obviously, you talked about industrial manufacturing demand being strong here in the quarter non res I think you said it was up double digits.
I'm curious if you could just dissect that a little bit I mean, I didn't hear too much about civil infrastructure projects. My understanding is that starting to accelerate here in the last couple of months is that a category that you are expecting to accelerate here into the back half.
So it's how do we speak about the margin impact on some of those projects. If any are here for the back half of 'twenty three.
Yeah, Ken I'll take that one so it's not one of those things it's easier to track as you know I would say intuitively, yes, we do expect a lot of the civil projects that are funded by the infrastructure Bill.
And prospectively the inflation reduction act to start gaining momentum in terms of exactly what that cadence looks like it would be great. If there were a schedule we have not found one but certainly the outlook for infrastructure.
It is positive right you've got north of one five trillion dollars of spend over the next 10 years, let's say.
And spend that we are very well positioned for given that had made this comment in his prepared remarks, but the strategy. We've developed over the last 10 years is unique and puts us in a great position to be the most value added partner to the contractors that are executing those projects.
Exactly.
Thanks, Ken.
Thank you. Our next question comes from Scott Schneeberger with Oppenheimer.
Thanks, guys. Good morning, I'm in there I'm going to follow up that last non res question. A common question. We feel is about weak spots within non res and everything we've heard on this call sounds very very good a crossroads right. So one of the areas of concern as its commercial real estate.
Non manufacturing and office buildings any insight you can share there or any other areas of weakness manage it sounds like it it's very broad based and very good.
Want to hone in on any trouble points that you might be seeing.
Yeah, No and I know Ted has done some work on the stat. I mean, we all know what the vacancy rates are and we know those are issues, but I don't know that that was ever a real big part of our business right is vertical versus horizontal usually a bigger bigger rental needs as opposed to vertical but that may have some information sure. Yeah. It certainly if you look at what we call non <unk>.
It continues to grow quite nicely, we don't get as granular as the questions you're asking so if you were to look at the construction put in place data Scott certainly you'd look looking at office and commercial you know whether it's year to date or I think June which is the most recent data.
Both continued so show growth now I think you were asking more on a forward looking basis and when we think about that and we have in total those two verticals are about 20% of total non res construction put in place.
And you know I'd say the office part is when people worry about given where turned office and work from home and those things commercial is a huge segment. So its not strip malls wherever people live it's much broader but I think those are the two areas that we've talked about being reasonably at risk.
Now then you talked about the areas, where we see where we are optimistic where we see strong pipelines and we continue to see strong growth in the ones you would highlight would be manufacturing as we've talked about.
Public Road and highway power communication transportation and health care.
All of which are performing well in total those are 55% of total non res.
And our.
Our contention would be the growth in those markets is really going to offset any headwinds we would reasonably anticipate can the office commercial combination. So that is logically what drives our optimism looking out across the.
The back half of this year and going forward.
Great. Thanks, Pat that's the answer I was looking for appreciate it.
We're a just a quick follow up specialty rental could you speak a little bit to the asset categories. It sounds like things have been going very well and it sounds like that's broad based as well, but just curious if anyone is lagging behind.
The category or pulling ahead and also any commentary on G. F N. The old goal was to to double that within five years.
An update now that we're two years pass at the close of that acquisition, where are where that stands. Thanks. So much.
Yeah. So.
So the first part of your question Nobody has fallen behind as I said in the prepared remarks.
T at 17% organic growth and all the business segments were in double digits, just right now certainly the G. S N, which you pointed to just go a little bit faster than the rest, but we would expect that and as far as that goal to double the size of the business in five years I think we shared this earlier in the year that where we're ahead of schedule you know whether we're a year ahead of schedule.
Two years ahead of schedule and time will tell but we're we're very pleased with where they are and we're continuing to open cold starts to continuing to grow.
That sector as well, but we're around all of our specialty segments. We're really pleased with the work the team is doing there.
Sounds good thanks, Matt.
Thanks Scott.
Yeah.
Thank you. Our next question comes from Neil Tyler with Redburn.
Yes, hi, guys. Thank you.
Two please firstly on the topic of Capex and fleet availability one of your competitors floated the notion that ticket prices or we see ticket prices have been.
Inflated recently by you know things like surcharges.
That should still Claywell fall away, if it's available to approve so don't know if that's a perspective I'd love to hear your perspective on whether that the likelihood of a certainty or or or not the notion that you you'll consider it first of all please.
Sure. So we don't talk about our negotiations on open Mike just you know.
We're gonna be good partners with our vendors, but the comment of some of the surcharges and the costs associated with creating those surcharges is certainly a fair comment when we were discussing with our partners. So I don't think that characterization is wrong. We just we just don't really talk about our negotiations with our partners public.
Publicly but the characterization fairway.
Great. Thank you that no. That's still helpful. And then just apologies, but wanted to just quickly come back to the time you'd comments you made earlier just so I understand this you know the the.
The lower year on year, it's not huge it splits between the two.
Timing of fleet arrivals and the deliberate.
A deliberate move to to.
It's a normalized time Ute and am I right in thinking that the first of those two categories is more or less behind behind us.
The second will persist for the rest of the year is that is that fair.
Yeah, I mean, the first enables us to do the second Friday, if we had to bring in the fleet, we wouldn't even be able to tamp. It down. So they are very much going go in hand in hand, but just by definition of how much capital we have less of a year for versus the growth we're going to bring a good amount of our capex in Q3 here.
As you would expect for the balance of the what's left for the balance of the year and.
And I think like I said earlier when people trying to see if we could forecast the productivity number will sequentially grow, but we think youre going to see similar year over year dynamics to what we saw in Q2. So we feel good about it we feel good about the demand and we'll continue to have capex rolling here in Q3.
Okay. That's really helpful. Thank you Mike.
Yeah.
Okay.
Thank you our final question comes from.
<unk> with Baird.
Oh, Thank you for fitting me in good morning.
A lot has been covered here, but maybe on the topic of non res.
Ted I appreciate it all the context, you provided but I wanted to sort of ask a hypothetical question.
We're looking at private non res this year.
They put in place is growing north of 20%.
If if growth slow.
In 2024, right tougher comps or maybe maybe some of the pockets that are a weakness that people are worried about.
We're talking about growth reverting back to <unk>.
Hello to mid single digits.
What does that mean in terms of how you're going to manage your business. How do you. How do you manage fleet in terms of Capex disposals.
Again, I'm not asking for guidance I'm, just trying to understand hypothetically, how you would react and stuff like that.
Yeah. It's a good question and again, it's something we go through every year. So of course, we're talking in nominal dollars. So you've really got to convert this all to volume, but that's how we approach the whole year as it relates to Capex as we get into the fall and into the fourth quarter. We will start our bottoms up planning process that process will help us.
Get a much better sense for what our customers think they're growth will look like at 24 at that point. We can then think about what our replacement capex needs will be.
Based on the always see we plan to sell next year, and then the incremental fleet and we need to support growth in that environment. It's.
As Matt said, we think we've kind of reset the baseline back to where we want to be this year. So as we think about next year.
Let's just say, we're kind of at that steady state then there's less of a timing dynamic that comes into this and then it's more a function of how do you manage the growth in your OFC.
Is that fair yeah, no I think you've covered it well.
Okay, and then hypothetically answer to your question.
Well it helps.
I'm still kind of scratching my head on the fact that you're going to be exiting the year with significant year over year growth in fleet right. So you know if growth slows does that mean that you were sort of pivoting towards just pure replacement capex or you are still in.
Fleet growth mode. That's what I was trying to tease out yeah, and it's a fair question, but it will depend on what we see as a demand as we go through our planning process, but we're certainly not as a negative on the growth as maybe your tone, you're sharing but you know what time will tell in and we're going to adjust and manage the business appropriately for whatever environment we have.
All that being said, we do expect and I think you're seeing this with most of the big players for us to outpace overall industry growth. We think the bigs getting bigger is a dynamic that will continue to play and I would say the type of work that we've talked a lot about everyone lends itself to the larger players. So I I wouldn't even even if there is a slower growth than the overall industry.
We think we will have the ability to out outpace that but I do get your point and we'll manage through it and that's the thing about doing it at year end as well know what that carryover grumping capacity is which allows US then to factor that into whatever our capex spend will be.
Alright, and this gets back to.
It's continuing to be very good stewards of our shareholders' capital.
Understood. Thank you gentlemen, you gotta make thanks.
Thank you at this time I'll turn the call back over to Matt Flannery for any additional or closing remarks.
Thanks, operator, and no additional remarks that wraps it up for today, So I want to thank everyone for joining us and we look forward to speaking with you all again in late October and in the meantime, please feel free to reach out to Elizabeth at anytime if you have any questions.
Again, operator, please go ahead and end the call.
Thank you. This does conclude today's call. We thank you for your participation you may disconnect at any time.
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