Q3 2023 United Rentals Inc Earnings Call

October 26, 2023

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Operator: Good morning and welcome to the United Rentals Investor Conference call. Please be advised that this call is being recorded. Before we begin, please note that the company's press release comments made on today's call and responses to your questions contain forward-looking statements. 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 31st 2022 as well as to subsequent filings with the SEC. You can access these filings on the company's website at www.unitedrentals.com.

Please 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.

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.

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

You should also note that the company's press release and today's call include references to non-GAAP terms, such as free cash flow adjusted EPS EBITDA and adjusted EBITDA.

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

Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer, and Ted Grace, Chief Financial Officer. I will now turn the call over to Mr. Flannery. Mr. Flannery you may begin.

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.

Matthew Flannery - CEO: Thank you operator and good morning everyone and thanks for joining our call this morning. As you saw in our third quarter results, the team continues to raise the bar, as evidenced by the new high-water marks we set across this quarter's revenue, adjusted EBITDA and returns. As you've heard me say many times, our employees are the key to our results and their focus on safely supporting our customers is paramount to generating value for our shareholders. And I'm most thankful that our team again delivered a company-wide recordable rate below one. This goes without saying, but safety is not only a differentiator in the eyes of the customer but it's also critical that we take care of our most valuable assets, our team. Looking towards the rest of the year, our reaffirmed guidance for 2023, reflects our confidence in the outlook of our business and that is I'll touch more on later. This is driven by both what we hear from the field and the tailwinds we see on the horizon. More generally, we are confident in the strategy that we've developed. The competitive advantages we've created over the last decade position us well to continue to outpace the industry as we drive towards our long-term goals.

As you saw in our third quarter results. The team continues to raise the bar as evidenced by the new high Watermarks, we set across this quarter's revenue adjusted EBITDA and returns.

As you've heard me say many times our employees are the key to our results and.

Their focus on safely supporting our customers is paramount to generating value for our shareholders.

And I'm, most thankful that our team again delivered a companywide recordable rate below one <unk>.

This goes without saying, but safety is not only a differentiator in the eyes of the customer but.

But it's also critical that we take care of our most valuable assets our team.

Looking towards the rest of the year, our reaffirmed guidance for 2023 reflects our confidence in the outlook of our business and that is I'll touch more on later this is driven by both what we hear from the field and the tailwind we see on the horizon. More generally we are confident in the strategy that we've developed. The competitive advantages we've created over the last decade positioning us well to continue to outpace the industry as we drive towards our long term goals.

More generally we are confident in the strategy that we've developed.

The competitive advantages we've created over the last decade positioning us well to continue to outpace the industry as we drive towards our long term goals.

Now, let's dig into the third quarter results. Total revenue rose by 23% year-over-year to $3.8 billion, a third quarter record. Within this, rental revenue was up 18% with broad-based growth across verticals, regions and customer segments. Place productivity increased 1.5% on a pro forma basis. Adjusted EBITDA increased 22% to a third quarter record of $1.85 billion, translating to a margin of over 49%. While adjusted EPS grew by over 26% to a third quarter record. And finally, our return on invested capital expanded to a new record of 13.7%.

Total revenue rose by 23% year over year to $3 8 billion.

Third quarter record.

Within this rental revenue was up 18% with broad based growth across verticals regions and customer segments.

Please productivity increased one 5% on a pro forma basis.

Adjusted EBITDA increased 22% to a third quarter record of 185 billion.

Translating to a margin of over 49%.

While adjusted EPS grew by over 26% to a third quarter record.

And finally, our return on invested capital expanded to a new record of 13, 7%.

So let's dive into a bit more of the details behind these results. Used equipment sales more than doubled year-over-year to $366 million as we normalized volumes and rotated out older fleet after holding back in 2022. Rental CapEx was in line with expectations at just over $1 billion, reflecting a more normal quarterly cadence. And as the supply chains recovered, our need to pull spend forward should be behind us. And now to Ahern. As we approach the first anniversary of the deal, the integration remains on track and highlight continues to be the quality of the team. As you know, people are one of the key components we add when we bring companies on board and integrate them into United Rentals. Looking forward, this added capacity combined with my comments on CapEx and supply chains should position us well to serve our customers as we enter 2024. Ahern's is another great example of the strength we have in leveraging our balance sheet as a way to benefit both our customers and our shareholders.

Used equipment sales more than doubled year over year to $366 million as we normalized volumes and rotated out older fleet after holding back in 2022.

Rental capex was in line with expectations at just over $1 billion.

Reflecting a more normal quarterly cadence.

And as the supply chain has recovered.

Our need to pull spend forward should be behind us.

And now to a heart.

As we approach the first anniversary of the deal the integration remains on track and highlight continues to be the quality of the team.

As you know people are one of the key components, we add when we bring companies on board and integrate them into United rentals looking forward.

This added capacity combined with my comments on Capex and supply chains.

Should position us well to serve our customers as we enter 2024.

<unk> is another great example of the strength, we have and leveraging our balance sheet as a way to benefit both our customers and our shareholders.

Now, let's turn to customer activity and demand. Key vertical saw broad-based growth led by industrial manufacturing, metal and mining and power. Non-res construction grew 9% year-over-year. And within this, our customers kicked off new projects across the board, including numerous EV in semiconductor related jobs, solar power facilities, infrastructure projects, data centers and health care. Geographically, we continued to see growth across all gen rent regions. And our specialty business delivered another excellent quarter, with organic rental revenue up 16% year-on-year and double digit gains in most regions. Within specialty, we opened 14 cold starts during the quarter, resulting in 39 new specialty location openings this year.

Key vertical saw broad based growth led by industrial manufacturing metal and mining and power.

Non res construction grew 9% year over year.

And within this.

Our customers kicked off new projects across the board, including numerous EV in semiconductor related jobs.

Solar power facilities.

Infrastructure projects data centers and health care.

Geographically, we continued to see growth across all gen rent regions.

And our specialty business delivered another excellent quarter with organic rental revenue up 16% year on year and double digit gains in most regions.

Within specialty we opened 14 cold starts during the quarter, resulting in 39, new specialty location openings this year.

Turning to capital allocation, in addition to the investments we've made in growth, we returned $350 million to shareholders through share buybacks and dividends this quarter and remain on track to return over $1.4 billion of cash to shareholders this year. As we look ahead, we feel confident in our outlook and this is supported by the ABC's Contractor Confidence Index, which remains strong across the third quarter as did its backlog indicator, the Dodge Momentum Index, which advanced sequentially in September. Furthermore, non-res construction spending and non-res construction appointment both remained solid. And most importantly, our own customer confidence index continues to reflect optimism, while early indications from our field team on their expectations for '24 are also encouraging.

As we look ahead, we feel confident in our outlook and this is supported by the Abcs contractor confidence index, which remains strong across the third quarter as did its backlog indicator.

Dodge momentum index, which advanced sequentially in September.

Furthermore, non res construction spending and nonresident struction appointment both remained solid.

And most importantly, our own customer confidence index continues to reflect optimism while early indications from our field team on their expectations for 'twenty four are also encouraging.

Yeah.

Finally, I'd like to acknowledge the team for their efforts in earning our company's recent selection to the 2023 Time magazine's World's Best Companies and the U.S. News and World Report's Best Companies to Work For list. Recognition like this comes as no surprise when you see our employees dedication and hard work in the field day in and day out.

In the U S news and World Report's best companies to work for list.

Recognition like this comes as no surprise when you see our employees dedication and hard work in the field day in and day out.

So to wrap up my comments today, Q3 was a strong quarter. We remain very pleased with how the year is playing out. Looking forward, the opportunity ahead of us around large projects is unlike anything in my career and we're uniquely positioned in the rental industry to win more than our fair share of the 2 trillion plus of investment we see on the horizon. Not only do we have the scale, technology and one stop shop solutions to make us a preferred partner but we have a history of execution our customers can rely on. We set high expectations for 2023 and I'm proud of the results, 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 lines to Q&A. Ted, over to you.

Q3 was a strong quarter.

We remain very pleased with how the year is playing out.

Looking forward.

The opportunity ahead of us around large projects is unlike anything in my career.

And we're uniquely positioned in the rental industry to win more than our fair share of the two trillion plus of investment we see on the horizon.

Not only do we have the scale technology and one stop shop solutions to make us a preferred partner.

But we have a history of execution our customers can rely on.

We set high expectations for 2023 and <unk>.

I'm proud of the results, 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 lines to Q&A Ted over to you.

Ted Grace - CFO: Thanks Matt and good morning everyone. As you saw in our third quarter release, our team again delivered strong results that were consistent with our expectations and importantly, keeps us on track for another record year. I'll add that we continue to feel very good about our prospects beyond 2023, based on our strategy and the tailwind we've discussed extensively. Although remains a little premature to say too much about next year given where we sit in our planning cycle, I will say that 2024 is shaping up to be another year of growth, certainly more to come there in January with our focus today on our third quarter performance and the balance of the year.

I'll add that we continue to feel very good about our prospects beyond 2023 based on our strategy and the tailwind we've discussed extensively.

Remains a little premature to say too much about next year, given where we sit in our planning cycle I will say that 2024 is shaping up to be another year of growth certainly more to come there in January with our focus today on our third quarter performance and the balance of the year.

One quick reminder before I jump into the numbers. As usual, the figures I'll be discussing are as reported except where I call them out as pro forma, which is to say the prior year period adjusted include Ahern standalone results from the third quarter of last year. So with all that said, let's get into the numbers.

So with all that said, let's get into the numbers.

Third quarter rental revenue was a record at over $3.2 billion. The year-over-year increase of $492 million or 18% supported by diverse strength across our end markets, as you heard Matt say. Within rental revenue, OER increased by $413 million or 18.5% in. An increase in our average fleet size contributed 22.2% to that growth, partially offset by a 2.2% decline in as reported fleet productivity and assumed fleet inflation of 1.5%. Also within rental ancillary revenues were higher by $83 million or 19.7%, while re rent declined $4 million. On a pro forma basis, which as you know is how we look at our results, rental revenue increased by a robust 10.2% with fleet productivity up 1.5%, reflecting a healthy rate environment that continues to be supported by good industry discipline.

The year over year increase of $492 million or 18% supported by diverse strength across our end markets as you heard Matt say.

Within rental revenue increased by $413 million or 18, 5% in.

An increase in our average fleet size contributed 22, 2% to that growth, partially offset by a two 2% decline in as reported fleet productivity and assumed fleet inflation of one 5%.

Also within rental ancillary revenues were higher by $83 million or 19, 7%, while re rent declined $4 million.

On a pro forma basis, which as you know is how we look at our results rental revenue increased by a robust 10, 2% with fleet productivity up one 5%, reflecting a healthy rate environment that continues to be supported by good industry discipline.

Turning to use results, third quarter proceeds roughly doubled to $366 million, reflecting more normalized volumes as we continue to refresh our fleet. The decline in our third quarter adjusted use margin to 55.2% was largely due to expanded channel mix required to drive higher volumes, the impact of some cleanup actions we took on Ahern's fleet and the normalization of supply demand dynamics. Importantly, we continued to take advantage of a robust used market by driving strong volume growth in our retail sales at attractive pricing. I'll also note that our average fleet age was 51.6 months at the end of the quarter, which is essentially back to pre-pandemic levels.

The decline in our third quarter adjusted use margin to 55, 2% was largely due to expanded channel mix required to drive higher volumes the impact of some cleanup actions, we took on <unk> fleet and the normalization of supply demand dynamics.

Importantly, we continued to take advantage of a robust used market by driving strong volume growth in our retail sales at attractive pricing.

I'll also note that our average fleet age was $51 six months at the end of the quarter, which is essentially back to pre pandemic levels.

Moving to EBITDA, adjusted EBITDA in the quarter was a record $1.85 billion, reflecting an increase of $329 million or 22%. The dollar change includes a $264 million increase from rental within which, OER contributed $252 million and ancillary added $19 million while re-rent declined $7 million year-on-year. Outside of rental, used sales added about $85 million to adjusted EBITDA, while other non-rental lines of businesses contributed another $15 million. While SG&A in the quarter did increase $35 million year-on-year as a percentage of sales declined to 180 basis points to 9.9% of total revenue, reflecting another quarter of very good cost efficiency.

Reflecting an increase of $329 million or 22%.

The dollar change includes a $264 million increase from rental within which <unk> contributed $252 million in ancillary added 19 million, while re rent declined $7 million year on year.

Outside of rental used sales added about $85 million to adjusted EBITDA, while other non rental lines of businesses contributed another $15 million.

While SG&A in the quarter did increased $35 million year on year as a percentage of sales declined to 180 basis points to nine 9% of total revenue, reflecting another quarter of very good cost efficiency.

Looking at third quarter profitability, our adjusted EBITDA margin decreased 80 basis points on an as reported basis but increased 20 basis points on a pro forma basis to 49.1%. This translates to as reported flow through of 46% and pro forma flow through a better than 50%, notably if we excluded the impact of use in the quarter, our core fluke flow through exceeded 53% and was in line with second quarter results. And finally, adjusted EPS increased 27% to a third quarter record of $11.73. Shifting to CapEx, gross rental Capex was $1.03 billion versus net rental CapEx of $664 million, the $257 million decline in net rental CapEx largely reflects a return to more normalized used sales levels this year. Year to date, gross rental CapEx through the third quarter has totaled almost $3.1 billion representing about 90% of our full year CapEx plan, which is in line with both our expectations and historical year to date level.

This translates to as reported flow through of 46% and pro forma flow through a better than 50%, notably if we excluded the impact of used in the quarter, our core fluke flow through exceeded 53% and was in line with second quarter results.

And finally, adjusted EPS increased 27% to a third quarter record of $11 73.

Shifting to CapEx gross rental Capex was 1.03 billion versus. Versus net rental capex of $664 million, the $257 million decline in net rental capex largely reflects a return to more normalized sales levels. This year. Year to date gross rental capex through the third quarter has totaled almost $3 1 billion. Presenting about 90% of our full year Capex plan, which is in line with both our expectations and historical year to date levels.

Versus net rental capex of $664 million, the $257 million decline in net rental capex largely reflects a return to more normalized sales levels. This year.

Year to date gross rental capex through the third quarter has totaled almost $3 1 billion.

Presenting about 90% of our full year Capex plan, which is in line with both our expectations and historical year to date levels.

At this point, it is our sense that the supply chains have largely normalized which should enable us to return to more typical quarterly cadences going forward and better match the timing of deliveries with seasonal demand. Turning to return on invested capital and free cash flow, rent set a new record at 13.7% on a trailing 12 month basis and remains well above our cost of capital while free cash flow also remains a good story. The quarter came in at $339 million translating to a trailing 12-month free cash margin of 12.8% all while continuing to fund robust growth. Moving to the balance sheet, our net leverage ratio at the end of the quarter was flat sequentially at 1.8 times while our liquidity totaled $2.7 billion with no long-term note maturities until 2027. Notably, all of this was after returning $1.05 billion to shareholders year to date, including $750 million through share repurchases and $305 million via dividends.

Turning to return on invested capital and free cash flow.

<unk> set a new record at 13, 7% on a trailing 12 month basis and remains well above our cost of capital while free cash flow also remains a good story the quarter came in at $339 million translating to a trailing 12 month free cash margin of 12, 8% all while continuing to fund robust growth.

Moving to the balance sheet, our net leverage ratio at the end of the quarter was flat sequentially at one eight times well our liquidity totaled $2 7 billion with. With no long term note maturities until 2027. Notably all of this was after returning $1.05 billion to shareholders year to date, including $750 million through share repurchases and $305 million via dividends.

With no long term note maturities until 2027.

Notably all of this was after returning $1.05 billion to shareholders year to date, including $750 million through share repurchases and $305 million via dividends.

So let's shift to the guidance we shared last night. We reaffirmed within our ranges for total revenue EBITDA and free cash flow, reflecting our continued confidence in delivering a record year. Within this, we raised the midpoint of total revenue by $50 million to a range of $14.1 to $14.3 billion, reflecting cleanup actions being taken to dispose of some older fleet acquired that comes with no margin benefit. Just to avoid any confusion, that is to say if they were just being sold at the values they are recorded at on our balance sheet. You see this in our implied used sales guidance of $1.5 billion at midpoint, which is an increase of $50 million versus our prior guidance. Adjusted EBITDA guidance is $6.775 billion to $6.875 billion which maintains the midpoint at $6.825 billion. And finally, I'll point out that we expect to generate free cash flow of $2.3 to $2.5 billion, of which we'll return a little over $1.4 billion to our investors through repurchases and dividends. This equates to more than $20 per share or around a 5% yield on return of capital at current share price levels. So with that, let me turn the call over to the operator. Operator could you please open the line.

Within this we raised the midpoint of total revenue by $50 million to a range of $14 one to $14 $3 billion.

Reflecting cleanup actions being taken to dispose of some older fleet acquired that comes with no margin benefit.

Just to avoid any confusion that is to say if we just being sold at the values. They are recorded on our balance sheet.

You see this in our implied used sales guidance of $1 5 billion at midpoint, which is an increase of $50 million versus our prior guidance.

Adjusted EBITDA guidance is $6 $7 75 billion to $6 $8 75 billion, which maintains the midpoint at $6 $8 5 billion.

And finally, I'll point out that we expect to generate free cash flow of two three to $2 5 billion. Of which will return a little over $1 4 billion to our investors through repurchases and dividends this equates to more than $20 per share or around a 5% yield on return of capital at current share price levels. So with that let me turn the call over to the operator, operator could you. Please open the line.

Of which will return a little over $1 4 billion to our investors through repurchases and dividends this equates to more than $20 per share or around a 5% yield on return of capital at current share price levels.

So with that, let me turn the call over to the operator. Operator could you please open the line.

So with that let me turn the call over to the operator, operator could you. Please open the line.

Operator: At this time, we will open the floor for questions. If you would like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. Once again, if you would like to ask a question, please press star 1.

You may remove yourself from the queue at any time by pressing star two.

Once again, if you would like to ask a question. Please press star one.

Our first question will come from David Raso with Evercore ISI. Please go ahead.

David Raso - Evercore ISI Institutional Equities, Research Division: Hi, thank you for the time. I know you don't want to give '24 guidance, but can you help us with just two elements, at least how you're thinking about it. The productivity measure and let's just think of it as, as reported basis. Ahern anniversary's in mid-December and the toughest part of the time you [inaudible]. We start the anniversary soon, given peak supply chain constraints about three or four quarters ago. How should we think about productivity with those two items sort of anniversarying? How are you thinking about productivity's ability then to go back to flat, to maybe up--all in as reported.? And then also any help you can be at all with, you noticed, you mentioned the supply chain now is loosened up, you can go back to your normal cadence on CapEx--how are you thinking about the fleet going into next year? There's some carryover growth, but just curious how you're thinking about replacement CapEx next year or is there some growth CapEx just to help frame those two big building blocks you're thinking about '24 is an up or down. I know you're saying up but just wanted to get some of the pieces. Thank you.

The productivity measure.

Think of it as a as reported basis.

Hey, her it anniversaries in mid December and the toughest part of the time you comps.

We start to anniversary soon given peak supply chain constraints.

About three or four quarters ago.

How should we think about productivity with those two items sort of anniversarying.

How are you thinking about productivity as ability then to go back to flat to maybe up.

All in as reported.

And then also any help you can be at all with you noticed you mentioned the supply chain now is loosen ops you can go back to your normal cadence on Capex.

How are you thinking about the fleet going into next year, there's some carryover growth, but just curious how youre thinking about.

Replacement Capex next year or is there some growth capex just to help frame those two big Bill.

Building blocks for thinking about 'twenty, four is an up or down I know youre, saying up but just wanted to get some of the pieces. Thank you.

Matthew Flannery - CEO: Sure, David. Now without giving guidance, I'll just try to help out first on your first part of the fleet productivity. I think you captured it well, we absolutely expect next year to have positive fleet productivity. The anniversary is a very tough--and even on a pro forma basis, when you think about this year, we still had tough comps from a time utilization perspective and we've talked about that over that unusual time that, just, we didn't feel was healthy and put way too much hand to mouth orders and customer relationships at risk. So we've run a really strong time this year, as I told you guys in July, back over what we were in '19, and we think this is a more appropriate level so we wouldn't expect time to be a headwind next year.

Tried to help out first on your first part of the fleet productivity.

I think you captured it well we absolutely expect next year to have positive fleet productivity.

<unk> is a very tough and even on a pro forma basis. When you think about this year, we still had tough comps from a time utilization perspective, and we've talked about that over that unusual time that just we didn't feel was healthy and.

Put way too much hand to mouth orders and customer relationships that risk. So we've run a really strong time. This year as I told you guys in July back over what we were in 19, and we think this is a more appropriate level. So we wouldn't expect time to be a headwind next year.

And with that being said, the industry still needs to get it right. So when we think about the two largest contributors to fleet productivity, we have one flat and the other one positive and then mix will be what mix will be, we certainly expect to have positive fleet productivity next year. And as far as fleet CapEx cadence, we certainly, I think the supply chain it's not 100% back to normal, but probably close, probably about 90%. There is still a couple of categories, high time yield assets that we can't get it as quickly as we want, but frankly, I don't think we're going to able to frontload that either because it's just an [inaudible] supply. So I think a more normalized cadence is the right way to think about what we'll do from a capital perspective and we're not going to give CapEx guidance right now, but think about off of our basis, $21 billion of fleet, we usually want to sell 11% or 12% of the fleet year to keep it fresh and as Ted mentioned in his comments, we're really pleased that we got back to pre-pandemic fleet days and we want to keep that rolling.

Contributors to fleet productivity.

Paul one flat and the other one positive and then mix will be what mix will be we certainly expect to have positive fleet productivity next year.

And as far as <unk>.

Fleet Capex cadence, we certainly I think the supply chain, it's not 100% back to normal, but probably close probably about 90%. There is still a couple of categories high time you'd assets that we can't get it as quickly as we want.

But frankly, I don't think we're going to able to frontload the heater because it just an Intel supply. So I think a more normalized cadence is the right way to think about what we'll do from a capital perspective and.

We're not going to give capex guidance right now, but think about off of our base of $21 billion of fleet, we usually want to sell 11 or 12% of the fleet year to keep it fresh and as Ted mentioned in his comments, we're really pleased that we got back to pre pandemic fleet age and we want to keep that rolling so.

Roughly if you think about those numbers, you're talking about somewhere between $2.3, $2.5 billion of fleet sold to get that 11% to 12% and if we think about the replacement CapEx on that at this point, certainly higher than 15, let's just round up to 20. When you are talking about somewhere between $2.8 to $3 billion of CapEx replacement next year, depending on how much we sell and I'd use that as a baseline and anything over and above that we'll obviously communicate in January, that will be our growth CapEx. We do expect '24 to be a growth year and we expect there will be some growth CapEx, but we're just not, we just haven't worked through the planning process yet, we'll give you better guidance in January.

So to get to that 11%, 12% and if we think about.

The replacement Capex on that at this point certainly hired 15, let's just round up to 'twenty. When you are talking about somewhere between $2 eight $3 billion of Capex replacement next year, depending on how much we sell and I'd use that as a baseline and anything over and above that we'll obviously communicate in January that will be our growth Capex, we do expect 20 Ford.

To be a growth year.

And we expect there will be some growth capex, but we're just not we just havent worked through the planning process, yet, we'll give you better guidance in January.

David Raso - Evercore ISI Institutional Equities, Research Division: Alright, thank you. And lastly, with all that said and how you're perceiving the world going into '24--I know I asked this last call too but the leverage down at 1.6 times, the net debt to EBITDA at the end of the year--can you just give us some framework of how you're thinking about M&A versus other uses of that balance sheet and cash flow or the leverage is expected to stay, continue to go down next year. Just trying to get a sense of how you're thinking about it. Thank you I'll [inaudible].

I know I asked this last call too, but the leverage down at one six times net debt to EBITDA at the end of the year can you just give us some framework of how you're thinking about M&A versus other uses of that balance sheet and cash flow or the leverage is expected to stay.

Continue to go down next year, just trying to get a sense of how youre thinking about it. Thank you I'll hop.

I'll answer a little bit of it and I'll let Ted jump in here. Certainly, we always talk about the use of our capital is going to be growing business. So first and foremost, feed the organic growth that to meet the demand that our customers are expecting us to meet and then secondly, M&A, if we find find opportunities where we can be a better owner of a business, we certainly have shown a history of that and frankly, we're pretty good at it so why not utilize the balance sheet for that. That pipeline remains robust, but we have a high threshold so I'm not pointing to anything imminent other than the fact that we're always looking and we will have a specific lien to any new products, we can add or specialty, but then also to add capacity like we did with a couple of deals including Ahern in this past year. As far as after we've used capital for growth I'll let Ted take that. yeah. Thanks for the question, David So as everybody saw where leverage about one eight at the end of this quarter and implied guidance would have us at around $1 six at year end, so a little bit below that.

Matthew Flannery - CEO: I'll answer a little bit of it and I'll let Ted jump in here. Certainly, we always talk about the use of our capital is going to be growing business. So first and foremost, feed the organic growth that to meet the demand that our customers are expecting us to meet and then secondly, M&A, if we find find opportunities where we can be a better owner of a business, we certainly have shown a history of that and frankly, we're pretty good at it so why not utilize the balance sheet for that. That pipeline remains robust, but we have a high threshold so I'm not pointing to anything imminent other than the fact that we're always looking and we will have a specific lien to any new products, we can add or specialty, but then also to add capacity like we did with a couple of deals including Ahern in this past year. As far as after we've used capital for growth I'll let Ted take that.

We always talk about the use of our capital is going to be drug business. So first and foremost feed the organic growth that ended up to meet the demand that our customers are.

Expect us to meet and then secondly, M&A, if we find find opportunities where we can be a better owner of a business, where certainly have shown a history of that.

We're pretty good at so why not utilize the balance sheet for that.

That pipeline remains robust, but we have a high threshold, so I'm not pointing to anything imminent other than the fact that we're always look and we will have a specific lean to any new products, we can add or specialty, but then also to add capacity like we did with with a couple of deals including eight here in this past year as.

As far as after we've used capital for growth I'll, let Ted take that yeah. Thanks for the question, David So as everybody saw where leverage about one eight at the end of this quarter and implied guidance would have us at around $1 six at year end, so a little bit below that.

Ted Grace - CFO: Thanks for the question, David. So as everybody saw we're at leverage, about 1.8 at the end of this quarter and implied guidance would have us at around 1.6 at year end so a little bit below that bottom threshold, we introduced in 2019 is 2. We do think the strategy overall served us very well and it accomplished a lot of what it was intended to accomplish which primarily was to allocate excess free cash flow to reduce equity volatility and improve valuation. And so when we measure kind of our absolute relative data, when we look at our absolute relative multiples, we think that has been quite successful in delivering what we wanted. In terms of what's next, certainly that's something we've talked about that we're still working on. We would expect to have an update for the fleet as we introduce our '24 guidance and other related capital allocation programs that'll be underpinned by that plan. So more to come there in January.

Bottom threshold, we introduced in 2019 of too.

Or do you think the strategy overall has served us very well and it has accomplished a lot of what it was intended to accomplish.

Primarily with the allocate excess free cash flow to reduce the equity volatility and an improved valuation and so when we measure kind of our absolute relative data when we look at our absolute and relative multiples. We think that has been quite successful in delivering what we want it in terms of what's next certainly that's something we've talked about that we're still working on.

We would expect to have an update for the street as we introduce our 24 guidance and other related capital allocation programs that'll be underpinned by that plan. So.

More to come there in January.

Okay.

Operator: Thank you. We'll take our next question from Rob Wertheimer with Melius Research. Please go ahead.

Rob Wertheimer - Founding Partner and Machinery Analyst, Melius Research: Thank you. So my question is on rental gross margin and I think Ted mentioned that you saw some cleanup, I guess, activity on the air and sea which may be depressing gross margin, I think you have extra depreciation, but it seemed a little sequentially weaker than 2Q. And I'm just wondering if there's any other driver or if it was incremental activity related to Ahern that drove that and I guess Ahern probably has enough specialty so I wonder if you could address the absolute gross margin as well. Thank you.

My question is on rental gross margin and I think Ted mentioned that you saw some cleanup I guess activity on the air and sea, which maybe depressing gross margin I think you have extra depreciation, but it seemed a little sequentially weaker than <unk> and I'm just wondering if theres any other driver or if it was incremental activity related to hear in that drove that and I guess.

And probably the next specialty so I wonder if you could address the absolute gross margin as well. Thank you.

Ted Grace - CFO: Yes, so if we look at that gen rent rental gross margin, I'd say in line with our expectations--while you did see the as reported margin down 320 basis points versus 270 last quarter, pretty minor when you convert that into dollars. You'd be talking about the 50 basis points being equivalent to about $12 million of cost on a revenue base of about $2.3 billion. There's always puts and takes within cost structures as everybody knows, depreciation was part of that, so if you think about that 50 basis points--the incremental depreciation we recognized in the quarter as we go through final purchase accounting on Ahern, it was probably 30 of those basis points would have been captured in that and otherwise you always have onetime cost or other cost dynamics that may be hitting you. We don't think there's really much to be made of it. The question is very fair, I wanted to ask, in the scheme of things given the numbers I just walked through--I think it's pretty, yes, we've characterized that more as quarter on quarter noise. Within specialty, so you saw flat margins, I guess year-on-year off record of 52.2%, so very strong performance there. There really wasn't much to call out, we did have some mix shifts within the different pieces of specialty that would've been relative headwinds, but again, if we can grow a business at 16% and generate 52% margins, we feel really good about that.

Pretty minor when you convert that into dollars you'd be talking about.

That 50 basis points being equivalent to about $12 million of cost on a revenue base of about $2 3 billion.

There's always puts and takes within cost structures as everybody knows depreciation was part of that so if you think about that 50 basis points.

The incremental depreciation we recognized in the quarter as we go through final purchase accounting on Acorn.

It was probably 30 of those basis points would have been captured in that and otherwise you have always have onetime cost or other cost dynamics that may be hitting you. We don't think there's really much to be made of it. The question is very fair I wanted to ask in the scheme of things given the numbers I just walked through I think it's pretty yes, we've characterized that more as quarter on quarter noise. Within specialty. So you saw flat margins. I guess year on year. Off a record of 52, 2% so very strong performance there there really wasn't much to call out we did have some mix shifts within the different pieces of specialty. That would've been relative headwinds, but again, if we can grow a business at 16% and generate 52% margins, we feel really good about that.

Within specialty.

So you saw flat margins.

I guess year on year.

Off a record of 52, 2% so very strong performance there there really wasn't much to call out we did have some mix shifts within the different pieces of specialty.

That would've been relative headwinds, but again, if we can grow a business at 16% and generate 52% margins, we feel really good about that.

Rob Wertheimer - Founding Partner and Machinery Analyst, Melius Research: Perfect, that answers that. If I'm allowed, you guys have some experience with megaprojects by now and I know there's a lot of different kinds of megaprojects coming from LNG to airport semiconductors to whatever but there is a lot of questions--if commercial or office or whatever construction declines and megas rise, do you have a sense of on a dollar for dollar basis, you lose a dollar on one and on the other, is that materially different on mix?

If I'm allowed.

You guys have some experience with mega projects by now and I know Theres a lot of different kinds of mega projects coming from LNG to airport semiconductors to whatever but there is a lot of questions, if commercial or office or whatever construction declines and Mega is rise do you have a sense of on a dollar for dollar basis, you lose a dollar in one.

And on the other.

Materially different on mix.

And I'll stop there.

Ted Grace - CFO: Materially different on what? Rob.

Rob.

Rob Wertheimer - Founding Partner and Machinery Analyst, Melius Research: On mix. So if you lose a dollar of construction, you lose a certain amount of revenue, you gain a dollar of mega construction, you gain a certain amount of revenue how does that shift out for you?

Matthew Flannery - CEO: Thanks Rob, I'll take that. We're probably thinking more about, if you're thinking about what that larger customer, larger project, longer duration rental does from a mixed perspective. There's a bigger variance if you're thinking about this transactional business, so certainly our largest customers get a little bit of leverage out of their spend with us than Joe the plumber walking in the store. So that's where the biggest gap is, but one of the reasons why we built our go to market to make sure we specifically cater to these large customers, large projects and large plants is because when you could put those big block of revenues to work at one site, you could serve them much more efficiently. On the top line there may be some variance, certainly between your transactional business in the top line rate that you charge but margin-wise, we historically don't see much of a difference because of that lower cost to serve and that's why we've built this go to market to cater to those projects.

We're probably thinking more about if you're thinking about what that what that larger customer larger project longer duration rental.

Does from a mixed perspective.

As a bigger variance if youre thinking about this transactional business, so certainly our largest customers.

A little bit leverage out of their spend with US then Joe the plumber walking in the store. So that's where the biggest gap is but one of the reasons why we built our go to market to make sure. We specifically cater to these large customers large projects and large plants.

Is because when you could put those big block of revenues to work at one site you could serve them much more efficiently.

On the top line there may be some various certainly between your transactional business.

And the top line rate that you charge, but margin wise, we historically don't see much of a difference because of that lower cost to serve.

And that's why we've built this go to market to cater to those to those projects.

Rob Wertheimer - Founding Partner and Machinery Analyst, Melius Research: Thanks.

Good luck.

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

Steven Fisher - UBS Investment Bank, Research Division: Thanks, good morning. Just to follow up on the megaproject discussion, I'm curious if you could talk a little bit about what's happening beneath the surface there on the megaprojects within your pipeline. Obviously, there's some headlines about some projects experiencing some delays, but I guess to what extent or are any new ones coming onto the radar screen. As well or is it more like just a known population at this point, I'm curious about the just the flow of what you're seeing in the market opportunities there.

Your pipeline, obviously, there's some headlines about some projects are experiencing some delays, but I guess to what extent or are any new ones coming onto the radar screen.

As well or is it more like just a known population at this point I'm curious about the just the flow of what youre seeing in the market opportunities there.

Matthew Flannery - CEO: Sure Steve. I would call the handful--I think it's less than a handful, somewhere four or five projects that have hit the headlines--are really not relevant to the whole pipeline that we're tracking and I, to be fair, would say the same about new ones coming on. We do find out about new things coming on all the time, but the base is pretty robust and pretty well known quantity. And we've been tracking that number, that number remains strong at a steady level. When we think about the other, about the thing about these handful of projects, none of them are macroeconomic related, right. There are some delays that you would call political, maybe that there was a Chinese partner that one of the plants with dealing with that got some noise about others are permitting, there was a job in South Carolina that got delayed because some environmental potential issues that they have to work through so we're not seeing things that are slowed down because there's economic issues. It's really more just individual issues that are coming up for each of these projects. So not anything that we're concerned about, there is still a robust pipeline of jobs, many of which we have laid out today and many of which we know are coming out of the ground in 2024.

I think it's less than a handful somewhere four or five projects that have hit the headlines.

Well really not relevant to the whole pipeline that we're tracking and I could be fair I would say the same about new ones coming on we do find out about new things coming on all the time, but the base is pretty robust and pretty well known quantity.

And we've been tracking that in that number that number remains strong at a steady level when we think about the other.

About the thing about these handful of projects none of them are macroeconomic related right. There are some delays that you would call political right maybe that there was a Chinese partner that one of the plants with dealing with that got some noise about others are permitting there was a job in south Carolina that got delayed because some environmental potential issue.

And you said that you have to work through so we're not seeing things that are slowed down because there is economically.

It's really more just individual issues that are coming up for each of these projects. So not anything that we're concerned about, there is still a robust pipeline of jobs, many of which we have laid out today and many of which we know are coming out of the ground in 2024.

Steven Fisher - UBS Investment Bank, Research Division: Great. And then just a bigger picture question about Ahern. When we think about next year, are there actual tailwinds in '24 from Ahern or is it more just kind of like a neutral, you said kind of just lapping the utilization? And what about the synergies? I know there had been some plans about synergies. I'm curious if it's actually going to be adding from Ahern next year, just sort of like a neutral.

Great and then just a bigger picture question about <unk>. When we think about next year are there actual tailwind in 'twenty four from a hurt or is it more just kind of like a neutral you said kind of just lapping the utilization and what about the synergies I know there had been some plans about synergies.

Curious if.

If it's actually going to be adding from a earn next year, just sort of like a neutral.

Matthew Flannery - CEO: I would call it more neutral, the egg's pretty well scrambled at this point other than some of the cleanup we're doing and certainly will be by year end when we when we lap the anniversary. As far as the synergies, we did a good job, we'll meet the synergies that we had guided towards in that we had targeted by year end, we're pretty close to done with them now. So we're in good shape there and it'll be nice to have a little bit cleaner view to share with you all, know more pro forma as reported. I know it's been confusing on some of the metrics specifically and all of that will be cleaned up by year end.

As far as the synergies we did a good job will meet the synergies that we had we had guided towards in that we had targeted by.

By year end, we're pretty close to done with them now so we're in good shape, there and it'll be nice to have a little bit cleaner view to share with you all know more pro forma as reported I know, it's been confusing on some of the metrics, specifically and all of that will be cleaned up by year end.

Steven Fisher - UBS Investment Bank, Research Division: Terrific. Thank you very much.

Matthew Flannery - CEO: Thanks, Steve.

Operator: Thank you. Our next question comes from Jerry Revich with Goldman Sachs. Please go ahead.

Clay Williams - Equity Research Associate, Goldman Sachs: Hi, this is Clay Williams on for Jerry Revich. Quick question, one of the hallmarks of your acquisition strategy has been the ability to get acquired businesses to post-utilization and margins that are typically in line with the base business as we approach the one year anniversary on Ahern. When do you--is this kind of comparable fleet productivity in margins as the base business or still work to do there?

One of the hallmarks of your of your acquisition strategy has been the ability to get acquired businesses to post utilization and margins that are typically with the base in line with the base business as we approach the one year anniversary on <unk>. When do you is this as it kind of comparable fleet productivity in margins as the base business are still work to do there.

So usually we say as far as [inaudible] differentiation, right. So the asset attributes, which would be more of a fleet productivity, we'll get there next year somewhere around, but you have to remember it would be a like-for-like asset. They didn't have specialty, they didn't have some of the higher-valued items, but when you think about the assets that we bought from them, by next year we expect them to look--the performance to look like the assets that we own in that category. Now when you think about margin level, to get all of our processes implemented in their stores, it usually takes a little longer. Now you're talking somewhere between 18 months to two years depending on how fast we move, so there'll be a little bit of drag still on the operations of those stores as they implement all the new activity, the new tools, but from the fleet productivity it should be mostly realized on that shift. But one thing I might add, and just for everybody's benefit,

Matthew Flannery - CEO: So usually we say as far as [inaudible] differentiation, right. So the asset attributes, which would be more of a fleet productivity, we'll get there next year somewhere around, but you have to remember it would be a like-for-like asset. They didn't have specialty, they didn't have some of the higher-valued items, but when you think about the assets that we bought from them, by next year we expect them to look--the performance to look like the assets that we own in that category. Now when you think about margin level, to get all of our processes implemented in their stores, it usually takes a little longer. Now you're talking somewhere between 18 months to two years depending on how fast we move, so there'll be a little bit of drag still on the operations of those stores as they implement all the new activity, the new tools, but from the fleet productivity it should be mostly realized on that shift.

They didn't have specialty they didn't have some of the higher valued items, but when you think about the assets that we bought from them by next year, we expect them to look the performance to look like the assets that we own in that category and when you think about margin level to get all of our processes implemented in their stores. It usually takes a little longer now youre talking somewhere between.

18 months two years dependent on how fast we move so there'll be a little bit of drag still on the operations of those stores as they implement all the new activity, the new tools, but from the fleet productivity.

It should be.

Mostly realized by that shift, but one thing I might add and just for everybody's benefit.

Ted Grace - CFO: So one thing I might add, and just for everybody's benefit, each deal certainly has its unique profile from a margin standpoint. Just for clarity's sake--we've talked about this pretty extensively--but the deals we do, tend to be margin-dilutive structurally. That's not to say they're not very good deals economically, the returns have clearly been very attractive, but if you think about Ahern, they were doing 35% EBITDA margins, LTM fully synergized, they were going to be sub 40. That was the same thing for Blue Line, I think, NDS fully synergized, they would've been 42. Neff was closer but certainly if you look at GSN, they were doing LTM, EBITDA margins of 27, they're in the low 30s synergized and the same thing was true with Ahern so we do do great job, we take pride in the fact that we're able to integrate these companies and extract a lot of value, including through cost synergies, but there has been that dynamic so I just--Clay I'm sure you appreciate that but for other people's benefit I just wanted to make sure we added that.

Each deal certainly has its unique profile from a margin standpoint, just for clarity sake, we've talked about this pretty extensively but the deals we do tend to be margin dilutive structurally that's not to say, they're not very good deals economically the returns have clearly been very attractive, but if you think about <unk>. They were doing 35% EBITDA margins LTM fully <unk>.

<unk> is there going to be sub 40% that was the same thing for Blue line I think NDS fully synergize they would've been 42.

Nerf was closer but certainly if you look at GSI and they were doing LTM EBITDA margins of 27 Theyre in the low 30 synergize in that same thing was true with acre so.

We do do great job, we take pride in the fact that we're able to integrate these companies and extract a lot of value, including through cost synergies, but there has been that dynamic so I just.

Greg I'm sure you appreciate that but our other people's benefit I just wanted to make sure we added that.

Yeah.

Clay Williams - Equity Research Associate, Goldman Sachs: Thanks, I appreciate it. And on guidance, midpoint of guidance implies margins are slightly up sequentially in Q4 versus 3Q. This is better than a normal seasonality, what's improving versus normal seasonality or should we not be looking at it from a midpoint to midpoint? Thanks.

This is better than a normal seasonality, what's improving versus normal seasonality or should we not be looking at it from a midpoint to midpoint.

Matthew Flannery - CEO: Yeah just, we've always been consistent in telling people don't anchor to midpoint and it's not kind of a give a wave or nod which direction you should be thinking, but we've given the range kind of where we feel comfortable indicating fourth quarter but beyond that we don't give quarterly guidance as you know.

Oh, it's been consistent target people don't anchor to midpoint, and it's not kind of skip a lake or not which direction you should be thinking, but yes, we've given that range, that's kind of where we feel comfortable.

Indicating fourth quarter, but.

Beyond that we don't give quarterly guidance as you know.

Clay Williams - Equity Research Associate, Goldman Sachs: Thanks.

Operator: Thank you. We'll take our next question from Tim Thein with Citigroup. Please go ahead.

Timothy Thein - Citigroup Inc., Research Division: Thank you, good morning. Matt, back to your earlier comments on--you expect fleet productivity to be positive in '24. Do you think that, do you still believe that your confidence in terms of the ability to exceed inflation, I know you mentioned positive, but do you have expectation that can be positive in excess of inflation? And to that point, measuring the replacement, the dollars you'll be replacing offered at 20%--is that, just as you think about bringing in more fleet today, that you're dropping off from [inaudible] 7, 8 years ago. Is that 1.5% number that close to what you think actual inflation rates should be in this environment?

You expect fleet productivity to be positive.

24, do you think that.

Do you still believe that our confidence in terms of the ability to to exceed inflation I know you mentioned positive but.

Do you have expectation that can be positive.

In excess of inflation and to that point, you mentioned that the replacement the dollars youll be replacing.

Our friends at 20% is that just as you think about bringing in more fleet today that youre dropping out from seven eight years ago.

Is that one 5% number that.

Close to what you think actual.

Placement rates should be in this in this environment.

Matthew Flannery - CEO: Sure, Tim. So first off, that will always be our goal, to outpace inflation and we think we will. We feel confident we'll have positive fleet productivity and frankly, we need to outpace that inflation right. The whole point of fleet productivity was to make sure that we generate revenue growth higher than the fleet growth and that fleet growth, some of it's inflation, so you've got to exceed it. As far as the point and a half bogey that we put out there a couple of years ago, in reality, it's a little bit higher today where that extra inflation gets captured in mix, which gets captured in the fleet productivity report. So whether we change that bogey to higher, if we make that 2%-2.5% and then we add it back into the fleet productivity looks better--it's really just right pocket, left pocket. We're keeping it at one and a half for now, just for simplicity's sake. We're keeping it consistent but we still absorb that extra inflation and that comes in as negative mix. So you guys still see the whole picture and we'll probably continue to do that going forward. We talked about a little bit internally and we think it's easier to keep the metric consistent and we do expect to exceed that inflation, even with the extra mix headwind.

We feel confident we will have positive fleet productivity and frankly, we need to outpace that of inflation right. The whole point of fleet productivity was to make sure that we generate revenue growth higher than our fleet growth and that fleet growth. Some of it's inflation. So you've got you've got exceed it as far as the point and a half bogey that we.

Put out there couple of years ago.

In reality, it's a little bit higher today, where that extra inflation gets captured in mix, which gets captured in the fleet productivity report so whether we change that bogey to higher if we make that 225% and then we added back into the fleet productivity looks better. It's really just right pocket left pocket, we're keeping it at one and a half for now.

Just for <unk>.

Just for simplicity sake of keeping a consistent but we still absorb that extra inflation and that comes in as negative mix or you guys still see the whole picture.

And we will probably continue to do that.

Going forward, we talked about a little bit internally and we think it's easier to keep the metric.

Consistent and we do expect to exceed that inflation, even with the extra mix headwind.

Okay understood and then hopefully that makes sense.

Timothy Thein - Citigroup Inc., Research Division: Okay, understood.

Matthew Flannery - CEO: And then hopefully, that makes sense.

Timothy Thein - Citigroup Inc., Research Division: It does, thank you Matt. And then, you guys have a good lend into the kind of the supply and demand balance in the industry from a number of sources, including the Rouse data and it seems, to us anyway--you mentioned earlier supply change and loosening up and some of the OEM dealers seem to be getting more active in rental, also seem to be catching up in terms of product availability. I am curious if that's coming through in terms of that supply demand data that you guys see and just how, if at all, it's influencing or informing you about your CapEx plans for '24.

You guys have a good <unk>.

<unk> into the kind of the supply and demand balance in the industry from a number of sources, including the rouse data and.

It seems to us anyway.

The you mentioned earlier supply change and loosening up.

And.

Some of the OEM dealers that are seem to be getting more active in rental.

Also seem to be catching up in terms of.

Product availability I am curious if if that's coming through in terms of the.

That supply demand data that you guys see.

And just how if at all it's influencing our informing you about your Capex plans for 'twenty four.

Matthew Flannery - CEO: Sure Tim. Well, it's certainly gotten better, right. So supply chain, certainly gotten better and I think you're seeing, I think you'll see most of the industry around more normalized time utilization and you've seen that this year and that's a good thing. Because it can run the business more efficiently and frankly, be more reliable partner to your customers. But I think the next big leg of growth, the OEMs still going to be replaced, I don't think that as OEMs grow their volume, this is going to be all this extra fleet in the system. There's still a lot of replacement CapEx that needs to be served and especially in some of the areas that's been dragging. So I think that'll be more the characteristic of the next year or two, we're getting ahead of the curve, you see how how much we're trying to focus on the used sales to get that fleet age right. So we feel good about where we are but we're still going to have a lot of replacement CapEx next year just like the rest of the industry.

The Oems still going to be replaced I don't think that as Oems grow their volume. This is going to be all this extra fleet in the system, there's still a lot of.

Replacement capex that needs to be served and especially in some of the areas. That's been dragging so I think that'll be more characteristic of the next year or two we're getting ahead of the curve you see how how much we're trying to focus on the used sales to get that fleet age right. So we feel good about where we are in but we're still going to have a lot of replacement capex.

Next year, just like the rest of the interim.

Timothy Thein - Citigroup Inc., Research Division: Okay. Thanks for the time, Matt.

Operator: Thank you. As a reminder, if you would like to ask a question, please press star 1 at this time. Our next question comes from Neil Tyler with Redburn Atlantic. Please go ahead.

Our next question comes from Neil Tyler Redburn Atlantic.

Please go ahead.

Neil Tyler - Partner, Redburn Atlantic: Thank you, good morning. A couple of small questions, please. Firstly, just going back to your comments, Matt, about the Ahern synergies. I thought you made comments at the previous couple of quarters that the revenue synergies might take a bit more time to crystallize and probably wouldn't be expected to come through in the first 12 months. So I wanted to just check where you stand on that and the thoughts. I understand that you are just--and to use your words, the egg's fairly well-scrambled at the moment, but if you can just sort of help us understand how the cross selling has been going there. And then the second one, just a bit more specific, on the used proceeds. As you move into next year, first of all, it sounds as if you've broadly sort of caught up in terms of exiting or shedding the fleet of the older assets, so presumably the used fleet will be slightly younger, but I guess we're all expecting used prices to normalize downwards a bit. So if you can help us sort of think about the percentage, although you see perhaps that those proceeds will track through the next 12 months or so.

A couple of small questions. Please firstly just.

Just going back to your comments.

Matt about the.

Synergies.

Made comments in the previous couple of quarters that the revenue synergies.

Might take a bit more time to crystallize and probably wouldn't be.

We expect it to come through in the first 12 months. So I just wanted to do I wanted to just check where you stand on that.

I understand that.

Yeah.

And to use your words, the extracellular scrambled amendment, but if you can just sort of help us understand how the cross selling has been going there.

And then the second one just a bit more specific on the.

Use of proceeds.

As you move into next year, So first of all.

It sounds as if you've broadly sort of caught up.

In terms of ER exited.

Exited or shedding the fleet of the older assets, so presumably the.

The used fleet will be slightly younger, but I guess, we're all expecting used prices to normalize downwards a bit. So if you can help us sort of.

Think about the percentage, although you see perhaps that those proceeds.

It will track through the next 12 months or so.

Ted Grace - CFO: Sure, Neil. Thanks for giving me the chance to clarify. Our cost synergies will be realized, you are absolutely right. Our revenue synergies will take longer so I--so knowledgeable of that, that I heard it as cost even if it wasn't asked that way, so thanks for that clarity. But the cross selling is going well and you know we're on schedule and that usually takes a couple of years to fully bake and we're on track for that. I think the customer base and the sales teams that come with that are very pleased to have a full portfolio to shop. So that's working well. And then as far as the used proceeds, yeah I mean, certainly we've talked about these dynamics for a while now and as the supply chain normalizes, the expectation would be that that incremental buyer, who couldn't buy new and is left to only buy used, fades. It's on a relative basis, you'll see not as much demand versus supply. That's something we've talked about and expected in '24 that's likely is going to be a dynamic that we should be looking for. On the other hand, you're still going to have fleet inflation and Matt alluded to kind of the cumulative 20%. That's for us, a very good position. I would say fleet inflation more broadly, it's higher and ultimately that provides an umbrella for used pricing. So these are the kind of cross-currents that we'll be balancing next year. We certainly would expect to have recovery rates well above historical levels. '22 set an unsustainable bar, I think everybody understood that there were some temporary benefit there that's led to us getting 74 cents on the dollar, if I'm not mistaken, selling eight-year old equipment. That's not normal and that's not something anybody ever expected to be sustained, you're seeing a normalization this year with that channel mix. Next year, I think you'll see us kind of normalize again, so ultimately those recovery rates they won't be at '22 levels, but they won't be back to those kind of pre-'20 levels either.

So knowledgeable of that that I heard it as cost even if it wasn't asked that way so thanks for that clarity.

Cross selling is going well and you know we're on schedule and that usually takes a couple of years to fully bake and we're on track for that I think are I think the customer base and the sales teams that come with that are very pleased to have a full portfolio to shop. So that's working well and then as far as the.

Use of proceeds.

Yeah, I mean, certainly we've talked about these dynamics for a while now and as the supply chain normalizes.

The expectation would be that that incremental buyer, who couldnt buy new and what's left to only buy used.

Fades.

On a relative basis, youll see not as much demand versus supply.

That's something we've talked about and expected in '24 that's likely is going to be a dynamic that we should be looking for. On the other hand, you're still going to have fleet inflation and Matt alluded to kind of the cumulative 20%. That's for us, a very good position. I would say fleet inflation more broadly, it's higher and ultimately that provides an umbrella for used pricing. So these are the kind of cross-currents that we'll be balancing next year. We certainly would expect to have recovery rates well above historical levels. '22 set an unsustainable bar, I think everybody understood that there were some temporary benefit there that's led to us getting 74 cents on the dollar, if I'm not mistaken, selling eight-year old equipment. That's not normal and that's not something anybody ever expected to be sustained, you're seeing a normalization this year with that channel mix. Next year, I think you'll see us kind of normalize again, so ultimately those recovery rates they won't be at '22 levels, but they won't be back to those kind of pre-'20 levels either.

Both should be looking for on the other hand, you're still going to have fleet inflation and Matt alluded to kind of the cumulative 20%.

And a very good position I would say fleet inflation more broadly it's higher and ultimately that provides an umbrella for used pricing. So these are the kind of crosscurrents that we'll be balancing next year, we certainly would expect to have recovery rates well above historical levels.

I would say fleet inflation more broadly, it's higher and ultimately that provides an umbrella for used pricing. So these are the kind of cross-currents that we'll be balancing next year. We certainly would expect to have recovery rates well above historical levels. '22 set an unsustainable bar, I think everybody understood that there were some temporary benefit there that's led to us getting 74 cents on the dollar, if I'm not mistaken, selling eight-year old equipment. That's not normal and that's not something anybody ever expected to be sustained, you're seeing a normalization this year with that channel mix. Next year, I think you'll see us kind of normalize again, so ultimately those recovery rates they won't be at '22 levels, but they won't be back to those kind of pre-'20 levels either. The other part about fleet age, Neil, it won't be tremendously different. I mean, we still got--we just got back to more normalized fleet age. We've always had plenty of 8-year old equipment to sell so we don't think that that 7 to 8-year old average range that we've been hitting will be changing that much.

22 set.

Sustainable bar I think everybody understood that there were some temporary benefit there that's led to us getting 74 cents on the dollar amount mistaken selling eight year old equipment.

That's not normal and that's not something anybody ever expected to be sustained youre seeing a normalization. This year with that channel mix next year, I think you'll see us kind of normalize again, so ultimately those recovery rates they won't be at 22 levels, but they won't be back to those kind of pre 20 levels either.

The other part about fleet age Neal it won't be tremendously different I mean, we still got we just got back to more normalized fleet age we've always had plenty of. At year old equipment to sell so we don't think that that seven to eight year old average range that we've been hitting we'll be changing that much.

At year old equipment to sell so we don't think that that seven to eight year old average range that we've been hitting we'll be changing that much.

Neil Tyler - Partner, Redburn Atlantic: Okay. That's really helpful. Thank you.

Neil, do you have a third question? I think you said you had three, I don't know two or [inaudible]. No just that just the two of them.

Ted Grace - CFO: Neil, do you have a third question? I think you said you had three, I don't know two or [inaudible].

You said you had three I don't know two two.

Neil Tyler - Partner, Redburn Atlantic: No just that just the two of them.

No just that just the two of them.

Yeah.

Operator: Thank you. Our next question will come from Steven Ramsey with Thompson Research Group. Please go ahead.

Steven Ramsey - Thompson Research Group, LLC: Good morning. I know it's early days on megaprojects getting ramped up, I'm curious on the secondary effects that you're seeing there. If the rental market in those geographies is tighter and helping utilization and rates more broadly besides just the project itself.

The rental market in those geographies is tighter and helping utilization and rates more broadly besides just the project itself.

Matthew Flannery - CEO: Yeah, just generally yes. But I think you're talking about mostly the larger companies that are going to be supplying these jobs and we'll all mobilize the fleet to get there to take care of the customers, but generally it will tighten up in the surrounding areas. And then the other part of a lot of these plants, especially the ones that are built in more rural markets is you'll have infrastructure built around and whether that be feeder plants, whether that be residential and then the retail and the schools that go with it. So these are big boon for these markets overall, that we pick the whole, we certainly expect to get our fair share plus, but that's a whole area we'll benefit from.

More rural markets as you'll have infrastructure built around and whether that be feeder plants, whether that be residential and then the retail in the schools that go with it. So these are big Boon for these markets overall that that we pick the hole, we certainly expect to get our fair share plus but that's a whole area will benefit from.

Steven Ramsey - Thompson Research Group, LLC: That's helpful. That's all for me thanks.

Matthew Flannery - CEO: Thanks, Steve.

Operator: Thank you. Our next question will come from Jeff Weber with Wells Fargo. Please go ahead.

Unknown: Hey. Hey, guys. Good morning, it's Seth. I just wanted to go back to the used equipment discussion again for a second just to clarify. It sounds like you kind of tweak your channel mix here to help get rid of some of the older fleet, the acquired fleet. Can you just talk to what you think your channel mix will be going forward, whether it's more wholesale, less auction, what have you. Just how should we think about the channel mix to sell used equipment going forward relative to where it's been for the last couple of quarters. Thanks.

I just wanted to go back to the US used equipment discussion again for a second just to clarify it sounds like you you kind of tweak your channel mix here to help get rid of some of the older fleet. The acquired fleet can you just talk to what you think your channel mix will be going forward.

Whether it's more wholesale less less auction what have you just.

How should we think about.

The channel mix to sell used equipment going forward relative to where it's been for the last couple of quarters. Thanks.

Matthew Flannery - CEO: Sure, Seth. So if you go back to pre-COVID levels, we're usually about two thirds of our volume of retail and less than 5% auction and whatever fell in the middle there between trades and brokers varied a little bit on years, just based on what kind of negotiations with the vendors, what were the assets we needed to replace and so on. I think we expect it to be a bit more normalized in that type of atmosphere. Obviously, you saw 17% auction this past quarter, [inaudible] but tha'ts certainly a large number for us and that was just blowing out some of the older assets from the $2.2 billion of acquired fleet that we had through M&A, right. Everybody had their 5% to 10% in the back of the lot that you had decided to work through or get rid of it. So we just decided to clean that up but we will get back to more normalized channel mix that what you saw pre-pandemic.

Obviously, you saw 17% auction this past quarter, that's right that might be the highest we've ever done, but thats certainly a large number for us and that was just blowing out some of the some of the older assets from the $2 2 billion of acquired fleet that we had through M&A right everybody had their 5% to 10% in the.

And the back back is a lot that you had decided to work through where or get rid of it. So we just decided to clean that up but we will get back to more normalized.

Channel mix that what you saw pre pandemic.

Unknown: Okay. That's all I had, thank you guys.

Matthew Flannery - CEO: Thanks.

Operator: Thank you. Our next question comes from Michael Feniger with Bank of America. Please go ahead.

Yes, thanks for taking my questions, Matt, we Havent really seen how rental holds up in a higher for longer interest rate environment. How does that tie typically way on project activity, but also impact that rent versus own trade off how does this kind of higher for longer. The rate environment differ from other periods, when we think of the impact to the rental equipment space. The rate environment differ from other periods, when we think of the impact to the rental equipment space. So. For my 30, plus years of doing this anytime capital becomes more expensive. It's logical to think that people pay more attention to what they spend their capital. So when you think about customers that were owning or wanted to own. It adds another barrier thought to them to then think about the opportunity to try rental and once they do the math just works when you think about the lack of even in a flat. Interest environment, when you think about once they get over the fact that and I get what I want when I need it our industry has come such a long way that we don't lose customers. They don't go the other way after that because the rental experience is much better they have flexibility to turn the assets and when they don't need them. They don't have to deal with all those soft costs. Storage, maintaining transportation and the reliability right. So our mechanics are usually going to do a heck of a lot better job than somebody who is working on an equipment once in a blue moon. So all of those variables mean, greater rental penetration and I think a higher interest environment just adds another. Layer of that higher penetration so. What would be our expectation that's what history has taught us.

Michael Feniger - Director of Equity Research, Bank of America Merrill Lynch: Yes, thanks for taking my questions. Matt, we haven't really seen how rental holds up in a higher for longer interest rate environment. How does that tie typically way on project activity, but also impact that rent versus own trade off? How does this kind of higher for longer rate environment differ from other periods when we think of the impact to the rental equipment space?

The rate environment differ from other periods, when we think of the impact to the rental equipment space.

Matthew Flannery - CEO: So for my 30-plus years of doing this, anytime capital becomes more expensive, it's logical to think that people pay more attention to what they spend their capital on. So when you think about customers that were owning or wanted to own, it adds another barrier thought to them to then think about the opportunity to try rental. And once they do, the math just works. When you think about the lack of--even in a flat interest environment--when you think about once they get over the fact that 'can I get what I want when I need it' our industry has come such a long way that we don't lose customers. They don't go the other way after that because the rental experience is much better, they have flexibility to turn the assets too when they don't need them. They don't have to deal with all those soft costs of storage, maintaining, transportation and the reliability, right. So our mechanics are usually going to do a heck of a lot better job than somebody who is working on an equipment once in a blue moon. So all of those variables mean greater rental penetration and I think a higher interest environment just adds another layer of that higher penetration. So that's what would be our expectation, that's what history has taught us.

So.

For my 30, plus years of doing this anytime capital becomes more expensive.

It's logical to think that people pay more attention to what they spend their capital. So when you think about customers that were owning or wanted to own. It adds another barrier thought to them to then think about the opportunity to try rental and once they do the math just works when you think about the lack of even in a flat.

Interest environment, when you think about once they get over the fact that and I get what I want when I need it our industry has come such a long way that we don't lose customers. They don't go the other way after that because the rental experience is much better they have flexibility to turn the assets and when they don't need them. They don't have to deal with all those soft costs.

Storage, maintaining transportation and the reliability right. So our mechanics are usually going to do a heck of a lot better job than somebody who is working on an equipment once in a blue moon. So all of those variables mean, greater rental penetration and I think a higher interest environment just adds another.

Layer of that higher penetration so.

What would be our expectation that's what history has taught us.

Michael Feniger - Direct of Equity Research, Bank of America Merrill Lynch: Thank you. And my follow up is just, clearly there's some moving pieces for the construction cycle next year--offices, commercial versus infrastructure, industrial, upstream energy versus downstream--so help us in the context of fleet intensity. We saw this in 2015-16 with three years of the oil downturn. How much fleet would come out of some of these weaker pockets compared to the fleet necessary to service some of these other markets where there is some tailwind. So if you could just kind of help us conceptualize some of those moving pieces. Thank you. And Michael let Mike Poppe pockets, you're talking about are you referring to to what areas because.

Michael Feniger - Director of Equity Research, Bank of America Merrill Lynch: Thank you. And my follow up is just, clearly there's some moving pieces for the construction cycle next year--offices, commercial versus infrastructure, industrial, upstream energy versus downstream--so help us in the context of fleet intensity. We saw this in 2015-16 with three years of the oil downturn. How much fleet would come out of some of these weaker pockets compared to the fleet necessary to service some of these other markets where there is some tailwind. So if you could just kind of help us conceptualize some of those moving pieces. Thank you.

Downstream just help us in the context of.

Intensity, we saw this in 2015 16 with three years of the oil downturn, how much wood.

<unk> come out of some of these weaker pockets compared to the fleet.

Necessary to service some of these other markets. There is some tailwind. So if you could just kind of help us conceptualize some of those moving pieces. Thank you.

Matthew Flannery - CEO: And Michael, pockets you're talking about, are you referring to what areas because we--I think you heard in my opening comments, we're seeing pretty broad-based demands; all the verticals that we serve, ironically other than oil and gas and I think we've all seen the rig count come down--has been were positive in Q3. So we're not seeing a lot of the soft pockets, say a little more what you're thinking about.

And Michael let Mike Poppe pockets, you're talking about are you referring to to what areas because.

I think you heard in my opening comments, we're seeing pretty broad based demand all the verticals that we serve ironically other than oil and gas and I think we've all seen the rig count come down has been were positive in Q3. So we're not seeing a lot of the soft market say, a little more what you're thinking about.

Michael Feniger - Director of Equity Research, Bank of America Merrill Lynch: Well, I guess if those pockets do soften next year, Matt, how should we think about the business model reacting? And the fleet services, maybe some of these small pockets that the market is worried about, commercial real estate, private office--relative to the fleet that's required for some of these other end markets that are seeing really strong verticals or strength on a multi-year basis.

How should we think about the business model reacting.

We sat services, maybe some of these small.

Pockets of the market is worried about commercial real estate private office.

Relative to the fleet that's required for some of these other end markets that are seeing really strong verticals.

<unk> strength on a multiyear basis.

Matthew Flannery - CEO: Okay, great. So, we have always somewhere between $3 and $3.5 billion at our disposal to reposition fleet profiles, if that's what necessary. But one of the great things of the model is very fungible assets. The fleet we use may vary a little bit depending on what type of construction is going on, maybe in some of these stadiums you're going to need bigger booms and maybe on some of these megaprojects you're going to have a higher propensity for a full breadth of fleet, from more dirt-moving because they are bigger footprints. But our fleet breadth can really account for that and it's one of the great parts of the rental model--is as long as you don't get overly specialized, which we don't, that fungibility allows you to move it from different types of work to the other. And that's something that on the margin, if there's some changes, we certainly have just within our replacement CapEx, the opportunity to re-profile and send that fleet to the right place.

We have always somewhere between three and $3 $5 billion right at our disposal to reposition fleet profiles, if that's what necessary, but one of the great things of the model. So we are very fungible assets right.

The fleet, we use may vary a little bit depending on what type of construction is going on maybe in some of these stadiums youre going to need bigger booms and maybe on some of these mega projects, you're going to have a higher propensity for a full breadth of fleet from more dirt moving because they are bigger footprints, but our fleet Brad can really.

Account for that and it's one of the great parts of the rental model is as long as you don't get overly specialized which we don't you don't have that Fungibility allows you to move it from different types of work to the other and that's a that's something that on the margin if theres. Some changes we certainly have just within our replacement capex the opportunity.

To re profile and send that fleet to the right place.

Ted Grace - CFO: Mike, what I might add--it's really difficult to get into demand intensity by sub-vertical, if you will--but the way we've kind of talked about this publicly when we look at it internally, is just more from a top-down perspective. If you think about the verticals where certainly, we feel very good things like manufacturing, power, infrastructure, transportation, healthcare, et cetera; if you look at the dollar value of those projects and those markets versus the areas you're alluding to, which maybe it's aspects of offices, aspects of commercial. The absolute dollars are much greater in the areas that seem to be opportunistic and so from a weighted basis, that's where we see our opportunity growing next year.

We feel very good things like manufacturing power infrastructure transportation health care et cetera. If you look at the dollar value of those projects and those markets versus the areas Youre alluding to which maybe it's aspects of office it's <unk>.

<unk> is a commercial.

Just the absolute dollars are much greater in the areas that seem to be opportunistic and so from a weighted basis, that's where we see our opportunity growing next year.

Michael Feniger - Direct of Equity Research, Bank of America Merrill Lynch: Thank you.

Matthew Flannery - CEO: Thank you, Mike.

Operator: Thank you. At this time, we have no further questions in queue. I will turn the call back to Matt Flannery for closing remarks.

Matthew Flannery - CEO: Great. Thank you, operator. That wraps it up for today and I want to thank everyone for joining us and remind you all, if you have any questions, please feel free to read out reach out to Elizabeth anytime. Operator, you can now end the call.

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

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Q3 2023 United Rentals Inc Earnings Call

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