United Rentals, Inc.

Good morning and welcome to the United Rentals Investor Conference call. Please be advised 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 presentation 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 today. I'll apologize in advance for my voice as I'm fighting through a little cold here, but I'm sure we'll get through it okay. Yesterday afternoon, we were pleased to report our third quarter results. The hard work of our nearly 28,000 employees enabled record revenue and adjusted EBITDA. The year is playing out better than we originally expected, and our updated guidance reflects the demand environment we continue to successfully serve. In short, our unique value proposition, experience, and ability to support a broad range of our customers' needs distinguishes us from the competition. Last quarter, I spent a lot of time on the road visiting branches, job sites, and meeting with customers. And while this is nothing new, it did make the quarter's results and our subsequent guidance update no surprise from my perspective. Our branches are very busy, and the team's working hard to serve customer demand. Our people are true differentiators in the rental industry, and their professionalism and knowledge, their expertise, and their commitment day in and day out shows. We often talk about putting the customer at the center of everything we do as it feeds our flywheel of growth. Without the dedicated United Rentals team members safely executing our customer-centric model, we could not generate the success we continue to deliver. And from where I sit today, I expect this momentum to carry into 2026. In the third quarter specifically, we again saw growth across both our general rental and specialty businesses, with optimism from the field and our customer confidence index reinforcing our expectations going forward. The demand for used equipment also remains healthy. Now, with that said, let me get into the review of our third quarter results and our updated 2025 guidance, and then Ted will review the financials in detail before we open the line for Q&A. Let's start with the quarter's results. Our total revenue grew by 5.9% year-over-year to $4.2 billion, and within this, rental revenue grew by 5.8% to $3.7 billion, both third-quarter records. Fleet productivity increased 2%, contributing to OER growth of 4.7%. Adjusted EBITDA increased to a third-quarter record of over $1.9 billion, resulting in a margin of 46%, And finally, adjusted EPS came in at $11.70. Now, turning to customer activity, and as I mentioned, we saw growth across both our general rent and specialty businesses in the quarter. Specialty continues to post double-digit increases with rental revenue up 11% year-over-year, driven by growth across all our product offerings and an additional 18 cold starts. Year-to-date, we've opened 47 cold starts as we continue to fill out our specialty footprint. We see this, combined with the power of cross-sell and the addition of new products to our portfolio, as critical points of competitive differentiation, which benefit our customers while also providing important drivers of long-term growth. By vertical, our construction end market saw strong growth across both infrastructure and non-residential construction, while our industrial end market saw particular strength within power, We continue to see new projects kicking off, and while data centers are certainly one area of growth, we also saw new projects across infrastructure, semis, hospitals, LNG facilities, and airports, to name just a few. Our end market exposure by vertical is intentionally diversified, and our equipment is fungible to ensure we can serve demand no matter where it presents itself. Now, turning to the used market, we sold $619 million of OEC at a recovery rate of 54%. The demand for used equipment is healthy, and we're on track to sell approximately $2.8 billion of fleet this year. As I mentioned in my opening remarks, the year is playing out better than we initially expected. To meet this demand, we spent nearly $1.5 billion of capex in the quarter and now expect to spend over $4 billion on fleet this year. This positions us not only to capitalize on the current environment, but also for the anticipated growth in 2026. Our customers and the field remain optimistic, particularly around large projects and key verticals. And thanks to our go-to-market approach and one-stop-shop value proposition, we believe we're well positioned to be the partner of choice for these projects. Year-to-date, we've generated free cash flow of $1.2 billion. with the expectation to generate between $2.1 and $2.3 billion for the full year, including the impact of our higher capex spend. As a reminder, 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. Speaking of capital allocation, we always start with ensuring the balance sheet is in good place, and it is. We then fund organic growth reflected through our CapEx and complement this with inorganic growth that makes financial and strategic sense. In the remainder, we return to shareholders. This quarter specifically, we returned over $730 million to shareholders through a combination of share buybacks and our dividends. For the full year, we remain on track to return nearly $2.4 billion to shareholders. Our leverage of less than 1.9 times leaves plenty of dry powder to support disciplined M&A, where we continue to pursue opportunities to put capital to work and attractive returns. Our M&A pipeline remains robust within both general and specialty and across a spectrum of deal sizes. And while it's difficult to predict the timing of M&A, This is an important capability we've built over our company's history, and we'll continue to use it to enhance our business and drive shareholder value. As we enter the final months of 2025, we're focused on execution and delivering the results outlined in our updated guidance, including total revenue growth of 5% or 6% ex-used, strong profitability, robust free cash flow, and returns above our cost of capital. Although our growth is coming with some additional costs, which Ted will cover in his remarks, we're working through these challenges and are taking proactive measures, including bringing in additional fleet to help mitigate fleet movement costs. I'm very pleased with 2025 and how it's playing out ahead of our initial expectations and see good momentum heading into next year. Based on what we see today, 2026 will be another year of healthy growth. We believe the tailwinds we've discussed throughout this year will carry over And our unrelenting focus on being the partner of choice for our customers positions us very well to win this business and to outperform the industry. For now, we won't get into the specifics about 26 as we're in the middle of our planning process, but we will share more details in January as we always do. In closing, I'm pleased with the outstanding job the Anati Rentals team is doing to support our customers. And that's the starting point for everything we do. Not only do we have the scale, technology and value proposition to make us the preferred partner, but we have a history of execution our customers can rely on. By working together with our customers to meet their goals to drive safety, productivity and efficiency, we ensure we build a relationship of trust that positions us to win in the marketplace. Subsequently, our strategy, business model, competitive advantages and capital discipline allow us to generate compelling shareholder returns for the long term. So with that, I'm going to hand the call over to Ted, and then we'll take your questions. Ted, over to you.

Thanks, Pat, and good morning, everyone. As you just heard, the year continues to progress well with third quarter records across total revenue, rental revenue, and EBITDA. More importantly, based both on what we're seeing and hearing from customers, we expect the strong demand to continue. which is supporting our increases in both rental revenue and CapEx guidance. More on that in a minute, but first, let's go through this quarter's numbers. As you saw in our press release, rental revenue increased $202 million year-over-year, or 5.8%, to a third-quarter record of $3.67 billion, supported again by growth from large projects and key verticals. Within this, OER increased by $133 million, or 4.7%, driven by 4.2% growth in our average fleet size and fleet productivity of 2%, partially offset by soon fleet inflation of 1.5%. Also within rental, ancillary and re-rent grew over 10%, adding a combined $69 million of revenue. Consistent with our first half results, third quarter ancillary growth again outpaced OER as we continue to focus on supporting our customers. Moving to used, we generated $333 million of proceeds at an adjusted margin of 45.9% and a 54% recovery rate, while OEC sold set a third quarter record at $619 million. Combined, these results speak to the continued strength and health of the used equipment market. Turning to EBITDA, adjusted EBITDA increased $42 million year-on-year to an all-time record of $1.95 billion. Within this, a $69 million increase in rental gross profits was partially offset by a $6 million decline in used gross profit dollars. SG&A increased $23 million, which is in line with revenue growth, while other non-rental lines of businesses added $2 million. Looking at profitability, our third quarter adjusted EBITDA margin was 46.0%, implying 170 basis points of compression on an as-reported basis and 150 basis points ex-used. At a high level, margin dynamics in the third quarter were similar to what we've discussed the last several quarters. This includes the impact of ancillary, the strategic investments we're making in the business, and still relatively elevated inflation. An area I might call out again this quarter was delivery, which was impacted both by higher fleet repositioning costs in support of large projects and our use of third-party outside haul to serve the stronger-than-expected demand seen during our seasonal peak. To try to put this in perspective, our third quarter delivery costs increased 20% year-on-year versus a roughly 6% increase in rental revenue. Simply assuming that these costs increase proportional to revenue, this gap implies over $30 million of additional costs year-on-year and translates to an almost 80 basis points drag on our EBITDA margins. Now, I'm sure we'll talk more about this during Q&A, but this provides a great example of the balance we are constantly managing between capital in the form of fleet and costs, both fixed and variable, with the goal of serving customers as efficiently as possible. Shifting to CapEx, third quarter gross rental CapEx was $1.49 billion. I'll speak more to this in a moment, but this included the acceleration of some purchases to help us support the stronger-than-expected demand we are experiencing. Moving to returns and free cash flow, our return on invested capital of 12% remains comfortably above our weighted average cost of capital, while year-to-date free cash flow was $1.19 billion. Our balance sheet remains very strong with net leverage of 1.86 times at the end of September and total liquidity of over $2.45 billion. I'll note, this was after returning $1.63 billion to shareholders year-to-date, including $350 million via dividends and $1.28 billion through repurchases. In total, between dividends and share repurchases, we still plan to return almost $2.4 billion in cash to our shareholders this year. This equates to a little better than $37 per share for a return of capital yield of almost 4%. Now, let's shift to the updated guidance we shared last night, which reflects our confidence in delivering another year of solid results. As you've heard us say a few times this morning, we are seeing stronger than expected demand. In response, we accelerated the landing of some fleet into Q3 while also raising our full-year CapEx guidance by $300 million at midpoint to a range of $4 to $4.2 billion. In turn, we are increasing our total revenue guidance by $150 million at midpoint while narrowing the range to $16 to $16.2 billion, implying full-year growth of roughly 5% at midpoint. Within this, our used sales guidance is unchanged at around $1.45 billion, which implies total revenue growth ex-used of 6% at midpoint. I'll note that the additional CapEx accounts for roughly half of the increase to our revenue guidance, given we'll only realize a partial year of OER benefit with a balance coming from ancillary. On the EBITDA side, we are narrowing our range to $7.325 to $7.425 billion while maintaining the midpoint at $7.375 billion. Ahead of Q&A, I'll quickly mention that the lack of implied pull-through from this additional revenue reflects our expectation that, as I just mentioned, a portion of the increase will come from lower margin ancillary, but we also expect to manage through similar cost dynamics in Q4, especially delivery. Turning to cash flow, we reaffirmed the midpoint of our guidance for cash flow from operations at $5.2 billion, while our revised free cash flow guidance of $2.1 to $2.3 billion simply reflects the additional investment in CapEx that we plan to make. Importantly, our updated free cash flow guidance does not impact our share repurchase program. I'll remind you that we intend to repurchase $1.9 billion of shares this year, which highlights our strategy of both investing in growth and returning excess capital to our shareholders. So to wrap up my prepared remarks, overall, we were pleased with how the quarter played out, especially on the demand side. And while our margins were burdened by the cost mentioned, we remain focused on supporting our customers' growth as efficiently as possible as we lean into their demand. So with that said, let me turn the call over to the operator for Q&A. Operator, please open the line.