United Rentals [URI] Conference call transcript for 2022 q4
2023-01-26 14:44:04
Fiscal: 2022 q4
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 companyâs press release, comments made on todayâs call and responses to your questions contain forward-looking statements. The companyâs 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 companyâs press release. For a complete description of these and other possible risks, please refer to the companyâs annual report on Form 10-K for the year ended December 31, 2022, and as well as to subsequent filings with the SEC. You can access these filings on the companyâs 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 companyâs press release and todayâs 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 companyâs 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.
Matt Flannery: Thank you, operator, and good morning everyone. Thanks for joining our call. Yesterday we reported record fourth quarter results to cap the best full-year financial performance in our history. And we definitely raised the bar in 2022 and we intend to raise it again in 2023. Weâre moving forward with a larger sales and service team, a more expansive footprint and a fleet thatâs significantly larger than a year ago, and thatâs a lot of tailwind at our back in another year of high demand. And Iâll start with a recap of fourth quarter results, which kept us on a strong trajectory. We grew both rental revenue and total revenue by a solid 19% compared with fourth quarter last year. And we grew adjusted EBITDA by 26% with a 280 basis point improvement in margin, and that brought our margin to 50% in the quarter, and that came in at a very strong flow through of 65%. We also continued to generate significant cash. For the full year, we delivered $1.76 billion of free cash flow, and thatâs after investing over $3.4 billion in fleet. And none of this would have been possible without our people. First off, as you know, our top priority is always safety. And our team delivered another first-class recordable rate in 2022 in a year when we onboarded over 6,000 new employees. On the financial side, you can look at every metric I just mentioned and see the quality of Team United behind the result. For example, our revenue growth comes from keeping our customers front and center in the field. Our people are laser-focused on helping our customers succeed. And our flow-through comes from the teamâs ability to leverage our growth and maintain good cost discipline. Inflation was a factor, but that didnât stop us from delivering very good margins. We also reported a record return on invested capital of 12.7% at year-end. And on the ESG front, we made good progress with sustainability, including new investments in zero-emission vehicles and fleet. And the customer adoption of our new emissions tracking tool has been excellent. This is the technology we launched on our total control platform, and itâs an industry first. Another highlight of the quarter was the Ahern acquisition, and Iâm pleased to say the integration is going very well. We closed the deal on December 7. And then by the 16th, our new team members were already operating with the rest of the company on the same technology system. And this means our branches are sharing fleet and customer information seamlessly. One of the main reasons we like M&A is the capacity we gain. And that comes in three forms: people, fleet and facilities. And we always focus on the people first, because itâs critical to get that right. And weâre really bullish about the talent we onboarded in this acquisition. We had over 100 of the Ahern managers at our Annual Meeting earlier this month, and they fit like a hand in glove. And theyâre excited to be part of United and theyâre raring to go. Now weâre focused on optimizing the fleet and facilities. Weâre running on schedule, and itâs boosting our resources at an ideal time to capture share. The diversity of demand that we pointed to a year ago turned out to be a major tailwind in our operating environment, and that continues to be true. And Iâll share some fourth quarter data to underscore how we translated this opportunity into top-line growth. Demand in our key verticals was broad-based, with total construction up 19% year-over-year and non-res up 22%; and industrial, up 11%. We leaned into that opportunity across the board and grew rental revenue by solid double digits in all of our gen rent regions as well as all of our specialty businesses. Our specialty segment delivered another strong performance with an 18% increase in rental revenue year-over-year. And itâs notable that every line of business in that segment reported solid gain led by our mobile storage business. Our greenfield investments in specialty are highly strategic and theyâre targeted by geography and line of business to generate attractive returns. And we opened 35 of these locations in the past 12 months, and our plan calls for at least another 40 cold starts in 2023. So that brings us to 2023. So there are plenty of reasons to feel confident about our operating environment. We have terrific internal and external momentum with good visibility into revenue. And the teamâs done a great job of driving strong fleet productivity to help offset the cost inflation weâve experienced. Contractor backlogs are growing, and not surprisingly, the employment reports indicate that U.S. contractors continue to be in expansion mode. Industry indicators like Dodge Momentum Index show healthy growth trends in commercial construction, and this includes the planning trends for future projects. Thereâs also a strong institutional component to the trends which we see in our business. And a number of our multi-year projects are in sectors like healthcare and education. And the industrial indicators like the PMI still have room for improvement. But the construction activity and manufacturingâs going strong. Weâre winning business on a wide range of new plant construction including automotive and batteries, semiconductors and petrochem. And importantly, our own survey shows that customer sentiment remains strong with the majority of our customers point to growth over the next 12 months. One final indicator of market strength and an important one was at our annual management meeting. We had over 2,000 field leaders with us in Houston two weeks ago, and their take was extremely positive. And Iâm throwing that into the mix because this is coming directly from people on the front lines. We took all this into consideration when we developed our 2023 guidance. And as you saw yesterday, we expect our revenue and adjusted EBITDA to hit new high water marks, including free cash flow of more than $2.1 billion, while our return on invested capital should be another milestone for us. In addition to the capacity we carried into January, we plan to invest more than $3.4 billion in gross CapEx this year. And at the same time, weâll continue to take advantage of a strong used equipment market to optimize our fleet. Longer-term outlook for our industry continues to be very favorable driven by several tailwinds that we believe are largely independent of macro conditions. And weâve talked about these before, things like infrastructure spending, the Inflation Reduction Act and the return of manufacturing to North America as well as investments in both energy and power. Now, before I wrap up, I want to mention two important announcements we made yesterday regarding capital allocation. First off, weâre reactivating the $1.25 billion share repurchase program that we pause when we announce the Ahern deal. We plan to buy back $1 billion of stock this year. And weâll also be instituting quarterly dividends for our shareholders, totaling $5.92 per share this year. These two decisions underscore our confidence in the durability of our cash generation and the strength of our balance sheet. And together, theyâll return $1.4 billion of capital to our shareholders in 2023. So to come full circle, 2022 was a demand environment that through the door wide open for a record year and we ran with it. But to quote Babe Ruth, we also know that yesterdayâs home runs donât win tomorrowâs games. So now itâs onwards and upwards. 2023 is officially the start of the next quarter century in business for United Rentals, and by all accounts, this will be another memorable year. So with that, Iâll ask Ted to cover the results and then weâll go to Q&A. Ted, over to you.
Ted Grace: Thanks, Matt, and good morning, everyone. As you saw in the results we reported last night, the team did a great job delivering across the board, both in the quarter and for the full year. And importantly, as you can see in our guidance, we expect these trends to continue in 2023. Combined with the enhancements to our capital allocation strategy that weâve announced this quarter, we are confident that we will continue to drive meaningful long-term value creation for our shareholders. Iâll dig into this more in a bit, but first, letâs dive into the quarter. Fourth quarter rental revenue was a record $2.74 billion. Thatâs an increase of $435 million or nearly 19% year-over-year. Within rental revenue, OER increased by $354 million or 18.6%. Our fleet average â our average fleet size increased by 14.2%, which provided a $270 million benefit to revenue and fleet productivity increased by healthy 5.9%, which added another $113 million. This was partially offset by our usual fleet inflation of 1.5% or roughly $29 million. Also within rental, ancillary revenues were higher by $81 million or 23.1% year-over-year. While re-rent was essentially flat. Outside of rental, fourth quarter used sales increased by roughly 26% to $409 million as we sold some fleet weâve held back on selling earlier in the year. To help accomplish this, we brought in our channel mix for used sales in Q4 to something closer to normalized levels. The net of this was our adjusted use margins increased by 940 basis points year-over-year to 61.6% supported by strong pricing. Letâs move to EBITDA. Adjusted EBITDA for the quarter was $1.65 billion, another record and an increase of $338 million or 25.8% year-on-year. The dollar change included a $291 million increase from rental within, which OER contributed $256 million. Ancillary added $34 million and re-rent was up $1 million. Outside of rental, used sales added about $83 million to adjusted EBITDA, while other non-rental lines of businesses contributed another $18 million. SG&A was a $54 million headwind to adjusted EBITDA due primarily to higher commissions and the continued normalization of certain discretionary costs. As a percentage of sales, however, SG&A was down slightly year-over-year. Looking at fourth quarter profitability, our adjusted EBITDA margin increased 280 basis points to 50.0%. Excluding the benefit of used sales, flow-through was in line with recent quarters at a healthy 59%. Iâll add that within the fourth quarter results, in the roughly three weeks we owned Ahern, the business contributed about $54 million of total revenue, the vast majority of which was rental and roughly $20 million of EBITDA. And finally, fourth quarter adjusted EPS was $9.74 per share. Thatâs an increase of $2.35 per share or almost 32% year-on-year. Turning to CapEx. Fourth quarter gross rental CapEx was $980 million, and net rental CapEx was $571 million. This represents an increase of $205 million in net CapEx year-over-year, which positions us well for the growth we see in 2023. Now, letâs look at return on invested capital and free cash flow. ROIC was another highlight at a record 12.7% on a trailing 12-month basis. Thatâs up 50 basis points sequentially and an increase of 240 basis points year-on-year. Free cash flow also continues to be very strong, with the year coming in at $1.76 billion or a free cash margin of better than 15%, all while continuing to fund growth. Turning to the balance sheet. Our leverage ratio at the end of the quarter was 2.0 times on an as-reported basis, including the impact of the Ahern acquisition. More importantly, on a pro forma basis, our year-end leverage ratio was flat sequentially at 1.9 times. And finally, our liquidity at the end of the quarter was a very robust $2.9 billion with no long-term note maturities until 2027. Now, letâs look forward and talk about our 2023 guidance. Total revenue is expected in the range of $13.7 billion to $14.2 billion, implying full year growth of about 20% at midpoint and pro forma growth of roughly 12%. This increase is supported by the momentum weâve carried into the New Year, particularly within rental revenue and the contribution from Ahern. Within total revenue, Iâll note that our used sales guidance is implied at $1.3 billion, with the expectation that weâll sell roughly $2 billion of OEC. This 35% increase in used sales year-over-year primarily reflects two things. First, is the normalization of our used sales as the supply chain continues to improve. And second, a substantially larger fleet, including the addition of Ahern to our business. We remain focused on efficiently converting this growth to our bottom line. Our adjusted EBITDA range is $6.6 billion to $6.85 billion. On an as-reported basis, including the impact of Ahern, at midpoint, this implies roughly flat full year adjusted EBITDA margins and flow-through of about 48%. On a pro forma basis, however, which we think is the more appropriate way to think about it, our guidance would imply at roughly 80 basis points of margin expansion and flow through in the mid-50s. On the fleet side, our initial gross CapEx guidance is $3.3 billion to $3.55 billion, with net CapEx of $2 billion to $2.25 billion. And finally, our free cash guidance is $2.1 billion to $2.35 billion. To be clear, this is before dividends and repurchases. Assuming these two factors are a use of cash of roughly $1.4 billion that leaves $825 million of remaining free cash flow to fund additional growth or reduce net debt. Now before we go to Q&A, I want to make some additional comments on our updated capital allocation strategy. Specifically around our plans to return excess cash to our investors. As you heard Matt say, we are very pleased to be adding a dividend program to our mix. Based on an initial yield of 1.5%, we expect to pay $5.92 in dividends per share in 2023. This will translate to approximately $400 million this year or roughly 18% of free cash flow. We expect that our first quarterly dividend payment of $1.48 will be made on February 22, with all four payments expected within the calendar year. Following the transformation of the company over the last decade or so, we feel that itâs the appropriate time to add this last element to our capital return strategy to help drive greater shareholder value. Not only will this help expand the universe of potential investors, we expect that it will also provide another means of enhancing total returns for our investors over time. It also reflects the confidence we have in our operating model to consistently generate considerable excess free cash flow after investing in growth. Weâre also very pleased to announce the restart of our share repurchase program, which we paused in November with the announcement of Ahern. The restart is probably a bit ahead of schedule, but the integration is off to a great start and the decision is well supported by the financial performance we expect this year. Itâs our intention to repurchase $1 billion of the $1.25 billion authorization in calendar 2023. As Matt said, these two programs combined, should return approximately $1.4 billion to our shareholders this year or about $20 per share at the same time that we continue to see substantial growth in our earnings. Finally, I want to be clear that these announcements are being made in the context of our continued commitment to a disciplined balance sheet strategy. Our financial strength has served the company and its shareholders very well, and weâre not planning any changes there. So with that, weâll turn to Q&A. Operator, could you please open the line?
Operator: Weâll take our first question from David Raso with Evercore ISI.
David Raso: Hi, thank you for the time. Two questions. One, where thereâs some worry by investors and another where thereâs a clear cementing of a structural improvement on peopleâs minds about the business model. First, in the area of , equipment availability, I think, Matt, you had mentioned earlier about maybe taking some market share this year. Can you let us know what youâre seeing and hearing regarding competitors and even include OEM dealers, rental fleets in this comment? What are you hearing about their incremental ability to get equipment? What are you hearing about their adding fleet for the year? Just the overall availability from that side? And what are your equipment suppliers suggesting about increased availability versus last year? And Iâll follow up the other question.
Matt Flannery: Yes, sure. So we â itâs still a tight market. Iâm hoping it will be a little better as far as delivery slots than we got last year. But we donât expect the supply chain to be fully back to normal this year, maybe to the back half, but to be fair, I thought maybe the back half of last year would have and we still saw slippage. There are some niche products that are being quoted out to 2024. Now thatâs the exception, not the rule. But I think that that kind of underlies another year of some supply chain challenges. And weâre mitigating that by, as you saw, we brought in some fleet in Q4, and youâll probably see us do a little bit more in Q1 than usual to make sure weâre ready for the build season. And then from there, weâll adjust according to demand appropriately. So, I think there will still be a little bit of a challenge. I think our vendors work hard, David, to get us a fleet they did in 2022, and we think theyâll work hard to get this number. Iâm not seeing a remedy to the supply chain challenges.
David Raso: Yes. Can I asked one question related to what you just said the first quarter, a little larger than normal. Iâm just curious, just the cadence for the CapEx for the year, Iâm talking gross, the 3.425 midpoint. Can you give us some sense of cadence is â I know you pulled forward, but on the idea of roughly flat gross for the year. Is the down quarter more the fourth quarter because of the pull forward in the fourth quarter?
Matt Flannery: Thatâs our expectation as we sit here today, David. What I really wanted to refer to is youâll prop because itâs the one that we feel pretty sure of is that youâll probably see us do more about 20% of our capital spend here in Q1 as opposed to maybe in a standard year, it would be 12% to 15%. And that pull forward is really just to get ready for the spring season, and making sure specifically in these high time categories that have been the most challenged in the supply chain that weâre ready to respond to the customers. Is that really what I was referring to as far as the cadence for the rest of the year, Q2 and Q3 really will depend on how fast weâre absorbing the fleet that we brought in as well as how well weâre doing with the Ahernâs fleet. So, weâll adjust as we had the past three years accordingly.
David Raso: Itâs pretty interesting. Thatâs taking about $1.6 billion of fleet in the fourth quarter and the first quarter when you combine the two. I assume youâre seeing project backlogs that are really focused on we need this equipment for certain projects. This is not a presumption of demand? I mean, is that just a pretty big first quarter number to follow the fourth quarter, is thatâ¦
Matt Flannery: Yes, it absolutely David. And that is because we see the underlying demand, and weâve talked a lot, right, in the last quarter as well about the mega projects. So theyâll require a lot of this high time utilization assets. Additionally, weâll also get more to a more normal cadence of used sales than we have. We held back, and we hope we donât have through this year. Weâre planning on selling about 35% more use sales to get back to a normal fleet rotation. So that some of that capital will be to make sure that we have the ability to sell, and we donât have the team losing confidence in their ability to rotate fleet out so that we can still meet demand.
David Raso: Just a strong â obviously, youâre seeing very strong demand in the year is going to start very strongly with that much fleet over the six months even with the used sales as well. Second question. So if we do the dividend, we do the repo if you look at the guide, it implies net debt-to-EBITDA at the end of the year at 1.55 , which is almost a half turn below the low end of your range. Can you give us a sense of the capital allocation, how we should think about that? Where would you be comfortable with the leverage? Or should we think of it as you want to get the leverage back to the low end of the range and thus, M&A?
Ted Grace: David, this is Ted. Iâll take that one. Thereâs no change to that longer-term framework weâve provided of two times to three times being that optimal level. Weâd always said there was nothing religious about the low end. And so living there for some amount of time to us is something that is consistent with what weâve articulated. The idea really would be the kind of stockpile dry powder for potential growth opportunities. If we were to kind of decide to live in a different ZIP code entirely, we would certainly update â the Street. But certainly for the immediate future, weâre comfortable at these levels.
David Raso: I appreciate it guys. Thanks for the time.
Ted Grace: Thanks, David.
Operator: Thank you. Our next question comes from Steven Fisher of UBS.
Steven Fisher: Thanks. Good morning. So just, Iâm curious how the fleet productivity you reported in Q4? How did that compare to what you thought you could do going in some of the investors we chat with kind of seem to note the moderation in fleet productivity as the year progressed. I guess, whatâs the message you want to give to them about how they should think about sort of lower level of fleet productivity in 2023? Is it just more that itâs settling into a more normalized level, still above your hurdle rate, but just kind of moving beyond these unusual dynamics of utilization and inflation in 2021 and 2022 and itâs just sort of steadily into a more normalized path. Is that what message you would give? Or how would you frame that?
Matt Flannery: I think thatâs â first of all, this is an output, right? So, weâre going to manage the heck out of rate and time even though we donât report it out individually. And Iâm very pleased that the whole industry is doing that, and we see the discipline shown in the industry from that perspective. But I think the way you characterize it is fair, we were pleased with our Q4 fleet productivity. It was what we expected. And just for clarity for those that may not have picked it up, the 5.9% as reported when you take out Ahern, that would be 6.5%. So thatâs about three weeks of Ahern built into the fourth quarter. So, we will report next year fleet productivity on as reported and on a pro forma basis, so you could see that impact. And what weâll really be focused on is making sure we take the entirety of the fleet and drive more value out of it. And any time this number exceeds our threshold we expect to comfortably do next year will â thatâs a net gain. And weâll be measuring that on a pro forma basis for you see what weâre doing with the Ahern fleet against their baseline as well.
Steven Fisher: Okay. And then Iâm wondering about the general cadence of project activity that you expect during the year and where you are with these large projects. Obviously, you talked about taking all the extra CapEx more front-end loaded. I guess Iâm wondering how you compare whatâs in the â still in the planning stages on these large projects compared to what you have on rent at the moment because there are some investors that, I think your business is slowing down, but Iâm wondering if thereâs actually â if youâre seeing more large projects in the planning stages than whatâs on rent, Iâm wondering if that could actually lead to some type of acceleration as the next year or two plays out?
Matt Flannery: Yes. Weâll stay away from quarterly cadence, but obviously, it gets held by our pulp that we expect to need more fleet come the spring build up. Weâre not â Q1 is always going to be the slowest quarter seasonally, but we see strong demand here today, and we expect that to continue to ramp up from big projects. And then once you really get to the peak season, once you get past May, June and even all the local market stuff starts popping. So when you hear about this pull forward, we donât feel the fleet that we would normally have had ready is going to be enough when we get to the real build season in April. And thatâs really more what that pretends to be in Q1, isnât really the focus, the focus in is, are we going to be ready for the build, all these projects that are scratching dirt or coming out of the ground that weâre going to need, weâre going to need to mobilize fleet for in the spring.
Steven Fisher: Okay. Just a quick clarification, if I could. Whatâs the embedded flow-through that you have on the Ahern business in 2023? And compared to 2022, you got a 55% pro forma for legacy or? Whatâs the Ahern flow through?
Matt Flannery: Yes. Steve, that one is harder to speak to just because of the way we integrate acquisitions, especially in gen rent, and thatâs why itâs easier to frame as a function of pro forma. So I think you hit the nail on the head, certainly as reported, flow-through would look like 48 â or excuse me, as reported looks like 48% pro forma 55%, but itâs hard to kind of discretely break apart the businesses. The one thing I would note, just to remind people of, we do think weâll achieve about $30 million of the cost savings out of the $40 million we talked about. So we can certainly share that. Yes, in 2023, weâll hold $40 million, but we only get about $30 million of it in 2023 as to our expectations.
Operator: Thank you. Our next question comes from Rob Wertheimer with Melius Research.
Rob Wertheimer: Hi, thanks. Good morning everybody. I wanted to kind of circle back to the demand side or at least the end market support thatâs out there in the short and the long-term. And so if you look at the dynamics, I guess, we have the mega projects that people talk about you have the fear or the risk that rising interest rates and the potential recession will cause project delays or cancellations? And then you have the infrastructure bill, which is kind of different from some of the chips and semiconductors and stuff that will flow in. So, I wonder if you could level set us on those. Are you seeing any delays, cancellations, et cetera? The mega projects I assume are flowing in? And are you seeing any of the infrastructure bill starting to flow? And I assume thereâs pretty good duration on some of the stuff. So, I wonder if you have any comments on what your visibility is now versus past errors in the history.
Matt Flannery: Yes. Sure, Rob. So broadly, weâre â we believe that these â many of these projects are not macro relining. You heard me say that in our opening comments, and weâre talking about the type of mega projects weâre talking about. We feel really good about that. As far as infrastructure, weâve been saying all along, we expected this to be a 2023 event, and Iâm pleased to say that we are seeing projects coming out of the ground and projects that are taking fleet as we speak. Mostly, youâre think looking at bridges, airports, whether it be expansions or remodels. So weâre pleased, and we think that will carry out and accelerate through this year and beyond, right, be a multiyear event. So, weâre very pleased with that. Ted, I donât know if you had anything to add?
Ted Grace: Yes. No. I mean we really have not seen anything along those lines, Rob. Probably the one area where maybe weâve seen some delays just as weâve talked about it, has been more in the alternative power side, and I think thereâs been some stuff written about this publicly. Solar has had some supply chain issues. And within wind, weâve seen a couple of permitting issues. All that said, our Power business in the quarter was up about 9%. And for the year, weâre up about 10%. So while weâre seeing kind of reports that youâre seeing delays on project starts. That business for us has continued to be very robust. And just for clarity on the broadness that weâve been talking about, right, in just the mega projects, the mega projects are really the kicker, while you hear us this strong tone and guidance that weâre coming out with, but we have seen this breadth growth throughout all geographies. So itâs not mega project reliant, but theyâre kind of a kicker that maybe could offset if the commercial retail is going to drop or you think office space is going to drop. So we really feel that the balance is appropriate for this type of guide and the bullishness â you here in October.
Rob Wertheimer: And just to clarify on that, I was going to ask anyway, but we all talk construction, you have a lot of non-construction verticals youâre seeing strength kind of throughout the industrial side?
Matt Flannery: We are, yes. I mean if you really go through all the verticals with the exception of midstream, which throughout the years, youâve been the only vertical down for us, everything is up and even though the rate of change across those verticals has been negligible. I mean, itâs really been very consistent across the year.
Rob Wertheimer: Perfect. Thank you.
Matt Flannery: Thanks, Rob.
Operator: Thank you. Our next question comes from Seth Weber with Wells Fargo.
Seth Weber: Hey guys. Good morning. You guys are obviously planning to sell a lot more fleet used fleet this year. And Matt, I think I heard you reference something about a broad mix or something different channel mix or whatnot. Can you just give us some more details on what your â kind of how youâre selling this used fleet? I mean thereâs obviously some concerns about used pricing starting kind of rolling over. And what your expectations are? Whatâs embedded in your expectations for used equipment pricing for 2023? Thanks.
Matt Flannery: Sure. So, we feel good about the end market including pricing. Weâll fall off the historic eyes that weâve set over the last two years, maybe a little bit, but weâll find out. And I think one of the things weâre going see is that the increase of replacement capital costs could definitely have a halo effect on used pricing. But when we think about what channels weâre going to open up is what we were talking about, weâve been strictly or 90% retail all the way in the first three quarters of 2022. And then you saw we lose it up a little bit to get â to do some more volume in Q4. And that wasnât because there werenât options; it was to retain fleet to rent. Because we â the supply chain just wasnât getting fleet to us fast enough for our customers. Weâre hoping our expectation is that we can go back to a more normalized channel mix in 2023, and thatâs whatâs embedded in our guidance. So, weâll open up the broker chain. Weâll do some trades. We probably wonât do much auction unless you have something thatâs really in this repair. Weâre not really a big auction player. But just opening up that channel mix over and above the retail, and that will allow us to rotate out about $2 billion worth of hopefully.
Seth Weber: Got it. Okay. Thatâs helpful. Thanks. And then just on the strength in the specialty margin in particular was pretty notable is â I think it was 400 basis points year-to-year. Is there something â is there some step changes happened there? Is it the general finance business, itâs clicking or anything youâd call out that is supporting that big jump year-over-year? Thanks.
Matt Flannery: Yes. I think there are a couple of things there, Seth. I mean certainly, growth has been good, so thatâs helped drive fixed cost absorption. But beyond that, you had really good cost control in the quarter. And you also had some beneficial mix both within the specialty segments and on a project basis that benefited that flow through.
Seth Weber: Okay. All right guys. Thank you very much.
Matt Flannery: Thanks, Seth.
Operator: Thank you. Our next question comes from Timothy Thein with Citigroup.
Timothy Thein: Thanks. Good morning. Just maybe group two together here. Matt, maybe the first is just on fleet productivity and just how you think about the components within that in 2023, just thinking of maybe time and rate given that you held on the fleet longer in this year to make sure you met the demand presuming youâre running pretty hot on time. So potentially, that starts to run against you, but maybe Iâm wrong on that. And then just kind of the interplay on rate. And then the second question, maybe for Ted, is just any help in terms of EBITDA to operating cash flows, how should we think about, say, cash interest and cash taxes. Any help you have on that? Thank you.
Matt Flannery: Sure, Tim. On the fleet productivity, we still feel that the environment is going to be very constructive to drive positive fleet productivity. But you pointed out, the reality of our time may have been running so hot, but at some point, you have to look at it, are we running the appropriate level of time? Can we continue to raise it? Or does it become a bit of a headwind. With that being said, even if time becomes a headwind just because weâre running so hot in some key categories, and we need to make sure we have availability for our customers. We still have ample opportunity to drive positive fleet productivity. And we think the end market is constructive for that. Weâll feel comfortable that both in as reported and pro forma basis will exceed our hurdle rate that we talk about that 1.5% even if that goes up to 2%. So, we feel good about it. And Ted, you can take the EBITDA question.
Ted Grace: Yes. So Tim, just in the absolute, we would look for cash taxes in 2023 to be about $565 million. Thatâs an increase roughly of about $240 million. Cash interest at about $600 million, which would be an increase of $195 million or so. And so when you bridge kind of that $1.1 billion increase in EBITDA against a roughly $460 million increase in free cash flow, really that the delta is going to be the change in working capital.
Timothy Thein: Got it. Thanks, Ted. And did you â usually you speak to a merit increase as we think about an SG&A kind of bridge year-over-year. Any â have you quantified that as to how we should think about that for this year?
Matt Flannery: Yes. I donât know if weâre ready to quantify it. But certainly, weâve got that built into our guidance and built into our operating plan. We always talked about the importance of supporting our employees and taking care of them, and thatâs an important aspect of doing just that. So there is absolutely a merit increase built into this guidance. But in terms of quantifying it, itâs not something I think weâre prepared to do.
Timothy Thein: All right. Fair enough. Thank you.
Matt Flannery: Thanks, Tim.
Operator: Thank you. Our next question comes from Jerry Revich with Goldman Sachs.
Jerry Revich: Yes. Hi. Good morning, everyone. Iâm wondering if you could, just talk about the impact of the new higher pricing on new equipment on the marketplace. When we saw a Tier 4 higher pricing roll through that had a nice pricing umbrella on the rental industry for the entire fleet. And Iâm wondering, I know itâs early post the January price increases by the OEMs. But to what extent is that a pricing opportunity for the industry as you folks see it? How would you compare and contrast this transition versus the Tier 4 transition in terms of driving pricing upside? Thanks.
Matt Flannery: Sure. Well, number one, this would be more across the board, and we feel comfortable, I talk about it in used pricing as replacement CapEx gets increased. Thatâs kind of an umbrella on the used pricing, residuals, which is a positive. And I think to your point about the whole industry having absorbed some inflation has been â has bolstered the discipline that weâve been seeing. But to be fair, we saw it even before the price increases, and I think this is just the maturity of the industry. Youâve heard us talking about the bigs â getting bigger and just more sophistication and information in the industry. I think all those are helping and certainly increased OEM pricing makes that even more important. And so I think your point is well taken. It will probably bolster some of the behavior in the industry.
Jerry Revich: Super. And just curious, a lots of cross currency in the cycle, as weâve discussed, Iâm wondering if you look at the 2011 through 2015 environment, any analog that you would draw in terms of the industryâs ability to match supply and demand today versus that cycle where early on supply demand matched pretty well, but obviously 2015 touch of oversupply. Can you just talk about how you view the industryâs position today between availability and data, et cetera, and how youâre managing the supply/demand balance?
Matt Flannery: Yes. So one of the biggest differences is the information that access â everybody has access to, right, whether itâs the route data, whether itâs now that over a third of the industry is covered by top three public companies, right? These type information gives everybody more understanding and visibility of the important metrics to focus on and the opportunities that exist in the industry. So â and the scale â so specifically for us, and letâs say, our next largest competitor, scale allows us to get through things in a different way. And so I donât really wouldnât draw a comparison. I think the industry changed significantly in my 32 years, but even in the last 10, we do things differently, and Iâm sure some of our peers do. And I think youâre seeing that manifest in better performance overall for the customer and for the shareholder.
Jerry Revich: Super. And lastly, if I could just sneak one more in there. Ted, Iâm wondering if you could just talk about what level of inflation is embedded in guidance overall? And if you can just touch on transportation, specifically where it feels like there might be some tailwinds for you folks on third party? Thanks.
Ted Grace: Yes. In terms of the inflation thatâs built into our expectations, certainly probably elevated versus historical levels, probably not as significant as what we saw in 2022. And yet, weâve been able to manage it very effectively, right? So if you look at that flow through last year, as an example, when you back out use across the full year, flow-through would have been 56%, 57%. So clearly indicative of our ability to manage that inflation very effectively. And when you think about what weâre pointing towards in 2023, a similar level of flow-through on that pro forma basis. So â itâs not to say that weâre in a benign cost environment. Thereâs still elements of inflation that weâre managing and all companies are managing, but we feel very comfortable in our ability to manage it effectively. In terms of pickup and delivery, thatâs an area where, frankly, weâre not trying to make money. So as you see, the price of diesel, as an example, ebb and flow, the impact on our margins is relatively de minimis. So itâs something the team has done a great job managing through in 2022 when obviously, diesel prices were a substantial headwind to companies. But if you think about that dynamic in 2023, I donât think it will be very appreciable.
Jerry Revich: Super. Thanks.
Operator: Thank you. Our next question comes from Michael Feniger with Bank of America.
Michael Feniger: Hey guys. Thanks for taking my question. Just we â I know thereâs been a lot of talk of mega projects. We see Tesla announcing a $3.6 billion of new investments in two battery plants in Nevada. Just â we think about the economically sensitive areas of non-res like office and retail. Can you just help us understand when we think of these mega projects, how much more fleet on rent for these projects versus your typical office or retail? Are the terms and structures different? Is it different in terms of the multiyear visibility there, the different type of fleet required. Just curious if we see that trade-off over the next 12 months, 18 months, how we should kind of view that?
Matt Flannery: Yes. Michael, the type of projects vary so much that would be pretty hard to do. I mean outside if youâre thinking about towers, right, large towers, office building, which may be more limited in what type of fleet you would rent on it. All these projects have different needs. And the great thing about our product line is whether itâs early when theyâre scratching dirt, whether he needs trench places from creating the infrastructure to then creating the structure to then finishing off the building. Weâve got the opportunity to cross-sell into all those needs. But as far as the volume needs, we do attribute models, theyâre really hard to be predictive. I wouldnât really say that itâs something that you can rely on. I think the speed and the time to do the project and the sensitivity probably drives more variation of how much men, material and fleet theyâre going to put on there, right? And it seems like nowadays everything is a fast-track project. That used to be a term 10 years ago, that meant they were going to do something quicker now itâs every project is fast-track. So, I think that has implications of driving more rental than anything else.
Michael Feniger: Thanks. And you guys highlighted all year that fleet productivity number was going to decelerate. I know you kind of gave us some puts and takes for 2023. But is the view that number continues to decelerate through 2023 or finds more stability at some point? Could you guys were kind of clear through the year how we should kind of prepare for that throughout the quarter? Just curious if thereâs anything we could kind of prepare as we go through 2023 there directionally?
Matt Flannery: Yes, I mean, you see whatâs embedded in our guidance on as reported basis, right? And within that range would be a different number anywhere. I wonât even say the number. You could do the work. But I think really the most important thing is that the environmentâs good for us to continue to drive positive fleet productivity, even if time utilization doesnât go up. And thatâs really what matters. Thatâs the important part of it. And we will report this on a pro forma basis. Theyâll be a little bit as reported drag from the 800 â bringing in the 800 fleet, but weâll report that out and thatâll be a couple of points differentiation there, even between as reported and pro forma is what our expectation is. So, weâll â itâs an output that we really donât want to try to predict. But what our expectations are for are all embedded within our guidance.
Michael Feniger: Great. And just, Iâll sneak one last one. Just, I know we talked about power exposure, alternative energy, just on the traditional side, the upstream, midstream, downstream, just are you seeing more activity there? Is that actually accelerating? Iâm just curious if you kind of touch on the traditional side?
Matt Flannery: Yes. Itâs bit pretty consistent in terms of that progression. Hold on, Iâm just turning something quickly, Mike. Give me one sec. So certainly continue to see strong momentum in upstream. I mentioned midstream has been kind of the one sector that has been a headwind for us this year. Theyâre â itâs relatively small, call it 2% of our total mix and downstream has been pretty steady as well. Chemical processing would be the same. So if we look at the business, itâs consistently been about 13% of our total business across the year.
Michael Feniger: Thank you.
Matt Flannery: Thank you, Mike.
Operator: Thank you. Our next question comes from Ken Newman with KeyBanc Capital Markets.
Ken Newman: Hey, good morning, guys. Thanks for squeezing me in here.
Matt Flannery: Good morning, Ken.
Ken Newman: Good morning. Matt, I wanted to go back to a couple of your comments that you made. Obviously, you gave a lot of good color on infrastructure spend opportunities earlier in the call. I think the guide implies, call it a low double-digit organic growth after you strip out Ahern. But maybe, is there any way you can help us try to size what the midpoint of guide assumes are the benefits from the trends weâre seeing in industrial restoring or your visibility on infrastructure projects?
Matt Flannery: I donât really have it broken out that way. We really look, frankly when weâre planning, but more by region versus the verticals and then we track the verticals as we assign capital after the fact. So I actually donât have that number for you, Ken. We can do a little work and get back to you on that. But just generally, right, without trying to get too pegged on numbers that I havenât vetted. Generally, itâs â we view infrastructure as something thatâs accelerating, right? We view that weâre seeing the beginnings of it â of the spend, and we think thatâll accelerate through 2023 and beyond into multi years. As far as the manufacturing, someone mentioned earlier, thereâs some big plants going on right now that have a lot of fleet on rent as we speak. But thereâs also some projects coming out of the ground that we think are multi-year mega projects. I donât really know how to lay those against each other. But Iâd say overall the mega projects work will certainly outpace infrastructure work in totality. But the acceleration infrastructure will continue throughout the year.
Ken Newman: Understood. For the follow-up, and you touched on this a little bit, but obviously weâve seen some cracks start to emerge for the broader industrial space, especially on the â you talked about PMI in your prepared remarks. I know thatâs a little less than 50% of your customer mix, the industrial MRO part of the business. Maybe talk to us a little bit about how much conservatism is built in to the bottom end of the guide range. Whatâs embedded there in the assumption if we really do see a sharper turn in the industrial MRO demand environment?
Ted Grace: Yes, Ken, Iâll take that one. As Matt mentioned, when we do our forecasting, itâs really built by the branches up to districts, regions, divisions, and corporate ultimately. So itâs really kind of set by the field. We donât look at it kind of top down looking by vertical. So as I mentioned, our industrial business has held in very well. Weâre not seeing any signs of cracks, and I know people have looked at whether itâs the PMI or other metrics and itâs raise concerns. Weâre not seeing signs of those. And as Matt mentioned in his prepared remarks, we also see a lot of these industrial projects kicking off this year. Weâve talked about autos and related stuff. Weâve talked about semis, but frankly, itâs even broader than that. And so if thereâs an offset from this â if there is a headwind on the MRO side, I think weâre very confident youâll see within industrial kind of offsets on the construction side. But just to answer the question pointedly, we donât forecast our business based on these industrial verticals.
Ken Newman: Got it. Maybe if I could just sneak one more in here. It doesnât sound like you guys expect any constraints certainly from a capital perspective, even with the new dividend and the share repo, but I am curious if you think thereâs enough management capacity to go after M&A here in the near term?
Matt Flannery: Yes, Ken. So outside of anything that has a significant overlap with Ahern, right? So in those markets where theyâre integrating the teams together, right, getting the sales reps together, thatâs a lot of work on the ground. So weâre going to pause for a little bit on anything that would have a large overlap. But if we have opportunities and we continue to work the pipeline as we have for the past couple years that donât have a big overlap and we have capacity in the field. Weâre absolutely if they clear that final hurdle of the finance â makes financial sense. We have the dry powder, we have the capability and we certainly would consider M&A that whether it be a tuck-in gen rent deal in a market that Ahern wasnât in or a specialty product line where theyâre not dealing with any integration issues right now. So, our integration work rather than issues. So I would say absolutely we would. And just to touch on the capital allocation, one of the reasons why it was the right time for us to do a dividend now is because this is not at the expense of growth. When you look at the past two years and the kind of growth we drove, including significant M&A, we still have the capacity and free cash flow to give a dividend. So we had asked that question by someone earlier, are you given a dividend because of less growth prospects? No, quite contrary, itâs because even after supporting growth, we have excess cash to return and thatâs push points to the resiliency of our strong free cash flow through the cycle.
Ken Newman: Very helpful. Congrats.
Matt Flannery: Thank you, Ken.
Operator: Thank you. Weâll take our next question from Stanley Elliott with Stifel.
StanleyElliott: Hey guys. Thank you guys for fitting me in. Matt, in the past you guys have talked about the big â getting bigger and in the K you mentioned 4% North American rental growth and youâre talking about 12% sort of growth right now. I mean, do you guys have consistently outgrown the broader industry? But are we seeing a step up now, an inflection point with the scale that you have, the specialty that now itâs reasonable to think that you guys might be able to put up 3x what the industryâs growing at?
Matt Flannery: Well, certainly yes, because thatâs what our guidance implies. I think youâd have to think that that 4% number would be locked in as well. So, I donât know what the coming out number for ARA was last year, but I know they raised it throughout the year. But we donât focus on that as a barometer limiting ourself. We focus on what we see in front of us, what we do during our planning process and what we hear from our customers as well as our people in the field. But implied in this guide is 3x. And we do think we could do that. I think, Iâve talked about this before, how the top end of the business, the biggest getting bigger is a trend that we think is going to continue. And we think scale gives you some opportunities and options as well as adding additional product lines and cross selling that are â gives better service to the customers and gives you an opportunity to grow faster than the industry. And I think weâll see that continue.
StanleyElliott: Great guys. Thatâs it for me. Thanks.
Matt Flannery: Thanks.
Operator: Thank you. Our next question comes from Scott Schneeberger with Oppenheimer.
Scott Schneeberger: Thanks, guys. Good morning. My first question, in gen rent specifically, I guess, probably, Ted you may be the best to speak to this, but how is rental duration performed over the last few years? Have you seen an expansion of your equipment staying out on rent and with mega projects coming and infrastructure bill feels like 2023 is going to be a lot of that should, is it likely that we may see that expand? I know weâre talking a matter of days here. But might the length of period that assets are out on rent expand and could that have a positive margin benefit for the company? Thanks.
Ted Grace: Yes, so Iâll touch the first part of the question. Iâll start there. In terms of the mix between daily, weekly, monthly, which is really the way we would look at this. We donât kind of measure contract duration and maybe the way youâre asking Scott, but those numbers have not moved meaningfully. Youâve seen a very modest shift between daily and monthly to the point of â to the tune of about a point. So, weâd be kind of mid-single digits on a daily and weâd be about 80% on monthly. And those numbers have been remarkably consistent for a long time and it really hasnât been an appreciable change in terms of 2022 versus 2021 or prior years. In terms of the margin impact, certainly what weâre always trying to do is be mindful of getting more of your volume and serve you more efficiently. And so certainly, I donât know that thereâs a huge change there, but we do have that benefit as we do get larger projects that last longer and we get more fleet on this projects, weâre able to serve that customer more efficiently. And that certainly benefits margins to some degree and importantly returns.
Scott Schneeberger: Great. Thanks. Appreciate that. And then, Ted still for you, kind of your thoughts and kind of how the Board is looking at with the new dividend program, should we anticipate United Rentals to be a dividend growth story? I think you referenced about an 18% payout. If you want to quantify this, but is there a comfort going higher on payout ratio? Is that kind of a direction weâd expect to take vis-a-vis share repurchase, just high level thoughts there? Thanks.
Ted Grace: Yes, absolutely. Donât want to get ahead of the Board, but absolutely, we have the intention of growing the dividend over time. In terms of what that relative growth looks like relative to net income because youâre asking about a payout ratio. I donât know that weâd get locked in there just yet, but absolutely the intent is to continue to grow the dividend over time. Itâs fully our expectation. Weâll continue to grow the company over time. Weâll continue to expand margins. Weâll continue to generate more cash. And so one of the things that dividend allows us to do is have another tool to return that excess cash to investors as we keep growing. So yes, I think itâs very fair to assume that we will grow the dividend over time and in terms of what that rate looks like, stay tuned.
Scott Schneeberger: Fair enough. Thanks a lot guys.
Ted Grace: Thanks.
Operator: Thank you. That concludes our question-and-answer session. Iâll now turn the call back to Matt Flannery for any additional or closing remarks.
Matt Flannery: Thanks, operator. And that wraps it up for today. And I want to say thank you to everyone for joining us as we kick off another year of growth for our shareholders. And we look forward to reporting a strong quarter for you in April. Until then, if you have any questions, please feel free to reach out to Ted. Have a great day. Operator, please go ahead and end the call.
Operator: Thank you. This concludes todayâs call. Thank you for your participation. You may disconnect at any time.