Q1 2025 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.
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, 2024, 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.
Speaker Change: 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. Please go ahead Sir.
Matt Flannery: Thank you operator, and good morning, everyone. Thanks for joining our call.
Matt Flannery: Yesterday afternoon, we were pleased to report our first quarter results, which reflected a solid start to the year.
We saw growth across both our industrial and construction end markets demand for used equipment remains healthy and importantly, our customers continue to feel good about their own outlooks.
As you've heard me discuss before a key element of our strategy is being the partner of choice for our customers.
Matt Flannery: And thanks to the team's steadfast commitment to this which always includes putting safety first.
Matt Flannery: We delivered first quarter records across revenue and adjusted EBITDA.
Matt Flannery: This is facilitated by our focus on operational excellence and innovation.
Matt Flannery: And as you saw through I reaffirmed guidance 2025 is on track to be another year of profitable growth.
Matt Flannery: Reinforced by the momentum we've carried into our busy season.
Matt Flannery: Today I'll review, our first quarter results, followed by why do we feel confident in our 2025 guidance.
Matt Flannery: And finally I'll discuss how we think about managing the business for the long term success.
Matt Flannery: And then Ted will discuss financials in detail before we open up the call to Q&A.
Matt Flannery: So with that let's start with the first quarter results.
Matt Flannery: Our total revenue grew by six 7% year over year to $3 7 billion.
Matt Flannery: And within this.
Matt Flannery: Rental revenue grew by seven 4% to $3 $1 billion, both first quarter Records.
Matt Flannery: Fleet productivity increased to three 1% as reported.
Matt Flannery: And 1.9% pro forma for <unk>, which we've now lapped.
Matt Flannery: Adjusted EBITDA increased to a first quarter record of $1 7 billion translating to a margin of nearly 45%.
Matt Flannery: And finally.
Matt Flannery: Adjusted EPS came in at $8.86.
Matt Flannery: Now, let's turn to customer activity.
Matt Flannery: We continue to see growth in both our gen rent and specialty businesses.
In fact specialty rental revenue grew 22% year over year, and 15% pro forma for yeah.
Matt Flannery: We opened eight specialty cold starts in the first quarter and expect to open at least 50 this year.
Matt Flannery: By vertical our construction end markets saw solid growth across both infrastructure and non res construction, while our industrial end market saw particular strength within power and chemical processing.
Matt Flannery: We continue to see new projects kicking off with a few recent examples including data centers pharmaceuticals airports and industrial manufacturing facilities.
Matt Flannery: Now turning to the us market.
Matt Flannery: We sold over $740 million of always see which was a first quarter record.
Matt Flannery: The demand for used equipment remains healthy and we're on track to sell an estimated $2 $8 billion of fleet. This year.
Matt Flannery: We spent over $700 million on rental capex in the quarter in response to solid customer demand.
Matt Flannery: As you would expect growth continues to be led by large projects, where all elements of our strategy position us to be the partner of choice.
Matt Flannery: We drove free cash flow of nearly $1 $1 billion setting us up for another year of strong cash generation, which we view as a hallmark of the company.
Matt Flannery: The combination of our industry, leading profitability capital efficiency and.
Matt Flannery: And the flexibility of our business model enables us to generate meaningful free cash flow throughout the cycle and in turn allocate that capital in ways that allow us to create long term shareholder value.
Matt Flannery: Finally capital allocation.
Matt Flannery: Priority number one for us is funding growth, while maintaining a healthy balance sheet.
Matt Flannery: After the organic growth, we supported in the quarter, we returned nearly $370 million to shareholders through a combination of share buybacks and our dividend.
Matt Flannery: Our leverage of one seven times remain towards the lower end of our targeted range, leaving.
Matt Flannery: Leaving plenty of dry powder to support both inorganic growth.
Matt Flannery: And to return excess capital to our shareholders.
Matt Flannery: To this point following the completion of our prior share repurchase authorization last month I am pleased to share that our board has approved a new $1 $5 billion program as Todd will discuss shortly.
Matt Flannery: Now, let's turn to the rest of 2025.
Matt Flannery: As evidenced by our reiterated guidance our expectations for the year unchanged.
Matt Flannery: The year is off to a start we anticipated while feedback from the field continues to be optimistic, particularly for large projects.
Matt Flannery: The momentum we're carrying into our busy season, along with backlogs in our customer confidence index are all supportive of our outlook.
Matt Flannery: I will note, we've not seen a change in customer outlooks for the balance of 2025.
Matt Flannery: But with all that said we understand the recent concerns around the macro uncertainty.
Matt Flannery: And if things change, we feel confident in our ability to react to best support both our customers and our stakeholders.
Matt Flannery: And as we think about the long term.
Matt Flannery: Our strategy is built on how we can competitively differentiate ourself and outpaced the market.
Matt Flannery: When we listen to the voice of the customer we gained additional conviction that our one stop shop offering is critically important.
Matt Flannery: The power of cross selling lets us take our long established relationships and accelerate our growth by meeting our customer demands with both our gen rent and specialty products.
Matt Flannery: And when we layer on our technology offerings.
Matt Flannery: We can provide our customers a truly unique experience.
Matt Flannery: And while we've had specialty as part of our business mix for many years. We believe this growth engine has a lot of runway ahead.
Matt Flannery: Courted by both geographic white space and additional products and Adjacencies that we can add to our portfolio.
Matt Flannery: To continue to better serve our customers.
Matt Flannery: To bring this to life.
Matt Flannery: We have a large national account customer with a longstanding relationships primarily with our gen rent too.
Matt Flannery: And as we dug into how we could better serve the customers' needs.
Matt Flannery: We learned we had the opportunity to be a better partner.
Matt Flannery: This included not just providing additional products, but also innovating together such as feeding information directly into their own internal tracking systems.
Matt Flannery: And through our partnership we learned more about the customers' requirements.
Matt Flannery: An added specialty products to fit the bill well to make a long story short.
Matt Flannery: Over just two years, we've increased their spend with us by 12 times.
Matt Flannery: Becoming an enterprise solutions and specialty has increased from 10% of their spend with us to 40%.
Matt Flannery: And this example is another strong proof point of our go to market strategy.
Matt Flannery: In closing.
Matt Flannery: We remain focused on being the best partner to our customers. We're.
Matt Flannery: We're on track for another year of profitable growth.
Matt Flannery: And we believe the longer term outlook, we see combined with our business model strategy.
Matt Flannery: Capital discipline, and our competitive advantages.
Allow us to generate compelling shareholder returns.
Matt Flannery: And with that I'll hand, the call over to Ted and then we will take your questions Ted over to you.
Ted Grace: Thanks, Matt Good morning, everyone.
Ted Grace: As Matt just shared 2025 is off to a good start with first quarter records across total revenue rental revenue and EBITDA, which combined with the momentum we're carrying into our busy season and encouraging customer sentiment is enabling us to reaffirm our full year guidance.
Ted Grace: So with that said, let's jump into the numbers.
Ted Grace: First quarter rental revenue was a record at 315 billion.
Ted Grace: That's a year on year increase of $216 million or seven 4% supported again by growth from large projects and key verticals.
Ted Grace: Within this we are increased by $118 million or four 9% driven by three 3% growth in our average fleet size and fleet productivity of three 1%, partially offset by assumed fleet inflation of one 5%.
Ted Grace: Also within rental ancillary and re rent grew by 19% and 15%, respectively, adding a combined $98 million of revenue.
Ted Grace: This outsized growth relative to <unk> was primarily driven by specialty where delivery represents a bigger portion of revenue from our <unk> business and where our other specialty businesses support customers with value added services like fueling an installation as part of our one stop shop strategy.
Ted Grace: Turning to our used results as Matt mentioned, we took advantage of strong demand to sell a first quarter record amount of OCC generating $377 million of proceeds at an adjusted margin of 47, 2% and a 51% recovery rate.
Ted Grace: Moving to EBITDA as I mentioned adjusted EBITDA was a first quarter record at $1 67 billion.
Translating to an increase of $84 million or 5%.
Ted Grace: Within the sequential gross profit contributed $89 million.
Ted Grace: This was partially offset by used where the continuing normalization of the market drove a 13% decline in used gross profit dollars translating to a $26 million headwind to adjusted EBITDA.
Ted Grace: SG&A increased by $47 million year over year, including $12 million of <unk> related merger costs. Excluding these costs our growth in SG&A was roughly in line with growth in rental revenue.
Ted Grace: And finally, the EBITDA contribution from other non rental lines of businesses increased $68 million.
Ted Grace: Primarily due to the $64 million breakup fee, we received from the termination of the <unk> deal.
Ted Grace: Looking at profitability, our first quarter adjusted EBITDA margin was 44, 9%, implying 60 basis points of compression.
Ted Grace: Notably and as our press release highlighted this includes a $52 million net benefit related to the breakup fee.
Ted Grace: Which is the $64 million less the $12 million of related SG&A costs.
Ted Grace: Although it doesn't impact EBITDA, we also absorbed roughly $13 million of bridge financing fees related to the deal that are included in our net interest expense.
Ted Grace: Taken together, our first quarter results included a net pre tax benefit of $39 million.
Ted Grace: Bringing this back the margins, excluding the <unk> benefit and the impact of your sales or EBITDA margin compressed 150 basis points year over year.
Ted Grace: Similar to last quarter I thought it'd be helpful to talk through a few of the key factors here ahead of Q&A now of course margins in any given quarter will fluctuate with normal variability, but at a high level several of the dynamics in Q1 were consistent with what we talked about in January.
Ted Grace: First ancillary revenue again significantly outpaced our core rental growth.
Ted Grace: Our core elements of our service offering, particularly within specialty they come at a lower margin than our core rental business would have attractive returns as they don't employ much capital.
Ted Grace: As importantly, they provide a unique aspect of customer service that both DIFM.
Ted Grace: <unk>, United Rentals, and helps drive deeper customer engagement.
Ted Grace: So from this perspective, we view this as good business, but it does have a dilutive impact on margins that we estimate at about 50 basis points in Q1 or about a third of the 150 basis point decline.
Ted Grace: Secondly.
Ted Grace: First quarter delivery costs were up driven by a few dynamics, including our growth and adding and the increased dispersion of growth across our footprint.
Ted Grace: A byproduct of the ladder, the greater need to reposition fleet in support of high time utilization.
Ted Grace: Said differently. These are choices, we make between costs and capital efficiency with the idea of supporting returns for the quarter. These additional repositioning costs impacted our margin by about 30 basis points.
Ted Grace: And finally <unk>.
Ted Grace: Given where we sit in the current cycle, our OE growth remains relatively low and he is still fairly inflationary environment at.
Ted Grace: At the same time, we continue to make long term strategic investments in important areas like specialty cold starts and technology, both of which enable us to be the partner of choice to customers and provide attractive returns the.
Ted Grace: The combination of these factors and normal variability in our cost accounted for the balance of the decline so call it about 70 basis points.
Ted Grace: Importantly, these are all contemplated within the ranges provided in our guidance.
Ted Grace: And lastly on the P&L side of things our adjusted earnings per share was $8 86 include.
Ted Grace: Including a 45% benefit from <unk>.
Ted Grace: Shifting to Capex first quarter gross rental capex was $707 million in line with normal seasonality.
Ted Grace: Moving to returns and free cash flow our return on invested capital of 12, 6% remained well above our weighted average cost of capital while free cash flow totaled a robust $1.08 billion.
Ted Grace: Our balance sheet remains quite strong with net leverage of one seven times at the end of the quarter and total liquidity of over $3 3 billion.
Ted Grace: I'll note. This was after returning $368 million to shareholders in the first quarter, including $118 million via dividend and $250 million via repurchases.
Ted Grace: Looking forward following the completion of our repurchase program last month, we are pleased to share that our board approved a new one $5 billion program supported by our continued strong free cash flow generation and healthy balance sheet.
Ted Grace: The new program will begin this quarter and is expected to be completed by the end of the first quarter of 2026.
Ted Grace: For the year. It is our intent to repurchase a total of $1 5 billion of common stock, including the shares we purchased in the first quarter and.
Ted Grace: At our current share price this represents about 4% of our market capitalization.
Ted Grace: In total we intend to return roughly $2 billion in cash to shareholders in 2025, equating to over $30 per share or a return of capital yield of better than 5%.
Ted Grace: So to wrap up my prepared remarks overall, another solid quarter that puts us in a position to reaffirm guidance on total revenue EBITDA capex and free cash flow.
Ted Grace: Our balance sheet remains in great shape, providing strong optionality for the business, while our commitment to capital discipline keeps us positioned to support long term shareholder value.
Ted Grace: With that let me turn the call over to the operator for Q&A operator, Please open the line.
Speaker Change: Certainly thank you Mr Grace, ladies and gentlemen at this time, if you would like to ask a question. Please press star one on your telephone keypad and you may remove yourself from the queue at any time by pressing star too. We do ask that you. Please limit yourself to one question and one follow up question. Once again Thats Star one for questions. We'll go first this morning to David Raso.
David Raso: <unk> of Evercore ISI.
David Raso: Hi, Thank you for the time I'll, let others sort of dig into the margin question I was curious about two things the implied revenue growth the rest of the year and how tariffs are impacting conversations with your customers. So so first on the revenue growth.
David Raso: If you pull out the used equipment sales the rest of the year.
David Raso: Sales guide is implying up about 3%.
David Raso: When you look at the Capex and the used sales and you always see youre looking to sell it seems like the average fleet size growth is going to be 3%. So.
David Raso: Almost implies no meaningful help at all from fleet productivity.
David Raso: Is that conservatism or something else, you're trying to signal, especially you noted in the first quarter. The timing it was still fairly healthy that you're moving equipment around so just curious how that dovetails into the fleet productivity guide.
David Raso: And then to follow up on the tariffs how does the potential inflation from tariffs.
Speaker Change: New equipment sales right, meaning for an OEM raising price.
Speaker Change: Does your customer then look at rental as a better alternative right now or particularly does it give you any umbrella to maybe raise rates or at least that conversations leaning that way versus maybe some negative of the inflation impacting the level of construction activity be it lumber or whatever it may be impacting construction.
Speaker Change: Project decisions. Thank you.
Matt Flannery: Sure. David This is Matt I'll take the tariff park firsthand and both Ted and I can discuss the revenue back half revenue growth or Baxter to search when.
Matt Flannery: Do we think about the tariffs first of all our 2025 Capex is fully negotiated and.
Matt Flannery: Over well over 80% of it already has.
Matt Flannery: Yes.
Matt Flannery: Should we will not be impacted by cash in any way in the future to your point about what would happen if our partners did have too.
Matt Flannery: <unk> got significant tariffs and did have to make some changes in the future well a couple of points.
Matt Flannery: To your to your comment we probably have to pass it on like happened post COVID-19 when when we all had to enjoy some pretty healthy increases and then secondly, there'd be some decisions to make there is we've got vendors a couple of vendors in every category of equipment, we buy and there is not a product category that I can think of that doesn't have.
Matt Flannery: Non tariff in part impacted partner, so there'll be a way for us to manage through it and whatever we did have to absorb would be something the whole industry absorbed into your point could be it could be an umbrella coverage for maybe some increased productivity not our preference, but certainly something we have the ability to do on.
Ted Grace: From the growth perspective, Ted you want to take.
Ted Grace: Yes, the only thing I might add on tariffs and certainly anytime there is uncertainty that tends to favor rental over ownership and we never advocate for uncertainty, but we are in a period of time, where there obviously is.
Ted Grace: A couple of things that the macro is trying to struggle with so I'd say at the margin. That's also going to benefit rental even more than we think some of the other advantages we have over over ownership the implied revenue side I guess, the one piece you didn't really.
Ted Grace: We are into that question, David was the impact of inflation and so when we think about that we see growth that's in nominal terms.
David Raso: And so I think when you when you do the math you would see that adjusting for that we'd want to make sure that we are contemplating the effect of inflation, which obviously ties back to fleet productivity and in terms of just the growth rate kind of what you saw in the first quarter versus what would be implied in the back.
David Raso: Three quarters, obviously, we've now lapped Jack so as people think about that relative.
David Raso: Theres relative growth rates I, just wanted to be mindful of that shift as well.
David Raso: So we could again, if you want to touch on any part of that.
David Raso: Well I ended the day when you look at the size of the average always see growth implied from a fairly normal cadence of what you're going to sell the OSC being sold and of course, that's a gross landed sleep per quarter.
David Raso: Just to level set a little of it sounds like the fleet productivity, which is one nine in the first quarter.
David Raso: Ex yeah, right pro forma let's call. It the rest of the year those fleet productivity numbers implied or lease level set there are lower than the one nine is that fair.
Speaker Change: Like the first quarter Im not really I would say David.
Speaker Change: I'd say it'd be pretty steady David is what I listen we're not in the game of forecasting that because there's a big portion of it is just an output of what our revenue construct looks like specifically in mix, but generally what's embedded in the guide, especially if you're using the midpoint is a continuation of that type of positive fleet productivity and that's what our expectation is and that's that's what isn't.
Speaker Change: Other than the guidance.
Speaker Change: Very helpful. Thank you so much.
Speaker Change: Thanks.
Speaker Change: Thank you we'll go next now to Rob Wertheimer at Melius.
Rob Wertheimer: Alright, thank you.
Rob Wertheimer: I'd like to dig into a couple of the margin drivers that you guys called out which was helpful and.
Rob Wertheimer: Basically trying to figure out how temporary are they are fleet repositioning I wonder if you could kind of expand on what the dynamics for that led to that I think you said, maybe broadening out of growth is that repositioning done and dusted that kind of headwind fades and maybe maybe the same question just on mix, maybe that's really in specialty whether that reverts.
Rob Wertheimer: Or whether you see a continuation of that mix.
Speaker Change: Profit Laura I see it at a lower margin drag.
Speaker Change: Yes, Rob I'll talk about the repositioning a little bit.
Speaker Change: Touch on the mix. So just think about the past couple of years before 24, when we had such a broad based growth, we really didn't pull any equipment from any markets everybody had the opportunity to put the fleet they had to work and in some instances even more right. So when we think about now where major projects are really dry.
Speaker Change: A big part of our growth in the local markets are very dependent on where you are now instead of just sending new equipment to manage these new projects right, which was a much more cost effective way because it's coming right from the manufacturer we're relocating equipment right. So we're staging equipment, we're bringing in from other places to serve these large projects. So I think that.
Speaker Change: Balancing is what we're referring to that's driving a little bit of extra costs. When you think about what we were able to do historically and then Ted on the mix, yes, Rob in terms of thinking about specialty in the quarter itself.
Speaker Change: The next certainly the ancillary grew their to healthy pace relative to <unk> still had very healthy <unk> growth.
Speaker Change: But we had an uptick in delivery and for a couple of different reasons part of that would've been yak.
Speaker Change: And part of it would have been the repositioning of fleet just given the nature of projects ending and starting in just that.
Speaker Change: Greater dispersion in growth, we've talked about all year. So that would have been about 150 basis points of the 600 basis point decline in gross margins.
Speaker Change: It will really depend on how the year itself plays out.
Speaker Change: Elsewhere within that margin construct we probably had about 50 basis points of impact from higher subcontract labor those are value added services, we're providing to customers to really help.
Speaker Change: Help them with their projects and alleviate pain points in their business processes. So that again is really driven by serving our customers.
Speaker Change: And there is another 30 basis points related to fuel services again, one of those ancillary services, we do at the request of customers. So when you add that up you'd be looking at the better part of 230 basis points or so I think related to that mix.
Speaker Change: Depreciation just to Dimensionalize that is that was another important part of that revenue bridge that was about 330 basis points 600 basis points.
Speaker Change: Specialty gross margins.
Speaker Change: Really all of which related to Yak.
Speaker Change: Okay that makes perfect sense, and then just as a minor follow up I know repositioning will continue as the market continues to shift but would you say it's lumpy.
Speaker Change: Lumpy.
Speaker Change: <unk> is the bulk of it or is that continue on through the year and I'll stop thanks.
Speaker Change: The honest answer is we're on top of it but we're not sure. We certainly did a deep dive when we saw the drag on the margins and looked at and we were pretty comfortable with the decision to teammates, but I would say this is really an output of where the demand shows up and where we have to put the fleet.
Speaker Change: We are on top of it we've got a pretty good system to make sure where we're making the right decisions in bidding out to third party haulers in an effective manner and.
Speaker Change: If there is an anomaly we'll report it out to you guys as it comes along.
Speaker Change: Thank you.
Speaker Change: Thank you. We'll go next now to Angel Castillo at Morgan Stanley.
Angel Castillo: Hi, Good morning, Thanks for taking my question, maybe just to kind of continue on that.
Angel Castillo: I was wondering if you could expand just on the kind of uncertainty of whether some of these headwinds persist or now what does that kind of imply in terms of your ability to kind of deliver either on the low end or the high end of the guide.
Angel Castillo: Just kind of any implications there would be helpful.
Angel Castillo: Yes.
Speaker Change: I'm going to jump in here Haynesville just to be clear no. One misconstrues my answer to Rob set last question.
Angel Castillo: We're not implying that that the.
Speaker Change: All of these costs are going to persist or not.
Speaker Change: When you think about the ancillary that's really an output of what customers need so it's a good decision.
Speaker Change: Bring us more EBIT dollars. It's just if the revenue construct that's higher than the midpoint of the EBITDA might not move along with it at the same pace as our OE our rental so but it is still the right not doing it isn't an option, we're putting we're putting money in the till so to speak and taking care of our customer what I was speaking to Rob about what's that.
Speaker Change: It is $10 million to $15 million of repositioning we don't really know how much of that will repeat because it's going to be responsive to where the equipment needs our debt. Please.
Speaker Change: That answered the question.
Speaker Change: Okay. That's very helpful and then.
Speaker Change: I'm sorry, the last part of your question contemplated this isn't a big enough number to move us anywhere within the guide we feel very comfortable about reiterating the guidance.
Speaker Change: Got it that's helpful. Thank you and maybe could you expand a little bit more on just the underlying demand trends it sounds like your customers.
Speaker Change: And we're pretty optimistic here I'm just curious how did you see utilization our general kind of overall demand kind of shift or change between January and February versus maybe March and more recently in April and what Youre seeing there.
Speaker Change: Yeah, we don't really talk about monthly sequential in any way shape or form, but the year is playing out as expected and we talked about it being very similar to 24, when we came out with the guidance in January and that's what we're seeing.
Speaker Change: We really we don't talk about weather, we were big enough now and diverse enough that we don't have those type of issues to have to call out and I would say that the year is playing out.
Speaker Change: And a standard seasonal growth pattern and gives us a lot of confidence that there'll be the demand to meet our goals here and that's why we reiterated our guidance.
Speaker Change: Understood. Thank you.
Speaker Change: Thanks.
Speaker Change: Thank you we'll go next now to Jamie Cook with tourist Securities.
Jamie Cook: Hi, Good morning, I guess two questions one Ken just for you understanding the puts and takes at the margins in the quarter and the incremental margins in the quarter.
Jamie Cook: I'm, just wondering your confidence and the 50% 60% through cycle.
Jamie Cook: The incremental margin for United rentals.
Jamie Cook: Just given where the incrementals have been it seems.
Speaker Change: So like the top line just haven't grown at double digit rate for you to achieve that so just your confidence there maybe we should start thinking about EBITDA growth versus incremental so that's my first question and then my second question, obviously, the cash flow is strong.
Speaker Change: Increased authorization is a positive, but just what youre seeing on the M&A front with the AT&T deal falling through wondering given the uncertainty in the market is there opportunities for you guys to sort of be.
Speaker Change: More opportunity opportunistic and your your preference for specialty versus Gen rent. Thanks, yes.
Speaker Change: Yes, Jamie I'll take that first one I think Matt will probably take the second but.
Speaker Change: Nothing has changed in our view of our ability to drive margin expansion over the course of the cycle one of the things we've talked about over really 2020 for now 2025 is the fact that we're in a relatively slower growth phase of the cycle, it's still relatively inflationary it's not our expectation that these kinds of conditions will last for.
Speaker Change: A multi year period, our expectation is that the economy in our markets do obviously accelerate as you get more accommodative fed and better interest rate policies that support overall economic growth and as we get there that obviously gives us the ability to leverage fixed costs more efficiently.
Speaker Change: And so nothing has changed from that perspective, the other thing Thats just something we highlighted today was obviously this revenue construct and the impact we've had from providing more ancillary which we view as a good thing. It has the effect on margins and flow through we've talked about but it's very good business that supports customers in ads EBITDA dollars just not at the same.
Speaker Change: Margin, we would in our core business.
Speaker Change: So we can yes.
Speaker Change: Any follow up on that side, let me know otherwise I'll hand, it over to Matt Yeah. So from the M&A front, we had a pretty robust pipeline.
Speaker Change: Before the <unk> deal and that pipeline remains so G to the focus areas that we really like to hone in on certainly, adding any new products and services to our customer base, we've done very well with that when you think about <unk> in general finance before that so that's that's our primary focus but adding more capacity.
Speaker Change: Within specialty where we still have white space and penetration opportunities.
Speaker Change: This double digit growth trend that we're on would be another area of focus and there is still a pretty good pipeline that the team is working through we have plenty of dry powder as we talked about earlier at one seven times leverage and a strong balance sheet and we have the capability. So we certainly are still in the M&A game.
Speaker Change: We just have to find the right partner and make sure it meets a very high bar.
Speaker Change: Thank you very much.
Speaker Change: Thanks.
Speaker Change: Thank you well go next now to Michael Feniger of Bank of America.
Michael Feniger: Yeah, Hey, guys. Thanks for taking my question just on the specialty growth even ex M&A up 15, just I know you touched on it earlier, but is there anything you can flesh out in terms of what's driving that in terms of end markets product product lines is it gaining more customer share.
Michael Feniger: Is it the cold starts just your confidence on that kind of double digit growth rate that we've kind of seen from specialty.
Michael Feniger: So far for the rest of this year.
Michael Feniger: Well I think it's all of the above right. So and when you think about the example, I gave in the opening remarks about even with long standing relationships, we could as we continue to add more products and services to our portfolio, even with long standing relationships. We find we have opportunities and also they have to have the demand so the kind of projects.
Michael Feniger: Specifically, our larger customers tend to have a more complex and need more support and we're there to meet that sport I think that's driving a lot of the specialty growth, but then also as we add these new.
Michael Feniger: Products to our platform and the ability to scale them up is another big opportunity and we still have white space, there and that would be dismissive of what's happened in one of our most established ones, which is power our power HVAC heating still grow double digits and in one of our strongest growers in the company as they not only get more pent.
Michael Feniger: <unk>, but add more products to their portfolio. So it's really across the board, which is why you hear the confidence in our voice of double digit growth for especially for the foreseeable future.
Speaker Change: Great and Matt just to follow up just like Gen rent is still positive, but clearly in a slow growth phase right now just in terms of the cycle how to think about it do you have to go negative first before we see a reacceleration based on the conversations in the field what would be that catalyst for <unk>.
Speaker Change: Is it more D escalation of tariffs is it fed rate cuts deregulation I mean, if you look back in 2009, obviously that was a very severe recession. There was just a very long lag for non res to recover.
Speaker Change: Do you think that is the case. This go around more kind of talking about maybe a reacceleration in some areas like the local markets are some areas that have been soft. Thank you.
Speaker Change: Yes, so we certainly don't think it needs to go negative we feel like we're in the slower part of the cycle and we're not going negative but to your point about the local market. We are much more highly penetrated in the local market with gen rent.
Speaker Change: And that's a that's a bigger needle mover for them, but they still have some of the opportunities that we have in large projects to help offset that and I think although most of our gross our growth is coming from specialty I think our general team is well positioned to as the market picks back up as a local market repairs, whether thats driven by interest rates just overall strong.
Speaker Change: Our economy, whatever it we're very well positioned we've kept our capacity we didn't overreact to this slower growth, which although maybe it's drags on margins a little bit into the right long term decision. So we feel really good about where we're positioned we don't think we have to turn negative for an acceleration and Mike I might just add from a vertical perspective, the two areas that have been most challenging.
Speaker Change: And then residential and residential related.
Speaker Change: And kind of call. It the oil patch. So I think those are verticals that people understand have had kind of unique challenges.
Speaker Change: To the degree you saw those inflect that would that would that.
Speaker Change: It'd be a positive for the Gen rent growth.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Thank you the next now to Tim Thein of Raymond James.
Speaker Change: Oh, great. Thanks, just.
Speaker Change: Wanted to circle back as a follow up on the earlier question on tariffs and.
Speaker Change: Ted you covered it with with respect to the Capex impact from new equipment, but just curious from an opex perspective.
To the extent, we were to see parts pricing may change or be impacted by tariffs is there protection there or how would we think about that I guess hypothetical at this point, but maybe just update us on that point.
Speaker Change: Yeah, It's a fair point, Tim but still all negotiated for 25. So we're locked in for 25, but it's it's no different than the fleet costs, we negotiate our parts and our fleet costs with our partners annually and 26, if if there is some stuff there we're going to have to make sure we're aligned with the folks at Ken.
Speaker Change: Either Bob.
Speaker Change: Bypass having to push them on or or avoid them altogether and that'll be part of our 26 negotiation, but nothing that we see in 'twenty five.
Matt Flannery: Okay, Okay, and then Matt just you highlighted.
Speaker Change: Several others.
Speaker Change: The larger national account business and how we've been dealing with this softness in the local account business, which is.
Speaker Change: The market for some time, which is.
Speaker Change: It seems to be continuing but I'm just curious if that.
Speaker Change: A is that creating any sort of a mix headwind for United in and I guess, if so when.
Speaker Change: Could it be more pronounced in what what is a seasonally softer quarter just normally slower activity in the first quarter is that more pronounced store.
Speaker Change: Or none of the above I'm, just curious from a mix impact is there any sort of headwind there.
Speaker Change: Yeah.
Speaker Change: Don't think there'll be any further headwind to your point about Q1 being a slower part of the year and not the part of the year, we bring in the more capex that could have some impact on that repositioning costs that we talked about from an ancillary perspective, it's really mostly driven by the very high level of growth in specialty and the extra products in <unk>.
<unk>, we provide with with that offering so.
Speaker Change: Nothing that I think is going to change seasonally it'll it'll depend I think we'll continue to see the demand and therefore, where we put our fleet to play out similar to 'twenty four I guess, the one difference would be as we continue to grow the act business. We continue to grow our specialty footprint through cold starts I think that's driving some of the ancillary for all forget.
Speaker Change: Reasons really for good.
Speaker Change: Cross sell growth.
Speaker Change: Okay, alright, well ill leave it there. Thank you for your time.
Speaker Change: Chip.
Speaker Change: We'll go next now to Jerry Revich of Goldman Sachs.
Jerry Revich: Yes, hi, good morning, everyone.
Jerry Revich: I'm wondering if we could just pull on the thread one of the hallmarks of where are you folks who have added value over the years has been just M&A and the ability to improve those operations and so as you sit here today given the size of the company can you just talk about how.
Jerry Revich: Active the runway is on a multiyear basis on the M&A pipeline you know there was some concern that.
Jerry Revich: What sort of acquisitions that you folks have been able to deliver in the past that opportunity might be slowing so if you could.
Jerry Revich: Just talk about what that looks like on a multiyear basis as you sit here today.
Jerry Revich: We don't really forecast to that or plan like any.
Jerry Revich: Any kind of budgetary goals for.
Jerry Revich: For M&A, we think that leads to bad behavior, but as far as when we're thinking about what the pipeline looks like I mean, we don't have the expectation that we don't have enough runway on M&A, whether it may be more like a string of pearls or even big paroles. When we think about where can we fit out some of the specialty offerings.
Jerry Revich: But I don't think we sat here a couple of years ago, and said, while meeting would be a great thing to add so we're continually investigating new opportunities, but theres. Some theres still some chunky deals out there certainly not as much on the gen rent space.
Jerry Revich: As as what the other opportunities are but we still think theres plenty of M&A runway, we don't really put a target on the cherry because that's not the way we think about it. We're just constantly working the pipeline and see what meets our threshold and what could be a good use of capital and strategically beneficial.
Speaker Change: I appreciate the color, Matt and separately, obviously, you folks pulled cost levers really well in.
Jerry Revich: In recessions as we think about a potential.
Jerry Revich: Recession scenario can you just talk about the levers that you could pull in this coming cycles that we spoke about.
Jerry Revich: <unk> revenues.
Jerry Revich: Contractor costs et cetera to what extent, if we were to see a negative economic outlook could we see greater margin opportunities for you folks similar to what you folks were able to deliver most recently.
Jerry Revich: In 2020.
Jerry Revich: Yes, I'll take that one and Matt jump in if there's anything you want to add.
Jerry Revich: At the end of the day I think both from an Opex and the Capex standpoint, we've got a lot of flexibility I feel like your question was more oriented towards margins and so when you think about the nature of our cost structure and really are our core operating costs.
Something on the order of about 50% is going to be highly correlated to volume. So it can be things like pickup and delivery and.
Jerry Revich: Repair and maintenance discretionary items like teeny or overtime, those we can flex very readily and they move with with demand.
Jerry Revich: So that part of it we feel very good about modulating in a downturn you certainly saw that during COVID-19. As an example, there is a relatively small part of our cost structure that we would be was fixed.
Jerry Revich: It's probably on the order of the very low double digits in between it's really a function of labor and benefits and that is as flexible as you are willing to make tough decisions on on teammates and Thats something we want to protect at all costs when we're able to so yes. It.
Jerry Revich: It's really going to be the interplay of how does <unk>.
Jerry Revich: Volume perform versus how do we manage those costs.
Jerry Revich: Certainly we feel very good about what we demonstrated in 2020, we've only gotten better at managing the cost structure, but a lot of this will obviously depend on the nature of a downturn.
Jerry Revich: Yeah, I would just add to <unk> point, how deep and how long would make the decision so that middle 30%, let's call. It for lack of a better better term of our costs and just to remind people outside of.
Jerry Revich: <unk> nine when we had to do significant layoffs during COVID-19, we made the opposite.
Jerry Revich: And holding onto that capacity really paid off coming out of that so that would be what our FERC future outlook would be.
Jerry Revich: In a downturn and we're certainly not trying to speak that into our future.
Jerry Revich: It would depend on how aggressively we do that.
Jerry Revich: I appreciate it thank you.
Jerry Revich: Thanks.
Speaker Change: Thank you the next now to Steven Fisher with UBS.
Steven Fisher: Thank you good morning, I just wanted to come back to I, just want to come back to the ancillary pick up and I know you gave us some good color on.
Steven Fisher: The fact that it was the yak inclusion in some of the fueling services I guess I'm just kind of curious.
Steven Fisher: If there is any other sort of broader reason kind of why now why this is all happening obviously Jack is news that would make sense, but.
Steven Fisher: Implementing specifically new initiatives to target the fueling.
Steven Fisher: Operations are there any other particular services that you're kind of.
Steven Fisher: I was trying to bring for us too.
Steven Fisher: Clients into your customers' attention that they can kind of roll this out.
Steven Fisher: Yeah, so to.
Steven Fisher: To your latter part of your question. The answer is yes, we're continuing to look at ways, where we can solve more problems for our customers right and in an effective and profitable way. So yes, certainly it was a big driver for it but even when you think about as we're growing our mobile storage and modular business.
Steven Fisher: Set up for that falls into this category fueling whether it would be not just for generators, but for equipment. Overall is another pain point for customers that if we can continue to increase that touch point, we'll do that so it's a little bit of both it's the growth of the platforms like like matting and Mod.
And mobile storage, that's driving a lot of it but also some additional services that we're offering.
Speaker Change: Okay. That's helpful and then just.
Speaker Change: Come back to the margins for a second just so I'm totally clear on this I would say that the incrementals are implied to be higher for.
Speaker Change: Q2, and Q4 can you just remind me.
Speaker Change: Kind of what the reason is that going.
Speaker Change: What's going to drive that improvement in.
Speaker Change: The second part of the year, you know, what what's going to be different relative to the first quarter. Thank you.
Speaker Change: Alright, I think this is where it is important to decompose kind of what happened in the first quarter right and so you can look at it.
Speaker Change: You said flow through we look at margins, but being down nominally 150 basis points ex HMA termination fee and ex us, but when you cut through kind of the ancillary and dynamics, we've talked around repositioning down 70.
Speaker Change: And that's really how we think about that core performance. So certainly as we progress through the year you get into the busier season.
Speaker Change: And you lap some of these costs some of which were transient we would expect the business to perform as expected.
Speaker Change: Now did you agree to where we land is going to depend on how that revenue.
Speaker Change: Ends up working out from the standpoint of ancillary probably as much as anything.
Speaker Change: Okay. Thank you very much.
Speaker Change: Thanks Keith.
Speaker Change: Thank you well go next now to Kyle Mingus of Citi.
Kyle Mingus: Thank you could you guys just touch on just the level of confidence in the backlog for the rest of the year and I understand visibility might normally be about six months out.
Kyle Mingus: Could you just talk about maybe level of visibility and is there more visibility in the backlog now just given more mega projects in the pipeline do you have any sort of sense on what percentage of of your backlog is mega projects at this point versus maybe last year or kind of.
Kyle Mingus: And I guess in a more normal year.
Kyle Mingus: Yes, sure Kyle So I think as far as the profile of the demand from major projects to fill the rest of the business is pretty similar to what it was last year, maybe it ticked up towards major projects, maybe a hair, but but but pretty similar I think as far as the forward looking visibility.
<unk> certainly higher than the six months on the projects because we got a plan with our with our partners. So we have more visibility there I think the backlog data as supporting six months plus of backlog, but more importantly, our customer confidence index continues to give us confidence about the balance of the year, our leadership team and sales teams that are <unk>.
Kyle Mingus: With our customer on a daily basis out in the field.
Kyle Mingus: Continuing to give us solid feedback and then our metrics our actual execution of what we're doing with fleet on rent and utilization rates weak.
Kyle Mingus: We have confidence that.
Kyle Mingus: For the balance of 2025, we see the runway ahead, and that's why we reiterated our guidance.
Speaker Change: Got it makes sense and then just another tariff question more related to the value of your use suite just.
Speaker Change: How should we be thinking about maybe the value of the U sleep and the overall used market.
Speaker Change: Just given maybe some tariffs on new equipment and are you seeing any early signs of that just.
Speaker Change: And the used market related to tariffs.
Speaker Change: No it's way too soon I mean, I don't even know if people have finalized what their costs are going to be in for most of these vendors, but theoretically to what you're talking about like it did post COVID-19 if the new equipment pricing were to increase out of the ordinary that would act as an umbrella unused pricing values, we certainly have seen that.
Speaker Change: In the past and we would expect that to happen, we don't feel at all Thats what happened yet or is what driven the volume that we experienced in demand we've experienced in Q1.
Speaker Change: Similar to what we had planned for and what we expected I think it's more about the demand out there in the end market and to your first question you asked earlier it's another.
Speaker Change: Area of confidence for the outlook for the rest of 'twenty five we sold a record level of always see and I don't think people are buying equipment to pocket and yard. So there's still there's still a good amount of work going on out there.
Speaker Change: Helpful. Thank you.
Kyle Mingus: Thanks Kyle.
Speaker Change: We'll go next now to Tami Zakaria at J P. Morgan.
Tami Zakaria: Hey, good morning, Thanks for all the comments so far I have only one question.
Speaker Change: I think I heard you mentioned that local markets are more indexed to your gen rent offering right now.
Speaker Change: I'm curious is there a structural barrier of reason.
Speaker Change: Why specialty maybe could not become a bigger part in local markets, meaning is there not a scalable market for specialty at the local level or could overtime specialty could become as big at the local level as it could be for the national accounts.
Speaker Change: Yes, I think as our specialty businesses mature they will get more penetration locally, but I think the one big part of our one stop shop strategy is cross selling so we prioritize overall as a company.
Speaker Change: Our larger half of our customer set which tend to be more on project and with bigger customers. So when we get new offerings. So we really focus on that part of the cross sell because they tend to do more complex projects. So this is a decision for us it doesn't mean that people that theres not local trench work that theres not local temp.
Speaker Change: Power work, it's just our profile in the way we go to market.
Speaker Change: The maturity of Gen rent is so much further down the road and also through a lot of acquisitions that Theyre just the reality is theyre just more penetration.
Speaker Change: We do have that opportunity in the future for especially to continue to get more penetrated locally.
Speaker Change: Great. Thank you.
Speaker Change: Thank you.
Speaker Change: We'll go next now to Ken Newman of Keybanc capital markets.
Ken Newman: Hey, good morning, guys. Thanks for squeezing me in.
Ken Newman: I know, it's a smaller part of your mix, but I was curious can you just talk about what youre seeing in the smaller local accounts and just the expectation for that through the rest of the year I'm just trying to get a sense of how much patting there isn't the guide if that does get incrementally softer in the year progresses.
Ken Newman: Oh yeah.
It's really the area that we had the leases or at least visibility to but when you take the aggregate of of whether Youre looking at a branch district or region of the activity in there where the field is very close to the local market and then they do their forecast we feel confident that we have enough visibility through that ground up.
Ken Newman: Mechanism.
Ken Newman: To stay within the ranges of our guidance and certainly you hear the confidence in our voice of reiterating so we don't expect that.
Ken Newman: With that being said.
Ken Newman: It is still a smaller part of our business. So therefore, the impact of that variability it would be a little bit less than if something happened in the macro that impacted our national accounts and remember for people that remember years ago, when we moved to larger customers national accounts.
Ken Newman: It wasn't because mega projects. We didn't know this was going to be a thing or are these tailwind that we talked about it was because when work does slow down we do feel that the larger contractors sell deeper into the pipeline and we needed to be aligned with those and we learned that through the <unk> recession, and I think that that would also be a buffer to any kind of change I think we're better positioned with those customers.
Ken Newman: Right. Okay that makes sense and then just quickly for my follow up I just had a clarification question on Jack.
Ken Newman: There's already been a lot of talk about inflation and tariffs.
Speaker Change: Do you depreciate those assets at Jack to zero I think over a two or three year period, obviously lumber is much higher on a year over year basis.
Speaker Change: Can you remind us how margins in that business could or maybe it doesn't fluctuate with spot lumber prices.
Speaker Change: I don't think we've experienced much of that ourselves and the kind of words were buying.
Speaker Change: But certainly we feel comfortable that they can maintain their margins look sleep.
Speaker Change: Just leave it at that.
Speaker Change: Double thanks.
Speaker Change: Thanks, Ken.
Speaker Change: We'll go next now to Scott Schneeberger of Oppenheimer.
Scott Schneeberger: Thanks, guys. Good morning, just on specialty rental curious if it's come up a few times, but this.
Scott Schneeberger: Your confidence and continued double digit growth.
Very impressive just curious could you delve in you use seven product categories is everything growing is there a disparity or some carrying the weight and.
Scott Schneeberger: And in others not keeping up.
Scott Schneeberger: Discussing across all seven platforms and is it is is it.
Scott Schneeberger: Cold starts that's really driving it are you getting market share gains pricing just curious to go into a level or two deeper on how you think you are differentiating in those markets.
Scott Schneeberger: Yeah, no, it's it's pretty broad and we've talked about that in the past, how even though some of our more mature specialty businesses.
Scott Schneeberger: We're growing double digits, so each quarter it may be a little more choppy, but you'd have to think about the newer platforms with more white space and more cold starts are going to grow faster, but power being I think you know one of our most mature continues to be one of the leaders in the pack on growth. So it's across the board, it's partly driven by.
Scott Schneeberger: Penetration and a big part of it is driven by our go to market right. So between the white space in our go to market are continuing to sell into our targeted customers, where we're probably taking share as they may be we're using a myriad of smaller type providers and I think the fact that we can bundle it as a big advantage for us.
Scott Schneeberger: And why.
Scott Schneeberger: We're seeing that growth and have confidence in that future growth.
Scott Schneeberger: Yeah.
Scott Schneeberger: Thanks, and just a.
Speaker Change: One more on specialty and ancillary kind of following up a bunch of questions there too, but it seems like you all maybe have more to say there it sounds like you're digging in.
Speaker Change: <unk> acquisitions can help in that space or maybe some internalization delivery or our set up of maybe less outsourcing and maybe we hear from this from you all in the future, but I got the sense on earlier question. There's more you could and would be open to things. So that's why I'm asking it now.
Speaker Change: Yeah, I mean, certainly we're always looking at ways that we can be more efficient and in sourcing is one of the ways that we will do that and we'll always balance.
Speaker Change: We think we are a better provider at versus what we can do and and.
Speaker Change: Even within fueling well, we'll use some outside parties to help that certainly depending on the needs. So it is going to be a mixed we do look at some of our businesses. How can we be a better provider of these ancillary services, but I wouldn't point to any specific targets right now for a couple of reasons, but it's a good thought.
Speaker Change: That youre, having a consistent with our continuous improvement mindset of how can we how can we do better.
Speaker Change: From a service and margin perspective.
Matt Flannery: Got it thanks, Matt appreciate it.
Speaker Change: Thanks.
Steven Ramsey: And we'll go next now to Steven Ramsey of Thompson Research group.
Steven Ramsey: Hi, Good morning wanted to think about cross selling you you've done well going from Gen rent to specialty I'm curious if there's any color on cross selling within specialty with these more mature categories, and then being able to add on some of the less mature groups within within that segment.
Steven Ramsey: Yeah, It's a great point its something that we focused on with our teams and something that we're working on actively some of these acts naturally go together right and when we think about how we've organized our our OS business right, which was a restroom trailers imported yarns along with our modular business you would think setups on job site. So that's it.
Steven Ramsey: That's one of the areas, where we've really focused on putting those together when we think about what we did with our pump business. When we bought Baker and make a full fluid solutions now we've made it a whole separate region of fluid solutions right to treat transferring and contained so there's many examples of us doing that and we continue to try to find.
Steven Ramsey: As many opportunities we can ken to make it seamless for the customer and that's really what the bundling is all about if we make it easier for them.
Steven Ramsey: To streamline their vendors and to have one solution.
Steven Ramsey: Provider, it's it's it's a win win situation.
Speaker Change: Okay. That's helpful. And then one other thing on the ancillary re rent.
Steven Ramsey: Top getting relatively tough for the last four quarters.
Steven Ramsey: 2% to 3% benefit on tablets.
Speaker Change: Into rental revenue do you expect that same level.
Steven Ramsey: A benefit in the rest of the year.
Speaker Change: Okay.
Speaker Change: That's a great question, Steven and that's something we're trying to figure out at the end of the day. It is being responsive to what customers are asking of us.
Speaker Change: And if we just look at that relative rate in the first quarter, we grew 19% ancillary versus 5% OE. Our so called it four times relative rate part of that was of course Yak.
Speaker Change: But last year, we grew at about I.
Speaker Change: I want to say two times the rate overall, so we've seen an acceleration thus far but it's hard to predict exactly how this will play out. It is part of our strategy you heard Matt talk about that this is.
Speaker Change: But being that partner of choice to our customers and making their lives as easy as possible, So time will tell and and.
Speaker Change: Yeah, I'll have an update in July obviously about how this has progressed in the second quarter.
Speaker Change: Excellent. Thanks.
Speaker Change: Thanks, Steve.
Speaker Change: Thank you and gentlemen, that's all the questions. We had this morning, Mr. Flannery I'll turn things back to you Sir for any closing comments.
Speaker Change: Thank you operator and to everyone on the call. We appreciate your time I'm glad you could join us today.
Speaker Change: As always our Q1 investor deck has the latest updates and Elizabeth is available to answer your questions. So please stay safe and we look forward to speaking to you all in July operator, you can now in the call.
Speaker Change: Thank you very much Mr. Flannery again, ladies and gentlemen that will conclude today's United Rentals earnings Conference call again, thanks, so much for joining US everyone and we wish you all a great day Goodbye.
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