The Operator welcomes the audience to the United Rentals Investor Conference Call and informs them that the call is being recorded. The company's press release, comments, and questions contain forward-looking statements that are subject to various risks and uncertainties. The company's annual report, Form 10-K, and SEC filings contain a summary of these risks. The press release and call will also include non-GAAP terms that need to be reconciled with the most comparable GAAP financial measure. The Operator then introduces Matt Flannery, President and Chief Executive Officer, and Ted Grace, Chief Financial Officer, who will begin the call.

In the second quarter of 2023, the company saw record-breaking revenue, EBITDA, EPS, and ROIC. This was driven by growth across all customer segments, regions, and verticals, as well as strong employee performance and safety records. Used equipment sales also reached a record high, with strong retail market demand and a broadened channel mix. The company is on track for another record year and has increased their full-year guidance to reflect their continued confidence in customer demand.

In the second quarter, rental CapEx totaled $1.25 billion and the teams have come together well to optimize the combined branch network and fleet. Key verticals saw broad-based growth, including industrial manufacturing, metals and minerals, and power. Non-res construction was also up double-digits. Geographically, growth was seen in all regions. The specialty business also delivered another excellent quarter with rental revenue up 17% year-on-year organically. Over $350 million was returned to shareholders through share buybacks and dividends are on-track to return over $1.4 billion of cash to shareholders this year. 2023 is on-track to be another record year across a variety of KPIs.

The customer sentiment and external indicators point to growth and give the company confidence in their updated guidance. The ABC's Contractor Confidence Index, the Dodge Momentum Index, and the company's own Customer Confidence Index all remain strong. The company is also optimistic about the two trillion plus dollars of construction projects over the next decade that will be driven by infrastructure, industrial manufacturing, and energy and power. The company also recently released a sustainability report which highlights the benefits of the rental model in terms of reducing emissions and helping customers. The company is pleased with how the year is playing out.

In the second quarter of 2023, United Rentals achieved a record $2.98 billion in rental revenue, an increase of $519 million or 21% year-over-year. This was supported by diverse strength across their end markets and a 25.5% increase in average fleet size. Additionally, their second quarter used revenue increased 133% to $382 million, and their adjusted used margin was 57.3%.

In the second quarter, the company saw a record high in adjusted EBITDA of $1.7 billion, a 40 basis point increase on an as reported basis and 130 basis points on a pro forma basis. SG&A decreased 180 basis points year-on-year to a second quarter record low of 10.6%. Adjusted EPS increased 26% to a second quarter record of $9.88. Gross rental CapEx was $1.25 billion and net rental CapEx was $869 million. ROIC set a new record at 13.4% on a trailing 12-month basis.

The company has seen increased revenue and profits, with total revenue expected in the range of $14 billion to $14.3 billion, implying a $200 million increase at midpoint and full-year growth of around 21.5%. Additionally, their adjusted EBITDA guidance has been increased by $100 million at midpoint to a range of $6.75 billion to $6.9 billion, and their net CapEx range has been narrowed by $50 million between $3.35 billion and $3.55 billion. They have also seen a decrease in their net leverage ratio to an all-time low of 1.8 times and have a liquidity of $2.7 billion.

The company increased its free cash flow guidance and is pleased with the pro forma being up 2.1%. The decline in pro forma was not due to demand or rate issues, but rather a time issue due to the company's decision to front-load its fleet in order to respond to customer needs and prevent putting big relationships at risk. This was in addition to bringing in the Ahern fleet.

Matthew Flannery stated that they expect the fleet productivity to be similar in the third quarter as it was in the second quarter, and that they view 2024 as a growth year. He also mentioned that they will start the year with more fleet to support growth and that they still believe the end markets will come out of an exit rate this year with strong end market demand.

William Grace and David Raso discuss the company's plans for the rest of the year, including growth CapEx and replacement CapEx. They expect to place around 10-12% of their fleet per year and anticipate strong performance in 2023. They also anticipate pro forma flow through in the mid-50s and expect margin expansion on a pro forma basis. They anticipate free cash flow and EBITDA to result in a financial leverage of 1.6 at the end of the year.

Matthew Flannery discussed how the company is currently working to figure out the best way to allocate capital to drive shareholder value. He stated that they have discussed the potential of lowering the range of their capital allocation strategy, but that they are still working on the decision. The next question from Rob Wertheimer was about the maturation of acquisitions and the process of repairing and maintaining a fleet that may have been under invested in, as well as training people.

Matthew Flannery and William Grace discuss the process of integrating the Ahern acquisition into the company, which includes training employees on new systems and consolidating or repurposing facilities. They also explain that the equipment rental gross margin was down 140 basis points year-on-year on an as-reported basis, but on a pro-forma basis it expanded by 20 basis points, indicating the impact of Ahern on the company.

The company is investing heavily in fleet and facilities, which is causing an increase in depreciation on the P&L. Despite this, gross margins have increased by 80 basis points. Rob Wertheimer asked if the increased margins were due to better supply chain management and demand for rental equipment. Matthew Flannery responded that supply chain is not fully remedied, which is why they are front loading their CapEx. They had initially thought that there would not be an opportunity to pull CapEx forward, but they are now considering this in Q4.

The company is currently running lower utilization levels than usual due to supply chain issues, but they are now at a comfortable level and are aiming to improve utilization over the long-term trend. They have not had a normal year in three years due to the COVID pandemic and supply chain issues, but they hope to get back to their previous levels of performance as the supply chain improves.

William Grace from Ahern Rentals discussed the company's time utilization and the potential for big projects with major customers. He also mentioned that the rental gross margin decline should narrow and that they are expecting margin expansion across the business in the future. Additionally, he noted that there is still potential for more operating leverage on the SG&A line going forward.

The industry is in a good demand environment and has good utilization rates due to industry discipline. Companies with scale have been able to front-load capital to stay ahead of demand, avoiding the same situation they faced in the last couple of years. This is supported by reports from other companies in the industry, which have indicated similar trends.

The industry is in a much better shape now than it was in 2015 and 2016 when there was an oil and gas dislocation that caused high rates and too much fleet in the system. Now, the time utilization is healthy and industry discipline is in place, allowing companies to make good returns and margins at these utilization levels while still maintaining higher prices.

Jerry Revich and Matthew Flannery discussed the implications of lower year-over-year CapEx for the industry in the first half of 2024. Matthew Flannery mentioned that they are hoping for a normalized cadence and for OEMs to be able to make commitments in order to prevent holding back production through the winter. He also stated that they will prioritize their customers' needs over metrics and the P&L.

Matthew Flannery and William Grace discussed the importance of surety of supply for major projects and long-term contracts with customers. They also mentioned that specialty margins have been improving year-over-year and there could be potential opportunities for M&A on the specialty front.

William Grace and Matthew Flannery discussed the outlook for M&A within the specialty sector. They stated that they feel good about the performance of the business and the outlook for margins in the second half. They also noted that the market for M&A is robust and they are actively shopping, but they are being disciplined with their capital allocation. They are hopeful and optimistic that they will have something to do in the back half, both generally and within specialty.

Matthew Flannery explains that the inflation in the product category Ahern fleet is in will not create any more significant headwinds than what they already deal with in their own fleet. He also notes that their buying power is better than Ahern's, so the replacement vehicles may not be as high as their own older assets. He concludes that the normal course of business will be able to manage any inflation-related issues.

Matthew Flannery and William Grace both report that their project pipelines remain robust and they have seen no cancellations or delays due to financing or interest issues. They have seen an increase in the size of mega projects, ranging from 70-100%, and capital availability and cost of capital remain abundant and reasonable for their customers.

Matthew Flannery reports that customer confidence remains unaffected since the beginning of the pandemic, and that there is no discernible impact between their national and local accounts. He also notes that the company is not seeing any delineation in their local market and big job businesses, and that customer confidence index results also show no difference.

William Grace answers a question regarding the outlook for civil projects funded by the infrastructure bill and the Inflation Reduction Act. He states that the outlook for infrastructure is positive, and that the company is well-positioned to be a value-added partner to the contractors executing the projects. He also addresses a question about potential weak spots in non-res, particularly in commercial real estate and office buildings, and states that overall, the outlook for non-res is very good.

Matthew Flannery and William Grace discussed the vacancy rates and rental needs of various verticals and horizontals. Ted has done some work on this data. William Grace then discussed the non-res construction put in place data, which continues to show growth. He highlighted office and commercial as two areas that are at risk, but there are other areas that are performing well such as manufacturing, public road and highway, power, communication, transportation, and healthcare, which make up 55% of total non-res. These areas are expected to offset any headwinds in the office and commercial combination.

William Grace stated that all business segments in specialty rental had double-digit growth and that the GFN segment was growing faster than the rest. Grace also mentioned that they are ahead of schedule in achieving their goal of doubling the size of the business in five years. Neil Tyler asked if ticket prices had been inflated due to surcharges that may fall away if availability improves.

Matthew Flannery and Neil Tyler discuss the surcharges and costs associated with creating those surcharges in their negotiations with vendors. Flannery states that they don't talk about their negotiations publicly, but the capitalization is fair. Tyler then inquires about the lower year-on-year time mute would splits between a timing of fleet arrivals and the deliberate move to normalize time viewed. Flannery explains that the first enabled them to do the second, and they will bring in a good amount of their CapEx in Q3 for the balance of the year. He also states that they will see similar year over year dynamics to what was seen in Q2.

William Grace and Matthew Flannery discuss how to manage the company's fleet for the upcoming year, taking into account the growth rate of private non-res, which is currently at 20%. They go through their bottoms up planning process to get a better understanding of their customer's growth expectations for 2024. They plan to reset the baseline this year and then manage the growth of their OEC in order to manage their fleet. This answers the hypothetical question posed by Mig Dobre.

Matthew Flannery and William Grace discussed the fact that the company will be exiting the year with significant year-over-year growth in fleet, and that they expect to outpace overall industry growth. Flannery noted that they will manage the business appropriately for whatever environment they have, and Grace added that they will be good stewards of their shareholders' capital. No additional remarks were made, and the call was concluded.

The speaker thanked everyone for joining the call and encouraged them to reach out to Elizabeth with any questions. The operator concluded the call and thanked everyone for their participation.

This summary was generated with AI and may contain some inaccuracies.