United Rentals, Inc. (NYSE:URI) Q2 2023 Earnings Call Transcript

United Rentals, Inc. (NYSE:URI) Q2 2023 Earnings Call Transcript July 27, 2023

Operator: 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 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, 2022, 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.

Matthew Flannery: Thank you, operator, and good morning, everyone. Thanks for joining our call. As you have heard us say since the beginning of the year, 2023 is about raising the bar off of last year’s record results, and our second quarter performance across growth, profitability and returns provides evidence of that. I’m pleased with how the year is playing out including the Ahern integration, which remains on-track. Of course, key to all of this is our employees, who do an exceptional job supporting our customers every day. Without them, we wouldn’t be able to generate the results we consistently deliver. And I’m pleased to report that, once again, they have done this with safety at the forefront as our company-wide recordable rate remained well below one in the second quarter.

Importantly, our growth shows that, we continue to outpace our underlying market as we leverage our competitive advantages to provide a superior level of customer service. So let’s dig into the results. Total revenue rose by 28% year-on-year to a second quarter record of almost $3.6 billion. Within this, rental revenue grew 21% as reported with broad-based demand across verticals, regions and customer segments while fleet productivity increased 2.1% on a pro forma basis. Adjusted EBITDA increased 29% to a second quarter record $1.7 billion driving solid margin expansion. Adjusted EPS grew by 26% to a second quarter record $9.88. And clinically, our return on invested capital set another new high watermark at 13.4%. In short, we are on-track for another record year driven by robust customer activity.

And the increases to our full-year guidance reflects our continued confidence in customer demand. Used equipment sales were another highlight in the quarter. We generated a record second quarter proceeds of $382 million. The retail market remains very strong, and we also broadened our channel mix, as we discussed we would last quarter. Combined with the improvements we have seen across most of the supply chain, this has allowed us to refresh our fleet by rotating some of the older assets out. As you saw, rental CapEx totaled $1.25 billion in quarter, in line with our expectations and helping to ensure that, we have the capacity our customers need to support their projects today and going forward. And as I alluded to earlier, the integration of Ahern remains on-track.

The teams have come together especially well and our second quarter results reflect the ongoing improvements in the efficiency of their business. And at this point, we are focused on optimizing the combined branch network and fleet, which should be completed by year end. Now let’s take a closer look at the second quarter demand. Key vertical saw broad-based growth, led by industrial manufacturing, metals and minerals, and power. Non-res construction was also up double-digits. Within this, our customers kicked-off new projects across the board, including numerous CV plants and semiconductor plants, solar power facilities, infrastructure projects and for the Buffalo Bill fans out there, a new stadium. Geographically, we saw growth in all of our regions, on both the reported and pro forma basis.

And our specialty business delivered another excellent quarter with rental revenue up 17% year-on-year organically and double-digit gains across all major categories. Within specialty, we opened 19 new locations in the second quarter and are on-track for the 40 cold starts this year. Turning to capital allocation. We returned over $350 million to shareholders during the quarter through share buybacks, and dividends are on-track to return over $1.4 billion of cash to shareholders this year. And our balance sheet remains in excellent shape. Looking ahead to 2023, 2023 is on-track to be another record year across a variety of KPIs, including revenue, EBITDA, EPS and returns. We are encouraged by customer sentiment and external indicators, which point to growth and give us confidence in our updated guidance.

For example, the ABC’s Contractor Confidence Index remained strong across the second quarter, as did its backlog index. The Dodge Momentum Index was up 19% year-over-year in June, while non-res construction employment growth also remains solid. And most importantly, our own Customer Confidence Index continues to reflect their optimism. Beyond 2023, we remain positive on longer term outlook, driven by key tailwinds including infrastructure, industrial manufacturing, and energy and power. As we shared at our Investor Day in May, we spent the last decade building unique and diverse capabilities that position us very well for the two trillion plus dollars of construction projects underpinned by these tailwinds over the next decade. Put simply our advantages across scale, complex solutions, technology, and people put us in a first call position and we believe this provides a platform for leveraging our resilient business model and pursuing continued growth both organically and through M&A.

Finally, I want to highlight our new sustainability report, which we released yesterday. While there is a lot of great content in that report that we are very proud of, this year I would especially point out to the work our team’s done quantifying how the rental business model aligns with key aspects of sustainability. For example, less equipment needs to be manufactured because of rental, which has clear benefits while the equipment that we have in our fleet also helps our customers reduce their emissions intensity based on its younger age and greater fuel efficiency. And not only does this benefit our customers, we believe that it also benefits our employees, the communities we are operating in and our shareholders. Before I hand the call over to Ted, I will sum up today by saying I’m very pleased with how the year is playing out.

We entered 2023 with high expectations, and as you can see through our results, that is what we are delivering. We feel good about the rest of the year and what is ahead for United Rentals and our investors. And with that, I will hand the call over to Ted before we open the line for Q&A. Ted, over to you.

William Grace: Thanks Matt, and good morning, everyone. As you saw in our second quarter release, our team produced strong results that were consistent with our expectations and keep us on-track for another record year. And as we shared at our Investor Day, we continue to feel very good about our prospects beyond 2023 based on the tailwinds we have discussed extensively. One quick reminder before I jump into the numbers. As usual, the figures I will be discussing are as reported, except where I call them out as pro forma, which are adjusted to include Ahern standalone results from last year. So with that said, let’s get into the details. Second quarter rental revenue was a record $2.98 billion. That is a year-over-year increase of $519 million or 21% supported by diverse strength across our end markets.

Within rental revenue, OER increased by $443 million or 22%. Our average fleet size increased by 25.5%, providing a $514 million benefit, which was partially offset by a decline in as reported fleet productivity of 2% or $41 million. And our usual fleet inflation of 1.5% or $30 million. Also, within rental, ancillary revenues were higher by $75 million or 19.3% and re-rent provided an additional $1 million. I will note that on a pro forma basis, rental revenue was up a robust 12.4% year-over-year, and fleet productivity increased 2.1% as industry discipline continues to support a healthy rate environment. Turning to used results, our second quarter revenue increased 133% to $382 million as we continue to return to more normalized volumes, while our second quarter adjusted used margin of 57.3% reflected healthy pricing.

Notably, as we said we would, we have expanded our channel mix to support these higher used volumes. During the quarter retail accounted for 65% of our mix consistent with its longer term proportion versus 90% last year. Within the shift, we doubled our retail volume, it remains a very strong demand environment. Moving to EBITDA, adjusted EBITDA for the quarter was just under $1.7 billion, another second quarter record reflecting the increase of $384 million or 29%. The dollar change includes a $310 million increase from rental within which OER contributed $298 million. Ancillary added $15 million and re-rent was down three million. Outside of rental, use sales added $117 million to adjusted EBITDA, while other non-real lines of businesses contributed another $8 million.

SG&A increased $51 million due primarily to increases in variable costs, such as higher commissions. As a percentage of sales, however, SG&A declined 180 basis points year-on-year to a second quarter record low of 10.6% of total revenue. Some nice efficiency there. Looking at second quarter profitability, our adjusted EBITDA margin increased 40 basis points on an as reported basis and increased 130 basis points on a pro forma basis to 47.7%. This translates to an as reported flow through of 49% in pro forma flow through of better than 54%. And finally, adjusted EPS increased 26% to a second quarter record of $9.88. Shifting to CapEx, gross rental CapEx was $1.25 billion, and net rental CapEx was $869 million. This represents an increase of $161 million in net CapEx year-over-year, supporting our continued growth in 2023.

Year-to-date, gross CapEx is totaled roughly $2.05 billion. This equates to about 60% of the midpoint of our full-year rental CapEx guidance, which is where we expect it to be at this time of the year. Turning into return on invested capital and free cash flow ROIC, which as you know is a critical metric for us, set a new record at 13.4% on a trailing 12-month basis. That is 30 basis points sequentially and 190 basis points year-on-year, and remains well above our weighted average cost of capital. Free cash flow also remains a good story with a quarter coming in at $340 million or a trailing 12-month free cash margin of 12.3%, all while continuing to fund significant growth. Moving to the balance sheet, our net leverage ratio at the end of the quarter improved to an all-time low of 1.8 times or a decline of 10 basis points sequentially and 20 basis points year-over-year.

And our liquidity at the end of June exceeded $2.7 billion with no long-term maturities until 2027. Notably, this was after returning $352 million to shareholders in the quarter, including $250 million through share repurchases and 102 million via dividends. So let’s look forward and talk about our increased guidance, which reflects our continued confidence that 2023 will be a record year. Total revenue is now expected in the range of $14 billion to $14.3 billion, implying a $200 million increase at midpoint and full-year growth of around 21.5%, and pro forma growth of roughly 13.5%. Within total revenue, our used sales guidance is now implied at around $1.45 billion or an increase of $150 million reflecting better than expected pricing and stronger than expected retail demands.

We have increased our guidance for adjusted EBITDA by $100 million at midpoint to a range of $6.75 billion to $6.9 billion. This continues to imply as reported flow through of around 48% and pro forma flow through in the mid fifties. On the fleet side, we have narrowed our gross CapEx range by $50 million between $3.35 billion and $3.55 billion given the increase in our used sales expectations. This now implies net CapEx between $1.9 billion and $2.1 billion. And finally, we are increasing our free cash flow guidance by $175 million at midpoint to between $2.3 billion in $2.5 billion, which is before repurchases and dividends that together should return over $1.4 billion of cash to our investors or better than $20 per share. So with that, let me turn the call over to the operator for Q&A.

Operator, please open the line.

Q&A Session

Operator: [Operator Instructions] We will take our first question from David Raso with Evercore ISI.

David Raso: Just wondering if you could help us with how you are thinking about fleet productivity the rest of the year and maybe a little more color on what drove the pro forma decline from five nine down to two for the second quarter.

Matthew Flannery: Sure. David, it is Matt, how you doing? So as far as what drove the pro forma down, I mean, we are pleased with the pro forma being up 2.1%. We understand some of the concern out there and is that telling the street something. So I will be clear about a few things since we don’t actually give you the whole numbers. We have said, we talked to you qualitatively about it. This is not a demand or a rate issue, the industry still remains in really good shape. I think you are seeing that through the others that report the actual numbers, rate environment is strong and frankly, the discipline in the industry, strong and demand is supporting that. So, first off. This is really a time issue for us. We made the decision to front load fleet this year to tampon down the very, very aggressive time utilizations.

We have been running frankly for a couple years. And we didn’t really think it was responsive to our customer’s needs. And we were doing a little bit of too much hand to mouth, putting big relationships at risk. We weren’t comfortable with that. So we front loaded our fleet, you remember, back and forth quarter last year. And that is on top of bringing in the Ahern fleet. We are very pleased of how it is working out. And just to put it in context, although I’m not going to revert to giving back whole numbers. Our actual time utilization in Q2 was higher than pre-COVID averages and higher than the last time we gave you guys time utilization in 2019. So this is still strong time utilization just compared to the very frothy, almost inflated time use that we ran last year because we couldn’t get the fleet timely enough.

It is dragging a comp issue and that is all this is.

David Raso: And regarding the rest of the year, how should we think about year-over-year fleet productivity that is baked into the guide?

Matthew Flannery: Yes, I think you will see these dynamics play through in Q3 similar to what they did in Q2. We will, we will continue to have seasonal builds, but there were seasonal builds in the comps as well. So we think these dynamics will play through and we are very comfortable. We continue to see a strong rate environment. We will continue to bring in fleet to support this demand in Q3and so we think the dynamics to be similar.

David Raso: So if the fleet productivity is similar in the back half of the year as the second quarter, where does that leave you at the end of the year, as we think about 2024? You made a comment just now about time mute, on a historical basis is still sort of above average. Is that how you see the full-year time mute. Just trying to think about your confidence in starting the conversations for rates for 2024, where are we exiting our thoughts on this time mute level versus history?

Matthew Flannery: Yes. To be clear, we don’t want to get into forecasting ahead that far. But I will tell you when we said this in May at the Investor Day, we do view 2024 as a growth year. And if you do the math on the capital guide we gave and where we started the year, we are going to start the year with more fleet to support growth. We do think the end markets will come out of an exit rate this year at strong end market demand. We still believe that. And then from there, we will build up our – through our planning process towards the end of this year. We will build up what we think we need from more growth CapEx. We do expect that we will continue this will be a more normalized replacement CapEx. You are seeing that in this quarter as well, and we expect to do that next year as well. We want to place somewhere around 10% to 12% of our fleet per year, and I think this new number puts us right in the center of that target.

William Grace: David, this is Ted. The one thing I might add is, Matt made the comment about second quarter time you have altered history. Just to be clear, for the full-year, we would expect the same to be true. Relative to history, 2023 will be a strong time.

David Raso: Okay. That is helpful. And on the rest of the year guide, I’m talking reported, the implied EBITDA margins are down a little bit from the second half of last year. But in the first half of this year, your EBITDA margins were 50 bps higher than a year ago. So just curious why the margins would be down year-over-year in the second half, but having been up in the first half of this year.

William Grace: Yes. So I would say a couple of things there, David. One, we always caution people against anchoring with the midpoint. But Ahern, it is really kind of the factor that people need to be thinking about, as they think about first half and second half dynamics year-on-year. We have been clear to talk about pro forma flow through in the mid-50s. We have been delivering that and we would expect that to be true in the back half of this year, which will be driving margin expansion on a pro forma basis, which as Matt said is the way we think about our business.

David Raso: And last quick one, sorry to pause the call here. Apologies. But you are implied free cash flow the rest of the year and your EBITDA. It would imply that the leverage, the financial leverage at the end of the year is at 1.6. So to get back to even the low end of your target of 2% to 3% for leverage would imply you have about $2.8 billion to put to work, just to get to the low end. Just curious how you are thinking about deploying that? And again, that already counts for $500 million repo for the rest of the year. a couple $100 million of dividends. So this is above and beyond that. Thank you.

Matthew Flannery: Correct, it does. And this is one of the things we have been working on internally and we will work on it further as the year progresses. For 2023, kind of our allocation of capital is committed as you know. As it relates to next year, we will have decisions to make. And certainly, we will have an update for where we end up come January, I would expect. But we are left with a couple options, and we have talked about these publicly. On one hand, there is the potential that we could lower the range, which is something we talked about when we introduced the new capital allocation strategy in 2019, or you could keep it where it is. That is one of those things we are working on, trying to figure out what is the best way to allocate capital to drive shareholder value. So there is not much more specific I can add right now, but certainly, you know, that is how we are thinking about it.

David Raso: Alright, thank you very much. I appreciate it.

Matthew Flannery: Thanks David.

Operator: We will take our next question from Rob Wertheimer with Melius Research.

Rob Wertheimer: Hi. Good morning, everybody. So I had a question on Ahern and just the maturation of acquisitions in general. And I know you talk about how you sort of scramble the egg and you can’t always unscramble it, but I assume that you have still got some ongoing repair and maintenance as you sort of fix up a fleet that was presumably under invested in. And then I assume there is also a process just cause you guys have so much, you have so much process, you have so many SKUs and so forth of training people up and so forth. So I just wonder if you have any comments on how long or how big that margin differential is and how that maturation that acquisition drags up margins. Are we there now or is it going to take two or three or is it going to be, you know, a tailwind for two or three years or any commentary around that would be helpful.

Matthew Flannery: Sure, Rob, it is Matt. So to your point, you know, it takes time to get everything done. We always start with the people, first and foremost, make sure we secure everybody, get them comfortable with their jobs and we train them on the systems, make sure everybody’s working off the same operating system. All that has been done. So that is the front end and always is in any deal we do. From there, we start working through the fleet and then any kind of branch changes, whether it is consolidations, whether we are repurposing any facilities. And we will continue to work through fleet and facilities through the balance of this year. So, you know, we have got the game plan, it is just a matter of execution and we are working through that.

Then as far as margins in the maturation, I will let Ted talk to it, but I wouldn’t expect us to be fully mature, certainly by year one. We have done some work in this in the past with other deals. But Ted you may want to add some color.

William Grace: Yes, Rob, it is a good question and it kind of gets to some of the margin dynamics in the quarter that this is a good chance to kind of get those out there. So if you were to look at the equipment rental gross margin, on an as reported basis, it would look like it was down 140 basis points year on year. That is a slight improvement from the down 170 in the first quarter. So you can see some of those benefits playing through there. But importantly on a pro forma basis, our gross margin actually expanded 20 basis points. So you can see that impact of Ahern and just putting the year ago period into the numbers. So we have got margin expansion there and if you adjust for the increase in depreciation related to the assets, the valuation of the acquired assets, gross margins were actually up 80 basis points in the equipment rental gross margin line that includes the drag that we are talking about from this ongoing investment in fleet, which we have talked about last quarter continuing this quarter.

I think it is reasonable to assume it will continue in the second half as we get that fleet up to our standards and other investments we are making that do get expensed and things like facilities. So to us things are playing out very well, even in spite of these additional costs that are hitting us from P&L perspective. And you can see that in these numbers I just shared.

Rob Wertheimer: Okay, perfect. And if I can sneak in one more, I guess the normalization, excuse me, the normalization of supply chain means you and others are able to get fleet kind of more when you want it versus when you thought, and you know, maybe some of that plus some of the better margins you are getting on sale use equipment has led to the net rental CapEx coming in a little bit any relation of that to end market demand? I mean, are you still seeing strength in every vertical and everything? Is there any tie between those two, those two ideas? Thanks and I will stop there.

Matthew Flannery: Yes, sure. Thanks. So first off, let’s get clear. Supply chain is not fully remedied, which is why we front load CapEx so much in the first half of this year, right. So at 60% of our full-year spend, we are at the top end of the range. We had talked about in that 55 to 60. And if we could have pulled in some more upfront in specific categories, we probably would have. We had said in the beginning of the year, we didn’t really think there was an opportunity to pull CapEx forward, that this is a decision that probably we would make in Q4. If we were going to raise CapEx, that would really have to say more about what next year’s slots look like, and if we can get back to more normalized cadence when the supply chain hopefully remedies in its entirety.

So this change in net CapEx is just strictly about us having the opportunity to sell more fleet through the retail channel. And we are talking 90-month old fleet at $0.07 on the dollars, just smart business. It is time for that stuff to rotate out, and we wanted to normalize that. So if we could have pulled some more forward to maybe make that net CapEx number more whole, we may have done it in the right categories. We just didn’t really have that option, because the supply chains getting better, but not a 100% there yet. Hopefully that answers your question.

Rob Wertheimer: Thank you.

Operator: Thank you. We will take our next question from Steven Fisher with UBS.

Steven Fisher: Thanks, good morning. So I understand that some of the lower utilization you are seeing is by design, because you are running too hot, and your product availability wasn’t where you wanted to be to serve some of those key customers you mentioned. But would you say guess to what extent are your service level now back to where you like them to be and so that sort of intentional lower utilization is now run its course or do you still think you need to have more slack in the system by design?

Matthew Flannery: No, I think we are at a comfortable level. Listen, we want to continue to improve utilization over the long-term trend. It was just – we haven’t had a normal year in three years, right. So when you think about the COVID year, which was just goofy overall, and then the two years of just not being able to get fleet at the proper cadence, we will revert back to continuing to try to drive better metrics from 19 on as we had always done. So I’m not saying we are capped out, I’m just saying right now with, especially with continuing to work through the Ahern fleet, we are on a pretty healthy time utilization and we are being able to be responsive to these major opportunities we have with big customers on big projects. So that is how I categorize that, Steve.

Steven Fisher: Okay. That is helpful. And then in terms of the rental gross margin trajectory, so you had 170 basis point year-over-year decline in Q1 on the reported basis and 140 basis points in Q2, it is a little narrower decline. Should we extrapolate that pace, or should that drag get smaller at a faster pace and maybe even really kind of just ends this year? And so that by the start of next year you are growing your gross margins on a year-over-year basis. How should we think about that sort of trajectory?

William Grace: Yes. So we do our best not to guide to kind of gross margins, but certainly directionally we would expect it to continue heading in the right direction. There is going to be a gap there structurally, because that was a less profitable business then what we would have on a legacy basis, right. So – and we have talked about that. I think on an LTM basis there, EBITDA margins were 35%, whereas ours were 48%. And so that’ll obviously be a dynamic in these as reported numbers, but certainly that cap should narrow. And then as we get to next year, I think it would definitely be reasonable to assume that we would be looking for margin expansion across the business.

Steven Fisher: Terrific, thank you.

Operator: Thank you. We will take our next question from Seth Weber with Wells Fargo Securities.

Seth Weber: Hey guys good morning. Maybe Ted just, just following-up on your margin comment answer. SG&A was surprisingly good this quarter, it was down sequentially on a dollar basis. Great leverage as a percentage of revenue. Can you – is there still more operating leverage to come on the SG&A line for the company here going forward? Or is this as good as it gets?

William Grace: So here, again, this is an example of things we don’t typically guide towards. So I want to be careful there. It is all embedded within the EBITDA and EBITDA margin and flow through guidance we have given. So certainly we would expect to continue driving. Very good efficiency there. But in terms of kind of trying to give people more precise handholding, it is just not something we have done. So, I don’t know if that helps, Seth, but we feel really good about it and certainly we would expect to continue to be very efficient.

Seth Weber: Okay. Maybe Matt, just to appreciate all the color on time you and all that stuff. Maybe just a bigger picture question on the industry supply. We have heard from a few different some of your competitors have reported recently, some companies are raising CapEx, some are moderating CapEx can you just talk to what you think kind of industry supply looks like? Industry utilization looks like? Yes, just leave it there, I guess.

Matthew Flannery: Yes, I think so let’s talk about the large companies, which we all get a little more information from. I think we are in a similar boat. I think you will hear from most of them that this is still a good demand environment, still a good solid rate environment. And I think that points to the industry discipline. And I think not everybody’s reported yet, but I think everybody’s had the same challenge of that time you was just running a little too hot. And I think you are seeing people remedy that. And I think a lot of us that had the ability to, so specifically the big guys that had some scale to leverage front load their capital to try to bring it in ahead of the demand curve. So you didn’t get stuck in that same box we were in for the last year or two.

So, I think the dynamics of the industry are really solid, and I think you are going to hear – we already have heard a couple report similar trends to what we are talking about. So we think the industry is in good shape, think supply demand is in good shape, historically, strong time utilizations and that it is a solid rate environment so good all the way around.

Seth Weber: Got it. I appreciate it guys. Thank you.

Operator: We will take our next question from Jerry Revich with Goldman Sachs.

Jerry Revich: I’m wondering if we just expand on that comment you made a mo moment ago, so if we look back 2015, 2016 where there was a time utilization soft spot and rising used equipment inventories and new equipment inventories the industry gave back some price and what we are seeing from you folks and others is actually better price in 2Q than in 1Q? So can you just talk about the distinctions now versus then? How big of a factor is the availability of rouse market-by-market information? Any other significant distinctions that are driving the much better industry discipline today versus seven years ago?

Matthew Flannery: Sure. Well, to be specific. If you remember that 2015 was that oil and gas dislocation, right. Which really drove kind of a double dip, we will, call of rate problem because it was the highest value of rate just about every company’s portfolio that was serving it. Rates were really high there and it went away quickly across the board. But your point is still fair. That was what happened when there was too much fleet in the system. The time you then dropped to levels that made people have to make different decisions. The time now in the industry is very healthy. So even though it is dropped from inflated time utilization, the reason why you are seeing different behavior is part industry discipline, but also everybody is running at healthy time utilizations.

People are able to make good returns, good margins at these utilization levels and price of goods is higher so people understand the necessity for rate. So I think it is a totally different dynamic, and that is important to note because some people may be reading through the drop in time utilizations that are reported is a demand problem. That is not the case whatsoever. So thanks for help to make that point.

Jerry Revich: And in terms of just the natural implication of that, right, if we are not going to be looking to gear up in the first quarter as hard as an industry in 2024. Obviously, you are not giving 2024 guidance yet, but just the implication of that is lower year-over-year CapEx for the industry in the first half of 2024 just mathematically to tie all that together given how we are running in first half of 2023 is that a reasonable way to pull these pieces together?

Matthew Flannery: Maybe normalized cadence. I wouldn’t say lower, but we are not even sure of that yet, right. We have got to get these slots from the OEMs. They have to be able to make the commitments. I know they are working hard. I know you talk to these folks as well. They are hopeful. That slide channel remedy, but I wouldn’t go all the way there yet. But, hopefully, hopefully, that is what happens, and we can get a little more of a normalized cadence and not have to hold stuff through the winter because we are afraid we can’t get it in the spring. But either way, we are going to do what we need to do for our customers, right, not manage the metric more than the business and the output through the P&L.

Jerry Revich: I appreciate the discussion. Thanks.

Operator: Thank you. Our next question will come from Jamie Cook with Credit Suisse.

Jamie Cook: Nice quarter. I mean, most of my questions have been asked. But first just on what your customers are saying about 2024 and the implications for how their – how it will work with you going forward. So if we have, above average visibility, do they want to lock in business with you earlier and have sort of longer-term contracts to make sure, they are able to capitalize on the multiyear spend that is out there or with supply chains getting better, do you feel like customers potentially could get less sticky because they know there is going to be more equipment out there in the market? And then my second question, specialty margins continue to improve year-over-year. I’m assuming that is the trajectory for the back half of the year. And is there any opportunity on the M&A front end specialty that would be more M&A? Thank you.

Matthew Flannery: I will take the first part of that, Jamie, and Ted could talk to the specialty side. So big customers are still concerned, especially major projects, still concerned about making sure they have surety of supply, right, even though it is a small amount spend, right, couple of percentage points of spend on the project, it has major applications, when they can’t get the material and the labor activated. So we are having those conversations, and a lot of the projects we are talking about today kick-off this year and will carry in through next year and they all hit different phases. So we are in regular planning with our large customers on these mega projects, because it is really important to them. And they have felt the crunch over the last couple of years, and they want to make sure that, surety of supply is there.

So it is definitely more that way than thinking they can wait. I think the last two-years some ways, it is better for us planning more with our big customers, because they realize it is an important, it is an important factor to making sure we both have a win-win situation. Ted, do you want to touch on the second part?

William Grace: Yes, quickly, Jamie, I just wanted to be – sure I understood the questions. It sounded like there were three, and Matt answered the first, I heard the second half margins. I didn’t know if that was a general question or specific to specialty. And the third, it sounded like the outlet for specialty M&A.

Jamie Cook: Yes, it was specific. The question was specific to specialty, both in terms of margin and both in terms of M&A opportunity.

William Grace: So here again, you know, it is all kind of embedded in the guidance we have given, so we do our best not to get into kind of giving specific guidance by segment or unit. So certainly, you know, as we, you have heard us say, we feel very good about the way the business is performing and the outlook for margins in the second half, and that would be true on both sides of the business. I’m not sure I can be any more specific. In terms of the outlook for M&A, both broadly and within specialty it remains a very robust market. We have, you know, seen kind of what we have done year to date and we continue to be active shoppers. In terms of, you know, success, that is harder to say. Discipline is always job number one for us when we are allocating capital. So, you know, we are hopeful and optimistic that we will have some things to do in the back half, in M&A more generally, but certainly within specialty as well. Matt, anything you would add on that front?

Matthew Flannery: No, no, I think you covered it. I mean, you folks all know we are very inquisitive and opportunistic, but we are going to make sure it meets that high bar that we have.

Jamie Cook: Thank you.

William Grace: Thank you.

Operator: Thank you. Our next question comes from Tim Thein with Citigroup.

Tim Thein: Thanks. Good morning. Just first Matt, I wanted to follow-up on the earlier discussion on fleet productivity. I realize you don’t love dissecting all these pieces, but I just wanted to follow-up just from a mix perspective, you know, as you talk about, I realize there are multiple, you know, pieces and components that go into that. But as you, as you know, as you cycle more of that Ahern fleet out of the business, and you are refreshing the fleet as you talked about, does that continue to be presumably that is just given the inflation that we have seen recently in that product category that they were so big in areas, does that act as a headwind, you know, into 2024 or just, and again I know we are not, I’m not looking for, you know, super granularity on this, but I’m just thinking from a high level, but does that continue to drag on that fleet productivity or does that start to fade away?

Matthew Flannery: No, not more significant than what we deal with in our own fleet, right. So we are always going to manage inflation that is why we track fleet productivity. But I think you would have to imagine that our buying power was a little bit better. So some of those OECs and that is why you have part of the difference between as reported and pro forma. Some of those OECs are a little pumped up, a little higher than ours. They didn’t buy as well as us. So there is a little bit of a trade off there as a replace. So it won’t be incrementally – the replacement won’t be incrementally as high as it would be maybe on one of our old assets, our own assets that was, you know, nine years old or eight years old. So nothing that we would call out, nothing that we can’t manage through in the normal course of business.

Tim Thein: Okay. Alright. And then maybe just to get a bigger picture, you know, a fair amount of disruption, you know, that is occurred to the regional or the, you know, banking system over the last several months and, you know, there is more concerns around just lending availability and do some of these regional banks tighten up, again nothing that you haven’t heard, but I’m just curious as your conversations with, you know, fellow, you know, C-Suite folks, is that, are you hearing or seeing much from the standpoint of, you know, projects that, maybe were on your drawing board that are pushing out or anything that you would flag along those lines. Obviously, it is been a concern for some recently. I’m just curious if that is if it is something that you are seeing or hearing much about. Thanks.

Matthew Flannery: No, as a matter of fact our project pipeline remains robust. We are not seeing cancellations. We talked about delays on some solar projects that was more supply chain related, and we actually think those are coming back on quicker so than they were, which is good news. But when we look at mega projects overall, right, and you can decide how you define a mega project, it whether it is 400 million, 500 million, 600 million worth of value, these are all up significantly. And we are talking depending on which cut you use somewhere between 70% and over a 100%. So doubling the size of these amount of projects and that is what the pipeline looks like right now. So we actually feel really good about the pipeline. We haven’t seen any deterioration because of any kind of financing or interest issues. Ted might want to add something.

William Grace: Yes, Tim. I guess things I add, you said regional banks, but I think it is more specific to the local smaller banks, but frankly we are not seeing it either level. I mean, as best we can tell, capital availability remains abundant for our customers. Cost of capital remains reasonable. And so if we look at our customer confidence, really going back to the middle March when all this started, it is really unaffected. And if we look at our performance by customer segment, right. So you look at national account, strategic assigned, local, et cetera, but you are not seeing any real difference in how those are performing. So certainly, on a – through the second quarter there is no discernible impact and in terms of what the potential may be going forward or customers aren’t really talking about it and we are not sensing it is an issue, but it is something we are obviously watching closely as you would expect.

Tim Thein: Very good. Thank you.

Matthew Flannery: Thanks Tim.

Operator: Thank you. We will take our next question from Ken Newman with KeyBank Capital Markets.

Ken Newman: Matt, so obviously it sounds like you feel very confident in the demand environment here. I am curious if you just give a little bit of color on what you are seeing between your two customer sets, right? Because obviously your internal sentiment survey seems like it is still pretty strong or in line with last quarter, which is I think more tied to your national accounts. But any signs of material moves between your national accounts and your local accounts?

Matthew Flannery: Not anything that we are seeing now. We don’t do a lot of Harry homeowner type weekend warrior type work. So I don’t know what that segment is doing. And we definitely skew more towards the contractor, and large contractor, but we are not seeing any delineation in our local market business versus our big job business. We are actually in pretty good shape. We talked about that when we were talking about the non res numbers earlier. So we are – that is one of the areas where you would think it would show up, and it is not – we are actually not seeing any delineation and we are not seeing it in the customer confidence index results as well.

Ken Newman: Got it. And then just to follow-up on that non-res comment, obviously you talked about industrial manufacturing demand being strong here in the quarter, non-res, I think you said was up double digits. I’m curious if you could just dissect that a little bit. I mean, I didn’t hear too much about civil infrastructure projects. My understanding is that starting to accelerate here in these last couple of months. Is that a category that you are expecting to accelerate here into the back half? And if so, how do we think about the margin impact on some of those projects, if any? Here for the back half of 2023.

William Grace: Ken, I will take that one. So it is not one of those things that is easy to track as you know. I would say intuitively, yes, we do expect a lot of the civil projects that are funded by the infrastructure bill and prospectively the Inflation Reduction Act to start gaining momentum in terms of exactly what that cadence looks like. It would be great if there were a schedule. We have not found one, but certainly that the outlook for infrastructure is positive, right. You have got north of $1.5 trillion of spend over the next 10 years, let’s say, and spend that we are very well positioned for, given Matt had made this comment in his prepared remarks. But the strategy we have developed over the last 10-years is unique and puts us in a great position to be the most value added partner to the contractors that are executing those projects.

Ken Newman: Makes sense. Thanks for your time.

Operator: Thank you. Our next question comes from Scott Schneeberger with Oppenheimer.

Scott Schneeberger: I’m going to follow-up that last non-res question. A common question we feel is about weak spots within non-res and everything, we have heard on this call. Sounds very, very good across non-res. So one of the areas of concern is commercial real estate, non-manufacturing and office buildings, any insight you can share there or any other areas of weakness? Matt, it just sounds like it is very broad based and very good. I just want to hone in on any trouble points that you might be seeing.

Matthew Flannery: Yes. No, and I know Ted has done some work on this data. I mean, we all know what the vacancy rates are and we know those are issues, but I don’t know that that was ever a real big part of our business. it is vertical versus horizontals usually a bigger rental need as opposed to vertical, but Ted may have some information to share.

William Grace: Yes, certainly if we look at what we call non-res, it continues to grow quite nicely. We don’t get as granular as the questions you are asking. So if you were to look at the construction put in place data, Scott, certainly you would look – looking at office and commercial whether it is year to date or I think June, which is the most recent data, they both continued to, so show growth. Now I think you were asking more on a forward-looking basis. And when we think about that, and we have, in total, those two verticals are about 20% of total non-res construction put in place. And I would say the office part is one, people worry about given return to office and work from home and those things. Commercial is a huge segment, so it is not strip malls wherever people live.

It is much broader. But I think those are the two areas that we have talked about being reasonably at risk. Now then you talk about the areas where we are optimistic, where we see strong pipelines and where you continue to see strong growth. And the ones you would highlight would be manufacturing as we have talked about public road and highway power communication, transportation and healthcare all of which are performing well in total, those are 55% of total non-res. And our contention would be the growth in those markets is really going to offset any headwinds we would reasonably anticipate in the office commercial combination. So that is logically what drives our optimism looking out across the back half of this year and going forward.

Scott Schneeberger: For just a quick follow-up specialty rental, could you speak a little bit to the asset categories? It sounds like things have been going very well and it sounds like that is broad based as well, but just curious if anyone is lagging behind or asset category or pulling ahead and also any commentary on GFN. The old goal was to double that within 5 years. Just to an update now that we are two years past that, the close of that acquisition, where that stands? Thanks so much.

William Grace: Yes. So for the first part of your question, nobody’s fallen behind. As I said, prepared remarks, specialty had 17% organic growth and all the business segments were in double-digits, which is great. Now, certainly, the GFN, which you pointed to, growing a little bit faster than the rest, but we would expect that. And as far as that goal to double the size of the business in five years, I think we shared this earlier in the year that we are ahead of schedule. Whether we are a year ahead of schedule or two years ahead of schedule, the time will tell. But we are we are very pleased with where they are and we are continuing to open cold start to continuing to grow that sector as well. But we are growing all of our specialty segments. We are really pleased with the work the team is doing there.

Scott Schneeberger: Sounds good. Thanks Matt.

Operator: Thank you. Our next question comes from Neil Tyler with Redburn.

Neil Tyler: Hi, guys. Thank you. Two left, please. Firstly, on the topic of CapEx and fleet and availability, one of your competitors floated the notion that ticket prices. Obviously, ticket prices had been inflated recently by things like surcharges that should or may well fall away if availability improves. I don’t that is a perspective. But I would love to hear your perspective on whether that is a likely or a certainty or not a notion that you are considering, first of all, please.

Matthew Flannery: Sure. So we don’t talk about our negotiations on open mic. Just we are one of the good partners with our vendors. But the comment of some of the surcharges and the costs associated with creating those surcharges is certainly a fair comment when we are discussing with our partners. So I don’t think that characterization is wrong. We just don’t really talk about our negotiations with our partners publicly. But the capitalization is fair enough.

Neil Tyler: Great. Thank you. That is still helpful. And then just, apologies, but I want to just quickly come back to time mute would comments you made earlier, just to so I understand this. The lower year-on-year time mute would splits between a timing of fleet arrivals and the deliberate move to normalize time viewed? And am I right of thinking that the first of those two categories is more or less behind us, and the second will persist for the rest of the year. Is that fair?

Matthew Flannery: Yes. I mean, the first enabled us to do the second, right. If we can bring in the fleet, we wouldn’t even be able camp it down. So they are very much going hand-in-hand. But just by definition of how much capital we have left for the year for growth, we are going to bring in a good amount of our CapEx in Q3 here as you would expect for the balance of the – what is left of the balance of the year. And I think, like I said earlier, when people trying to see if we could forecast the productivity number. We will sequentially grow, but we think they are going to see similar year over year dynamics to what saw in Q2. So we feel good about it, we feel good about demand, and we will continue to have CapEx rolling here in Q3.

Neil Tyler: Super. That is really helpful. Thank you, Matt.

Operator: Thank you. Our final question comes from Mig Dobre with Baird.

Mig Dobre: Thank you for fitting me in. Good morning. A lot has been covered here, but maybe on the topic of non-res, and Ted, appreciate all the context you provided. But I wanted to sort of ask a hypothetical question. If we are looking at private non-res this year, the put in place is growing north of 20%. If growth flows in 2024, right? Tougher comps or maybe some of the pockets that weakness that people are worried about. And, you know, we are talking about growth reverting back to low to mid-single digit. What does that mean in terms of how you are going to manage your business? How do you manage fleet in terms of CapEx, disposals? And again, I’m not asking for guidance, I’m just trying to understand hypothetically how you would react to something like that.

William Grace: Yes, it is a good question, Megan. It is something we go through every year, so of course we are talking in nominal dollar, so you have really got to convert this all to volume, but that is how we approach the forward year as it relates to CapEx. As we get into the fall and into the fourth quarter, we will start our bottoms up planning process. That process will help us get a much better sense for what our customers think their growth will look like at 2024. At that point, we can then think about what our replacement CapEx needs will be, based on the OEC we would plan to sell next year, and then the incremental fleet we would need to support growth in that environment. As Matt said, we think we have kind of reset the baseline back to where we want to be this year.

So as we think about next year, you know, let’s just say we are kind of at that steady state, then there is less of a time dynamic that comes into this. And then it is more a function of how do you manage the growth in your OEC. Matt, is that fair?

Matthew Flannery: Yes, no, I think you covered it well.

William Grace: Okay. And does that hypothetically answer your question?

Mig Dobre: Well, it helps. I’m still kind of scratching my head on the fact that you are going to be exiting the year with significant year over year growth in fleet. Right? So, you know, if growth slows, does that mean that you are sort of pivoting towards just pure replacement CapEx or you are still in, you know, fleet growth mode? That is what I was trying to tease out.

Matthew Flannery: Yes, and it is a fair question, but it will depend on what we see as a demand as we go through our planning process. But we are certainly not as negative on the growth as maybe your, the tone you are sharing, but you know what time will tell and, and we are going to adjust and manage the business appropriately for whatever environment we have. All that being said, we do expect, and I think you are seeing this with most of the big players for us to outpace overall industry growth, we think the big is getting bigger is a dynamic that’ll continue to play. And I would say the type of work that we have talked a lot about to everyone lends itself to the larger players. So I wouldn’t even – even if there is a slower growth in the overall industry, we think we will have the ability to outpace that. But I do get your point and we will manage through it.

William Grace: And that is the thing about doing it year end is we will know what that carryover growth and capacity is, which allows us then to factor that into whatever our CapEx spend will be. Alright, this gets back to continuing to be very good stewards of our shareholders’ capital.

Mig Dobre: Understood. Thank you, gentlemen.

Matthew Flannery: You got it, Mig. Thanks.

Operator: Thank you. At this time I will turn the call back over to Matt Flannery for any additional or closing remarks.

End of Q&A:

Matthew Flannery: Thanks operator. And no additional remarks that wraps it up for today. So I want to thank everyone for joining us and we look forward to speaking with you all again in late October and in the meantime, please feel free to reach out to Elizabeth at any time if you have any questions. Thanks again. Operator, please go ahead and end the call.

Operator: Thank you. This does conclude today’s call. We thank you for your participation. You may disconnect at any time.