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, please note that the company's press release, comments made on today's call, and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control and consequently actual results may differ materially from those projected. 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, 2023, 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 presentations to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer and Ted Grace, Chief Financial Officer. I will now turn the call over to Mr. Flannery.

Mr. Flannery, you may begin. Thank you, operator, and good morning, everyone. Thanks for joining our call.

As you saw yesterday afternoon, we built upon our strong start to 2024 with another solid quarter. We're pleased with the growth, profitability, returns, and free cash flow in the second quarter, As the year continues to unfold in line with our expectations, our reiterated guidance is further proof of this. And of course, the key to these results is our team's diligence in providing our full offering across gen rent and specialty, coupled with a steadfast commitment to safety, operational excellence, and innovation. Without the hard work of our 27,000 plus employees, the results we'll be discussing this morning would not have been possible. On our first quarter call, we discussed that we've doubled down on being the best partner for our customers. This unwavering focus on the customer is critical and drives our strategy every day, whether in our go-to-market approach, our value proposition, or in our investment decisions. We've built a diversified business model that enables us to serve our customers with broadened relationships and generate shareholder value. I'm pleased with how far we've come as a company over the last decade. and for the opportunities ahead. Today, I'll discuss our second quarter results, our expectations for 2024, and what gives me confidence that United Rentals will continue to win in the marketplace. And then Ted will discuss the financials in detail before we open up the call for Q&A. So let's start with the second quarter results. Our total revenue grew by 6% year over year to $3.8 billion. And within this, Rental revenue grew 8% to $3.2 billion, both second quarter records. Fleet productivity increased by 4.6%, supported by continued industry discipline. Adjusted EBITDA increased to a second quarter record of almost $1.8 billion, translating to a margin of nearly 47%. And adjusted EPS grew by 8% to $10.70, another second quarter record. Now let's turn to customer activity. We saw growth in both our GenRent and specialty businesses. And within specialty, we continue to see growth across all product offerings. In fact, even excluding the benefit of YACC, specialty rental grew 18% year over year. Additionally, we opened 27 specialty cold starts, which puts us at 42 year to date, and we remain on track to open at least 50 this year. By vertical, We saw growth across both construction, led by non-res, and our industrial end markets, with particular strength in manufacturing. It'll come as no surprise that we saw multiple new projects in the quarter across data centers, utilities, healthcare, battery manufacturing, and infrastructure. And if you're a soccer fan, you'll be excited to know that Freedom Park in Miami kicked off as well. Additionally, the used market remains healthy. allowing us to sell a second quarter record amount of OEC. We believe the demand for used equipment will remain strong and still expect to generate around $1.5 billion of proceeds this year. Turning to CapEx, we spent $1.4 billion in the second quarter, in line with our expectations, as we added fleet to meet the seasonal uptick in customer activity. For the full year, our CapEx guide remains unchanged. Subsequently, Year-to-date, free cash flow is nearly $1.1 billion. We continue to see our strong cash generation as a key differentiator and remain confident in our ability to produce over $2 billion this year. As you've heard me say before, our flexible business model, coupled with our industry-leading profitability, enables us to drive positive free cash flow throughout a cycle and support long-term value creation for our shareholders. Now, turning to capital allocation, we returned $484 million to shareholders in the quarter via share buybacks and our dividend. Our balance sheet is in excellent shape, and we continue to plan to return nearly $2 billion to shareholders this year. The theme you've heard consistently so far today is that 2024 is playing out as we originally expected. As you saw from our updated guidance, we narrowed the range of expectations for revenue and EBITDA with the midpoint unchanged while keeping CapEx and free cash flow intact. But let's step back from the remainder of this year and look at what gives us conviction in our business even further out. First, we remain diligent in leveraging our unique value proposition as we work through the myriad of tailwinds we've discussed many times. In fact, we've been successful in each area, The outlook for large infrastructure projects, chip manufacturing, autos, and energy and power all remain positive. Data center construction has also been an area of focus, and we continue to win in this vertical as well. All of these type of projects play into our one-stop shop offering and are great examples of United Rentals having all business units accounted for as we help solve more of our customers' problems. As an example, Last month, I visited a large data center project we'd recently won. Beyond providing the core gen, rent, and space specialty products that might immediately jump to your mind, whether that be dirt, aerial, power, or trench, we're also supporting their safety and security requirements. We're providing secured access to the site with our advanced turnstiles and access control systems, in addition to educating workers with our United Academy safety training. Our experience and ability to help them solve their logistics from soup to nuts, differentiate us in the marketplace and allow us to further strengthen our customer relationship. Second, we continue to grow with new products. Our acquisition of Yak, which has now been part of the United Rentals family for over four months, is a perfect example of this. The integration is well underway and progressing on track. And this is a textbook example of how we can leverage our existing customer relationships to accelerate growth with a new product. And finally, we work with our customers to ensure we are their partner of choice. This is enabled by our 1UR culture and is augmented by the investments we continue to make in technology. Our size and scale allow us to invest aggressively in both customer-facing technology, such as telematics and total control, as well as internal technology that drives operating efficiencies across logistics, fleet management, and repair and maintenance. And when put to task and working together, these investments allow us to further entangle ourselves with our customers, thus enabling future growth. So to wrap things up, we're happy with how 2024 is playing out, and we're confident that our extensive competitive advantages combined with our flexible and resilient business model, allow us to drive profitable growth, strong free cash flow, and compelling shareholder value. And with that, I'll hand the call over to Ted before we take your questions. Ted, over to you.

Thanks, Matt. Good morning, everyone. As Matt highlighted, Q2 played out as expected with healthy demand and strong execution, driving record second quarter revenue, EBITDA, and EPS. Looking forward, Our reaffirmed guidance at the midpoint for total revenue, EBITDA, CapEx, and free cash flow reflects our continued confidence in delivering another year of solid growth, strong profitability, healthy returns, and significant free cash flow. As importantly, we remain focused on prudently allocating capital to drive shareholder value. So with that, let's jump into the numbers. Second quarter rental revenue was a record 3.215 billion dollars. That's a year-on-year increase of $234 million, or 7.8%, supported by growth in key verticals and large projects. Within rental revenue, OER increased by $143 million, or 5.8%. Growth in our average fleet size contributed 2.7% to OER, while fleet productivity added 4.6%, partially offset by soon fleet inflation of 1.5%. Also within rental, ancillary and re-rent revenues were higher by $91 million, or 17.5%. Turning to our used results, second quarter proceeds of $365 million were in line with expectations at a healthy adjusted margin of 51.8%. The strength and depth of the market were evident in the fact that we sold a second quarter record amount of OEC at a robust recovery rate of 59%, in line with first quarter levels. Moving to EBITDA, adjusted EBITDA was a second quarter record at $1.77 billion, translating to an increase of $74 million, or 4.4%. Within this, rental contributed $127 million year on year. Outside of rental, and similar to the first quarter, used sales were a $30 million headwind to adjusted EBITDA, driven by the ongoing normalization of the used market that we've discussed over the last several quarters. SG&A increased $23 million year-on-year, reflecting a larger business, but was consistent with year-ago levels as a percentage of sales. And finally, the EBITDA contribution from other lines of non-rental business were flat year-on-year. Looking at second quarter profitability, our adjusted EBITDA margin was in line with expectations at 46.9%. The 80 basis points of year-on-year compression was almost entirely due to the use dynamics I just discussed. Excluding the impact he used, our second quarter margin was down just 10 basis points with implied flow through of 44%. And finally, our adjusted earnings per share increased 8% to a second quarter record of $10.70. Shifting to CapEx, gross rental CapEx was $1.4 billion, which is in line with our forecast and historical seasonality. Turning to returns and free cash flow, our return on invested capital of 13.5% remained well above our weighted average cost of capital, while year-to-date free cash flow totaled $1.065 billion. Our balance sheet remains very strong with net leverage of 1.8 times at the end of June and total liquidity of almost $3.3 billion. I'll add that we continue to have no long-term note maturities until 2027 and a very distributed tower thereafter. And all this was after returning a record $969 million to shareholders year-to-date, including $219 million via dividends and $750 million through repurchases. I'll add, this has reduced our share count by over 1.1 million shares since January. Now, let's shift to the updated guidance we shared last night, which reflects our confidence in delivering another year of solid results. As previously mentioned, we are maintaining the midpoints for all metrics while narrowing the ranges for both revenue and EBITDA as we normally do at this time of the year. In terms of specifics, for total revenue, we've narrowed our guidance to a range of $15.05 to $15.35 billion, implying total revenue full-year growth of just over 6% at midpoint. Within this, I'll note that our used sales guidance is unchanged at roughly $1.5 billion of proceeds on approximately $2.5 billion FOEC sold. On adjusted EBITDA, we've narrowed the range to $7.09 to $7.24 billion. I'll note that our guidance for gross capex, net capex, and free cash flow are all unchanged. And importantly, we are still committed to returning a record $1.9 billion to shareholders this year, which translates to almost $30 per share or a current return of capital yield of about 4%. So with that, let me turn the call over to the operator for Q&A. Operator, please open the line.

Thank you. The floor is now open for questions. If you would like to ask a question at this time, please press star 1 on your telephone keypad. You may remove yourself at any time by pressing star 2. Once again, if you would like to ask a question, please press star 1 now. Our first question will come from David Rosso with Evercore ISI. Please go ahead.

Hi, thank you for the time. The question relates sort of to the interplay between gen rent, rental revenue growth versus specialty. It caught my ear when you said thinking about growth further out, kind of beyond this year. So just thinking about specialty has gone just in the last five years from 20% of total rental revenue growth revenues to now over 30% right and gen rent this quarter even year-to-date right it's pretty much flatlining so I'm just trying to think about how much gen rent could fall and specialty can offset it right the simple math of if gen rent is 70% specialties 30% you know gen rent can fall 5% as long as specialties growing 10 we're still flat right so that that's sort of the spirit of the question So I guess directly, gen rent, rental revenues, do we expect those to go negative in the second half of the year now that we're sort of flatlining in 2Q and specialty is the offset? I know specialty has some yak in it, but even just kind of think of it organically, right? Because you have implied in the second half rental revenues probably still growing, call it 7.5%, 8%. in the context of the whole company growing 6% revenues in the back half. So can you speak to gen rent trends? Should we expect those to go negative and specialty kind of carries the ship? Just curious how you're thinking about that. Thank you.

Sure, David. This is Matt. So we certainly, it's not our goal and we're not going to predict orders by segment, but it's certainly not our goal for our gen rent to go negative. That being said, our gen-rent business is much more impacted by the local market dynamics, right, as opposed to specialty where we don't have that local market penetration for those products. And think about our specialty business, and we're very pleased with the growth specialty, both organically and with YAC, with the M&A, that they are really tailored to broader needs. So when we can sell our one-stop shop to a customer, think about that advantage that we have on big jobs and big customers. which is a much higher profile of specialty's overall revenue. So I think that's really the dynamic that's playing through, and not unexpected for us. We put most of our growth capex into specialty this year, and you can see our cold starts. So we know we have more room for penetration for specialty, and it's just supported even more so by the major project work and the tailwinds that we've talked about. really backfilling some of the challenges in certain local markets where that local activity is just not as high as it was and certainly impacting general ed more than specialty.

Well, that's what I'm trying to think through, right? Everybody's just trying to figure out, Matt, like how much does the sort of softness in the underbelly of the market from typical rate impact lag now starting to slow some general projects and how large you are now in specialty and The visibility on specialty, I assume it's also pretty tethered as well to some of the mega projects. Your confidence in your visibility and specialty can kind of carry the show. And at the same time, the gross margins are a lot higher in specialty, right? Could we actually see a mix shift that helps your gross margin? So it's sort of a, you know, like you're lined up better to serve the mega project specialty. It's bigger. So that's how you can kind of offset gen ramping down. And does that actually translate into a better mix? just given the gross margin profile?

Theoretically, absolutely, right? And there's one of the reasons why we continue to focus on specialty and why we started this journey almost 15 years ago now, right, when we first started our first trench business unit. So you're thinking about it in the right way. The only thing I wanted to clarify is we still need to respond to our customers and what the demand is and make sure we have the right fleet in all of our businesses, TNRN as well, for what demand is coming. So we do feel this is a transient year. We'll worry about the future as we get to the tail end of this year. But if you remember when we gave our guidance in January, we expected this local market challenge to be there until there was a bit of a transition year that we were feeling that was going to be coming in the local market. And, you know, we'll react to the demands that our customers have. And specialty can certainly be a boon to not just margins, but more customer entanglement. All right. I appreciate the conversation.

Thank you.

Thanks, Dave. Thank you. Our next question will come from Rob Wertheimer with Melius Research. Please go ahead. Hey, everybody.

And thanks for the comments, Matt, on GenRen. I guess you sort of saw it was coming and it's coming. I had a couple questions around that as well. And one is just big picture. What's your strategy around? Are you still gaining share? Are you looking to gain share in a market that's a little bit flattening? Is the smaller end of the market actually down? You guys are flattish. Is the smaller end of the market down? So just sort of thinking about historically outgrown flat markets, is that kind of what's going on now and is that the desire?

Yeah, we certainly don't believe that we're giving up any market share, but frankly, we don't set market share goals. But just by definition, you'd have to believe that we think there are certainly some markets that are down in the local market business. Fortunately, because we saw this in advance, we didn't burden those branches with extra fleet. And I actually think the industry is doing a good job managing through this, and I think you see that in the metrics that are playing through. So we're really pleased with our level of support for the work that is there in every market, including some local markets that are growing. The fungibility of our assets allows us to flex that, which has really been good. So we don't set market share goals, but we certainly don't think we're seeding any market share. And the most important thing is with the targeted customers that we focus on, we do feel we're gaining share.

Perfect. And then if I could just follow up, I mean, the local market's part of Genrent, but I guess it includes some megas and everything else as well. So is the curve of megaprojects still within that segment? And the lull that you kind of talk about this year, does that get offset? by the wave that's still flowing in from those megas or by normal interest rate dynamics, you know, lower rates and more projects starting and so forth? I'll stop there.

Yeah. So when we think about local market growth, we're not including the megaprojects in that, right? So as we're talking about that dynamic. But as you can imagine, where there's lots of activity going on, there's going to be feeder plants, there's going to be other work going on around there which supports it. And then the opposite, if you're in an oil and gas market right now, there's probably not a lot of activity, extra activity going around the local market because we all know oil and gas is one of the examples of an area that continues to struggle. So it ties, Rob, but the way we look at it, we look at our large projects and large customers in a different segmentation than we do the local market.

Thanks. Thanks. Thank you.

Our next question will come from Tim Fine with Raymond James. Please go ahead.

Thank you. Good morning. Matt, maybe I'll start with the kind of thinking about the components of fleet productivity and specifically the expectation coming into the year that maybe you could hold time flat. And I don't remember if that was on a pro forma or an as reported comp versus 23, but Just going back to these comments on gen rent, and if gen rent revenues were up just under 1% but the fleet grew in total closer to 3%, obviously that suggests some component of time, rate, and or inflation acting as a headwind. Maybe just any change to the expectation for the full year, again, just given these little bit of softness on the local market dynamics that we've discussed.

Yes, sure, Tim. So your memory is correct, right? We did talk about trying to match last year's time utilization with this year, which would make the time component of the fleet productivity neutral, and that's what we've been able to do. And that's kind of – that expectation is embedded in our guidance as we look forward. So when you think about qualitatively, we won't give them quantitatively, but qualitatively, the other components are we said in January that rate would be a good guy. It would be positive, and we continue to see that, and we continue to see that through our peers, which is great news. It shows that industry discipline. And then the variability being in mixed. So that's an output of a lot of different things. So we don't forecast it, but I would call time neutral, meaning we're able to achieve last year's level of time utilization, which we are pleased about, rate a good guy, and the variability to where we end up with fleet productivity will be more in the mixed component.

Okay, got it. And then maybe just a comment on the M&A pipeline and, you know, just given the – the prospects of some potential change in tax policy on the horizon. I'm just curious, A, domestically, what you've seen in terms of just discussions and how the M&A pipeline is shaping up here. And then, you know, the international story has never been one of significance, but I've noticed two smaller deals, you know, in the last, you know, a couple months. Has the thought process changed around international growth more broadly?

Yeah, so I'll take the first part first. You know, the pipeline remains robust, right? I mean, we've been and has been for a couple of years. There's plenty of activity, both for specialty and general businesses. And you guys know what our prioritization is. If we get to see a new product offering like we did with Yak, right, that's in our sweet spot. That's primary. We think we can really be a better owner of businesses like that and selling it through our network. And then specialty overall, we continue to look for more growth, more penetration there because we do have more opportunity to build density there. But even in our gen rent, if we need capacity in a certain market and there's a good deal to be had, we've shown in the past that we'll strike there. So that pipeline continues to be broad and robust. And thinking about the international, we did recently close a deal in Australia. You know, we have an international toehold right now, right? We have a business in Europe that we added a small tool business to at the end of last year. That dynamic was just strictly... a tuck into the existing business we had there, selling into the same niche industrial markets and customers that we were selling into. And our team there earned that right to get some of the support for their growth, and that was great. Australia is a little bit of a different story. I was able to spend some time there earlier this year, and the team there is doing a great job. And we saw some opportunity to broaden our product offering there. And there may be the opportunity one day to run more of the United Rentals play in Australia. We're not all the way there yet, but this is definitely a jump into supporting the growth of that business there with some M&A and with a target that we think is a really good fit for the organization.

Got it. Thank you, Matt.

Thanks, Tim. Thank you. Thank you. Our next question will come from Jamie Cook with Truist Securities. Please go ahead.

Hi. Good morning. I guess my first question, Ted, Just sort of longer term, your incremental margins for 2024 are below your targeted range, which we understand why with some of the spend and used headwinds. But what type of environment do we need to see for United Rentals to get back to its targeted incrementals? I mean, do we need the double-digit top line? Or I'm wondering if we have single-digit growth next year with sort of used headwinds easing to the point if specialty becomes a larger versus the gen rent, that's a positive and with some of these acquisitions getting integrated. I'm just wondering, you know, what we need to see there to get the, you know, a more normalized, can we get back to the targeted incremental? Thanks.

Sure. Thanks for the question, Jamie. So there's obviously a lot that goes into incrementals. So without stating the obvious, or stating the obvious, obviously relative growth does matter, right? Growing, whether you want to say 5, 10, or 15 drives to different levels of fixed cost absorption. But obviously the composition of that growth matters a lot if you think about rate versus volume. And so it's hard to say what kind of growth you need to kind of drive lift in flow through. And there's obviously the consideration of cost on top of that. If you think about this year, you know, we're looking at what we think is healthy growth, mid-single digits overall. You'd point to flat margins in a year where, frankly, we're making some important investments. that we've talked about both on the cold start side and technology. So that kind of illustrates the importance of how you think about cost. So we absolutely task ourselves as driving kind of strong cost discipline, margin lift in some environments and under some conditions, depending on where you're making investments, that can be easier or not as easy. So I don't know that we'd want to get pinned down on what kind of top line growth you need to see for all the reasons I just went through, but what I can say is we have and will always have an incredible focus on driving as efficient operations as possible to drive attractive profitability.

Okay. Thank you very much.

Thank you. Our next question will come from Jerry Revich with Goldman Sachs. Please go ahead.

Yes. Hi. Good morning, everyone. Hey, morning, Jeff. Hi. I'm wondering if you can talk about the 18% organic growth and specialty. How broad-based is that, and what are the stronger parts of the portfolio that's above that average, if you're willing to comment? And is it fair to assume that specialty as a mix of the CapEx plan has moved up over the course of the year?

Yeah, sure, Jerry. We're pleased. And I said in my opening remarks, we saw growth across all the product offerings and specialty, right? You can imagine the couple that have been the largest growers, let's leave the yak aside for now, right? But even in the 18%, you know, standalone growth without the yak influence. You know, mobile storage, where we talked about our commitment to doubling the size of that business within five years is growing strong. Power continues to be strong growth. but we're seeing it in our trench and fluid businesses as well. So it's across the board, and I think that's really important, and I think it also points to the cross-sell opportunities that we have on large projects and large customers. Like I said in the opening remarks, every business unit is accounted for on these big jobs, and we do a really good job making sure we're selling that full-value prop, and I think that's helped drive a lot of this growth.

Super. And, Anya, can you just talk about what the developments have been under – Your ownership, obviously, you folks have the advanced pricing tools and logistics tools. Can you just talk about how that integration has gone and any surprises and opportunities as you've owned the business for a number of months now?

Yeah, so the first surprise, and not really surprise, but great, pleased to acknowledge that this was a really strong team. We understand why they were a leader in the space of this product. And we believe what we really bring to the table is is our network, right? Our ability to fund their growth, distribute their growth across our network and our customer base. So they were, you know, they're a little bit capital constrained for their growth. And frankly, really good. Have a lot of technology built in to support the customer already in that business, in logistics. And we think bringing in some of our tools and our network can help grow that business. So, but I don't want to, this was not a broken business. Actually, they're quite good at what they do. They just need more support, and we're looking forward to doubling this business over the next five years as well.

Great. Thanks, Matt.

Thanks, Jerry. Thank you. Our next question comes from Michael Finnegar with Bank of America. Please go ahead.

Yeah. Hey. Good morning, everyone. Thanks for taking my question. Just, Matt, obviously the last few weeks there's been some incremental negative data points around non-risk construction and the industrial economy. You guys have kept the midpoint of your guide. Some of your peers had to revise their outlook. Are you guys observing that incremental weakness, or are you guys just being more nimble, kind of moving fleet from weak areas to stronger areas? Is that fleet movement, you know, higher than normal that you guys have seen in the past?

You know, we're seeing, as we said, we're seeing the year play out as expected. So we're not really seeing... Any concerns? I know there's been concerns and questions we've been getting about the mega project flow. Large projects come and go. You heard me talk about the Miami Soccer Stadium in my open remarks. Remember last year we were talking about that was one of the quote unquote cancellations or holds. So there's an ebb and flow to these projects that is normal for us. We've been doing major projects for a long time. So maybe we already had a little bit of that expectation built in. But we're very pleased with the pipeline and And we think the back half of the year is going to look very similar to what we had here in Q2. The other part of the fleet movement, once again, we've been supporting projects like this for a while. But this is an area where I think our density actually helps. The fact that we have a lot of fungible assets and a broadly distributed network means we've probably got most of the fleet we're going to need for any project somewhere within a reasonable distance of the area. So I do think that helps us on logistics. And, you know, it's a great part of the business model and why scale matters.

Hey, Mike, the one thing I might add is, you know, obviously there are data points that everybody's looking at. And, you know, I know people struggle to make heads or tails of them. But when we think about what our customers are telling us, they continue to be positive, right? And to us, that's much more telling than a given data point that tends to have a lot of volatility. So when we talk to our customers and we talk to the field, you know, that's really what underpins kind of our outlook here.

And maybe just to follow up with that, Ted, just when you speak to your customers, I'm curious, you know, as we're potentially going into a rate easing cycle, you know, there's been some downturns where an easing cycle takes quite a few, takes time to really see that pipeline fill. I'm curious with this backdrop right now with some of these mega projects, with what you're seeing already with the confidence of your customers, what do you think an easing cycle starts to look like in terms of really seeing that sensitivity to filling that pipeline up in the local markets or continuing that momentum on the mega project side? Thank you.

I think our thought is sentiment matters as much as anything, and so the anticipation of a more constructive rate environment likely helps spur activity. In terms of trying to calculate a lag, I'm not sure anybody's got a model that does that effectively, but certainly if you look at how equity and credit markets have traded the last month or so, there's certainly the expectation that the Fed is going to start easing, right? If you think about how the market started to discount rate cuts in the U.S., you're looking at about 2.7 cuts between now and year end. That number was probably 1.6 even a month and a half ago. And if you look at next year, the expectation is you're going to get north of a point of cuts in Fed funds. And obviously in Canada, I'm sure everybody's seen, but Canada has now started to cut. They've cut half a point in the last two months. So You know, I think when you think about customers thinking about cost of capital and the direction of the economy, they're becoming more encouraged, and that to us is a positive.

Yeah, and I would add that remember these tailwinds that we've talked about that we always expected would backfill any softness in some of the verticals within non-reds are multi-year tailwinds. So you could see this type of, regardless of how long it takes for the local business to start building up and showing more green shoots again, and we do think that Fed cuts will assist that, You know, we've got a good pipeline of work in the tailwinds that we've talked about.

Thank you. Thank you. Our next question will come from Tammy Sicario with J.P. Morgan. Please go ahead.

Hi. Good morning, Tim URI. Great to be on the call, and thanks for the time. So I just wanted to confirm, I know you discussed time utilization rate and mix to Tim's question earlier, but overall fleet productivity, do you still expect that to remain positive for the year? And related to that, should we expect YAC to be adding about 160 basis points to productivity for the rest of the year, or is there seasonality to think about?

Yeah, Tammy, this is Matt. So we To the latter part of your question, there could be some seasonality there. It could be a little more. You're not going to have to do a lot of work on that. We're going to call that out separately each quarter until we lap YAC. So we'll let you know what it is with or without YAC. And as far as to your first question, we do expect fleet productivity to be positive in every quarter this year. That was something we committed to in January, and I'm really pleased to see the team executing on that. And we still have that expectation, and that's what's embedded in our guidance.

Got it. One more question. Thank you for the answer. For used equipment margin weakness this quarter, can you speak to what you're seeing in the third quarter, quarter to date? Have things stabilized or remain sort of under pressure? And how much headwind should we think about from this in the second half versus the $30 million you called out and took you?

Yeah, so I don't think we've characterized the margin weakness as a function of the market. This is this ongoing normalization coming out of the really extraordinary period, 22, that started to normalize in 23 and is continuing in 24. So, Jamie, just as a reminder, historically, we've recovered about 50 to 55 cents on the dollar selling assets. In 2022, that got as high as 74 cents. At the time, we said that that was unsustainable and really a function of the perfect storm of much better than expected demand and obviously supply chain challenges. We then said we thought that would start the process of normalizing in 23. You saw that kind of, you know, mean revert a little bit. We got 66 cents on the dollar last year. And this year we think we'll get something around 60 cents. That's where we've kind of been the last two quarters. So we don't think it's rate pressure per se. We think it's this ongoing normalization. those margins also remain well above historical norms. So we feel very good about that. We don't comment intra-quarter, but certainly you can see in our guidance, in my prepared remarks, we talked about about a billion and a half of proceeds and about two and a half billion of OEC, which would underpin that 60 cents on the dollar. So demand has been very strong there. And frankly, we'd say those recovery rates have held in very well and reflect the strength of that demand. And I think that's another sign of the health of our customer. We had a second quarter record amount of OEC we sold into the market.

Got it. That's very helpful. Thank you.

Thank you, Tammy. Thank you. Our next question will come from Kyle Mingus with Citigroup. Please go ahead.

Thank you. Following up on Tammy's question on the used market, just what's giving you confidence that the used market will remain strong for the remainder of this year and then Second part of the question, I noticed that the mix of specialty as a percentage of the new and used sales ticked up in this quarter. So should we expect that to continue for the remainder of the year and maybe even into 2025? And should we assume that that's a positive mix impact to the used and new sales margins?

So taking the first question, Kyle, I think a big part of business confidence is obviously that year-to-date resulting in line with our expectations. knowing kind of what customer activity is. And so, you know, there's nothing that would suggest, you know, we're kind of deviating from our expectations. And you come back to customer confidence and their own expectations, looking out, you know, as we ask them. So certainly if we saw a deviation there, you know, we'd start to ask questions why we're not. And so I think those things come together to support our views of the used market. In terms of the mix, there's just a natural ebb and flow. I don't know that we want to get into kind of trying to forecast one variable or another, but obviously we've been very pleased with the results.

Makes sense. Thanks. And then could you just talk a little bit about where your fleet age is at the end of the quarter? And if you'd still like to bring that down a little bit, like what's a comfortable target range for the fleet age?

Sure. So I think we're a little over 51 months in the quarter. So that's from the peak during COVID, it's probably down four months I'll remind people that when you look at that 51, there are a couple structural changes there versus pre-COVID levels. One was the acquisition of General Finance, which added about two months, and the other was the acquisition of Baker right ahead of the COVID period that added about a month, a month and a half. So if you were to adjust for structural changes to product mix, that average age is probably something in the 47, 48 months, which is very comfortable. We've long talked about fleet age as really more of a risk management strategy. In a prospective downturn, we'd want to be able to age the fleet 12 months, right? It's just kind of a way to hedge ourselves and protect cash flow. So we are now at the point where we feel like we could very comfortably age the fleet 12 months in that kind of scenario, not the plan. But we're not trying to engineer for a given fleet age. It's really an output of decisions we make. So if that helps, Kyle, we can dig in deeper there if you'd like.

That's helpful. Thank you. Thank you.

Our next question will come from Angel Castillo with Morgan Stanley. Please go ahead.

Thanks for taking my question. Matt, I just wanted to kind of follow up with that and also on some comments you made earlier about just your fleet, I guess, that you have and your ability to kind of move product around, maybe away from some of the local markets. You left your CapEx unchanged and as you think about having the fleet age at a place where you can essentially age it a little bit or in a good spot, plus the fact that you have the ability to move product from other areas, can you talk about the decision to perhaps keep CapEx unchanged versus perhaps lowering that and utilizing what's maybe being impacted on the local markets?

Yeah, so first let me clarify, we have no goal to age our fleet. What Ted was pointing to is we have that opportunity when thinking about is your fleet age at the right place. We always like to leave that dry powder. We have no expectation of needing to use that dry powder anytime soon. And the reason that we're continuing on with our CapEx is because the team's putting it to work. As we've stated earlier, you know, our fleet productivity is positive. the demand, as you can see from our guide, we expect to be as expected. So there's really not a reason why we would then try to age our fleet forcefully and cut CapEx because we believe in the future growth prospects of the business. And the CapEx is warranted because that's what the customer's demand is. As you can imagine, a big portion of that is replacement CapEx, right? And we talked about that. About 3 billion of the CapEx is inflation adjusted to replace a 2.5 we expect to sell. And then on top of that, you can imagine within the growth capex, that's really feeding the cold starts and the growth of specialty primarily, which is, you know, continues to be a good story for us.

Very helpful. Thank you. And maybe just to kind of clarify, there was a discussion around the neutral utilization for the year. Could you just talk about that on a second half versus first half basis and also kind of putting it in context of kind of longer term? I believe you've kind of essentially normalized to where you think it'll kind of remain. So just, again, that dynamic of where we were in the first half versus the second half.

Yeah, what we said in January maintains. We expect, you know, time utilization. Our goal is to match last year's time utilization, which got to a good, strong rate and at a healthy level, and that will remain our goal. We don't really see – we're not going to forecast it numerically by half, but we don't see any need to – to adjust our thoughts and therefore that's why we were able to reiterate our guide.

Understood. Thank you.

Thanks, Angel. Thank you. Our next question will come from Steven Fisher with UBS. Please go ahead.

Thanks. Good morning. So your positioning on large projects is clearly providing a variety of benefits this year. I'm just curious, how active is the bid pipeline for the next round of large projects wondering how much visibility you have on those projects for the next year or so at this point. And how do you think those next projects are going to be different from what we've seen so far, you know, in terms of maybe the verticals or the size or duration or anything like that? Thanks.

Yes, Steve. So I think one of the key things is to remind people is, you know, these large – we have equipment on projects right now that started in 2022, right? So these are long-lived projects, the mega projects that are going on. So we expect this to be a multi-year tailwind. We're not really getting into bid pipelines or all that. We view some of that as competitive information. But I think you guys all see and hear what's coming out of the ground and what's expected. And we feel good that this is a multi-year tailwind. That's probably the way that I would characterize that. And I think we're well-positioned. with the history of our relationships with the customers that are doing this type of work and the broad product offering to take advantage of this and, once again, see this as a multi-year tailwind.

Okay, that's helpful. And then the 44% flow-through X used, I think, compared to about 54% in Q1. Just curious what drove the reduction in that flow-through in Q2 versus Q1. Was it the impact of going from 15 cold starts in Q1 to 27, or are there extra logistics costs to redirect fleet around? And how should we think about the kind of the flow through that you have implied and embedded in the second half of the year relative to the 44% in Q2? Sure.

Steve, I'll take that one. So, one, I'll just remind you, quarter to quarter, there's a lot of sensitivity to these calculations, and certainly in this kind of growth environment, that's, you know, very true. You saw we delivered kind of in-line profitability this quarter and the first quarter. We reaffirmed guidance. So all this is playing out as expected. I think it's important to start there. If you look at what's implied in the back half, it's kind of not dissimilar to what we did in the second quarter, right? You're going to have flow through in that mid-40s, XUs. We've talked about XUs having, you know, targeting flat margins for the year. That was the expectation. That remains the expectation. In terms of sequentially... You know, cold starts are part of it. We talked about those investments we're making. We talked about technology investments we're making. And so it is that kind of making progress on those two programs specifically that continues in the back half.

Perfect. Thank you.

Thanks, Steve. Thank you. Our next question will come from Neil Tyler with Redburn. Please go ahead.

Thank you. Good morning. A couple left, please. Just, I suppose, touching on the previous question around the cadence of cold starts, was it always the intention to front load those, or has that altered slightly? And then the second question, just coming back to the used comments you made, Ted, Is there anything to be done or being done in terms of channel shift that you've been able to achieve or intend to achieve to maximize the return on that used fleet? Thank you.

Neil, I'll take the cold start question and Ted can talk to the UCL some more, but a little bit accelerated, right? So whether they fell in Q3 or Q2 was probably more a function of were they able to find the right real estate? So we were pleased. We were able to co-locate a couple in existing real estate that helped accelerate that. So we had some real estate capacity that probably accelerated that a little bit. Not tremendously so, but certainly a little bit more. And that's not something we really try to manage by quarter. We don't manage the business really by quarter. It's not the way we look at it. So we are pleased that the team's a on cold starts and feel good about our target for the year.

Yeah, on the channel mix for used sales, there's probably a little less retail this year than last year. I think last year we averaged about 70 percent thereabouts. This year we'll probably be closer to two-thirds. That's really just take advantage of capacity and other channels as we ramp the amount of OEC we're selling. I think last year we sold something on the order of 2.3 billion of OEC. This year we'll be you know, call it in that 2.5 billion vicinity. So, you know, we'll take advantage of some other channels that we'd held back on in prior years. But ultimately, what you're seeing in 2024 is really getting back to that normal distribution of about two-thirds coming through retail.

Got it. That's helpful. Thank you very much. Thanks, Neil.

Thank you. Our next question will come from Scott Sneeberger with Oppenheimer. Please go ahead.

Thanks very much. Good morning, guys. I guess, Matt, for you on, you know, we've talked about megaprojects. That's obviously a nice tailwind for you. Interest rate sensitive, you know, kind of smaller project end of the market, a little bit more challenging. We haven't really discussed the infrastructure bill and the funds flowing from that. Are you seeing a pickup year over year from that to the degree you can sense that from your customers? And how is that influencing large and small projects? And how, you know, do you anticipate that improving in 25 or kind of a status quo flow year over year? Thanks.

Yeah, so our infrastructure business has been growing for a while, right? I think the first time we started talking about was the NEP acquisition in 2016. We talked about we needed to bolster our fleet to start to serve the infrastructure needs. So we are long on this. We do think that there's more work to be coming. Some of the funding is hard to track about when it's coming out, and I think it's almost more postmortem than predictable, in my opinion. But we are continuing to see green shoots in infrastructure, opportunities. You know, I drove around this weekend and was pleased to see a lot of our gear around on road and bridge projects. And I think we all see about the airport work that's been going on as you travel. So we do feel good about infrastructure. I'd still say we're in the early innings of this. I do think there's more opportunity ahead than funding that's gone on up to date.

Thanks. Appreciate that. And then, Ted, real quick, this may be a real simple question, but contribution from ancillary and re-rent 2% year-over-year nice in the second quarter. Had a real easy comp from last year. It might be just as simple. That might just be the answer. But is there anything special going on, or is it more the comp? Thanks.

In terms of the growth from ancillary and re-rent, the biggest thing is YAC. So when we bought YAC, we talked about they've got a slightly different kind of composition of revenue. They've got the OER piece, which is the more traditional rental revenue, and then a bigger portion of the revenue coming from ancillary and re-rent, and ancillary more specifically. You heard that in my prepared remarks, being up 17.5%. That substantially reflects the impact of YAC.

Got it. Okay.

Thanks. Thanks, Scott.

Thank you. Our last question will come from Ken Newman with KeyBank Capital Markets. Please go ahead.

Hey, good morning, guys. Thanks for squeezing in.

Maybe just real quickly, I mean, I know you don't give time mute, but we can back into dollar utilization. I think the maintaining guide implies we're getting back to dollar mute highs in the back half that we haven't seen since 2014. And obviously, I know that mixed from specialty has been a positive driver here for the last, call it, decade now. But I am curious just on how much more headroom you think there is for dollar utilization expansion from here.

To be honest with you, Ken, we don't really focus on dollar utilization, right? So it's the combination of rate and time, which we do manage very aggressively on a daily basis. So we don't really look at it that way, but we do think mixed certainly is a component. Both ways, by the way. You know, we have summer assets that are high return, but not necessarily as high a dollar use. The YAC acquisition, the revenue we got from that would certainly help dollar use as well. So similar to how it helped fleet productivity. So that's been a lift. But it's really not the way we manage the business as opposed to the individual components of it. But we certainly think there is opportunity to continue to drive returns, and that should help dollar use. Got it.

Maybe just to, as my follow-up, I just want to clarify a question that was asked at the beginning of the Q&A session. The gen rent growth for the second half is kind of expected. To clarify, I mean, I know you're not expecting that growth to be necessarily negative year over year, but is it the expectation that the decoupling that we've seen between specialty and gen rent is probably going to be similar that we see in the second half versus the first half?

Well, it has been for a while, right? So our specialty has been growing faster than the overall business for a while. Part of that is added products and services, and the other part of it is the maturation of many of these businesses, and our ability to continue to improve and cross-sell to our existing customer base. So I would say that's been the driver of it, and we would expect specialty to continue to outpace the overall company growth. And even if you look out to our long-term customers, goals, we state that. So we feel really good about our ability to serve customers broadly and cross-sell, and we'd expect that to continue to show these type of results.

Thank you. Thanks, Ken.

Thank you. At this time, I would like to turn the call back to Matt Flannery for any additional or closing remarks.

Great. Thank you, Operator. And to everyone on the call, we appreciate your time. I'm glad you could join us today. Our Q2 investor deck has the latest updates, so please take a look at it. And as always, Elizabeth is available to answer any questions you have. So until we talk again in October, stay safe and take care.

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