United Rentals Inc ($URI) Q3 2025 Earnings Call

Morning and welcome to the United Rentals investor conference call. Please be advised this call is being recorded. Before we begin, please note 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 31st, 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'll now turn the call over to Mr. Flannery. Mr. Flannery, you may begin.

Thanks, Matt, 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 some fleet inflation of 1.5%. Also within rental, ancillary and re-rent grew over 10% adding a combined $69 million 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 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 $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 cost 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 or 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 four 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 the 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, while we also expect to manage through similar cost dynamics in Q4, especially delivery. Turning to cash flow, we reaffirm 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 dollars shares this year, which highlights our strategy 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.

Absolutely. At this time, if you'd like to ask a question, please press the star and one keys on your telephone keypad. Keep in mind you can remove yourself from the question queue at any time by pressing star and two. Again, it is star and one to ask a question today. We'll take our first question from David Raso with Evercore ISI. Please go ahead, your line is open.

Hi, thank you for the time. Obviously, we have the demand positive and the cost negative here. So, I just wanted to dive into the demand side first. The cadence of the CapEx when I think about 26 and the comment you accelerated equipment for the third quarter, but just so we're clear, when you're thinking of the demand profile that you said was better than you expected, is any of this 25 CapEx increase pulling forward 2026? And if not, just thinking about the cadence of some of the CapEx for 26, you know, obviously, when you bring this much fleet on the third quarter, you know, people wonder how do we go into 26 with a level of fleet just given the seasonal weakness. So, that's a demand question. I'll follow up with a quick cost question.

Okay, thank you. And then on the cost side I mean it's easier for me to say but ancillary revenues are up to close to 18% of total rental revenue how do we think about pricing for those services? I know I appreciate the comment providing those services is partly why you win more than your fair share let's say of the major projects but it's, you know, it went from so sort of an afterthought to again want to throw in re-rent it's 20% of rental revenue so is there a way to rethink that pricing some kind of annual contract something where it doesn't continue to be a drag and related to that the fleet productivity number I know you don't like going into the details but can you give us some sense of the components of fleet productivity? You know that I mean were both utilization and rate up one up one down just trying to get a sense of those components as we sort of push against the cost. Thank you.

And on the margin side within ancillary, David, you know, obviously the thought there is you want to be responsive to the customer. You know, it all kind of ties back to this concept of being the partner of choice. Frankly, it's hard for us to predict what that mix will look like between something like pick up and delivery or installation, breakdown, setup, fueling, etc. The margins themselves don't fluctuate a tremendous amount, but they are what they are. So, delivery to Matt's point is probably the thinnest of that. That's really kind of, you know, just the convention of the industry. Others, you know, are certainly not going to have the kind of margins that we have in rental, but as we've said, you know, that they're definitely positive and they add GP dollars with very little capital coming along with that. So, we think they benefit us both strategically and financially. But it's going to drive kind of variability depending on what that composition looks like.

All right, I appreciate that. Thank you.

We'll take our next question from Rob Wertheimer with Melius Research. Please go ahead. Your line is open.

Yes, thank you. Good morning, everybody. You've mentioned a few times across the call, you know, solid demand indicators, you know, kind of driving some of the CapEx move. Could you talk a little bit qualitatively about what that looks like in the field? Is this mega projects that, you know, we all knew about but that are finally coming online? Is this share gain as people appreciated? Is this interest rate sensitive construction having bought I mean, what's kind of going on? Thank you.

Thank you. And then the fleet repositioning that's been there this quarter and before, that's related to that shift in demand. Does that have an end date to it where you've kind of got stuff moved around where you want it or is that just a new world where projects are bigger and in different places? I'll stop there. Thanks.

Thank you.

We'll take our next question from Michael Feniger with Bank of America. Please go ahead. Your line is open.

Great. Thanks, guys, for squeezing me in. Matt, just on the local market, it seems like you're signaling 2026 as a growth year. Is that inclusive of the local market or is that more on the larger projects? And if we see rate cuts, does that alone get the local markets back? Historically, there's been a delay between rate cuts and construction picking up, but those rate cuts happened in deep recession. So, I'm curious if you feel the feedback loop from rate cuts is a little shorter than normal in terms of when that pipeline might fill up. That's more of a second half next year type of event.

Perfect. And Matt, you know, you mentioned accelerated the CapEx to meet the demand. Did large projects, did you see anything that got green lit that maybe was on the fence? Or are you seeing your atypical win rate starting to...

to inch up versus prior years? And just to tag on that, Ted, if there's any way you could help quantify where you think that power vertical for you guys, how big you think that is today for you guys versus maybe where it was a few years ago. Thanks everyone.

Yeah, I would just say, you know, we've just had greater success and the customers that rely on us have had greater success on these large projects and the pipeline's robust. So, I would say that's what drove the extra demand is really just good execution from the team and I'll let Ted talk to the power vertical.

Yeah, Mike, thanks for the question. So, it's currently in low double digits, say, you know, 11-12% is probably a reasonable area. And if you go back to when we introduced what we called our power vertical strategy, and just to be clear, this is really a focus on investor-owned utilities, whether it's generation, transmission, distribution. At the time in 2016, it was probably 4%. So, we're probably coming up on nearly tripling that relative exposure to what we think is at the time we thought it would be a very large, stable business. It's very large. It's obviously seen a lot of investment and we expect, you know, certainly continue for the long foreseeable future. So, feel like we're really well positioned there. You know, and we've spent the better part of a decade building what we think is a lot of competitive advantages to serve those customers in that market uniquely.

Thank you. We'll take our next question from Steven Fisher with UBS. Please go ahead. Your line is open.

Thanks. Good morning. I just wanted to ask about the, come back to the margin dynamics here. Just looking at the Q2 versus Q3 year-over-year, specialty going from, you know, 220 basis points to 490 basis points headwind. You know, it sounded like qualitatively that the drivers weren't really that different categorically, but just curious what accounts for that difference in year-over-year. Was there sort of faster growth in YAC that was driving, you know, more of that delivery impact or what just accounts for the 220 versus 490? Thanks.

Yeah, yeah, absolutely, Steve. Thanks for the question. So, overall, I would say the cost dynamics within specialty and frankly the whole business have been pretty consistent across the year. When you look specifically at specialty 2Q versus 3Q, the big difference was the increase in depreciation we had in that and that spoke to, you know, kind of the aggressive investment we're making in YAC more than anything in matting. I mean, those assets get depreciated at a far faster pace than any other asset class we have in that business. So, when you look at kind of the 490 basis point decline, 200 basis points of that was depreciation. So, call it 40%. The other pieces were the same things we've talked about like delivery and really ancillary being the other big piece.

Okay, that's helpful. And you know, I think you were on track or planning to do 50-ish cold starts this year. Sounds like you're pretty close to that already. And do you think that momentum is likely to kind of continue into the fourth quarter and any sense of, you know, having done 70-plus last year and maybe on track for 50-plus this year, directionally where you see the cold starts heading for next year?

Terrific. Congratulations.

We'll take our next question from Jamie Cook with Truist Securities. Please go ahead. Your line is open.

Hi, good morning. I guess just, you know, two questions. You know, the setup for 2026, obviously, ancillary is just becoming a larger part of the business. It just sounds like structurally that will be a headwind on margins, but I guess Matt or Ted, I'm just trying to think about, obviously, you're seeing demand or demand is starting to improve or maybe your share is just improving, but I'm just wondering the setup in 2026 with a lot of the inflationary pressures, in particular with tariffs and section 232, you have the ancillary business becoming larger. To what degree do you think, you know, we can start to push through, you know, higher rental rates? Is the market strong enough that they could absorb that, just given some of the, you know, cost headwinds that we could see continuing to 2026? Thank you.

Got it. Good question, Jamie. We don't want to get too far ahead of ourselves, but certainly, if you just take a step back and you decompose what's happened in 2025 as a starting point, a lot of the margin dynamics have been being responsive to customers. You touched on ancillary, but obviously that is dilutive. And you could ask yourself why you're doing that. And again, it's to really be this partner of choice and be responsive, and frankly, use that as a tool to be a better partner and take share. We think that's absolutely worked out, and while it is dilutive to margins as we've talked about, you know, there are a lot of benefits to it. So, how does that play out next year? Time will tell. We don't think that's bad business. But we'll have a sense for what that's going to look like over the next 6 weeks as we get through the business planning process. Then you think about things like cold starts and investments and I don't think anybody would dispute, you know, the logic, strategic or financial, of the cold starts we're doing in specialty. To your question on inflation, broader inflation, you know, it's still elevated as I said in my prepared remarks. You know, is it going to subside in '26? Time will tell, but certainly we are very aggressively managing our costs in any environment, but certainly in this one. So, then you come to the delivery piece, and that's obviously been kind of the biggest discrete challenge we face this year. And that's driven a lot by being responsive to customers. That's what has helped support the demand and the growth you've seen. We're trying to figure out that piece next year, you know, what is the growth, what does it look like from a physical footprint standpoint, and then how do we most effectively serve it? Matt talked about, you know, the idea of managing CapEx differently such that you could mitigate some of that incurred cost of moving fleet. We're working through that, but that again is being responsive to where demand is and supporting our customers. So, all that, you know, is to say that, you know, we're looking at those things. They will all affect 2026 margins and flow through, but the focus as always is on profitable growth, and from that standpoint we think the team's managing the business really well.

Thank you.

We'll take our next question from Ken Newman with Key Bank Capital Markets. Please go ahead. Your line is open.

Hey, thanks. Good morning, guys. So, maybe to follow up on that response that I said, you know, I think Matt, you mentioned growing the fleet for, you know, both stronger demand, but also maybe to better address the fleet movement. You know, I know you don't want to talk about '26 yet, but just higher level, how do you think about balancing those two dynamics, right, to keep time use strong into next year? And just how long do you think it takes to tackle some of these cost inefficiencies? And, you know, maybe to that point, do you need to accelerate cold starts in order to, you know, tackle the movement or the fleet repositioning costs?

Right. No, that makes sense. And then just for my follow-up, you know, I appreciate all the color around, you know, the drags on the fleet repositioning costs. When we think about core profitability, you know, at some of these high ancillary and delivery mix, is there any reason to think that you can't drive flow through kind of in line with your more normalized type of margins, right? Because you're kind of signaling a growthier for next year at some of these, you know, more volatile mix impacts. Anything to suggest that you can't kind of get back to that 40% plus type of flow through at those items?

I guess what I'd say is the core profitability of the business we think is performing well, right? And we've talked about the impact of delivery this year, which is just a function of serving our customers as efficiently as we can. And as to Matt's point, it's balancing operating efficiency with, you know, cost efficiency or call it capital efficiency with margin. So, we think we're doing those things well, and we think the underlying business is actually performing as expected. In terms of what it looks like going forward, again, we would expect the core to perform well. A lot of this, and I hate to repeat myself, but it is being responsive to what customers ask of us and how demand is evolving. And so, when you think about it, that again explains a lot of what we're doing with ancillary, what we're doing with cold starts. And so, you know, I come back to what I just said to Jamie. We feel really good about that core profitability and, you know, our goal is always to be as efficient as possible serving demand. That doesn't change. But when you look at kind of what those margins look like when we talk about updated guidance or whatever, we would say that this is really being responsive to the market itself.

Understood. Thanks.

We'll take our next question from Tammy Zakaria with JP Morgan. Please go ahead. Your line is open.

Hey, good morning. Thank you so much. I have this one question. Sounds like customer demand has accelerated on the large project side. So, is it fair to assume your raised equipment purchase plans would be across GenRent and specialty equipment, or are there any specific categories where you're seeing better demand?

Wonderful. Thank you.

And we'll take our next question from Sabat Khan with RBC Capital Markets. Please go ahead. Your line is open.

Great. Thanks, and good morning. And earlier commentary indicated that, you know, the larger project side of the business is continuing to trend well. You know, some of these really took on as the IIJA really got going. I guess when you look ahead 1-2 years, 3 years, do you think the business or the industry needs some sort of a renewal to that IIJA program, or is the industry just generally inflecting toward these larger mega projects? Just some thoughts there. Thanks.

Yeah, absolutely. Certainly infrastructure broadly has been a very strong market for us. And certainly the IIJA has helped support that. You know, our best sense is there's still a healthy amount of that initial or that money left. So, that should support it. You know, the thing we've always talked about infrastructure, there's certainly not a lack of demand in the sense of, you know, the need to reinvest in infrastructure. We certainly expect that that will continue, whether it's, you know, funded by state initiatives or local initiatives or federal dollars. So, you know, we'll see ultimately what that funding looks like, but there's no question that the country on the whole needs to continue investing aggressively in reinvigorating infrastructure. And the other thing we've talked about just, you know, maybe as a corollary to that question is infrastructure's been a great market for us. It's an important part of our business, but we've got a lot of these tailwinds. And certainly we're riding a lot more than just one wave of infrastructure. When you think about a lot of the onshoring, a lot of the, you know, remanufacturing in the US and power and other things and technology, all those come together to give us, you know, a really optimistic outlook for the foreseeable future on demand.

Great. And then just as a follow-up, I think there's been commentary in the past that it may not necessarily be a larger project, lower margin type of a setup. But as you think about larger projects becoming a bigger part of your mix, and, you know, it sounds like you're ramping up that side, you're moving fleet around to meet these large projects. Is there sort of an inflection point that you see in your business at which larger projects are going to be stable at this base, and now we'll get operating leverage on the sort of the cost base that we installed to perhaps meet that demand that the larger customers are looking for? Just any view on, you know, how that as that business grows, is there a view on sort of an inflection point on overall margins and operating leverage? Thanks.

Yeah, it's a good point. What we've talked about historically is when you think about large versus our base margins, we have always and still believe by the way that although some of those large projects do get some discount as they leverage the bulk spend with us, that we get to serve it more efficiently on site versus spreading that overall. The one area that has changed as it's become a bigger part of the portfolio that quite frankly we didn't anticipate was the repositioning of the fleet. So, it's a little bit of where the jobs are, where you're positioned, and then what I said earlier, how well you can plan with the customers to position the fleet, that's going to decide that. Just to put it in context, in the relative scheme of things, we're talking about small numbers, right? You're talking about 1% of your operating cost. But, it does make noise within the metrics, which is why we're explaining it to you all. So, even with this extra burdened transportation cost, it's still relatively close to the same. It's just the challenge is, you know, where the fleet is versus where the need is and how you continue to improve that operating efficiency is what will make that decision. But, I wouldn't see it as terribly different even in its current environment with these extra costs because in the scheme of a $15 billion company and the cost base we have, it's not a big number.

Thanks very much.

We'll take our next question from Tim Thein with Raymond James. Please go ahead. Your line is open.

Thank you. Yeah, good morning. Maybe just the first question is, and maybe it's for you, Matt, just in terms of the customer dialogue and what you're hearing from, and, you know, in terms of some of the national account customers, you know, it's been a couple months since we've had the tax reform passed and if you, and some of the sentiment readings have kind of been all over the board, but it doesn't seem to be much change in terms of kind of forward-looking CapEx and other, you know, growth. But I'm just curious, you know, have you detected or seen any change in terms of, again, just kind of thoughts around big project spending and now that some time has elapsed since the OBBA has passed.

Yeah, okay. And maybe looking a little bit further out, the 2028 goals that you outlined at the investor day back in '23, you obviously wouldn't have kept it in the slides if you didn't think it was still, you know, realistic. But, you know, the elements of it specifically around what, you know, the implied flow through look to be a bit more challenging. Do those targets maybe rely a bit more on M&A from here or maybe just kind of an update as to how we're tracking towards those. Again, aspirational.

Yeah, go ahead.

You know, the margins frankly will be, you know, more challenging to hit that kind of roughly implied margin and the corollary to flow through. But, when we look at kind of why, there are a few things that we'd point to. You mentioned about acquisitions. Frankly, acquisitions tend to pull us in the opposite direction to getting there. You know, we've long talked about this. Give and I have talked about this and probably Matt and I have talked to the entire investment community about this, but acquisitions tend to be dilutive to our margins. And that's why we take the time to explain what that margin profile looks like, but we really talk about the returns and most specifically those cash on cash returns because that's how we think about allocating capital. But, if you look at the acquisitions we've done since '22, you know, they've virtually all been diluted. That doesn't mean they weren't good deals. We would say strategically they were all 10s and I'd say financially they've all been 10s. But, they're going to have that diluted effect. So, just to put some numbers around that, if you know, I've looked at the math, the acquisitions probably account for 70 or 80 basis points of margin dilution since 2022 in isolation. I think if Matt and I could go back in time, we would have done every one of those deals and frankly, we probably would have done, you know, we would have loved to do twice as many deals if they had the same financial profile. But, the margins, you know, are also impacted by the ancillary. This is, you know, if you think about that evolution of being responsive to customers and how ancillary has grown from let's say 15% of our rental revenue mix to now approaching, you know, the very high teens. That's probably not something we would have anticipated back then. It's had this diluted effect. We've talked about it today. We've talked about it, you know, for a while. But again, these are really beneficial things we're doing to take care of customers, to frankly use as competitive advantages over incumbents and they've helped support the growth you've seen us achieve. So, there again, like we would not go back and do things any differently with ancillary. And certainly, you know, I would just say the broader inflationary environment's been worse than probably anybody expected since '22. That being said, we feel like we've managed it really well on an underlying basis. And so again, the margins, you know, it'll be a stretch. I'll, you know, say that. I don't think that surprises anybody. That doesn't mean we're not going to keep pushing for it and it doesn't mean we're not incredibly focused on, you know, driving better core profitability of the business. So, Matt, I don't know if you'd add anything.

Thank you.

We'll take our next question from Scott Neuberger with Oppenheimer. Please go ahead. Your line is open.

Thanks very much, guys. Couple from me. First one is just if you could speak to, I know it's early and you're not giving guidance for next year, but your conversations right now, it's, you know, that time of year where you're speaking with the OEMs on pricing looking forward. Just with tariffs hovering, what are the conversations like? Is it going to be anticipated as a normal pace of rate increases for the upcoming year or might there be something that could surprise us? Thanks.

Thanks for that. And then on the theme of the day, just want to ask the question kind of in a different way. If you have a strong demand seasonal uptick next year, which it looks like you are expecting, with the elevated level of re-rent, ancillary, and large projects and need for probably still delivery. You're addressing it with some CapEx, but and it's, you guys have mentioned on the earlier question, hey, we're going to look and see what we can do to improve. But are there some ideas with regard to relationships with transportation providers on the outside maybe where you can get some bulk pricing? Are there operational execution initiatives that you're looking at is one part of this question. Then the second part of the question is you haven't done obviously H&E stepped away, but haven't done an acquisition in a while. What is the appetite there? I just heard Ted's response to Tim's question, but curious on where that may be applicable on this issue or just general appetite for M&A overall. Thanks.

Thanks.

And there are no further questions on the line. I'll turn the program back to Matt Flannery for any additional or closing remarks.

Thank you. This does conclude today's program. We appreciate your attendance. You may now disconnect.