United Rentals, Inc.

Good morning and welcome to the United Rentals 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, 2021, 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 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 presentation to see the reconciliation from each non-GAAP financial measure the most comparable GAAP financial measure. Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer, and Jessica Grisano, Chief Financial Officer. I will now turn the call over to Mr. Flannery. Mr. Flannery, you may begin.

Thank you, operator, and good morning, everyone. Thanks for joining our call. I'll start with the main takeaways from yesterday's release. In the second quarter, our team executed extremely well in a robust demand environment. And as a result, we delivered very strong performance by any measure. Our rental revenue increased by 26% year over year to a second quarter record of almost $2.5 billion, well above expectations. And adjusted EBITDA grew faster than the top line, up 31% to a record $1.3 billion. We also demonstrated good cost discipline. Our adjusted EBITDA margin expanded 360 basis points to 47.3%. This contributed to a strong flow through of about 65%. And importantly, we delivered a 230 basis point improvement in return on investment capital to a record 11.5%. The three tailwinds we saw at the start of the year continued to fuel our momentum. The macro environment remained favorable, which created more demand in the quarter. And you can see that in our rental revenue growth, which included fleet productivity of better than 11%. In addition, the customer trend toward renting equipment is alive and well. We see this as a secular shift that will continue to move the market from owning equipment to renting it over time. And lastly, we're confident that our growth is outpacing our industry as we continue to take share, both in our core markets and with key customers. One reason we're gaining share is our positioning as a one-stop shop. Customers place a lot of value on being productive, and our combination of scale, job site solutions, superior service, and technology is unique in our industry. Customers also care about safety. And we prioritize safety on and off the job site. And this is another area where our team delivered in Q2 by keeping our recordable rate well below one. And increasingly, customers place a value on sustainability. In May, we announced an initial agreement to purchase over 500 all-electric trucks and vans from Ford, including the F-150 Lightning pickups. This partnership is a good example of how we're continuing to add sustainable solutions to our rental fleet while moving toward greener operations. We're proud of the progress we're making in many different areas of ESG, including environmental stewardship and social impact. Yesterday, we released our 10th Annual Corporate Responsibility Report with comprehensive data covering 2021, along with more recent developments. You can find it on our website if you'd like to download it. Another thing customers strongly care about is reliability. It's high on their list, and we've got a very high bar in response. Our team is trained to deliver a caliber of service that earns the next opportunity. And our employees like that challenge, and they love being a hero to our customers. That's a big part of our culture at United, and it helps with retention and recruitment. Our net headcount at the end of June was 9% higher than a year ago, which is a solid gain in a tight labor market. And I'll repeat something I said before. We're fortunate to have a world-class team standing behind our strategy. It gives us confidence in every target we put out there, and that includes the updated guidance we released yesterday, which raised our outlook for total revenue, adjusted EBITDA, and free cash flow. We have strong visibility through the balance of the year, and the activity we're seeing will create a lot of demand to get equipment on rent. There are plenty of positive signs to support this view. Virtually all of the external indicators are favorable, including the Dodge Momentum Index, the ABI, contractor backlogs, and customer sentiment. And the used equipment market remains robust. In the second quarter, we captured record recovery rates and margins on used sales. I spoke to all of these dynamics coming out of Q1, and they're all still true today. Now I'm going to pivot to look at demand at the ground level. Our generate and specialty segments both performed extremely well in the quarter. All of our regions company-wide delivered double-digit rental revenue growth. In many ways, it's a continuation of what we spoke about in Q1, broad-based activity across regions stemming from a diversified mix of end markets and key verticals. Looking at it by end market, our rental revenue from non-res construction was up 27% year-over-year, and infrastructure was up 15%. And more broadly, almost every vertical showed year-over-year growth in rental revenue. In terms of project types, large data centers are continuing to break ground, along with infrastructure projects and distribution centers. And manufacturing is coming back. The power vertical is also accelerating, and there are more tailwinds in the wings. With infrastructure, for example, the funding is now finalized in Washington, and we expect to start seeing a benefit in 2023 and beyond. With manufacturing, the resurgence of the industrial sector in North America is being driven in part by supply chain challenges in other parts of the world, and that's good for us. It's already evident in certain sectors. Companies are investing hundreds of billions of dollars in megaprojects in the US and Canada to build plants across a variety of verticals, like semiconductors and automotive. These projects will require equipment for years to come, and they play to our competitive advantage with large customers. On the specialty side, the segment had another excellent quarter, led by our power and mobile storage businesses. The segment as a whole grew rental revenue by 39%, including the benefit from general finance. Pro forma specialty was up a strong 29%. We opened 24 cold starts through June in specialty against a revised target of about 45 openings by year end. And that's slightly higher than our original projection of 40 openings this year. So as you can see, 2022 continues to be a landmark year for our company, both financially and operationally. We delivered another record quarter in what we expect to be a record year. Our flow through in the quarter reflects the team's discipline in navigating a challenging cost environment. And we continue to have the benefit of a strong balance sheet, low leverage, and robust cash generation. This gives us the flexibility to act opportunistically on many fronts. This year we expect to make the largest investment in our history in fleet of about three billion dollars. Our suppliers are taking good care of us and our capex spend is tracking the plan. We'll also continue to explore growth through cold starts and acquisitions. We've made seven bolt-on acquisitions this year to date for a total consideration of over 300 million dollars. Lastly, we expect to complete our share repurchase authorization this quarter These are all prudent capital allocations to create long-term shareholder value. And we know that the key to leveraging capital is relentless execution. And that's what you're seeing from us in our results. Now, before I hand it over to Jessica, I'd like to take this opportunity to thank her personally for her many contributions over the past seven years. As you all know, Jess will be leaving us to take on a new opportunity, and Ted has stepped in as we go through the CFO search process. And I know I speak for our entire leadership team when I say it's been a pleasure to work with Jess, and we wish her all the best in her new endeavor. And now, with that, Jess, you've got the floor.

Good morning, everyone, and thank you, Matt, for your kind words. It's definitely bittersweet to be on my last earnings call for United. My time here has been an incredible experience, and not just with our amazing team, United, and our board, but also working so closely with Ted and the investment community. We've accomplished a lot together, so I'm grateful to have this chance to publicly say thank you. As we look to the quarter, I'm especially pleased to be able to report such great results on my last call. Record results, actually. As Matt shared, the strength we've seen in demand across our end markets has exceeded our expectations for the quarter. It also underpins our increased guidance for revenue, adjusted EBITDA, and free cash flow for the full year. And more on that later. Let's start with a closer look at the second quarter. Rental revenue for the second quarter was a record $2.46 billion. That's up $511 million, or 26.2% year over year. Within rental revenue, OER increased $383 million, or about 23%. Our average fleet size increased by 13.6%, which provided a $223 million tailwind to revenue. Fleet productivity was up a very healthy 11.3%, contributing $185 million. And rounding out OER was about a $25 million reduction in rental revenue from fleet inflation, which we estimate to be a 1.5% drag. Also within rental, ancillary revenues in the quarter were higher by about 115 million, or 42%, which is mainly due to increased delivery fees and other pass-through charges. And finally, re-rent was up 13 million in the quarter. Used sales for the quarter were 164 million, a decline of 30 million, or about 15% from the second quarter last year. We continue to manage used sales to help ensure we have adequate capacity to serve the robust demand we're seeing this year. We're focusing those sales in our most profitable retail channel, and together with a strong market overall and better pricing, delivered a healthy 62.2% adjusted used margin for the quarter. That represents sequential improvement of about 440 basis points and year-over-year improvement of just over 1,400 basis points. Let's move to EBITDA. Adjusted EBITDA for the quarter was $1.31 billion, another record for us, and an increase of 31.2% year over year, or $312 million. The dollar change includes a $324 million increase from rental. Now, in that, OER contributed $273 million, and ancillary was up $51 million. Used sales were a tailwind to adjusted EBITDA of $9 million, and other non-rental lines of business provided $10 million. Other income also contributed $10 million of year-on-year benefit, in part due to some of the one-time costs from acquisitions we called out in the second quarter of last year. SG&A was a headwind to adjusted EBITDA of $41 million, driven in large part by higher commissions on higher revenue. And as expected, we saw certain discretionary costs in SG&A continue to normalize. Adjusted EBITDA margin came in very strong at 47.3%, up 360 basis points year-over-year, with excellent flow-through of 64.5%. Excluding the benefit from used sales in the quarter, flow-through would have been a healthy 59%. The strong performance across the core business reflects better-than-expected growth in rental. It also reflects the impact of actions we've taken to pass through cost inflation in certain areas like delivery and fuel. Our team also did a great job managing costs across other areas of the business. Let's shift to adjusted EPS, which was another record for us at $7.86. That's up 68% or $3.66 versus last year. EPS this quarter includes about $0.55 from a one-time tax benefit, but even if we adjust for that benefit, I'm pleased to note our EPS would still have been a record this quarter. Looking at CapEx, gross rental CapEx was a healthy $872 million in the second quarter. Proceeds from used equipment sales were $164 million, resulting in net CapEx of $708 million, which was similar to the second quarter last year. Net capex through the first half of the year of $979 million is up $232 million, or 31%. Now turning to ROIC and free cash flow. ROIC continues to run well above our weighted average cost of capital at a record 11.5% on a trailing 12-month basis. That's up 60 basis points sequentially and 230 basis points year over year. Free cash flow also continues to be very strong as we generated $392 million in the second quarter and just under $1 billion for the first half of the year, all while continuing to invest in high levels of CapEx to grow our business. I'll share a few comments on our balance sheet. As I look back on my time here, I am especially proud of the work our team has done on the balance sheet. It is in fantastic shape. Our leverage ratio at the end of the second quarter remains at the lowest level in our history at 2.0 times. That's flat sequentially and down 50 basis points from the second quarter of 2021. Liquidity at the end of the quarter was a very strong $2.8 billion, with the vast majority of that coming from ABL capacity of just over $2.5 billion. And notably, within the quarter, we took a number of actions to further bolster our positioning, including upsizing and extending both our ABL and AR facilities with improved terms. And I'd be remiss if I didn't also mention that our next long-term note maturity isn't until 2027. The last thing I'll mention on our capital allocation relates to our current $1 billion share repurchase program. We leaned in a bit into the execution acquiring roughly $500 million in shares during the second quarter. Through June 30, we've spent $762 million of the authorization, repurchasing a little more than 3.5% of our fully diluted share count. With $238 million left to purchase, we expect we'll finish this program in the third quarter. Let's look forward and talk about our updated guidance for 2022, which we shared in our press release last night. Total revenue is now expected in the range of $11.4 to $11.7 billion, or an increase of $250 million at the midpoint, implying full-year growth of 18.9%. As I mentioned earlier, this increase is supported by robust demand that we continue to see broadly across our geographies and our end markets. We expect the profitability and flow-through on that higher revenue to remain strong. Our adjusted EBITDA range is now 5.4 to 5.55 billion, up $175 million from the midpoint of our previous guidance. This implies a 200 basis point increase in full-year adjusted EBITDA margin and robust full-year flow-through of about 58%. A range for gross and net capex is unchanged. We still expect to source about $3 billion of gross capex. We also expect the strength of the used equipment market will support used proceeds consistent with our original guidance, even though we'll sell less fleet for the full year than originally planned. And finally, our free cash flow guidance has increased $150 million at the midpoint, as we now look to generate between $1.85 and $2.05 billion That's mainly from higher operating profit we expect to deliver this year. Now, as I pass the baton, I've asked Ted to jump in on Q&A. So let's get to your questions. Operator, please open the line.

Certainly. At this time, if you would like to ask a question, please press star and one on your touchstone phone. You may withdraw yourself from the question queue at any time by pressing the pound key. And once again, that is star and one to join the question queue. Our first question comes from David Russo from Evercore ISI. Your line is open.

Hi. Thank you for the time, and congratulations, Jess. Regarding just sort of big picture, I mean, we can dive into a lot of numbers, but needless to say, the results were pretty solid. So I'm really just trying to think about 23 here, if you can indulge me. Matt, obviously, you've been doing this for many years. And the backlog that you're hearing from your contractors, when they – When they speak of where they are in the project development, do they have financing, how committed they seem, something underpinning it, be it infrastructure bill or whatever it may be. Just curious, when you look at this backlog today, if you could maybe comp it versus where it was this time last year and just your history with this business. the comfort that you have in these backlog numbers that I guess are still suggesting to you another year of solid growth in 23?

Sure, David. So obviously, you know, we'll go through our whole planning process this fall, but we'll do a deeper dive and then update everybody at year end on what we expect 2023 to be. But to be clear, we expect to carry good momentum into 23, whether that's the great fleet productivity, which there'll be some carryover effect as a positive into 2023, or the larger fleet size. So just structurally, we'll have some momentum going into 23. And additionally, to your point about the backlog, it remains pretty consistent on our CCI, where our customers at a high level have been consistent for six quarters, and that hasn't changed. So we're not seeing any kind of deceleration in our customers' expectation. And additionally, as I mentioned in my prepared remarks, Mega projects are going to be long term for us. So they're breaking ground now and funded and we're talking billions, billions of dollars of potential work out there. And we haven't yet seen a couple of tailwinds that I mentioned. shovel-ready, meaning activated for our rental revenue, the funding for infrastructure, and a lot more what we believe is going to be a manufacturing resurgence. So those are the tailwinds I call into play going into 2023. Some of it's structural for our larger and momentum that we're carrying into 2023, and then some of the macro areas that we have yet to enjoy that we think are going to be tailwinds in 2023.

Is there anything about what you're hearing for those projects that should influence our thought on the margins, be it it's going to be more national account or it's going to be more of a different vertical that you've historically had better or worse than average returns? Because right now it looks like the incremental EBITDA you're getting on the own fleet, it's been over 70% now, two quarters in a row. Obviously, the ancillary and the re-rent dragged it down a little bit to the overall 65%. but it just seems that the drop-through has been so strong. I'm just trying to calibrate how much is it. You know, right now we're just running at time utes that you probably wouldn't have thought were that possible. So the fixed cost absorption is great, but I'm also just trying to be thoughtful if I've got a different mix coming in 23 to try to calibrate how to really think about the incremental margins from here.

No. Operationally, we actually see some efficiencies on the large projects. Admittedly, some of the real large-scale customers, our largest national account, may have a little bit better pricing, but they kind of even off. And the consistency and the longevity of rental for major projects is a positive offset for us. So I don't expect to see a big margin profile change based on the project sizes or duration. I think that was the basis of your question.

Okay, thank you very much for the time. I appreciate it.

Thanks, David.

And our next question comes from Tim Theon from Citigroup. Your line is open.

Thank you. Good morning and congrats again, Jess. Thank you. Pretty nice of you to hand the keys over to Ted with leaving the balance sheet in such good shape. Thank you, Ted. Thank you. Yeah. And actually, just kind of continuing on that, Matt, just, you know, you mentioned that they're accelerating the repo into the third quarter. How are you thinking, given where, I mean, what you just outlined for potentially another strong year in 23 and where the balance sheet likely sits heading into the year, how are you thinking about the priorities beyond, you know, buybacks? Does M&A, just maybe updating view in terms of either M&A, does a dividend potentially come into the picture? Just maybe a few thoughts on that in terms of how you're thinking about capital returns.

Sure, Tim. I'll categorize all this as our capital allocation prioritization. So as you accurately depicted, we will finish a quarter in advance our billion-dollar authorization, and that was just a great opportunity for us to utilize excess cash that we have. And we'll still live in the bottom, if not below the bottom, of our leverage range. So we're very comfortably operating in that range. And there's no magic to it. If we go below it for a little while, that's not a concern of ours either way. The bigger statement I'd like to make is our prioritization of our robust balance sheet usage as well as our free cash flow. And first and foremost, it's to support the business, whether that's organically, as we've done a lot of this year, or through Smart M&A. And the opportunities we have to then disperse excess cash is not in any way indicative or a replacement for those first two opportunities. We absolutely can do this. This is an end strategy, not an or strategy. We're fortunate that the business is in great shape and the balance sheet, as Jess pointed out in her prepared remarks, is in shape that we can fund organic growth, we can do some deals, and still return excess cash to shareholders. And I won't get ahead of our board, but as we think about the options in which we can do that, you know, we'll update everybody maybe as soon as October.

Got it. Okay. And then maybe, Matt, just a quick follow-up. Just from a fleet standpoint, how should we think about, just given the strength and recovery values, what the fleet, kind of the composition from a, you know, to the extent you're selling fewer units than you thought, how do we think about the fleet from a, you know, value versus unit perspective, just given that? how the net capex is playing out, assuming that makes sense. How much larger is the fleet than it really is?

So, first off, we'll be up somewhere around 10% range at year end with over $17 billion of fleet approximation when we end the year in 23. So we'll have a larger fleet. And when we think about the value of that fleet, we haven't really seen a tremendous increase. We haven't changed our plug for inflation in our fleet productivity. And even if that picks up a hair, and I know we're hearing a lot of noise about that, I think the opportunity that we've had and that we've executed on driving strong fleet productivity can offset that. When I think about what the supply chain is going to look like next year, which would kind of be the back half of that question, We're ready for over a month now, earlier this year than usual for sure, talking to our OEMs about what our needs are going to be as they try to forecast out what kind of capacity they're going to need to fill the demand. So we're way ahead of the ballgame on planning with our OEMs. I know they're working their tails off. not only just to get us the $3 billion that they've committed to us this year, which we're on track, which is great news, but also for the future. And so I know they're working hard, and we have some that are doing better than others, but in aggregate, the vendor base is really doing a good job for us, and we expect the same in 2023. Okay. Thanks for the time.

Thanks, Tim.

And our next question comes from Rob Worthmeyer from MyListResearch.com. Your line is open.

Thanks, and good morning, everybody. Hey, Rob. So, Matt, you touched on this earlier, and I know you like to talk fleet productivity, and I'm not, I guess, asking for the level on time utilization, but it does seem like, obviously, rate is going up, but it feels like there is more to the performance this quarter than just rental rates coming up, and I assume time use is hitting new records. For one, is that roughly accurate, and for two, Is that an operational shift where you've learned how to unlock a little bit more productivity and keep it up, or is it just a super hot market and people aren't taking stuff off rent and there's less turnover or something? I'm just wondering if that's a sustainable change, if it's there.

Yeah, in short, Rob, that's a yes and a yes, right? So certainly necessity is the mother of invention here. But all kidding aside, you know, I guided in April, and I was never so pleased to be wrong, that we'd be somewhere in the mid-single digits in fleet productivity. And all three components of fleet productivity, whether it be rate, mix, or time, exceeded our expectations. So that's why you see this robust fleet productivity. But the one that was most surprising to me was time. I said publicly, we ran so hot last year in the back half of the year, I'd have been pleased if we repeated it, and the team outdid it. So that was the one that was surprised. Not numerically the largest value in the three. I'm not saying that. As you know, I'm not going to give numbers. But it was the most surprising to me because we had a real high bar to get over it. So that's how I would qualitatively talk about the really strong fleet productivity that we drove.

And then the sustainability of that. Have you learned new ways of getting there, of pushing it to new levels? Any comments on how you got there, if you were them? Thanks.

Yeah, as you know, because you visited our branch and we talked a lot about it, the technology that we've been embedding in our operations and the efficiency and productivity that's born out of that for many, many years, starting back as far as 10 years, has really given us an advantage over all the data that we see throughout industry actors. So we've always enjoyed time utilization gap to the positive. And part of that scale, part of that network that we have and the density of that network, but it's also embedded by technology, and we've actually improved upon that. So we do think it's sustainable. Admittedly, the team surprised me and set new heights this year, but I don't think that it's not sustainable. At some point, the more interesting part is, what is the level of off-time? Do we ever get a point where we want to make sure that we're still being as responsive as we are? All the metrics tell us that's still happening, so we're very pleased. Thank you. Operator, no questions?

All right. Our next question comes from Stephen Fisher from UBS. Your line is open.

Great. Thanks. Good morning. Just wanted to follow up on M&A and maybe the smart M&A, as you called it, Matt. You're doing a bunch of bolt-ons. I guess in general, how are the prospects for larger deals? And related to the bolt-ons, are you seeing increased desire from sellers? Are you doing more bolt-ons because the larger deals are harder to get done? Is there more specific things you're targeting that it makes sense to do via bolt-ons? Just a little color there, please.

Sure thing, Steve. We've always had a pretty diverse and robust pipeline revenue, and that has not changed. Matter of fact, it may have even increased a little bit, as specifically in some of the bolt-ons, as you call them, the smaller ones, where people have fully repaired their businesses from COVID. And now, you know, there's probably a few people out there that would have sold just before COVID, but they weren't going to sell at those low levels. So those are people who have repaired their business and have put themselves back on the market. and what you saw our execution on was really just spot opportunities in a given market where our local teams needed uh some more capacity whether that's people facility or fleet right that's the way i categorize capacity but there are still some big deals to be had um you know and and we're still working that pipeline it's just a matter of which ones get over the transom right and when i say smart m a it's because it's going to have to fit all three legs of our stool that we've talked about and that last check on the smart is the financial so we got to have a agreeable terms and a willing seller to get them over the final leg but we're working the pipeline on both big and small deals that's helpful and then what on the capex front uh what would you have to see to raise your capex guidance for this year on the growth side is it you know more near-term demand strength i mean it sounds like it's kind of going all out there

Or is it just, you know, more confidence that suppliers can deliver?

Yeah, it would be the latter. There's not a demand issue in any way, shape, or form. And as a matter of fact, Jeff alluded to, we've even sold less used to help fill that demand since we, in a normal year, we would have the OEMs pull forward, have already had some capex pull forward into Q2. And as you see, we're stuck to our original plan of around $900,000. and then another 1.1 in Q3. We don't think we're gonna have the opportunity to pull any more forward from those numbers. Our suppliers are working real hard to fill that, and I know the challenges they have, and that's why you didn't see us raise our CapEx. In a normal supply environment, you probably would have seen some increased CapEx, but we are using the used sales lever and pulled out any broker and auctions or trade-in. We don't really do a lot of auction trade-in sales to make sure we use that extra capacity to support the businesses.

All the best, Jess.

Thank you. Thank you.

And our next question comes from Seth Weber from Wells Fargo. Your line is open.

Hey, good morning, and congrats, Jess, as well. It was a pleasure working with you. Matt, I'm sorry. You might have just addressed this, and I might have missed it, but the the CapEx cadence for the second half of the year. Can you just talk through that? I mean, you know, some of your suppliers are obviously talking about getting constraints, getting stuff out the door. I assume third quarter is, you know, meaningfully up from the second quarter, but is there any way to frame just, you know, the cadence third quarter versus fourth quarter on gross CapEx?

Yeah, sure. It'll be. And as we had stated, uh, uh, in, in, April, it really hasn't changed our plans. We expected to do about 900 this year, which we're right about there. And then we do about 1.1, I'm sorry, Q2 900 and about 1.1 in Q3. And we think we're on track to do that. And then that leaves you another, depending on where we end up in the range, let's say five and a half for fourth quarter. So our expectations haven't changed all year. And as I stated earlier, we just don't have opportunity. There's not a lot of wiggle room for the vendors to accelerate or to increase that at this point. And if that changes, you know, we'd update everybody. We do not expect that to change in the meat of the rental season, which is Q2 and Q3.

Right. Okay. That's helpful. Thanks. And then just on the, you know, the use sale margins, very, very strong. And I know you called out some mixed benefit, just channel mixed benefit, but can you just talk to, I mean, there's obviously a lot of concerns around use, but in pricing prices that we see, which seems to be inconsistent with the prices that you guys are capturing. So I don't know. Can you just help people connect those dots as to, you know, your, your confidence in use, but in pricing to stay high, you know, for the, for the foreseeable future versus some of the concerns that are out there in the market around pricing rolling over. Thanks.

Yeah, Seth, this is Ted. I'll take that one. Look, in the quarter itself, we saw really strong results. So we certainly are not seeing pricing headwinds on a sequential basis. We are up high single digits. So, you know, certainly something we'd be keeping an eye on. but it's not something we've seen in our own results. Yeah, quite the contrary, right? Now, part of the great strength you see is that we're primarily selling the retail channel, and we've built a unique engine in that way compared to the rest of the industry. So we're not going to stop that because that's driving great pricing. But even within retail, year-on-year retail, we're seeing – strong pricing. So we've heard a little bit recently about people talk about that rollover. Maybe that's auction driven, but we're not seeing it in our experience or in the retail channels.

Right. Okay. Very helpful. Thank you, guys. And again, Jess, good luck.

Thank you. Thank you very much.

And our next question comes from Jerry Rivage from Goldman Sachs. Your line is open.

Hi, yes, this is Clay Williams on behalf of Jerry. Good morning.

Good morning.

Can you talk about how general finance is performing and if the supply availability of containers has eased? Thanks.

Sure thing, Clay. Performing very well. If you recall, we had said when we announced that deal that we wanted to double the size of that business in the next five years, and we're ahead of schedule. The team's really doing a great job, and the supply chain has helped. Ironically, when we initially bought them, that was probably the toughest time for quite some time to get containers, and the pricing was up. But things have remedied for that, and the team's taken full advantage. And as you heard on my prepared remarks, you know, such a great job that I wanted to call them out specifically for the growth they're doing. So we're excited to see that the thesis we had around the deal and buying that platform and growing it organically is executing ahead of schedule.

Yes, and just to follow up there, can you talk about what has enabled you to scale that business so quickly ahead of plan across your branches?

our network, right? So relationships with our customers and these were products that we knew our existing customers where we had deep relationships with. wanted and now we're able to supply them and that was a big reason why we looked at adding that product to our mix with a platform that was big enough so that we could support most of the network but also small enough that we could grow it organically and then pay for the multiple that we that we paid for it so it's really been a win-win from the strategy perspective and the customer support thanks thank you

And our next question comes from Ken Newman from KeyBank. Your line is open.

Hey, good morning, guys.

Morning.

I was just curious, you know, obviously there's been a lot more concerns around consumer-facing end markets as inflation ramps. I know that that's probably a much smaller part of your business, but maybe just remind us how much of your sales are consumer-facing, whether it be from entertainment or within the commercial segments. And then just talk a little bit about what you're hearing from customers in terms of whether or not you're seeing any changes in customer behavior.

Yeah. Again, I'll take the first part of that for sure. The direct consumer-facing parts of our business are really small. I guess if you're looking at non-res, which call it between public and private, it's probably 40% or so of our mix. Some fraction of that might be the component of retail within commercial, but we certainly don't think it's very significant. And frankly, it hasn't been kind of a strong market for a number of years. Obviously, strip malls and businesses like that have been under assault from e-commerce. You know, some of the aspects that might be more kind of consumer-facing could be things like entertainment, but there we focus on live sporting events that have been quite strong. So I think PGA events, you know, auto racing, things of that sort. So the direct piece is very small, and I'd say even the indirect piece is pretty small. Does that answer the first part of the question?

It does, yeah. And then I think the second part was just around. Go ahead.

Yeah, as far as customer behavior, which I think what the second part was, Ken, You know, we're actually, because of the market so tight here, we always are about repeat customers, building loyalty, building partnerships, and I would say in a tight demand environment, I mean supply environment for the robust demand, our customers are really relying on that. So, you know, our team's done a great job meeting the challenge, but it's In a tight environment, we've got to make sure we come through for those customers, and we think that bolsters our relationship selling opportunity and the one-stop shop value that we bring to these customers. And I would see, if anything, the relationship and appreciation of being able to be a one-stop shop has improved.

Got it. And then just for my follow-up real quickly, just to clarify, I know – You guys talked a little bit, I think, in the back, you had guided to that mid-single digits fleet productivity number. Just given all the commentary that you've given so far on the quarter, should we start thinking about fleet productivity in the high single digits here into the back half to kind of get to what's embedded in the midpoint of your guidance?

You beat me to it, Ken, absolutely. So that's what's embedded. If you use the midpoint, that would imply a high single-digit fleet productivity for full year, and that's where we think we'll end up.

Got it. Thanks for your time.

Thank you.

And our next question comes from Scott Schneeberger from Oppenheimer. Your line is open.

Thanks very much. Congrats on the quarter. And Jess and Ted, congratulations and best wishes in your roles. Thank you. You're welcome. I guess that last question was a great segue to my first, which would be clearly a very strong year this year in 2022. And it looks like you're going to be ending the year quite well. So as we think about fleet productivity exiting 22 and going into 2023, how should we think about the carryover impact? Just any thoughts and magnitude on what we can enter next year, Carrie? Thanks.

Well, yeah, as you know, Scott, I'll be painfully consistent in not giving quantification of the metrics. But just qualitatively, you're seeing what our other peers are reporting. The whole industry is doing a good job driving fleet productivity, including rate. So naturally, there'll be some carryover. I'm not going to quantify it, but there'll be some carryover just on the rate alone. And as far as mix... And time, the team, although we don't give the numbers, the team works really hard on making sure we're driving positive fleet productivity in every metric under their control. And although the comps on time, certainly, and I'll sound like a broken record because I said that this year, will be a challenge. So we expect that to moderate. We still think that there'll be opportunity to well exceed our expectations of that initial 1.5% for fleet productivity.

Got it. Great. Thanks, Matt. I appreciate the qualitative response. And I guess, Jesse, working you in here, the delivery expense, if you could speak to how, you know, in this inflationary environment, how that's trended in the first half, how you all have been managing that in a tough labor market, um you know internalizing transportation versus maybe using third party just commentary on that and also how you're uh you're managing any pressures with with fuel um and and any new lessons learned on on the go forward thanks yeah uh scott this is ted so um certainly if you look at our results in the first half both first and second quarter

It would be embedded in that ancillary line item that Jess calls out in her script and you can see in our financials. And from that standpoint, you can certainly see it's been considerably positive. All the contribution margin from the entire ancillary line items would be running in, call it probably the upper 30s. So certainly we've been able to manage all that very effectively. And as a reminder, only a component of that entire line item that you'd see in ancillary would be isolated to the fuel component of pickup and delivery. But I think it makes the point that the team's done a great job of passing that through to customers and making sure that we've been able to, at a minimum, protect margin. Does that help with the fuel piece? Yeah, that's great. Thanks. I'll turn it over. Thank you.

And our next question comes from Ming DeBoer from Baird. Your line is open.

All right, thank you. Good morning, and congrats, Jess, and best of luck to you. Thanks, Mike. So I'm going to try to kind of ask a question that a few folks have hinted at already. If we're sort of looking at your revenue guidance for the back half of the year, the implied guidance assumes here about another billion dollars of revenue, and you've been You've been running quite well year-to-date, especially in the second quarter, in terms of all the metrics surrounding the fleet. So I'm wondering, how are you thinking about the moving pieces as to what generates this sequential lift to revenue? Is it time used still? Is it maybe a little more rate? Is it fleet? What are some of the moving pieces there?

Yeah, Meg, this is Ted. You know, I would say it's all the above, right? I mean, it's certainly the expectation that we're going to have more fleet on rent as an example. It's the idea that we'll certainly have positive fleet productivity. But certainly you'll see, you know, the used sales are obviously implied to also be up in the second half versus the first half as we've held back fleet in the first half to make sure we're satiating customer demand. So I don't know that I would pinpoint it to kind of one or two variables. It's really kind of continuation of the fact that the business is performing very well and matching the seasonal curve that we would usually see in our industry right so q3 is always that that lifts up from q2 and admittedly to your point off a high base but we think a lot of that momentum will continue and you anticipated where I was going to go with this is there a common you want to make q4 relative to q3 is there a

Should we expect Q4 to be high relative to Q3? And, again, I'm just sort of asking as to what's baked into your assumptions. Who knows how it's going to play out?

You know, what's baked into our assumptions is consider the normal seasonal patterns that we usually enjoy, but now at a higher level, partly driven by – a little bit more fleet than we thought by selling less use although the bigger needle mover is the strong fleet productivity so we created a higher base off which to go to but if you look at the curve overall we expect the year and implied in this guidance is the standard seasonality just off a higher base and and and i'm sorry to be a stickler for this it's it's just that seasonality has been kind of screwed up with covid and and everything else that came from that so

Can you maybe remind me as to what the normal seasonality that you're referring to would look like?

Yeah, I don't have those numbers off the top of my head, but certainly if you were to look at the sequential revenue patterns historically, that would be a reasonable way to think about normal seasonality.

And then my final question. You obviously sound very optimistic about 2023, and within that context, I'm kind of curious as to how you're approaching your CAPEX discussions with your partners. Is it reasonable for people to think that CAPEX is going to be up in terms of demand for you, 23 relative to 22? And I'm curious, are you... Are you getting OEMs to commit to firm pricing, or is it just a discussion around production slots at this point? Thank you.

Yes, I'll take a lot of part of your question. We're simply talking about the production slots right now. To be fair to our partners, I don't think they know what their costs are going to be at the time it's ready to prepare all the raw material to get ready to build these assets. So we're focused on production. We'll expect to get win-wins with our partners as usual. Ted, I don't know if you want to take the first part of the question. Sorry, Nick, could you repeat it again?

Yeah, you know, you guys obviously sound really good about 23, and I'm wondering if we should be expecting CapEx to be up at this point.

Look, I think it's early to kind of get ahead of guidance on 23, but certainly from our tone, you can hear we feel pretty good about the outlook looking, you know, certainly through the end of 22. In terms of what that translates to, you know, we'll have an update in January. And certainly, you know, and we'll be working on the 23 plan as we get into the fourth quarter. So certainly more to come there. But to be clear, we do expect 2023 to be a growth year. We're just not ready to get details on that. We've got a whole lot of work to do from ground up, planning process that will start this fall, and we'll finalize in the fourth quarter. Thanks for the question.

And with that, it appears there are no further questions. I'd like to turn it back to the speakers for any closing remarks.

Thank you, Operator, and thank you, everyone, for joining us. We're happy to share such a strong mid-year outlook, and we'll have more when we talk again in October. And in the meantime, you can reach out to Ted anytime with your questions or comments. Operator, please go ahead and end the call.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.