Title

Presentation

Operator: Good morning, everyone, and welcome to the United Rentals Investor Conference Call. Please be advised that this call is being recorded. Before we begin, please note that the company’s press release comments made on today’s call and responses to your questions contain forward-looking statements. The company’s business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control. And consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the company’s press release. For a more complete description of these and other possible risks, please refer to the company’s annual report on Form 10-K for the year ended December 31, 2025, as well as the 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. Please go ahead, sir.

Matthew Flannery: Thank you, operator, and good morning, everyone. Thanks for joining our call. Yesterday afternoon, we reported a strong start to 2026, including first quarter records across revenue, EBITDA and EPS. I was very pleased by the growth, margins and fleet productivity we reported, as the team continues to execute against our North Star of putting the customer first. The momentum we’re carrying into our busy season, along with our customers’ feedback for their business, supports our expectations that this will be another record year, as further evidenced by our updated guidance. This is all attributed to our 28,000 team members who are laser-focused every day on serving the customer and delivering against our goal to be their partner of choice.

What exactly does this mean? Well, it means we have a broad unmatched offering of both gen rent and specialty products. We invest in industry-leading technology to make both the customer and our own operations more productive and efficient. And most importantly, we have a track record of providing superior service our customers can depend on. This didn’t happen by accident. We’ve developed sustainable competitive advantages through our differentiated value proposition and operational excellence, allowing us to deliver consistent performance and shareholder value. Now having said all this, today, I’ll give a quick recap of our first quarter results, followed by what’s driving our optimism for the year. And then Ted will go into more details around the numbers, before we open up the call for Q&A.

Receive real-time insider trading and news alerts

So let’s start with the quarter’s results. Our total revenue grew by 7% year-over-year to nearly $4 billion. And within this, rental revenue grew by almost 9% to $3.4 billion, both first quarter records. Fleet productivity of 2.3% contributed to OER growth of 6.5%. Adjusted EBITDA came in at $1.8 billion, resulting in a margin of 44.1%, a 60 basis point improvement year-over-year when you exclude the H&E benefit. And finally, adjusted EPS came in at $9.71, up 10% year-over-year and another first quarter record. Now let’s turn to customer activity. We continue to see healthy growth across both our gen rent and specialty businesses. Within specialty, which grew 14% year-over-year, we saw growth across all lines of business and opened 17 cold starts.

By vertical, our construction end markets saw strong growth led by nonresidential construction and infrastructure. And on the industrial side, power and mining and minerals were notable standouts, with power continuing to post double-digit growth. We saw a wide variety of new projects kick off in the quarter, spanning health care, infrastructure, power, industrial manufacturing and, of course, data centers. And for you soccer fans out there, we expect to be a key partner for the World Cup starting here in the second quarter. Now turning to the used market. We sold $680 million of OEC at a 51% recovery rate. We’re on track to sell approximately $2.8 billion of fleet this year supported by strong demand for used equipment. In conjunction with these sales, we spent $874 million on rental CapEx. This was spread across replacement and growth CapEx, with a focus on specialty and bringing in additional gen rent equipment where we see strong demand.

Subsequently, we generated free cash flow of $1.1 billion. We’re set up for another strong year of cash generation, which is a critical feature of the company. 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, which can be redeployed in ways that allow us to create long-term shareholder value. Finally, we allocated capital in the quarter consistent with our framework, which starts with a healthy balance sheet. After supporting both organic and inorganic growth, we returned $500 million to shareholders during the quarter through a combination of share buybacks and our dividend. Our leverage of 1.9x remains well within our targeted range, leaving plenty of dry powder to support growth and return excess capital to shareholders.

Now let’s turn to the rest of 2026. As evidenced by our updated guidance, the year is playing out better than we expected just a few months ago. Feedback from the field continues to be optimistic, particularly for large projects. We’re carrying a strong momentum into our busy season and we feel confident we’re positioned to win in the marketplace. So to sum it all up, our unwavering focus on our strategy, which includes our differentiated value proposition, positions us well to compete effectively in the marketplace. Our customers know they can depend on us. And our team is executing with strong capabilities. We see multiyear tailwinds for large projects and believe we’re well positioned for these opportunities. And we’ll continue to monitor and manage our cost structure and operate with capital discipline.

I’m confident the combination of our resilient business model, prudent capital allocation and balance sheet strength will allow us to continue to drive profitable growth, generate strong free cash flow and deliver compelling returns to our investors. And with that, I’ll hand the call over to Ted to review our financial results, and then we’ll take your questions. Over to you, Ted.

William Grace: Thanks, Matt, and good morning, everyone. As Matt just shared, we’re off to a strong start to the year with first quarter records across total revenue, rental revenue, EBITDA and EPS. More importantly, we’re pleased to be raising our full year guidance based on the momentum we’re carrying into our busy season and strong customer sentiment. Before we get into the details of the outlook, let’s dive into the first quarter numbers. As you saw in our press release, rent revenue increased $274 million year-over-year, or 8.7%, to a first quarter record of over $3.4 billion, supported primarily by growth from large projects and key verticals. Within this, OER increased by $163 million or 6.5%, driven by 5.7% growth in our average fleet size and fleet productivity of 2.3%, partially offset by assumed fleet inflation of 1.5%.

Also within rental revenue, ancillary and re-rent grew by nearly 18%, adding a combined $111 million as ancillary growth continues to outpace OER. Pivoting to used, we sold $680 million of OEC in the quarter, generating $350 million of proceeds at an adjusted margin of 47.4% and a 51.5% recovery rate. So solid used results overall. Next, let’s turn to EBITDA. Excluding the $52 million net benefit we realized with the termination of the H&E acquisition in the year-ago period, EBITDA increased $140 million to a first quarter record of almost $1.76 billion. This was primarily driven by a $160 million increase in rental gross profit, partially offset by a $12 million decline in used gross profits. Excluding the impact of H&E, SG&A increased $16 million year-over-year, but declined as a percent of revenue, while gross profit from other lines of businesses increased $8 million.

Looking at profitability, our first quarter adjusted EBITDA margin was 44.1%, reflecting a 60 basis point improvement year-over-year excluding the impact of H&E. As expected, we continue to see geographically dispersed large projects driving much of our growth while customer demand for ancillary services also remains strong. Nonetheless, as you saw this quarter, with the benefit of strong cost management, we expanded our underlying margins year-over-year. And while we’ll always have normal quarter-to-quarter variability in costs, it remains our goal to achieve flat margins for the full year. To give you a little more color on the cost controls, I’ll note that we recorded $45 million of restructuring charges in the first quarter, which were primarily related to the consolidation of overlapping facilities and head count reductions.

Additionally, we took steps across the organization to control variable costs with a significant focus on labor and outside hauling. And while it’s still early in the year, we’re pleased with the results of these initiatives. Shifting to CapEx, gross rental CapEx was $874 million, translating to around 19% of our full year spend at midpoint and in line with historical first quarter levels. Moving to returns and free cash flow, our return on invested capital of 11.8% remained comfortably above our weighted average cost of capital, while free cash flow for the quarter exceeded $1.05 billion. Turning to our balance sheet. Net leverage remained very comfortable at 1.9x at the end of March, with total liquidity of almost $3.4 billion. On the capital allocation front, we returned $500 million to shareholders in the quarter, including $125 million via dividends and $375 million through repurchases.

Now let’s shift to the guidance we shared last night, which reflects our confidence in delivering another year of strong results. Total revenue is now expected in the range of $16.9 billion to $17.4 billion, an increase of $100 million versus our initial guidance, while used sales are still expected at around $1.45 billion. At midpoint, this implies full year growth ex used of roughly 7%. In turn, we’ve also raised our adjusted EBITDA guidance by $50 million to a range of $7.625 billion to $7.875 billion. On the fleet side, we’ve increased our gross CapEx guidance by $100 million to a range of $4.4 billion to $4.8 billion, reflecting the stronger demand we see. This now implies net CapEx of $2.95 billion to $3.35 billion. And finally, we’re guiding to another year of strong free cash flow in the range of $2.15 billion to $2.45 billion, with the increase in CapEx offset by higher cash flow from operations.

Shifting to capital allocation, it remains our plan to repurchase $1.5 billion of shares in 2026. Combined with our dividend, this will return roughly $2 billion to our shareholders this year, equating to approximately $32 per share or a return of capital yield of about 4% based on our current share price. So with that, let me turn the call over to the operator for Q&A. Operator, please open the line.

Operator: Certainly. Thank you, Mr. Grace. [Operator Instructions] We’ll go first this morning to David Raso with Evercore ISI.

David Raso: I want to focus on margins and the cost saving initiatives versus maybe some fuel cost concerns. As you mentioned, right, the margins were up 60 bps year-over-year, incrementals were [ 53 ]. The amount of savings in the first quarter, be it labor, some of the real estate you spoke of, I’m coming up with something like $10 million. So even without that, margins were up 40 bps, incrementals were [ 49 ]. And the reason I go through those numbers is the rest of the year, and I’m just using midpoints, I appreciate that, but the rest of the year, you’re now implying margins down 20 bps year-over-year, incrementals only [ 42.5 ]. And I just want to make sure how much we should be looking at the first quarter, is a little bit of an anomaly on savings and the margin? And why would we then, if it’s not an anomaly, the margins would be down the rest of the year, year-over-year?

William Grace: Yes. I’ll start there and then we can go from there. So thanks for the question, David. I’d say, as always, we caution people against anchoring to the midpoint. It goes without saying we’re very pleased with the start to the year we’ve had. And certainly, the underlying improvement, excluding whatever the benefit was from restructuring, and you’re probably in a reasonable ZIP code assuming around $10 million of benefit in the first quarter, there’s still a lot of game to be played. We feel very good about the trajectory we’re on, excellent execution in the first quarter, but we’ve got to sustain that through the busy season, which is to say the second and third quarter. So if you look at the results, it was really kind of all 3 big areas of costs that provided leverage: labor, delivery and R&M.

So we feel like there’s a broad-based kind of contribution to the improvement. But again, we’ve got to sustain that through the busy season. And the area that is probably going to be the most important to focus on will be delivery through the busy season. And so we feel really good about the start to the year. The team is incredibly focused, after taking care of customers, focusing on cost is job #2. So Matt, I don’t know if you’d add anything?

Matthew Flannery: No, I think you covered it, but I want to anchor on the midpoint and, more importantly, the efforts we put in place that we talked about to help mitigate some of the cost challenges that came with the repositioning and some of the other challenges, the team is doing a good job, and we’ll continue to run that play.

David Raso: And a follow-up on that, then I’ll hop off, can you give us any sense of how you’re thinking about fleet productivity after the 2.3% in the first quarter? Cadence full year, whatever you want to provide us would be great.

Matthew Flannery: Sure, David. Yes, we feel like the supply-demand dynamics in the market are conducive to driving positive fleet productivity. As you know, our goal is always to overcome that 1.5% inflation bogey that we put out there, and I’m glad to see the team did that in Q1. And frankly, that’s our expectation in our guidance when we start every year. So on track, feel good about it. And when I think about it qualitatively, we continue to get positive rate. We feel good. Rates is still a good guy. The time utilization, which we’ve been talking about running at a high level for a few years now and maybe even thought that would be a headwind this year, I’m pleased to say the team are continuing to achieve high levels of time utilization.

And then the biggest change when we think about Q4, which got a lot of explaining and a lot of focus, was really an anomaly, and that’s why we talked so much about some of the challenges and mix, and we didn’t face those mix headwinds like we did in Q4. So we don’t expect to have those headwinds again. But once again, we’ll continue to update you guys as we go along.

Operator: We’ll go next now to Rob Wertheimer at Melius Research.

Robert Wertheimer: I’m most curious about some of your customer commentary. And I’m curious about whether what the time line is, especially on some of those larger projects, when you go from having conversations about how they feel to preorders or planning for specific projects as some of that start to happen, is that [indiscernible]? And then I’ll just ask my follow-up at the same time. Dirt movement — dirt equipment started moving upwards a quarter or 2 ago. There’s a lot of mixed signals in the industry, but some saw that as a leading indicator. I don’t know if you think that’s a tangible sign that we start at the bottom and working our way up and that’s some of the strengthening demand you’re seeing.

Matthew Flannery: Yes, Rob. So as far as the planning aspects, as you could imagine, the larger the project, the more time in advance the customers need to communicate with their suppliers, and certainly, equipment suppliers, about what they’re going to need. So we’ll continue to do that. It’s a continuous pipeline of projects, as you can imagine, a continuous pipeline of those conversations. So we have more visibility on those large projects and we feel good about not only our positioning, but the overall demand in the large project area. So we feel really good about that. As far as dirt, certainly, it makes logical sense about dirt being a leading indicator, we’re seeing strength across our portfolio, quite frankly. You saw a 6% gen rent number, and that wouldn’t — couldn’t happen if it was just driven by dirt.

Whether that’s a leading indicator for even more acceleration, we really — I would agree that the pipeline is strong. I wouldn’t really extrapolate those numbers to us because we’re not seeing a separation. But maybe the dealership network is impacting that number as well, which is good. But overall, we feel good about the demand cycle and we feel good about where we are with major projects.

Operator: We’ll go next now to Mike Feniger with Bank of America.

Michael Feniger: I was just hoping, Ted, if you could just talk about ancillary costs, repositioning costs. Just if we think about the bridge, I know this gets a lot of attention, is that pressure intensifying in 2026 versus 2025? How we mark to market with what we’re seeing potentially on the fuel side? And clearly, we’re seeing the cost savings come through and that should build. Does that kind of offset maybe any increases that you’re seeing there if we look at kind of a bridge on the margins for ’26 versus ’25.

William Grace: Yes. There’s a lot to unpack there, Mike, but thanks for the question. So ancillary growth, the relative growth to OER kind of held constant with what we saw last year. And so obviously, a big part of what we focus on strategically is taking care of our customers, and the team is doing a great job there. I would say from the standpoint of thinking about the contribution margin from ancillary, probably very much in line with that 20% we’ve talked about. No appreciable change in the first quarter. And I don’t think we’d be looking for any appreciable change at this point for the year. On the repositioning side, the team did a great job managing across those big 3 cost areas I talked about, and that does very much include delivery.

If you look at our rental results, the rental gross margin was up 50 basis points year-on-year. And again, all 3 of those contributed. But delivery, which is the area where we see kind of the most focus on execution, improved about 10 or 15 basis points as a percent of revenue year-on-year. So a great job given the fact that we did see almost 9% rental revenue growth. When you dig into the details, the biggest portion of repositioning will be and has been in specialty, and you saw that in numbers. They were still probably about 30 basis points behind the curve, but that’s a huge improvement versus what we saw last year. If you think about the drag on margins last year within specialty, it averaged about 150 or 200 basis points year-on-year per quarter.

And now we’re talking about a number that’s probably in the order of 30 basis points. So they’re doing an incredible job managing that, because there is a healthy amount of repositioning this year, we’ve talked about kind of the demand drivers, and we’ve talked about the focus on capital efficiency, fleet efficiency, and that will continue to be the case. On fuel, something we’re obviously monitoring and managing very closely. The majority of our exposure, as you know, Mike, is a pass-through. So that gets managed a couple of different ways, but the delivery calculator is the most obvious one, and that’s something that we update regularly to help pass through kind of the higher costs we could incur based on higher diesel prices. And then on the internally consumed diesel, we manage that through an active hedging program.

So a lot of focus there. The team is doing a great job, and we feel like we’re able to — we should be able to manage through any reasonable situation there. Matt, anything you’d add?

Matthew Flannery: No, I think you covered it well.

Michael Feniger: Great. And Matt, just for my follow-up, I know we talked about rate, I mean there’s been a discussion around competitive dynamics, particularly on the gen rent side and competition there. You mentioned the fleet productivity and rate being a good guy. Are you seeing anything on the ground on maybe intensifying competition on gen rent? Or is this the one-stop shop model that you guys have been building kind of separates you a little bit from maybe some of that competitive intensity? Just curious if you can kind of comment on that.

Matthew Flannery: Yes. I mean I’ve been doing this for 35 years and there’s always somebody that wants what you have, right? So what you need to do is differentiate yourself. And to the end of your point there, we spent a lot of time building a competitive moat around our offering and making sure that we’re targeting our customers’ needs, but also targeting the customers that value that. And we feel really good about where we’re positioned. We think the major project pipeline plays into our opportunity to solve, give more solutions to our customers. So we feel good about our positioning and where we are. And the supply-demand dynamics, as I said earlier, to David’s question, we feel good about the supply-demand dynamics in the industry, and that should continue to drive positive fleet productivity.

Operator: We’ll go next now to Steven Fisher of UBS.

Steven Fisher: Congratulations on the quarter. Just a follow-up on the rest of the year. You mentioned, Ted, that delivery is really going to be one of the key focus areas. Can you just talk about what are the keys to making sure that that works out favorably in the way you want it to? And then in terms of just any other additional inflation for the rest of the year, to what extent do you have an expectation that will be addressed by rate? Or will that remaining $15 million or so of planned cost reductions cover that extra inflation?

Matthew Flannery: Yes, Steve, I’ll take the first part of the delivery because I think it’s important just to understand, we’re not going to eliminate the challenges of repositioning and delivery. The point is to mitigate it. So the good news is we put some new processes in place, and those have worked in Q1. And I think Ted was referring to the challenge in Q2 or Q3, is to continue to do that when the system gets even busier. And we have a lot of focus there. But there still will be repositioning costs. The other cost actions we’ve taken are really to also help mitigate that because we still want to drive capital efficiency. We still want to move fleet versus just buy more fleet when you land new deals. So that will continue to be a focus for us.

So it will be two-pronged. It will be the execution of doing — moving fleet more efficiently as well as making sure any other cost opportunities there to help mitigate supporting that demand are there. So we can continue to run the business to support our customers in an efficient manner. And then, Ted, you could talk to other inflationary items.

William Grace: Yes, Steve. So I’d say outside of fuel, really the year has played out as expected from an inflation standpoint. The areas that we’ve talked the most about, obviously, you’ve got the labor piece, and we’ve been able to manage that really effectively. You can see that in our first quarter results. If you look at the numbers across the business, we got the better part of about 50 basis points of labor absorption. We talked in January about the importance of that. We’re off to a good start. So very pleased there, that even in the face of ongoing inflation on the labor front, we’re getting that kind of pull through. The other areas that continue to be inflationary, we’ve talked about real estate, we’ve talked about insurance being 2 of the other big ones.

Those again were built into the plan that are playing out as expected. So I don’t think there’s anything to point to there. In terms of the $15 million of cost reductions you mentioned, I’m guessing you’re talking about the incremental restructuring expense that we would have called out. So I just want to clarify that, and if that is the case — okay, perfect. So obviously, you would have seen the $45 million of charges we took in the first quarter. For the full year, we’re expecting $55 to $65 million. So at the midpoint, you’d say $60 million. So there’s another $15 million to go. When you look at the first $45 million, about 2/3 of that would have been real estate related. That’s the closure of overlapping facilities that we did in the first quarter.

And the balance, the other 1/3, was head count related. So probably those are the 2 big buckets that we’d be looking at across the rest of the year, although it’s more likely to be real estate, probably in headcount, we’re in a good position, but we’ll have updates there periodically. And all that was built into our expectations. So for the year, just to — I think David had a pretty good estimate of what the first quarter benefit was, around $10 million, for the full year, we’ve estimated that the full year benefit would be on the order of $45 million to $50 million. So that is — that was built into the initial expectations. We’re on track, and you’ll see that kind of come in, in a linear fashion across the balance of the year.

Steven Fisher: That’s perfect. And then just maybe a bigger-picture question about these facility closures. I’m curious about the trade-offs here. I assume these are branches closing. Clearly, you get lower cost. But I guess to what extent have you found ways to mitigate the lost revenues or other benefits from having less branch density? And if you have found ways to mitigate that, is that sort of — is there a broader applicability to your whole footprint or even the whole industry? Or is this a situation where the trade-off, we just needed to lower costs?

Matthew Flannery: Yes. There wasn’t really — the good news is there wasn’t too much of a trade-off here, other than maybe some shop space because we didn’t exit any markets. So no attrition that we’re worried about here. 95% plus of our equipment is delivered. So that consolidation didn’t have a revenue impact. And we really were specific and surgical in doing it in markets where, through acquisitions, we may have held on some extra real estate. And as we looked at it, we just didn’t need it. We still have some headroom even after the consolidation for growth because we do expect to continue to grow. So we’re talking about, in a business of 1,700-plus branches, or let’s just keep it to North America, right, so a little less than that.

we closed a couple of dozen branches. So not a big deal, but it was — it’s a good question because that was one of our points. Let’s not hurt the business. But if we have excess that we don’t need to utilize, let’s not hold on to it. And that’s the way we looked at it.

Operator: We go next now to Jerry Revich of Wells Fargo Securities. .

Jerry Revich: Matt, Ted, I’m wondering if you could just unpack outstanding performance in dollar utilization in the quarter. Saw that accelerated by about 1 point versus normal seasonality, and first quarter tends to be a pretty tough quarter to get rate overall. Can you just unpack the cadence of demand over the course of the quarter? And it sounds like the quarter played out better than what you thought would be when we were together at the end of January for last quarter’s call. Could you just unpack what were the positive demand or pricing variances that you saw over the course of the quarter across gen rent and specialty, if you don’t mind?

Matthew Flannery: Yes. So we won’t get into that last part of the question numerically. But even though we don’t give the components of fleet productivity, let’s be clear, we still focus on it relentlessly at the branch level: capital efficiency to drive high time utilization, and as well as we have a very unique offering, let’s make sure we get paid for it. So we still focus on rate and time at the branch level, we just don’t call it out that way. But as I said earlier, we — this only continues to be a strong focus for us. But the demand that’s out there is another part of this, with the supply-demand dynamics are good. And we’re going to make sure that we utilize that opportunity. As far as the dollar utilization, it’s really an output of that, ted, I don’t know if there’s anything you want to cover specifically on dollar utilization.

William Grace: Yes. I guess you’re doing the imputed version of this, Jerry, but obviously, it comes back to a lot of things Matt talked about. But we’re pleased to build the fleet on rent in the quarter. You can see the rental revenue growth was strong at 8.7%, and we had strong fleet productivity. So it came together, obviously, to support what was a nice improvement in that dollar ut. And another way to express that is the fleet productivity.

Matthew Flannery: Right.

Jerry Revich: And then in terms of just to circle back on the discussion on fleet productivity over the course of the year, and we can look at dollar, as you said, as a proxy for that. So the comps get pretty easy as we head into the back half of ’26 for the industry. And so now that based on the range of industry data, supply-demand having improved, normal pricing on a monthly basis and an upturn does suggest there’s potential for fleet productivity to accelerate significantly over the course of the year. I know it’s early on and things have to fall in place, but I just want to circle back to the earlier comments about north of 1.5% fleet productivity targets. It feels like our exit rate in the first quarter really points to a sharp acceleration as we head through the year, again, if normal seasonality in an up cycle plays out.

Matthew Flannery: Yes. Embedded in our guidance and, frankly, our goal, every year and as we plan with the team is to make sure we overcome that inflation. And in the simplest way, we want to grow rent revenue faster than we grow fleet, right? And it’s not any more complicated than that. We’ll continue to manage that. But the other components of fleet productivity, then rate, there’s a lot of focus on rate. We’ve been running time at a high level. I’m very pleased to say it’s not a headwind for us. But if we get to a point like we did in ’22 where it’s a negative trade-off, then we’ll manage that appropriately. We got to make sure we’re responsive to our customers’ needs. But we think we can do that. We’ve been doing it for years.

Mix is the wildcard, and that’s why we don’t try to predict this. We had no expectation of having 0.5 in Q4. That was all mix related. So outside of that, we feel good about the dynamics to drive positive fleet productivity. And as we get the results, we’ll explain to you guys if it comes out different than we expected, positive or negatively, with the mix dynamic. That’s really the part that’s very hard for us to predict. But we do feel good as embedded in our updated guidance about the opportunity to outpace inflation.

Operator: We’ll go next now to Ken Newman of KeyBanc Capital Markets.

Kenneth Newman: So maybe going back to the inflation piece here. I know there’s been some broader market worries around some of these new Section 232 methodologies, and I’m assuming you’re already protected from any potential surcharges from suppliers just given that you locked in those prices at the end of last year. But when I think about the fact that you are seeing a little bit stronger growth to start the year out, can you maybe just talk a little bit about your ability to maybe accelerate fleet growth if needed? And if you can still be price/cost positive if inflation starts to ramp further from here?

Matthew Flannery: Sure, Ken. Well, as you accurately mentioned, right, we do lock in our prices for the year. And embedded in that, we talk to our key suppliers, but most of our vendors, but about we want the ability to flex up, and we certainly have contractually the ability to flex down, although that certainly doesn’t need — seem to be in our immediate future. But that flexibility and our vendors’ ability to respond to those flexes is a real important part of the relationship we have with our vendors. So we do think if the end market plays out that way and demand continues to outpace our expectation, like it did here in Q1, we certainly have the opportunity to flex it.

Kenneth Newman: And just to clarify on this last question, I mean, are you — again, I mean, I know it’s early in terms of people trying to look through this, but are any of your suppliers coming to you and — or pushing for surcharges at this point? Or is it just still too early?

Matthew Flannery: Well, we don’t talk about our negotiations with our partners, but we are very, very disciplined about sticking to our original deal. So I would — we’re not really — we’re not worried about that.

Kenneth Newman: Makes sense. Okay. And then for the follow-up here, it’s — maybe just talk a little bit about the M&A pipeline. The free cash flow profile still seems pretty strong here. How active is the pipeline versus when we last talked to you a quarter ago? And I’m curious if the macro environment today makes it harder or easier to do deals.

Matthew Flannery: Yes. I wouldn’t say the macro — the pipeline hasn’t changed really over the last couple of years, with the exception of COVID. The deal pipelines remain pretty consistent. The real challenge for us isn’t how many deals to look at, it’s expectations and how many get — of us, of what we expect to do a deal and the returns we expect on a deal and to get that willing dance partner. But there’s no lack of opportunities to look at. And we continue to work the pipeline. We’ve got a great M&A team and business development team. And as you can imagine, we’d lean towards specialty, specifically adding in new products. But we’ll do tuck-ins as well in the gen rent business if it fills a need and gives us capacity in a growing market. So stay tuned. To your point, we have plenty of dry powder and we’ll continue to work the pipeline.

Operator: We’ll go next now to Kyle Menges of Citigroup.

Kyle Menges: Great. Maybe first off, could you talk a little bit about just if you’re seeing anything particularly in local markets? Any early impacts from the geopolitical uncertainty and a fading rate cut theme impacting those markets? And I think you had embedded roughly flat local market growth in your previous guidance. Any change there?

Matthew Flannery: No. We think the local market continues to be stable. It’s — that’s a positive thing, right? Whereas maybe earlier last year, the year before, you were seeing some markets that were still being impacted negatively. But overall, I’d say the local markets stabilized, and that was our expectation. And the project pipeline on the major projects as well as our specialty growth continue to drive some of the growth drivers that we’ve been not only executing on, but that we expected for this year. So we feel good about the end market.

Kyle Menges: Great. That’s helpful. And then certainly a theme that’s had a bit of a resurgence recently is just OEM dealers pushing more into rental or expanding their rental fleets. Just how do you see that impacting competitive dynamics in the industry? And I’m also curious roughly what you think your product overlap is with the typical OEM dealer rental fleet.

Matthew Flannery: Yes, really not much overlap there. It’s something that we’re aware of, and there’s a handful of them around the country that do a good job locally and regionally. But it’s not something that, in our competitive dynamics or if we were doing a competitive analysis, really doesn’t fall high on our radar, unless maybe in a specific local market’s competitive analysis. So nothing there really to talk about from our perspective.

Operator: We’ll go next now to Angel Castillo with Morgan Stanley.

Angel Castillo Malpica: Congrats on a strong quarter here. Just hoping to go back to the M&A question, but maybe a little bit backward-looking. Could you just talk a little bit about, I think, the $700 million — roughly $700-ish million in acquisitions you’ve done over the last 2 quarters? Just any color on what those assets are? How much they may be contributing to sales? And just any details you can share on those? I guess, in particular, I’m trying to understand if you think about kind of gen rent and specialty organic versus inorganic split this quarter and kind of the expectation, for how much maybe was already baked into the guide versus maybe how much might be partly driving that revenue increase? Just trying to understand the bits and pieces there, and any impact to that or your business on dollar utilization would also be helpful.

Matthew Flannery: Yes. Sure, Angel. So on the M&A piece, as you saw, we spent about $400 million in the first quarter, slightly less than that. Those were 4 small deals, the majority of which, 2 of them, the 2 larger ones, were done in the first week of January. So those were already embedded in our guidance. So you’re talking about a small amount of impact on the rest of the year for those other 2. And then when you think about deals over the course of all of last year and this year, we’re talking about like 1% of revenue growth. So not a huge number, but still, strategically, things that we decided to do. So to answer the latter part of that question, not a — a contributor in some way, but not the reason for our beat or for our updated guidance. And Ted, anything you have to add?

William Grace: The last piece on the impact on dollar ut, I think, very de minimis. I mean to Matt’s point, it was a handful of small acquisitions, none of which obviously are even collectively are going to move the needle in any appreciable manner.

Angel Castillo Malpica: Very helpful. And then I wanted to go back to the demand question. You talked about seeing I guess, in the mega projects area continuing to see, I guess, strength and things coming in maybe a little bit better than you had expected, as well as strengthening some of the end markets. Could you just give us a little bit more color on kind of the various key end markets, how you’re seeing that play out? Any particular pockets where you saw a little bit more strength than you had anticipated than the seasonality? And whether that was projects moving faster, weather allowing it or just perhaps your execution, win rates coming in better than you had anticipated? Just trying to understand, I guess, the underlying demand side versus maybe some more idiosyncratic, again, URI execution, win rate type of things?

Matthew Flannery: Well, I think the large project pipeline has been talked about pretty broadly. And everybody, certainly, data center has been a big part of that and everybody focuses on that. But as I said in my opening remarks, it’s a lot broader than just data centers. And non-res construction overall, even ex data centers, is still really strong. So the growth in non-res is pretty broad. And then when I think about the other end markets that have added to growth, I talked a little bit in my opening remarks about infrastructure, and power continues to grow at double digits. So power has been a really strong end market that we’ve been focused on for a while now. So those are really what the drivers are. And then when you think about — this is without petrochem really picking up yet.

That’s still a bit of a drag on a year-over-year basis. So we think the project pipeline and then the opportunity in petrochem to pick up will continue to give us growth for the foreseeable future.

Operator: We’ll go next now to Tami Zakaria of JPMorgan.

Tami Zakaria: Congrats on the great results. I’m curious about the World Cup that you mentioned, should we model a sizable maybe onetime tailwind from that in the second quarter? And related to that, do you expect the event to drive demand for both specialty and gen rent or one or the other?

Matthew Flannery: Tami, in the scale of our company, I wouldn’t model anything extra for the World Cup. It’s already been embedded in our guidance. As you can imagine, for large events like that, we knew before the year started that — what we were going to need to support those folks with. But in the scale of our business, there’s not any 1 project or event that’s going to make a meaningful difference. That’s a great part of having such a broad portfolio. I hope that answers your question.

Tami Zakaria: It does. And a quick one, the $100 million increased gross CapEx, is that driven by general rental or specialty?

Matthew Flannery: Across the portfolio. Now specialty is growing at a faster clip, so — and we did 17 cold starts. So it’s always going to have a little bit more of our outweighted growth CapEx to support those cold starts and the growth. But we’re also going to spend some money on some gen rent products that are tight, specifically for some major project support. And so it will be spread across the portfolio with a little more heavyweight specialty.

Operator: We’ll go next to Tim Thein of Raymond James.

Timothy Thein: The first question, just a follow-up on the delivery cost recovery. I’m just curious, Matt, if you could maybe speak to how the company is positioned today versus, we look back at historical periods when diesel and flatbed trucking rates really spiked, just how the company has evolved in terms of — it’s been some years we’ve talked about some of the tools that you guys have had built out. So maybe just is there a way to kind of handicap just in terms of how you, again, position today versus how maybe it would have been different in years past when we look at those periods of higher cost inflation?

William Grace: Yes. Tim, I can start there and then Matt can definitely fill in some more blanks. But obviously, we’ve long focused on costs and certainly making sure that we’re managing delivery effectively. So I think if you were to look at analogous periods, 2022 would probably be the first one that comes to mind in terms of a year where you saw a meaningful increase in diesel prices, and you could say what happened in that episode. So on-highway diesel prices increased over 50% in 2022 year-on-year. If you were to look at the impact that had on our fuel line, it would have been probably like a 15 basis point increase as a percent of revenue. And so you can see it’s something that is — was highly managed at that point. Delivery costs on the whole moved in a similar amount.

And I think if you were to look at our margins in 22 ex used, they increased considerably. So not that you can draw parallels between every period, but certainly, I think it serves as a good example of our ability to manage through these kinds of environments pretty effectively. Matt, anything you’d add there?

Matthew Flannery: No. No, I think you covered it well.

Timothy Thein: Okay. Then just on the specialty segment, so the revenue is up, I think, call it, 14% year-over-year. If I look at the ending asset base, which maybe wrongfully using as a proxy for OEC, but it was up like 16%. And so I’m just — my assumption has been that specialty tends to generate higher levels of asset efficiency, which I’m sure you would endorse. So I’m just kind of struggling with why that — I would have thought that relationship would have been a bit different. Is there something within that that maybe you would call out? I’m just trying to think through why you wouldn’t see higher level of revenue relative to the investment in that business. Hopefully, that makes sense.

William Grace: Yes. Well, I’d say intuitively, your assumption is correct that you do tend to get stronger dollar in those assets. and you can see that productivity historically. Truthfully, I’ll need to come back to you on that. I’m guessing it’s probably a function of timing, but I can’t think of anything on an underlying basis that would have turned that relationship upside down. So if it’s okay, Tim, I’ll come back to you on that.

Operator: We’ll go next now to Jamie Cook with Truist Securities.

Jamie Cook: Congrats on a nice quarter. I guess first question, Ted, it was the first quarter in a while I think we’ve seen the gen rent margins improve year-on-year. So any way — I mean, should we — how should we think about the gen rent margins as we progress throughout the year? Is there any reason why the first quarter was an anomaly? And then I guess my second question, obviously, the first quarter came in better than expected. I know there was that pipeline job that had a softer start in the fourth quarter. I’m just wondering how that job is going, whether the first quarter outperformance is because that job restarted and potentially there’s a catch-up in whatever we saw in the first quarter then for that reason isn’t sustainable too, because it’s like you raised your guidance, but you raised it by the beat or sort of less than the beat. So just trying to work through that.

William Grace: Sure. So I’ll start off, and Matt, please jump in. In terms of the rest of your gen rent margin, we don’t provide kind of segment margins, as you know. We talked about the focus the team had starting in January on both sides of the business. But you asked about gen rent, and they really delivered, right? If you look at that gen rent gross — rental gross margin being up 150 basis points, it was roughly equal contribution from labor, delivery and leveraging depreciation. And within that, still R&M was a positive. So the team really did a great job. And that will continue to be the focus. As I think we talked about earlier, the key will be sustaining a lot of this through the second quarter and delivery being kind of the one that will take probably the most focus.

So if you look at that in the first quarter in gen rent, that was about 50 basis points of leverage. The team did a great job. We’ve got to sustain that through the busy part of the season as we get deeper in the year. But what I would say on the whole, as we’ve talked about, the goal is flat margins for the full year. excluding the H&E benefit from last year. That’s on an EBITDA basis, so it’s across the business. Certainly, our goal across both segments would be to perform very well. So that was the first part. On the second part, the matting project that we talked about in January that affected the fourth quarter from a timing perspective, we’ve been delivering assets to that project. It has not entirely kicked off yet, but we’ve been mobilized.

With that said, as we talked about in the fourth quarter, matting was down year-on-year in the fourth quarter. It was not — it was up in the first quarter. And so that obviously was a big factor in the swing of fleet productivity that Matt talked about, that headwind we absorbed in the fourth quarter, just as a function of the timing of that start that we thought would have been in 4Q, ended up it will be 2Q. And then as it relates to, I think, the follow-through of the quarter, hard for us to speak to anybody’s external expectations. If you think about the $100 million revision to revenue and the $50 million to EBITDA, part of that was by the first quarter being a little stronger. You can see that we raised CapEx, so obviously, that’s going to contribute after the first quarter.

But we’re off to a great start. We feel really good about where we’re heading. And those are the 2 big components within that revision. Matt, anything I missed or you’d add?

Matthew Flannery: No, you covered it well.

William Grace: Jamie, did I miss anything in there?

Jamie Cook: No, I’m good.

Operator: We’ll go next now to Steve Ramsey of Thompson Research Group.

Steven Ramsey: On time utilization holding or being a positive, would you say that’s mega project driven slowly? Or would you say that local market stabilizing kind of any breakout on time utilization drivers?

Matthew Flannery: I mean it’s everything, right? Because it’s about having the right fleet in the right places for where demand is showing up. So it’s good planning. It’s good discipline, about only bringing in equipment when you need it, from the branch managers and the district managers out there. So I’d say it’s across the whole portfolio. We couldn’t drive this level of time utilization from just one or the other end market sector. So it’s across the board, Steve.

Operator: We’ll go next now to Scott Schneeberger of Oppenheimer.

Scott Schneeberger: A couple of questions. One on just following up on the branches and, Matt, some of the things you’re saying earlier. Just to get a little more clear, was it more gen rent, more specialty? I inferred specialty from the commentary, but just a little bit more clarity. And your — I think you’ve said you’re going to do fewer cold starts this year than last year. And following up on Steven Fisher’s question of your answer there, what is kind of the strategy? Can you do more with less or will we see in kind of out-years a reacceleration of the cold starts?

Matthew Flannery: Sure, Scott. So on the first part about the branch closures, it actually wasn’t more specialty. And if you think about that, it’s a lot of the — it was split pretty much across the portfolio. But as you think about the acquisitions we did, we just held on to some of those Ahern facilities maybe longer than we needed to as we were going through that integration. And I would think about things like that, and then some of the smaller deals that maybe you guys don’t get a visibility to. So you want to work your way through it. We don’t buy companies for cost-cutting measures. We buy them to help support growth. And sometimes we hold on to that real estate and find out in the long term we don’t need it all. And so it’s a couple of dozen branches and against a huge portfolio.

So not to make too much about it, but it was very surgically viewed and no risk of revenue there. We wouldn’t have closed one if there was risk of revenue. And then as far as on the cold starts, we did 17 in the quarter. I think we had — in January, said we were targeting around 40. There’s a continual pipeline of that. If the team gets ahead of schedule and ahead of that pipeline, we’ll raise the number as we go. But I wouldn’t say that there’s any change in how we’re viewing the opportunities. It’s just a matter of the execution, of finding the real estate, finding the people, but there’s a pipeline for each one of the specialty businesses about where there are opportunities to grow and where the other markets they’d like to get into. And we just work through that in a very methodical manner.

Scott Schneeberger: Great. I appreciate that incremental clarification. My follow-up is just on the smaller projects, smaller customers, a lot of talk on this call about a lot of demand activity with the large. Curious what you’re seeing and hearing from the smaller customers on their environment.

Matthew Flannery: Yes. I think they feel good about the end markets. It’s just, in general, I would say it’s about where our expectations were, that, as an aggregate, the local market business has stabilized. We’re not — we don’t see many markets where there’s negative growth or we need to pull fleet out of because their local market is not going to be able to absorb it and they don’t have a lot of projects. So we feel good about that across the board. I would continue to call that stable, which is consistent with what our expectations were for the year.

Operator: And gentlemen, it appears we have no further questions this morning. Mr. Flannery, I’ll turn things back to you, sir, for any closing comments.

Matthew Flannery: Thank you, operator, and thanks to everyone on the call. We appreciate your time today and I’m glad you could join us. Our Q1 investor deck has the latest updates. And as always, Elizabeth is available to answer your questions. So look forward to speaking to you all in July. And until then, please stay safe. Operator, please end the call. Thanks.

Operator: Thank you, Mr. Flannery. Thank you, Mr. Grace. Again, ladies and gentlemen, this brings us to the end of today’s meeting. We appreciate your time and participation. You may now disconnect.

Receive real-time insider trading and news alerts