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, 2024, 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. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Thanks for joining our call. Yesterday afternoon, we were pleased to report our first quarter results, which reflected a solid start to the year. We saw growth across both our industrial and construction end markets. Demand for used equipment remains healthy. And importantly, our customers continue to feel good about their own outlooks. As you've heard me discuss before, a key element of our strategy is being the partner of choice for our customers. And thanks to the team's steadfast commitment to this, which always includes putting safety first, we delivered first quarter records across revenue and adjusted EBITDA. This is facilitated by our focus on operational excellence and innovation. And as you saw through our reaffirmed guidance, 2025 is on track to be another year of profitable growth, reinforced by the momentum we've carried into our busy season. Today, I'll review our first quarter results, followed by why we feel confident in our 2025 guidance And finally, I'll discuss how we think about managing the business for the long-term success. And then Ted will discuss financials in detail before we open up the call to Q&A. So with that, let's start with the first quarter results. Our total revenue grew by 6.7% year over year to $3.7 billion. And within this, rental revenue grew by 7.4% to $3.1 billion, both first quarter records. Fleet productivity increased to 3.1% as reported, and 1.9% pro forma for YAC, which we've now lapped. Adjusted EBITDA increased to a first quarter record of $1.7 billion, translating to a margin of nearly 45%. And finally, adjusted EPS came in at $8.86. Now, let's turn to customer activity. We continue to see growth in both our gen rent and specialty businesses. In fact, specialty rental revenue grew 22% year-over-year and 15% pro forma for YAC. We opened eight specialty cold starts in the first quarter and expect to open at least 50 this year. By vertical, our construction end market saw solid growth across both infrastructure and non-res construction, while our industrial end market saw particular strength within power and chemical processing. We continue to see new projects kicking off with a few recent examples, including data centers, pharmaceuticals, airports, and industrial manufacturing facilities. Now, turning to the used market, we sold over $740 million of OEC, which was a first quarter record. The demand for used equipment remains healthy, and we're on track to sell an estimated $2.8 billion of fleet this year. We spent over $700 million on rental CapEx in the quarter in response to solid customer demand. As you'd expect, growth continues to be led by large projects where all elements of our strategy position us to be the partner of choice. We drove free cash flow of nearly $1.1 billion, setting us up for another year of strong cash generation, which we view as a hallmark of the company. The combination of our industry-leading profitability, capital efficiency, and the flexibility of our business model enables us to generate meaningful free cash flow throughout the cycle, and in turn, allocate that capital in ways that allow us to create long-term shareholder value. Finally, capital allocation. Priority number one for us is funding growth while maintaining a healthy balance sheet. After the organic growth we supported in the quarter, we returned nearly $370 million to shareholders through a combination of share buybacks and our dividend. Our leverage of 1.7 times remained towards the lower end of our targeted range, leaving plenty of dry powders to support both inorganic growth and to return excess capital to our shareholders. And to this point, following the completion of our prior share repurchase authorization last month, I'm pleased to share that our board has approved a new $1.5 billion program, as Ted will discuss shortly. Now, let's turn to the rest of 2025. As evidenced by our reiterated guidance, our expectations for the year are unchanged. The year is off to a start we anticipated, while feedback from the field continues to be optimistic, particularly for large projects. The momentum we're carrying into our busy season along with backlogs and our customer confidence index, are all supportive of our outlook. I'll note, we've not seen a change in customer outlooks for the balance of 2025. But with all that said, we understand the recent concerns around the macro uncertainty. And if things change, we feel confident in our ability to react to best support both our customers and our stakeholders. And as we think about the long term, Our strategy is built on how we can competitively differentiate ourselves and outpace the market. When we listen to the voice of the customer, we gain additional conviction that our one-stop-shop offering is critically important. The power of cross-selling lets us take our long-established relationships and accelerate our growth by meeting our customer demands with both our Genrent and specialty products. And when we layer on our technology offerings, we're able to provide our customers a truly unique experience. And while we've had specialty as part of our business mix for many years, we believe this growth engine has a lot of runway ahead, supported by both geographic white space and additional products and adjacencies that we can add to our portfolio to continue to better serve our customers. To bring this to light, we have a large national account customer with a longstanding relationship. primarily with our GenRent team. And as we dug into how we could better serve the customer's needs, we learned we had the opportunity to be a better partner. This included not just providing additional products, but also innovating together, such as feeding information directly into their own internal tracking systems. And through our partnership, we learned more about the customer's requirements and added specialty products to fit the bill. Well, to make a long story short, Over just two years, we've increased their spend with us by 12 times by becoming an enterprise of solutions, and specialty has increased from 10% of their spend with us to 40%. This example is another strong proof point of our go-to-market strategy. In closing, we remain focused on being the best partner to our customers. We're on track for another year of profitable growth, and we believe the longer-term outlook we see, combined with our business model, strategy, capital discipline, and our competitive advantages, will allow us to generate compelling shareholder returns. And with that, I'll hand the call over to Ted, and then we'll take your questions. Ted, over to you.

Thanks, Matt. Good morning, everyone. As Matt just shared, 2025 is off to a good start with first quarter records across total revenue, rental revenue, and EBITDA, which combined with the momentum we're carrying into our busy season and encouraging customer sentiment, is enabling us to reaffirm our full-year guidance. So with that said, let's jump into the numbers. First quarter rental revenue was a record at $3.15 billion. That's a year-on-year increase of $216 million, or 7.4%, supported again by growth from large projects and key verticals. Within this, OER increased by $118 million, or 4.9%, driven by 3.3% growth in our average fleet size and fleet productivity of 3.1%, partially offset by assumed fleet inflation of 1.5%. Also within rental, ancillary and re-rent grew by 19% and 15% respectively, adding a combined $98 million of revenue. This outsized growth relative to OER was primarily driven by specialty, where delivery represents a bigger portion of revenue from our matting business and where our other specialty businesses support customers with value-added services like fueling and installation as part of our one-stop-shop strategy. Turning to our used results, as Matt mentioned, we took advantage of strong demand to sell a first-quarter record amount of OEC generating $377 million of proceeds at an adjusted margin of 47.2% and a 51% recovery rate. Moving to EBITDA, as I mentioned, Adjusted EBITDA was a first quarter record at $1.67 billion, translating to an increase of $84 million, or 5%. Within this, rental gross profit contributed $89 million. This was partially offset by used, where the continuing normalization of the market drove a 13% decline in used gross profit dollars, translating to a $26 million headwind to adjusted EBITDA. SG&A increased by $47 million year over year, including $12 million of H&E-related merger costs. Excluding these costs, our growth in SG&A was roughly in line with growth in rental revenue. And finally, the EBITDA contribution from other non-rental lines of businesses increased $68 million, primarily due to the $64 million breakup fee we received from the termination of the H&E deal. Looking at profitability, our first quarter adjusted EBITDA margin was 44.9%. implying 60 basis points of compression. Notably, and as our press release highlighted, this includes a $52 million net benefit related to the breakup fee, which is the $64 million less than $12 million of related SG&A costs. Although it doesn't impact EBITDA, we also absorb roughly $13 million of bridge financing fees related to the deal that are included in our net interest expense. Taken together, Our first quarter results included a net pre-tax benefit of $39 million. Bringing this back to margins, excluding the H&E benefit and the impact of used sales, our EBITDA margin compressed 150 basis points year over year. Similar to last quarter, I thought it would be helpful to talk through a few of the key factors here ahead of Q&A. Now, of course, margins in any given quarter will fluctuate with normal variability, but at a high level, several of the dynamics in Q1 were consistent with what we talked about in January. First, ancillary revenue again significantly outpaced our core rental growth. These are core elements of our service offering, particularly within specialty, that come at a lower margin than our core rental business but have attractive returns as they don't employ much capital. As importantly, they provide a unique aspect to customer service that both differentiates United Rentals and helps drive deeper customer engagement. So, from this perspective, we view this as good business, but it does have a dilutive impact on margins that we'd estimate at about 50 basis points in Q1, or about a third of the 150 basis points declined. Secondly, first quarter delivery costs were up, driven by a few dynamics, including our growth in matting and the increased dispersion of growth across our footprint. A byproduct of the latter is the greater need to reposition fleet in support of high-time utilizations. Said differently, these are choices we make between costs and capital efficiency with the idea of supporting returns. For the quarter, these additional repositioning costs impacted our margin by about 30 basis points. And finally, given where we sit in the current cycle, our OER growth remains relatively low in a still fairly inflationary environment. At the same time, we continue to make long-term strategic investments in important areas like specialty cold starts and technology, both of which enable us to be the partner of choice to customers and provide attractive returns. The combination of these factors and normal variability in our costs accounted for the balance of the decline, so call it about 70 basis points. Importantly, these are all contemplated within the ranges provided in our guidance. And lastly, on the P&L side of things, our adjusted earnings per share was $8.86, including a 45-cent benefit from H&E. Shifting to CapEx. first quarter gross rental capex was $707 million, in line with normal seasonality. Moving to returns and free cash flow, our return on invested capital of 12.6% remained well above our weighted average cost of capital, while free cash flow totaled a robust $1.08 billion. Our balance sheet remains quite strong, with net leverage of 1.7 times at the end of the quarter and total liquidity of over $3.3 billion. All note, This was after returning $368 million to shareholders in the first quarter, including $118 million via dividend and $250 million via repurchases. Looking forward, following the completion of our repurchase program last month, we are pleased to share that our board approved a new $1.5 billion program supported by our continued strong free cash flow generation and healthy balance sheet. The new program will begin this quarter and is expected to be completed by the end of the first quarter of 2026. For the year, it is our intent to repurchase a total of $1.5 billion of common stock, including the shares we repurchased in the first quarter. At our current share price, this represents about 4% of our market capitalization. In total, we intend to return roughly $2 billion in cash to shareholders in 2025, equating to over $30 per share or a return of capital yield of better than 5%. So to wrap up my prepared remarks, overall, another solid quarter that puts us in a position to reaffirm guidance on total revenue, EBITDA, CapEx, and free cash flow. The balance sheet remains in great shape, providing strong optionality for the business, while our commitment to capital discipline keeps us positioned to support long-term shareholder value. And with that, let me turn the call over to the operator for Q&A. Operator, please open the line.