United Rentals, Inc.

Good morning and welcome to the United Reynolds Investor Conference call. Please be advised that this call is being recorded. Before we begin, note that the company's press release, comments made on today's call, and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the company's press release. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31, 2020, as well as to subsequent filings with the SEC. You can access these filings on the company's website at www.unitedrentals.com. Please note that United Reynolds has no obligation and makes no commitment to update or publicly revise any revisions to forward-looking statements in order to reflect in 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 most comparable GAAP financial measure. Speaking today for United Reynolds is Matt Flannery, President and Chief Executive Officer, and Jessica Graciano, Chief Financial Officer. I will now turn the call over to Mr. Flannery. Mr. Flannery, you may begin.

Thank you, Operator, and hello, everyone. Thanks for joining us this morning. Three months ago, we said that 2021 was shaping up to be a great year for United Rentals, and that's still very much the case. Our operating environment continues to recover. Our customers are increasingly optimistic about their prospects, and our company is continuing to lean into growth from a position of strength as a premium provider and our industry's largest one-stop shop. We're the supply leader in a demand environment. and we've leveraged that to deliver another consecutive quarter with strong results. The big themes of the second quarter are strong growth in line with our expectations and robust free cash flow, even after the step-up in our CapEx. Positive industry indicators, including a strong used equipment market where pricing was up 7% year-over-year. The expansion of our go-to-market platform through M&A and cold starts. This is time to the broad-based recovery in demand and our focus on operational discipline as we manage the increase in both volume and capacity while driving fleet productivity of nearly 18%. Another key takeaway is our safety performance, and I'm very proud of the team for holding the line on safety with another recordable rate below one, while at the same time managing a robust busy season and onboarding our acquired locations. This includes general finance, which we acquired at the end of May. As you know, this was both a strategic and a financial move designed to build on our strengths. The acquisition expanded our growth capacity and gave us a leading position in the rental market for mobile storage and office solutions. The integration is going well, and while we still have more work to do, we're moving steadily through our playbook. As you saw in our release, We raised our outlook to include the expected impact of general finance and other M&A we closed since the first quarter. It also includes some additional investments we plan to make in CapEx that will serve us beyond 2021. This outlook follows the higher guidance we issued in April when we raised every range compared to our initial guidance. So as you can see, we're tenacious about pursuing profitable growth, and the investments we're making will still have a positive impact on our immediate performance as well as future years. And before Jeff gets into the numbers, I want to spend a few minutes on our operating landscape. Almost all of the challenges of 2020 have righted themselves. We have a better line of sight, and so do our customers. When we surveyed our customers at the end of June, the results showed that over 60% of our customers expect to grow their business over the coming 12 months, which is a post-pandemic high. And notably, only 3% saw a decline coming over the same period. Customer optimism is a great barometer, and the trends we see in the field support their view. 2021 is a pivotal year for us. It confirms our return to growth, including our 19% rental revenue growth in the second quarter. I'll point to some of the drivers of that growth, starting with geography. The rebound in our end markets continues to be broadly positive with all geographic regions reporting year-over-year growth in rental revenue. Our specialty segment generated another strong performance with rental revenue topping 25 percent year-over-year, including same-store growth of over 19 percent. And importantly, we grew each major line of business by double digits, which underscores the broadness of the demand. For years now, our investment in building out our specialty network has been a key to our strategic positioning. These services differentiate our offering to customers and add resilience to our results throughout cycles. This is true of cold starts as well as M&A. This year, we've opened 19 new specialty branches in the first six months, which puts us well on our way to our goal of 30 by year end. We're also investing in growth in our general rental segment, where the big drivers are non-res construction and plant maintenance. Both areas are continuing to gain traction, and most of our end markets are trending up. Verticals like chemical processing, food and beverage, metals and mining, and healthcare are all showing solid growth. And while the energy sector remains a laggard, it was up year over year for the first time in eight quarters. We also have customers in verticals that are less mainstream, like entertainment, where demand for our equipment on movie sets and events more than doubled in the quarter. And while it's a relatively small part of the revenue, it's a good sign to see it come back. I also want to give you some color on project types. There are two takeaways, the diversity of the projects in Q2 and the fact that each region contributed to growth in its own way. The recovery has taken root across geographies and verticals on both coasts with solid activity and heavy manufacturing, corporate campuses, schools, and transmission lines. In this quarter, we're also seeing project starts in power, transit, and technology. These job sites are using our general equipment and our trench safety and power solutions. And fluid solutions are seeing a rebound in chemical processing and sewer bypass work, as well as mining. These are just a few of the favorable dynamics in a very promising up cycle. And I want to put that in context. 2020 was about the temporary loss of market opportunity. particularly in the second quarter. Now, the pendulum is swinging back, and 2021 is about locking in that opportunity within the framework of our strategy. Our team is managing that extremely well. One proof point is our financial performance and the confidence we have in our guidance. Another is our willingness to lean into growth today to create outsized value tomorrow, and it's about more than capex and cold starts. We're constantly exploring new ways to capture growth by testing new products in the field, developing new sales pipelines, and forging digital connections with customers. And finally, the most important proof point is the quality of our team. You can see that reflected on our safety record and our strong culture. Here's the thing to remember about 2021. This is still the early innings of the recovery. We're committed to capitalize on more and more demand as the opportunity unfolds. And we see a long runway ahead to drive growth, create value, and deliver shareholder returns. Well, I'll stop here and ask Jess to go through the numbers, and then we'll take your questions. Over to you, Jess.

Thanks, Matt, and good morning, everyone. When we increased our 2021 guidance back in April, we expected a strong second quarter supported by the momentum we were seeing to start the year. We're pleased to see that play out as anticipated with the second quarter results. And importantly, we're also pleased to see the momentum accelerate in our core business and support another raise to our guidance for the year. We've also added the impact from our acquisitions, notably the general finance deal. And I'll give a little bit more color on our guidance in a few minutes, but let's start now with the results for the second quarter. Rental revenue for the second quarter was $1.95 billion. That's an increase of $309 million, or 19%. If I exclude the impact of acquisitions on that number, rental revenue from the core business grew a healthy 16% year over year. Within rental revenue, OER increased $231 million, or 16.5%. The biggest driver in that change was fleet productivity, which was up 17.8%, or $250 million. That's primarily due to stronger fleet absorption on higher volumes, in part as we count the COVID-impacted second quarter last year. Our average fleet size was up 0.2%, or a $3 million tailwind to revenue, and rounding out OER, the inflation impact of 1.5% cost us $22 million. Also within rental, ancillary revenues in the quarter were up about $65 million, or 31%, and re-rent was up $13 million. And we'll talk more about the increase in ancillary revenues in a moment. Used equipment sales came in at $194 million. That's an increase of $18 million or about 10%. Pricing at retail in the quarter increased over 7% versus last year and supported robust adjusted used margins of 47.9%. That represents a sequential improvement of 520 basis points and is 190 basis points higher than the second quarter of 2020. Used sales proceeds for the quarter represented a strong recovery of about 59% of the original cost of fleet that was on average over seven years old. Let's move to EBITDA. Adjusted EBITDA for the quarter was $999 million, an increase of 11% year-over-year, or $100 million. That included $13 million of one-time costs for acquisition activity. The dollar change includes a $141 million increase from rentals. In that, OER was up $125 million, ancillary contributed $10 million, and re-rent added $6 million. Used sales were a tailwind to adjusted EBITDA of $12 million, and other non-rental lines of business provided $6 million. The impact of SG&A in adjusted EBITDA was a headwind for the quarter of $59 million, which came mostly from the resetting of bonus expense. We also had higher commissions on better revenue performance and higher discretionary expenses, like T&E, that continued to normalize. Our adjusted EBITDA margin in the quarter was 43.7%, down 270 basis points year over year, and flow through, as reported, was about 29%. Let's take a closer look at margin and flow through this quarter. Importantly, You'll recall that our COVID response last year included a swift and significant pullback in certain operating and discretionary costs. That was especially pronounced in the second quarter and is impacting flow through this year as activity continues to ramp and costs continue to normalize. We expect this will play through the rest of the year, notably in the third quarter. Specific to the second quarter, we've shared in previous calls that one of the costs that will reset this year is bonus expense. from the low levels incurred last year. As a result, we had an expected drag in flow through in the second quarter as we reset and now true up this year's expense. Flow through and margins were also impacted, as anticipated, by acquisition activity, including the one-time costs I mentioned earlier. I also mentioned higher ancillary revenue in the second quarter, which represents, in part, the recovery of higher delivery costs. Delivery has been an area where we've seen the most inflation pressure, including higher costs for fuel and third-party hauling. And while recovering a portion of that increase in ancillary protected gross profit dollars, it impacted flow-through and margin this quarter as a pass-through. And we expect to see that play out over the next couple of quarters as well. Adjusting for these few items, the implied flow-through for the second quarter was about 46%, with implied margins flat versus last year. With our expenses normalizing, that reflects the cost performance across the Corps that came in as expected. I'll shift to adjusted EPS, which was $4.66 for the second quarter, including a 13 cent drag from one-time costs. That's up 98 cents versus last year, primarily on higher net income. Looking at CapEx and free cash flow, for the quarter, gross rental CapEx was a robust $913 million. Our proceeds from used equipment sales were $194 million, resulting in net CapEx in the second quarter of $719 million. That's up $750 million versus the second quarter last year. Even as we've invested in significantly higher CapEx spending so far this year, our free cash flow remains very strong at just under $1.2 billion generated through June 30th. Now turning to Royke. which was a healthy 9.2% on a trailing 12-month basis. Notably, our ROIC continues to run comfortably above our weighted average cost of capital. Our balance sheet remains rock solid. Year over year, net debt is down 4%, or about $454 million. That's after funding over $1.4 billion of acquisition activity this year with the ABL. Leverage was 2.5 times at the end of the second quarter. That's flat to where we were at the end of the second quarter of 2020, and an increase of 20 basis points from the end of the first quarter this year, mainly due to the acquisition of General Finance in May. A look at our liquidity, which is very strong. We finished the quarter with over $2.8 billion in total liquidity. That's made up of ABL capacity of just under $2.4 billion and availability on our AR facility of $106 million. We also had $336 million in cash. Looking forward, I'll share some color on our revised 2021 guidance. We've raised our full year guidance ranges at the midpoint by $350 million in total revenue and $100 million in adjusted EBITDA as we now expect stronger double digit growth for the core business in the back half of the year. Our current guidance also includes the impact of acquisition activity since our last update, predominantly to include general finance. That increase for acquisitions reflects $250 million in total revenue and $60 million in adjusted EBITDA, which includes $15 million of expected full-year one-time costs. Additional CapEx investment will help support higher demand. To that end, we raised our gross CapEx guidance by $300 million, a good portion of which reflects fleet we're purchasing from Acme List. While the fleet will provide some contribution in 2021 and is assumed in our guidance, we expect to see the full benefit next year. Finally, our update to free cash flow reflects the additional CapEx we'll buy, as well as the puts and takes from the changes I mentioned. It remains a robust $1.7 billion at the midpoint. And we'll continue to earmark our free cash flow this year towards debt reduction to enhance the firepower we have to grow our business. Now let's get to your questions. Jonathan, would you please open the line?

Certainly. Ladies and gentlemen, if you have a question at this time, please press star then 1 on your touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of David Rasso from Evercore ISI. Your question, please.

Hi. Thank you for the time. A bigger picture question about the margins. I think investors are wondering out there about how the margins can improve from current levels. Over the last, say, four years or so, we've seen steady degradation on the rental margins in particular. Even EBITDA margins have been under a little pressure. I'm just trying to think through, like, when you think of the five large acquisitions you've done over the last few years, right, starting with NES and kind of running through Gen Finance, I'm an acquisition you bought over, let me say, about $2.25 billion of revenues, and those EBITDA margins were only 38, right, and you used to run high 40s. So I appreciate that's a lot of revenue you bought that's dragging down the margin. But when I look at the business today moving forward, how do we think about the rental margin structurally, if you want to weave that all the way into EBITDA, but really in particularly the rental margins? Is this as much about just a shift towards specialty, might lower margins, but improve returns on capital, just so we can kind of level set how we should think about not just top line growth, growing earnings, but margins?

Sure, David. Great question. Thanks for taking a longer term view of this, because that's really how we manage and see the business. And Although we have some short-term pressures when we acquire businesses that come in at lower margins, if you look over our experience of these acquired assets and what we've done with the businesses pro forma, it validates why we do M&A. We feel we can be a better owner. We can bring more value to those assets. If it drops even a margin for a period of time, that's one metric, but we also are very focused and, quite frankly, model our M&A deals on returns. So, uh, and, and our returns continue to be well above our cost of capital. So I don't think rental margin degradation is a concern for us. We'll continue to drive fleet productivity to overcome natural inflationary costs as well as efficiencies in our operations. And we, we think that's how we've taken these businesses that are in the thirties yet maintain mid forties, depending on the time of the year to hire EBITDA margin and, uh, And that's what we do, right? So that's a great question. And I think sometimes when people are looking at the headline, they may miss the fact of what we've done with these businesses pro forma is driving more value.

If I can add one thing, Dave, good morning. It's that to the earlier part of your question, there is no structural change in the way that we're managing the business and we're looking at the business longer term and we're thinking about the continued margins that we believe we'll be able to generate going forward.

But fair to say from that answer, structurally you don't think of this as driving margins or not. It's a matter of improving returns on capital, better cash flow, and obviously what you do with the cash flow from CapEx to M&A is how you drive earnings more so than thinking of this as a margin expansion. Is that a fair generalization?

We still are focused on margin expansion in the individual businesses, right? Just some of them structurally come in a little bit differently, to your point earlier, some of the acquired assets, GFN being the most recent one. As an example, that's never going to be a 50% margin business, but it's going to be a heck of a good return. So that's really more what we're saying, no structural issues that we're having here to continue to focus on margin expansion.

Yeah, I mean, look, everybody wants everything, right? You want margins, you want the better returns, you want the cash flow. But I'm just saying structurally, if you're pecking or it feels like this is more about cash flow and then grow the business, utilizing the cash flow effectively is what I was trying to generalize. And lastly, at that point, when we think of 22 versus 21, anything you can help us with on framework in the sense of resetting the bonus pool, how do we think about how 22 starts initially? other costs that came back, or even how you think about delivery costs on ancillary. Can you just give us some thoughts around how we should think of puts and takes on 22 versus 21, particularly regarding costs?

Yeah, so without even attempting to try to give guidance in 22, I think it's clear to say we feel good about the environment. We wouldn't be leaning into this capital spend in the M&A if we didn't, right? That's not just a 21 experience. And we will at some of the headwinds that we've had this year from a comp perspective, and specifically in this quarter, as Jess will continue to talk through as she did in her opening remarks. But we feel good about 22. We feel good about the prospects. As I said in my opening remarks, we think we're in the early innings of the cycle here. So we're excited about the prospects.

Any color, Jess, on the cost, though? I mean, I appreciate Matt's comments, but that's a little bit of a top-line comment, which I think at the moment folks aren't really – pushing back on that they're just trying to think about some leverage as well ideally and just anything you can do on the on the bonus pool and you know other other costs we can be thoughtful about how you're lining up your your delivery costs for next year any change and how you're contracting things out or any color would be appreciated thank you that's it for me sure that you know it's a little it's a little too early for us to start to apply on

any kind of guide numerically, right, of where we think some of those expenses are going to go, right, as far as how the bonus will play through next year compared to this year, and even what the inflation environment is going to look like next year. I think it's anybody's guess right now as to, you know, if there'll still be pressure in delivery, could there be pressure in other places. I think the takeaway for us is we're going to continue to respond the way we have. Right in looking to pass through and mitigate some of the inflation pressures that we're seeing right now, particularly in delivery. And just as we even think about where other pressures could come from in looking to how the business would be able to respond to to continue to drive the kind of profitability that we can across the business. So it's too early for more specifics than that, but I can tell you we're going to continue to be focused on, through the planning process, looking at all of those inputs and managing them appropriately.

All right, thank you for the time.

Thanks, David.

Thank you. Our next question comes from the line of Mick Dubre from Baird. Your question, please.

Yes, good morning, everyone. Hi, Mick. So sticking with this discussion on cost, I think I heard Jessica commenting that the flow through on EBITDA in the third quarter was going to be relatively modest as well. Maybe you can put a finer point here. And I'm curious, on the SG&A side, you talked about truing up on a bonus pool. Is that a comment that impacts Q3 as well, or was that just for Q2 specifically?

Good morning. So let me start with the third and fourth quarter and actually I'll take it from the perspective of the back half, right? We'll talk about the phasing in a second, but just to give a little bit of color behind what's implied and yeah, I'll start with my normal call out not to anchor to the midpoint here, but let me use the midpoint just to give some color behind the bonus dynamic and even some of the acquisition impact that we'll have in the back half. So if I use the midpoint, the back half implied margin would be down about 120 basis points for us. And that's going to generate flow through again at midpoint of about 39%. So think about margins 46.2%. Now that bonus headwind is going to continue for us more so in the third quarter than in the fourth as we think about the comp to last year where the bonus was, you know, I'll call it abnormally low, right, just lower than normal. So if you think about that bonus headwind as well as the anticipated headwind in flow through and margin that we get from the acquisition activity, That margin goes from down 120 basis points to up 40 basis points, or a margin implied in the back half at midpoint of 47.8% from 46.2. Flow through at the midpoint is about 50% adjusting for those two items. So those obviously will be an impact for us. And as you mentioned, the quarterly dynamic will play out if you just think about the comps we have against the belt tightening that we did last year, the third quarter will have more flow-through pressure than you'll see in the fourth. And then the other thing I just want to mention in the third quarter, just to be helpful in the modeling, is third quarter last year, we had $20 million of one-time benefits from insurance recoveries, and obviously those are not expected to repeat.

Okay, yes. Thank you, by the way, for that reminder. um then i i i guess to try to ask uh david's question maybe a little bit differently um when when we again sticking with sgna um when we're looking at 2022 is it fair for us to think that you guys can get some leverage on this line item that you know revenue growth can exceed uh whatever inflation you're going to have in sgna is that how you're intending to run the business or are there some other things happening in here that that might make that difficult to achieve.

Yeah. Yes. I think that that's definitely fair. And, you know, I'd be remiss not to point to, um, the, the 2021 dynamic is one that in part is because of the comp to 2020, right? If you think about sort of the normal course in 2022, it gets back to us. Um, our comments about there's no real structural change in, uh, in the way we're planning to run the business in 22.

Understood. Then lastly for me, you know, infrastructure is once again in the headlines, and I think by now we all sort of had a lot of time to kind of ponder as to what this would mean. So I'm sort of curious from your perspective, if something were to actually pass and become legislation, how, if at all, do you plan to change your strategy, your fleet, your go-to-market as a result? And at this point, have you sort of anticipated any of that in your CAPEX plans or the way you're kind of starting to think about framing 2022 internally?

It's a great question, Megan. We started focusing on this and preparing for this all the way back, if you recall, from the NEP acquisition, where that added to some of our dirt-engaging fleet experience that we that team brought with it, and product they brought with it, which would be played into infrastructure. And we've actually been growing our infrastructure business really because the demand is there, right? We all know the need is there. So now we would view this as icing on the cake. As far as fleet profile changes, I'll hazard a guess. Let's say 80% of the fleet that we would use to support and that we do use to support infrastructure is core fleet. So we have very fluid fleet. and very fungible fleet to support this vertical. On the boundaries, yeah, we would certainly, as things started to move, buy some more attenuated trucks, buy some message boards, some infrastructure-specific fleet. But outside of that, most of what we serve that end market with is core fleet of our very fungible assets. But we feel we're really well positioned, not just talent-wise, not just knowledge-wise, but also relationship-wise. We deal with these large customers, these large civil contractors. We feel good that whenever the monies get released and it's passed, we'll be able to outpunch our weight in that category.

Okay. Thank you. Thank you.

Thank you. Our next question comes from the line of Ross Gilardi from Bank of America. Your question, please.

Good morning, guys. Morning, Ross. I had a couple of specialty rental questions just on growth. And, you know, aside from general finance, What are some of the larger growth opportunities in your legacy specialty rental business? And I'm thinking specifically of Trench and hoping you can comment there. I mean, PG&E is talking about burying 10,000 miles of power lines in California to curtail forest fire risk. I mean, it's an enormous project if it actually happens. It's all over the headlines. I don't know that many people would necessarily connect the dots with United Rentals on something like that, but is that the type of project your trench business would be potentially engaged in? And beyond that, like pertaining to, you know, all this stuff in the headlines about forest fires, hurricanes, and droughts and everything, what about disaster recovery and how big that business is and how big it can become?

Sure. And you made a great point about trench and how we would do with that type of business. And frankly, a lot of infrastructure business, right? Really, plays into our specialty network as well, but also our general end products. And when we think about emergency response, we've really built up that need. Certainly, power and HVAC team has done a great job responding to that. But whatever the needs are, our fluid solutions team has really broadened their network of customers they serve back from the day when we basically bought an oil and gas pump company. So this type of spreading the product knowledge and breadth across our broader network and relationships to serve these unique end markets is really part of the specialty strategy for us. So thanks for giving me that softball there. It certainly is really a great part of our growth strategy for specialty.

But that though, specifically, what about burying just power, like thousands of miles of power line? Like, is that something you'd be engaged in? Is that like, would that be kind of a common project for your trench business? All the dirt that's got to be dug for that? I'm just trying to, rather than just talking about this all in very much generalities, trying to talk about in relation to like a big project that's all over the headlines that we can all kind of relate to a little bit more. concretely yeah i'm sorry absolutely sorry that is an absolute truth so one that one that uh maybe we take for granted but absolutely would be a higher participation of trench net than anywhere else okay great and then just um studio entertainment and live events i mean you've got a little bit of a presence there but but the absence of a bigger presence was you know, it seems like it was a key factor that might have caused you to lag some of the competition on top line growth, at least off of the bottom. Do you feel like you need to get bigger in that market and are there opportunities to do so via acquisition?

We certainly, it's a market that we continue to get bigger in. I think you just saw where the official supplier of NASCAR now. So we keep adding to this portfolio organically. We don't feel like aching need in the space, but we certainly organically are growing that space, have some great people associated with it that continue to grow that space. If an M&A opportunity arose that was positive, I think you always know we have a robust pipeline we look at, but it's not a strategic necessary focus, certainly an opportunity that we would want to uncover organically and M&A if it arose.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Jerry Revitch from Goldman Sachs. Your question, please.

Yes, hi. Good morning, everyone. Good morning, Jerry. Matt, Jesse, I'm wondering if you could just talk about your capital deployment options now that you have a bigger footprint in terms of broadening the specialty business with GFN and new regions as well. Where are you folks optimistic about being able to put capital to work in a way where United Rentals is a good owner for additional assets now that you have those additional regions and products? Thanks.

Well, certainly GFN, right? So this is an absolute growth play, this acquisition, not a synergy play, not a consolidation play. So that would be the most obvious area because we really think we could spread that throughout our network and fill in the blanks in their distribution points. Continued focus on penetration within our existing businesses. And someone had asked earlier about specialty growth. We continue to grow specialty strong double digits because although we're very, very mature in some of those markets, there's still opportunity to continue to penetrate further in those spaces. And so I would say all of the above. And then we'll see. We're not ready yet to declare, but we'll see about some of the other opportunities that are out there. We're certainly going to fund organic growth in a very aggressive way because we think coming off of this disruption that we had last year, we're seeing the opportunity to refresh the fleet, get the fleet out there, and continue to serve more customers.

And, you know, on the GFN acquisition call, Jess, you spoke about a good line of sight on getting GFN margins closer to industry-level margins. And now that you've owned the asset for a little bit, I'm wondering if you could talk about and just flesh that out in terms of what do you think of the logistics opportunity set, the opportunity to leverage GFN? Your pricing tools, I know it's early, but given we have a little bit more visibility than we did at the time of the acquisition, I'm wondering if you might just parse that out a little bit for us.

Sure. Good morning. So I can tell you we are doing the system integration in North America for general finance this weekend. And that's a great step towards continuing to leverage the United Rentals tools and support the growth and the opportunities and the efficiencies that we can share with that business as they grow. Obviously, as Matt mentioned, with this being the growth play, we're going to look for every opportunity we can to grow as productively and as efficiently as we can and to work through how the extension of those branches, right? If you think about part of the growth that we talked about was cross-sell with the existing United business, but the other part of the growth was to expand that business into more MSAs where they currently aren't, right? That's an opportunity for us to leverage the efficiencies and the productivities that we have now in our branches as we continue to support those geographic extensions for them. So we still feel very comfortable with our original thesis of getting those margins up to be closer to where that business and the peers in that business operate. And, again, very excited about, you know, looking under the hood over the last month and a half, very excited about, you know, getting that going as soon as possible.

Terrific. Appreciate the discussion. Thanks. Thanks, Jerry.

Thank you. Our next question comes from the line of Tim Thine from Citigroup. Your question, please.

Thank you. Good morning. Matt, the first one was just on on trying to kind of talk through the opportunity for fleet productivity in the back half of the year. And, you know, obviously the comps get tougher, but as you think about kind of the components of that, if, if I, I mean, I don't know if my estimates are right, but I would assume that from a time standpoint, you're, you're running, you know, at or near, you know, all time high levels. So obviously the, you know, I would assume, you know, from here, rate and mix are likely to play a bigger role. But maybe you can just kind of touch on each of those in terms of where you and how you see the opportunity in the back half of the year.

Sure. And so we're very pleased with fleet productivity. And we have expectations for high fleet productivity in the back half. But just for clarity, that very gaudy 18% number is partially driven by the easy comp that we had in Q2, so we don't expect to have those type of double-digit fleet productivity improvements in the back half of the year, but still significant fleet productivity improvements. A lot of the absorption opportunity was certainly the big driver here in the near term, but we think market conditions, without getting into each individual component, we think the market conditions and, frankly, the industry's discipline is very favorable towards continued fleet productivity, and most importantly, the demand is there. So we really feel good about it. And although I don't think we'll see 18% again, I do think that we'll see, you know, strong fleet productivity. And that's embedded in our guidance for the back half of the year.

Got it.

Okay. And then on, you know, as you think about the volatility that we've seen this year and, you know, not just in terms of just commodity costs and how that's impacting, you uh equipment and some of your supply uh costs but as well as the just the availability of new fleet from the oems is that do you expect that will influence how you'll approach the timing uh of as you you know get closer to that initial planning in terms of capex planning for 22 uh as well as as maybe how you're thinking about you sales and and you know perhaps maybe flex that fleet age higher i'm sure there's there's some push and pull here but you know if the used market is if it remains as strong as it is which obviously will depend somewhat on new supply availability but does that impact how you're again thinking one about the timing the initial budgeting for next year and then two uh just how you're thinking about managing the fleet in this environment of super tight used used markets. Thank you.

Sure. So I'll take the latter part first. I think, and you see a little bit play out this, you'll see a little bit play out in Q3 as it did in Q2. The used metering, to use a word to characterize what you're saying, is more about just time utilization, right? As we continue to drive high demand and high use of our assets, then they're not as available to sell. But the end market's strong there. So I think we'll continue to fill that demand I don't think that's necessary. And on the first part, on the supply side, you know, we've got some really good partners, some good suppliers out there, and I think they'll get their arms wrapped around these supply chain disruptions that everybody's been dealing with in every industry. But commodities probably will right-size a little bit as we get to the end of this year. I'm assuming that our vendors are working. I'm not assuming. I've talked to them. Working really hard to continue to improve any supply chain disruptions they have. So I'm not really seeing that as a barrier to us supporting our customers next year. If it is, we'll adjust. But that's not in our calculus right now and certainly not to age the fleet.

Got it. Thank you.

Sure.

Thank you. Our next question comes from the line of Ken Newman from KeyBank Capital Markets. Your question, please.

Hey, good morning, guys.

Morning, Ken.

I kind of want to piggyback off that last question a little bit. You know, one of your big suppliers talked this morning about some deliveries having slipped due to supply chain tightness. And I guess I am curious if you have any comments on equipment availability that you're seeing today. Are you getting equipment on time? And obviously, you took an FX guide this quarter. And I'm curious, one, how did you, how were you able to pull that off? And two, where do you see the opportunities for potentially increasing that fleet size at the end of the year end.

Sure, Ken. So we still have a pretty big range. So within that, right, at the midpoint, you all know about the $300 million change that we made. Although a lot of that is the Acme fleet that we acquired that we've talked about, there's still a portion of that that's just organic, but even raising that guide in April, tells you that we feel good about our ability and our team's ability to source the equipment we need to supply customers. So we understand the noise. Maybe it's our relationships. Maybe it's our scale or leverage. But we've been able to exceed, when we sat here in January, what we originally expected to purchase this year. So I think that's a good story. And I get the challenges that everybody has. We've got what we want. Yeah, there's been some slippage. And if you ask me within a quarter, did stuff come in a few weeks later? Absolutely. The team worked through it. We drove higher fleet productivity on the assets that we had. And this is part of those strong supply-demand and industry dynamics that I referred to in the earlier question about fleet productivity. So nothing that's inhibited us supporting customers. but something we'll continue to talk to our suppliers at, how can we help them help us? And that's how we'll look at it going forward.

Right. I know you're not ready to give guidance on catbacks or fleet growth next year, but as we kind of think about the normal course of ordering patterns, can you give us a sense of just how much of the production slots you've got for next year so far, or is there any kind of sizing of – of the production slots that you've talked with your suppliers in terms of just helping us kind of figure out just how tight is supply today and how hard is it to get new equipment?

Yeah, it's a little bit early for us. We're not in that planning process. But as far as the more strategic part of the conversation, you know, our suppliers know us pretty well. They have a good idea what categories we're turning. They have enough information to know. what kind of fleets coming out of what we call rental useful life or RUL as we refer to. So they've got a pretty good idea and then it's just a growth bet. How much outside of your replacement of your rental useful life assets are you gonna add? So 70% of the answer is there for them already, maybe more in some years if you're not growing a lot. So we'll get through the planning process, see how we work through this year, but we don't see a need to actually lock in deals with which vendor is going to supply what until fourth quarter, like we normally do. They all certainly are much more keen to what's the opportunities, and our fleet team discusses that with them every week.

Yep. Last one from me. Jessica, thanks for the clarification on the guidance bridge, particularly from the acquisition contributions. I'm curious, could you clarify how much of the $250 million in incremental acquisition sales are expected to flow through equipment rental versus some of the other businesses or other .

So in that number, there's about 30 million of used sales. Got it. Thanks. Great.

Thanks, Kev. Thanks, Kev.

Thank you. Our next question comes from the line of Steven Fisher from UBS. Your question, please.

Great. Thanks. Good morning. I just wanted to follow up on the acquisition impact here. It sounds like the market environment is continuing to get even better than it was a few months ago. So I guess I'm curious. I know it's still early for like a GFN and Franklin, but I'm wondering to what extent the improvement in the market could enable perhaps faster realization of the synergies on some of these acquisitions.

Yeah, certainly. So two totally different scenarios, right? Franklin's kind of a scrambled egg in with the rest of the business already, so we're not even looking at them standalone. Great acquisition, by the way. I went and visited some of these folks in the last two weeks and pleased with the facilities, the quality of the team and everything. So they're all united right now, and they're working hand-in-hand with the stores that we already had in that market. GFN, just converting them this weekend, right? So we're going to convert them, get them on our system this weekend. Dale and I attended a management meeting they had last week at the MISA team, so 100 of my new best friends. And we were really impressed with the quality, and they're excited about moving forward. But it's too early to try to accelerate the timing one way or another. But I would say they're excited about the growth prospects. They're excited about the opportunity to get more fleet and serve more customers. So the growth play is still very much in our sights. But, you know, a month in here and then not even on the system yet would be premature for us to already ramp up the speed on them externally. Internally, maybe it's a different story. If we told them about growth, growth, growth, probably 10 times last week.

Got it. And I wonder if you can talk a little bit about the re-rent market. And I'm wondering if this is essentially a growing opportunity for you in any way.

Yeah, so that's not mischaracterized, and this may be. I'm assuming this question is coming from the Acme acquisition. We're not necessarily buying those assets to re-rent them. We do do re-rents every once in a while, and we do re-rent for people every once in a while, but this was really us buying these assets because they were available and they really fit into our profile of the customers and the projects that we serve.

Got it. Thanks very much.

Sure. Thank you.

Thank you. Our next question comes from the line of Neil Tyler from Redburn. Your question, please. Good morning.

Thank you. I suppose, Matt, sticking with the topic of the ACMLF deal, could you talk a little bit more about how that perhaps came about? It seems to me that's quite a unique opportunity that presented itself. And I think I think Jessica said in her introductory comments that the impact from those assets wouldn't really be meaningful this year. And I wondered if I've interpreted that comment correctly, why that would be. And then secondly, also on the topic of, I suppose, growth capital, when you're thinking about the pace of new branch openings and presumably those branches before they mature, they act as some drag on margin. Is it that there aren't branches that you could potentially acquire in those locations, or they're not for sale, at least not at the right price, or is there something else about the greenfield development that is more attractive than acquiring? Thank you.

Sure, thanks. So a couple questions there, so I'll break it down. Let's talk about the ACMEs to clear up any misunderstanding. So within that $300 million of gross capex improvement, anywhere from $200 to $250 million of that we've been telling people are going to be the ACME assets. The reason why that's not a definitive number is we are going to buy these throughout the rest of the year. Those assets, a lot of them that we don't have right now, have to come off rent from where they are have to be serviced and delivered to us in rent-ready good condition. And if they're not, we won't buy them. So where that ends up, we'll know a lot more when we all talk at the end of October. By then, hopefully, we're primarily done. But because this is so back half loaded on the receipt of these assets, that's why you wouldn't see the normal correlating CapEx acquisition revenue impact that you'd see, let's say, if we brought them in the second quarter. So I think that's what was referred to there. And that opportunity came organically. We've had a relationship with them for many, many, many years, and they're changing their model, and we saw it as an opportunity to buy assets that fit our profile very well. So that's how that came up. Your second question I call it the build versus buy conversation. We absolutely have a dual-pronged approach to our strategy. As you know, M&A has been a big part of our business. I would even call the Franklin acquisition part of a build versus buy. We thought we had opportunity. to do a better job in the markets they're operating in. And there was an opportunity to happen to do that one in acquisition versus cold starts. But we're not going to wait just for the perfect deal to come along for us to have organic growth plans, whether it's a specialty or markets where we think we have more opportunity within the overall portfolio in general. So it's an analysis we do. It's part of our pipeline, that build versus buy conversation. And we'll continue to look at it that way.

Thank you. That's helpful. Perhaps if I could just chance a follow-up as well. On the topic of fleet utilization as it stands currently, and I understand you don't provide those numbers, but it's clear that it's at a record level or close to. At what point does that start to introduce inefficiencies in the cost base? And if so, are any of those represented in the higher delivery cost? Or is that just simply a cost of fuel and drivers?

Yeah, I would say the latter for the delivery cost, right? Just such a quick ramp up for the business when you look at it on a year-over-year perspective. But your question about utilization, we've always run higher utilization, and we're not sharing the individual components anymore. But from when we did, you all know that we've always shared higher utilization. That's part of what scale gives us. So we expect that. We continue to drive for that. And you don't see a correlating higher R&M. So that would be an area where you'd say you're maybe getting dilutive impact of running high utilization. We're not seeing that. And I think we will continue to reinvent ourselves, get more efficiencies out of our business that scale may give us options that haven't existed before to help continue to drive utilization. That's a big component of fleet productivity.

Okay, thank you. That's very helpful.

Thank you.

Thank you. Our next question comes from the line of Chad Dillard from Steam. Your question, please.

Hi, good morning, guys. So my question is just on the bonus accrual. Can you quantify the dollar amount that you're seeing this year? And just to double check, it sounds like there was a pretty big catch-up And 2Q, what's the key for the balance of the year?

So in that back half, as I directed earlier, Ches, there's about $45 million of year-over-year headwind that's coming from the bonus.

Gotcha. And for the full year?

For the full year, it's about $90 million.

Okay, great.

The way that'll save, just based off the count from last year, is there'll be a little bit more in the third than in the fourth. Gotcha.

That's helpful. And then just a bigger picture question. Can you just talk about the customer acquisition costs for in branch versus e-commerce? How much of your sales are actually made through the e-commerce channel today? And I mean, is there any real preference from your, from your end? Is there any margin differential? And I mean, I imagine that you'd want to segment that channel more towards your non key account customers. Maybe you can talk about that strategy.

Sure. I wouldn't say that this is a cosplay. I think it's about giving the customers the avenues to communicate with you that they prefer, right? And I've been very clear about that strategically, that we want to engage with the customer the way they want to engage. It's still not a big part of our revenue, or to be fair, a big part of the industry's revenue, but it's continuing to grow. I think more importantly, specifically for the leader in the industry, you have to have that option available for the customer. And I will say the more and more that engage with it, and a little bit of that ramped up during COVID, the more opportunity for growth there. I also think it's the information that some folks want to access information at their own time and their own way. And I think that's where the digital connections with customers really play out, even more than just the acquisition. The acquisition is only a piece of the digital engagement with the customer. Getting them real-time information, getting them access to information they haven't had, I think probably longer term, the more valuable customer experience than just the acquisition opportunity. Great. Thanks. Thank you.

Thank you. Our final question for today comes from the line of Scott Schneeber from Oppenheimer. Your question, please.

Thanks very much. Good morning. Matt, just curious. In times of when business is going well, just supply-demand imbalances, delivery costs go up because the third party purchased transportation. I'm just curious, you know, cyclically you encounter that. It's somewhat of a high-class problem, but how are you thinking about that strategically commuted, having a very large, you know, very large business, maybe to commute that in the future with employing more full-time drivers? And as a follow-up on this question, How are you seeing the labor market right now? And how are you feeling about staffing? And is that going to be a problem going forward if we continue to see a demand environment? Thanks.

Thanks. You're singing my tune here, Scott. I think as far as the insourcing, which we talked about a lot last year during COVID, keeping our people working, showed us the opportunity. Now, admittedly, the ramp up came really quick. And now that we're in the peak season, outside services were necessary. But longer term, I view this as an opportunity for us. The recruiting of drivers is probably the one area, not just for our industry. I think my trash pickup was late last month because they didn't have driver pickup. It's a problem for everybody. It's not going to be forever. So longer term, I think this is an opportunity for us to continue to drive even more efficiency in our business by insourcing things that we were doing. And as far as the labor market, And overall, we're doing pretty well outside of being able to hire more drivers and even get trucks fast enough. I would say the rest of our labor situation we feel really good about. Part of it is our low turnover, so we're not having to replace as many as if we had had higher turnover. And frankly, part of it is a decision we made to not do layoffs. So thank goodness we didn't do that because it would be really tough right now if we had mass layoffs during COVID-19. and then still had to support this level of activity. So I feel really good about the way we've managed through it, but still opportunity to insource in the future, and we've been talking about that a lot strategically here internally.

Thanks.

Thank you.

Thanks, Scott. Thank you. This does conclude the question and answer session. I'd like to hand the program back to management for any further remarks.

Thanks, operator, and thanks, everyone, for joining us. And I'm sure you can hear and you can see we're full steam ahead in a favorable market. And our Q2 investor deck reflects our recent expansion. So please download it from the website. And feel free to reach out to Ted if you have any other questions. Look forward to talking to you soon. Stay safe. And operator, you can now end the call.

Thank you. And thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.