United Rentals, Inc.URINYSE
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Operator: Good morning, and welcome to the United Rentals Investor Conference Call. Please be advised this call is being recorded. Before we begin, please note that the company's press release, comments made on today's call and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control. And consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the company's press release. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31, 2024 as well as 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. Mr. Flannery, you may begin.
Matthew Flannery: Thank you, operator, and good morning, everyone. Thanks for joining our call today. I apologize in advance for my voice. As I'm fighting through a little cold here, but I'm sure we'll get through it okay. Yesterday afternoon, we were pleased to report our third quarter results. The hard work of our nearly 28,000 employees enabled record revenue and adjusted EBITDA. The year is playing out better than we originally expected our updated guidance reflects the demand environment we continue to successfully serve. In short, our unique value proposition, experience, and ability to support a broad range of our customers' needs distinguishes us from the competition. Last quarter, I spent a lot of time on the road visiting branches, job sites and meeting with customers. And while this is nothing new. It did make the quarter's results and our subsequent guidance update, no surprise from my perspective. Our branches are very busy, and the team is working hard to serve customer demand. Our people are true differentiators in the rental industry and their professionalism and knowledge, their expertise and their commitment day in and day out shows. We often talk about putting the customer at the center of everything we do as it feeds our flywheel of growth. Without the dedicated United Rentals team members safely executing our customer-centric model, we could not generate the success we continue to deliver. And from where I sit today, I expect this momentum to carry into 2026. In the third quarter specifically, we again saw growth across both our General Rental and Specialty businesses with optimism from the field and our customer confidence index, reinforcing our expectations going forward. The demand for used equipment also remains healthy. Now with that said, let me get into the review of our third quarter results and our updated 2025 guidance. And then Ted will review the financials in detail before we open the line for Q&A. Let's start with the quarter's results. Our total revenue grew by 5.9% year-over-year to $4.2 billion. And within this, rental revenue grew by 5.8% to $3.7 billion, both third quarter records. Fleet productivity increased 2%, contributing to OER growth of 4.7%. Adjusted EBITDA increased to a third quarter record of over $1.9 billion, resulting in a margin of 46%. And finally, adjusted EPS came in at $11.70. Now turning to customer activity. And as I mentioned, we saw growth across both our Gen Rent and Specialty businesses in the quarter. Specialty continues to post double-digit increases with rental revenue up 11% year-over-year driven by growth across all our product offerings and an additional 18 cold starts. Year-to-date, we've opened 47 cold starts as we continue to fill out our specialty footprint. We see this combined with the power of cross-sell and the addition of new products to our portfolio as critical points of competitive differentiation, which benefit our customers while also providing important drivers of long-term growth. By vertical, our construction end markets saw strong growth across both infrastructure and nonresidential construction, while our industrial end markets saw particular strength within power. We continue to see new projects kicking off. And while data centers are certainly 1 area of growth, we also saw new projects across infrastructure, semis, hospitals, LNG facilities and airports to name just a few. Our end market exposure by vertical is intentionally diversified and our equipment is fungible to ensure we can serve demand no matter where it presents itself. Now turning to the used market. We sold $619 million of OEC at a recovery rate of 54%. The demand for used equipment is healthy, and we're on track to sell approximately $2.8 billion of fleet this year. As I mentioned in my opening remarks, the year is playing out better than we initially expected. To meet this demand, we spent nearly $1.5 billion of CapEx in the quarter and now expect to spend over $4 billion on fleet this year. This positions us not only to capitalize on the current environment, but also for the anticipated growth in 2026. Our customers and the field remain optimistic, particularly around large projects and key verticals. And thanks to our go-to-market approach and one-stop shop value proposition, we believe we're well positioned to be the partner of choice for these projects. Year-to-date, we've generated free cash flow of $1.2 billion, with the expectation to generate between $2.1 billion and $2.3 billion for the full year, including the impact of our higher CapEx spend. As a reminder, the combination of our industry-leading profitability, capital efficiency, and the flexibility of our business model enables us to generate meaningful free cash flow throughout the cycle, and in turn, allocate that capital in ways that allow us to create long-term shareholder value. Speaking of capital allocation, we always start with ensuring the balance sheet is in a good place, and it is. We then fund organic growth reflected through our CapEx and complement this with inorganic growth that makes financial and strategic sense. In the remainder, we returned to shareholders. This quarter specifically, we returned over $730 million to shareholders through a combination of share buybacks and our dividend. For the full year, we remain on track to return nearly $2.4 billion to shareholders. Our leverage of less than 1.9x leaves plenty of dry powder to support disciplined M&A, where we continue to pursue opportunities to put capital to work and attractive returns. Our M&A pipeline remains robust within both Gen Rent and Specialty and across the spectrum of deal sizes. And while it's difficult to predict the timing of M&A, this is an important capability we've built over our company's history. And we'll continue to use it to enhance our business and drive shareholder value. As we enter the final months of 2025, we're focused on execution, and delivering the results outlined in our updated guidance, including total revenue growth of 5% or 6% ex use, strong profitability, robust free cash flow and returns above our cost of capital. Although our growth is coming with some additional costs, which Ted will cover in his remarks, we're working through these challenges and are taking proactive measures, including bringing in additional fleet to help mitigate fleet movement costs. I'm very pleased with 2025 and how it's playing out ahead of our initial expectations and see good momentum heading into next year. Based on what we see today, 2026 will be another year of healthy growth. We believe the tailwinds we've discussed throughout this year will carry over and our unrelenting focus on being the partner of choice for our customers, positions us very well to win this business and to outperform the industry. For now, we won't get into the specifics about '26 as we're in the middle of our planning process, but we will share more details in January as we always do. In closing, I'm pleased with the outstanding job the United Rentals team is doing to support our customers. And that's the starting point for everything we do. Not only do we have the scale, technology and value proposition to make us the preferred partner, but we have a history of execution our customers can rely on. By working together with our customers to meet their goals to drive safety, productivity and efficiency, we ensure we build a relationship with trust that positions us to win in the marketplace. Subsequently, our strategy, business model, competitive advantages and capital discipline allow us to generate compelling shareholder returns for the long term. So with that, I'm going to hand the call over to Ted, and then we'll take your questions. Ted, over to you.
William Grace: Thanks, Matt, and good morning, everyone. As you just heard, the year continues to progress well with third quarter records across total revenue, rental revenue and EBITDA. More importantly, based both on what we're seeing and hearing from customers, we expect the strong demand to continue, which is supporting our increases in both rental revenue and CapEx guidance. More on that in a minute, but first, let's go through this quarter's numbers. As you saw in our press release, rental revenue increased $202 million year-over-year or 5.8% to a third quarter record of $3.67 billion supported again by growth from large projects and key verticals. Within this, OER increased by $133 million or 4.7% and driven by 4.2% growth in our average fleet size and fleet productivity of 2%, partially offset by some fleet inflation of 1.5%. Also within rental, ancillary and re-rent grew over 10%, adding a combined $69 million of revenue. Consistent with our first half results, third quarter ancillary growth again outpaced OER as we continue to focus on supporting our customers. Moving to used, we generated $333 million of proceeds at an adjusted margin of 45.9% and a 54% recovery rate, while OEC sold set a third quarter record at $619 million. Combined, these results speak to the continued strength and health of the used equipment market. Turning to EBITDA. Adjusted EBITDA increased $42 million year-on-year to an all-time record of $1.95 billion. Within this, a $69 million increase in rental gross profits was partially offset by a $6 million decline in used gross profit dollars. SG&A increased $23 million, which is in line with revenue growth, while other non-rental lines of businesses added $2 million. Looking at profitability. Our third quarter adjusted EBITDA margin was 46.0% implying 170 basis points of compression on an as-reported basis and 150 basis points ex used. At a high level, margin dynamics in the third quarter were similar to what we've discussed the last several quarters. This includes the impact of ancillary, the strategic investments we're making in the business and still relatively elevated inflation. An area I might call out again this quarter was delivery, which was impacted both by higher fleet repositioning costs in support of large projects and our use of third-party outside haul to serve the stronger-than-expected demand seen during our seasonal peak. To try to put this in perspective, our third quarter delivery costs increased 20% year-on-year versus a roughly 6% increase in rental revenue. Simply assuming that these costs increase proportional to revenue. This gap implies over $30 million of additional cost year-on-year and translates to an almost 80 basis points drag in our EBITDA margins. Now I'm sure we'll talk more about this during Q&A. But this provides a great example of the balance we are constantly managing between capital in the form of fleet and costs, both fixed and variable with the goal of serving customers as efficiently as possible. Shifting to CapEx. Third quarter gross rental CapEx was $1.49 billion. I'll speak more to this in a moment, but this included the acceleration of some purchases to help us support the stronger-than-expected demand we are experiencing. Moving to returns and free cash flow. Our return on invested capital of 12% remains comfortably above our weighted average cost of capital, while year-to-date free cash flow was $1.19 billion. Our balance sheet remains very strong with net leverage of 1.86x at the end of September and total liquidity of over $2.45 billion. All note, this was after returning $1.63 billion to shareholders year-to-date including $350 million via dividends and $1.28 billion through repurchases. In total, between dividends and share repurchases, we still plan to return almost $2.4 billion in cash to our shareholders this year. This equates to a little better than $37 per share or a return of capital yield of almost 4%. Now let's shift to the updated guidance we shared last night, which reflects our confidence in delivering another year of solid results. As you've heard us say a few times this morning, we are seeing stronger-than-expected demand. In response, we accelerated the landing of some fleet into Q3 while also raising our full year CapEx guidance by $300 million at midpoint to a range of $4 billion to $4.2 billion. In turn, we are increasing our total revenue guidance by $150 million at midpoint, while narrowing the range to $16 billion to $16.2 billion, implying full year growth of roughly 5% at midpoint. Within this, our used sales guidance is unchanged at around $1.45 billion, which implies total revenue growth ex used of 6% at midpoint. I'll note that the additional CapEx accounts for roughly half of the increase to our revenue guidance, given we'll only realize a partial year of OER benefit with the balance coming from ancillary. On the EBITDA side, we are narrowing our range to $7.325 billion to $7.425 billion while maintaining the midpoint of $7.375 billion. Ahead of Q&A, I'll quickly mention that the lack of implied pull-through from this additional revenue reflects our expectation that, as I just mentioned, a portion of the increase will come from lower-margin ancillary while we also expect to manage through similar cost dynamics in Q4 and especially delivery. Turning to cash flow. We reaffirm the midpoint of our guidance for cash flow from operations at $5.2 billion, while our revised free cash flow guidance of $2.1 billion to $2.3 billion simply reflects the additional investment in CapEx that we plan to make. Importantly, our updated free cash flow guidance does not impact our share repurchase program. I'll remind you that we intend to repurchase $1.9 billion of shares this year, which highlights our strategy of both investing in growth and returning access capital to our shareholders. So to wrap up my prepared remarks, overall, we were pleased with how the quarter played out, especially on the demand side. And while our margins were burdened by the cost mentioned, we remain focused on supporting our customers' growth as efficiently as possible as we lean into their demand. So with that said, let me turn the call over to the operator for Q&A. Operator, please open the line.
Operator: [Operator Instructions] We'll take our first question from David Raso with Evercore ISI.
David Raso: Obviously, we have the demand positive and the cost negative here. So I just wanted to dive into the demand side first. The cadence of the CapEx, when I think about '26, and the comment you accelerated equipment for the third quarter. But just so we're clear, when you're thinking of the demand profile that you said was better than you expected, is any of this '25 CapEx increase pulling forward 2026. And if not, just thinking about the cadence of sort of the CapEx for '26, obviously, when you bring this much fleet on the third quarter, people wonder how do we go into '26 with a level of fleet just given the seasonal weakness? So that's a demand question. I'll follow up with a quick cost question.
Matthew Flannery: Sure, David. I'll take that. This was not a pull forward from 2026. This accelerated CapEx in Q3 was to meet the demand that we were already seeing and to be responsive to specifically some large project wins throughout the year, but that put a little more need for fleet here in the back half. Then we let the Q4 CapEx flow through as normally would. Some of that's seasonal. And to your point about 6 all of this, although not a pull forward, is supported by being very comfortable that we expect 2026 to be a growth year, which is why we felt comfortable raising this full year CapEx. As far as CapEx cadence for next year, we haven't finished our planning process, but you can expect there to be the standard, let's say, we're going to sell $2.8 billion, maybe a little bit more in CapEx next year. The replacement for that is going to be $3 billion, $4 billion plus depending on how much more we sell. And then there'll be growth on top of that. That's the part that we're going to work through in the planning process this year. But to be clear, we certainly expect to have some growth CapEx here in 2026. And then we'll let you know about the cadence of that as we see how the demand plays out.
David Raso: Okay. And then on the cost side, I mean, it's easier for me to say, but ancillary revenues are up to close to 18% of total rental revenue. How do we think about pricing for those services? I know -- I appreciate the comment, providing those services is partly why you win more than your fair share, let's say, of the major projects. But it's it went from sort of an afterthought to, again, if you want to throw in a re-rent, it's 20% of rental revenue. So is there a way to rethink that pricing, some kind of annual contracts, something where it doesn't continue to be a drag. And related to that, the fleet productivity number, I know you don't like going into the details, but can you give us some sense of the components of fleet productivity. Were both utilization rate up 1 up, 1 down. Just trying to get a sense of those components as we sort of push against the cost.
Matthew Flannery: Yes, I'll take the latter part there, David, on fleet productivity, and then Ted can add some color on the ancillary. But on the ancillary, I do want to remind you that A big portion of this is delivery, which is basically a pass-through fuel, which is not a large markup. So there's just some things there that have historically been. And it's a fair point about the pricing. But as we think about that, and Ted can get into the detail of the math of how that impacts us, there's nothing new other than we're doing more of it as we continue to serve more products and services. And the fleet productivity, as I stayed true to telling you qualitatively. We're very pleased with how rate and time have performed throughout the year and specifically in Q3. I would say the gap, the difference between what you saw in Q2 at 3.3% fleet productivity, and Q3 at 2% was mix. Mix was a good guide for us in Q2 and not in Q3. So we would see that as normal variability. And it's important for us to remind you all that mix is just -- we're catching that. We're not driving that. That's a result of who you rent to, how you went to, what your rent, how long, what geography. So it's not anything that we have any capability to predict, quite frankly, because it's reactive and responsive to where the demand is. And then we just let you know that. But to be clear, rate and time are both up this year, and we feel good about it.
William Grace: And on the margin side within ancillary, David, obviously, the thought there is you want to be responsive to the customers all kind of ties back to this concept of being the partner of choice. Frankly, it's hard for us to predict what that mix will look like between something like pickup and delivery or installation breakdown, setup, fueling, et cetera. The margins themselves don't fluctuate a tremendous amount, but they are what they are. So delivery to Matt's point is probably the thinnest of that. That's really kind of just the convention of the industry. Others are certainly not going to have the kind of margins that we have in rental. But as we've said, they're definitely positive and they add GP dollars with very little capital coming along with that. So we think they benefit us both strategically and financially, but it's going to drive kind of variability depending on what that composition looks like.
Operator: We'll take our next question from Rob Wertheimer with Melius Research.
Robert Wertheimer: You've mentioned a few times across the call solid demand indicators kind of driving some of the CapEx move. Could you talk a little bit qualitatively about what that looks like in the field? Is this mega projects that we all knew about but are probably coming online? Is the share gain as people appreciate? Is this interest rate intensive construction having what's kind of going on?
Matthew Flannery: Sure, Rob. As we've talked about really for the past year plus -- there's some feedback there from somebody. But as we talk about large projects are really carrying the ball here. So we feel really good about that. And when we asked, what surprised us, we had a higher win rate than maybe we had originally planned for, and that's what the additional CapEx was for. As far as the local markets, the local markets, we would call flattish. It's very choppy in certain markets. There's a little bit more opportunity than others, but I'd call it net across the network probably flat on the local and really the growth coming from major projects, which are robust and we expect to do well, and I'm glad to see the teams executing on it.
Robert Wertheimer: And then the fleet repositioning that's been there this quarter and before, related to that shift in demand. Does that have an end date to it? Where you've kind of got stuff moved around where you want it? Or is that just a new world where projects are bigger and in different places? I'll stop there.
Matthew Flannery: So part of that is think about the disbursement of revenue, right? Think about a couple of years ago when we talked about broad-based demand and our network was a real advantage for us because we could just serve more demand out of our same cost basis basically with some variable costs. Now as these major projects are throughout our network, but there are chunks of revenue that we have to move fleet to from certain places. And in many instances, has some additional cost with these mega projects of building an on-site and a support team there. So I'd say that's a dynamic and the part that surprised us the most, and we've been very upfront about this is the delivery of mobilizing that fleet to these sites. Whether they be remote or not, it's -- you're mobilizing it from multiple areas. So that's a little bit different cost that we have to absorb that when we were spreading it throughout the network in the local markets just didn't have that additional cost burden. Outside of that, I wouldn't call out anything different. When you look at these decisions on their own, the math makes sense. They're good decisions. It's just some additional costs that you don't have to incur when you're not so weighted on the large projects.
Operator: We'll take our next question from Michael Feniger with Bank of America.
Michael Feniger: Matt, just on the local market, it seems like you're signaling 2026 as a growth year. Is that inclusive of the local market? Or is that more on the larger progress? And if we see rate cuts, is that alone get the local markets back. Historically, there's been a delay between rate cuts and construction picking up, but those rate cuts happen in deep recession. So I'm curious if you feel the feedback loop from rate cuts is a little shorter than normal in terms of when that pipeline might fill up. That's more of the second half next year type of event.
Matthew Flannery: Yes. We don't pretend to know, right, how that -- and I think if you look at history, there's different outputs. So if you can't even look at history and hope it will repeat itself because it's been different during different cycles. But sentiment feels a little bit better with there being a rate cut and talk of more rate cuts, but you don't take sentiment to the bank. Right now, we call local markets flat. We're going to go through our planning process for the balance of this quarter. That will inform our guidance. And we'll get a little bit closer to the local market as we talk to the branch managers and the district managers that are much closer to that and they'll give us their feedback on what do they think their growth potential is locally, outside of large projects. And then we'll have a better idea, but I agree with the tone of the sentiment. We just got to see does our team think when that's going to manifest and how we're going to capitalize that growth. But we'll be excited for that to happen. We do think it's potential upside, whether that's to '26. The back half, '26, '27, we're not even sure yet. So it's something that we'll communicate when we give out guidance.
Michael Feniger: Perfect. And Matt, you mentioned accelerated the CapEx to meet the demand. Did large projects -- did you see anything that got green lit that maybe was on the fence? Or are you seeing your typical win rate starting to inch up versus prior years? And just a tag on that, Ted, if there's any way you could help quantify where you think that power vertical for you guys? How big you think that is today for you guys versus maybe where it was a few years ago?
Matthew Flannery: Yes, I would just say it's -- we just had greater success and the customers that rely on us have had greater success in these large projects, and the pipeline is robust. So I would say that's what drove the extra demand. It's really just good execution from the team, and I'll let Ted talk to the power vert.
William Grace: Yes, Mike, thanks for the question. So it's currently in low double digits, say, 11%, 12%. It's probably a reasonable area. And if you go back to when we introduced what we called our power vertical strategy. And just to be clear, this is really a focus on investor-owned utilities, whether it's generation, transmission, distribution. At the time in 2016, it was probably 4%. So we're probably coming up on nearly tripling that relative exposure to what we think is, at the time, we thought it would be a very large stable business it's very large. It's obviously seen a lot of investment, and we expect that to certainly continue for the long foreseeable future. So I feel like we're really well positioned there. and we've spent the better part of a decade building what we think is a lot of competitive advantages to serve those customers in that market uniquely.
Operator: We'll take our next question from Steven Fisher with UBS.
Steven Fisher: I just wanted to ask about the -- come back to the margin dynamics here. Just looking at the Q2 versus Q3 year-over-year specialty going from 220 basis points to 490 basis points headwind. It sounded like qualitatively, the drivers weren't really that different categorically, but just curious what accounts for that difference in year-over-year? Was there sort of faster growth in Yak that was driving more of that delivery impact? Or what just accounts for the 220 versus 490.
William Grace: Yes, absolutely, Steve. Thanks for the question. So overall, I would say the cost dynamics within specialty and frankly, the whole business has been pretty consistent across the year. When you look specifically at specialty 2Q versus 3Q, the big difference was the increase in depreciation we had in that, and that spoke to kind of the aggressive investment we're making in Yak more than anything in matting. I mean those assets get depreciated at a far faster pace than any other asset class we have in that business. So when you look at kind of the 490 basis point decline, 200 basis points of that was depreciation, so call it 40%. The other pieces were the same things we've talked about like delivery and really ancillary being the other big piece.
Steven Fisher: Okay. That's helpful. And I think you are on track or planning to do 50-ish cold starts this year. I think you're pretty close to that already. Do you think that momentum is likely to kind of continue into the fourth quarter? And any sense of having done 70-plus last year and maybe on track for 50 plus this year, directionally, where you see the cold starts heading for next year?
Matthew Flannery: So we haven't finished the planning process yet, as I said earlier, and that's where we'll make those decisions. As far as with the balance of the year, we're in a small period here in Q4. Maybe there'll be another 10 to a dozen in Q4. It really depends on the timing of if the team finds the real estate and the bodies to be able to do it. So as far as '26, stay tuned. They've executed. The teams executed real well on cold starts here in '25, and they'll propose the plans for '26 in the next 6 weeks.
Operator: We'll take our next question from Jamie Cook with Trust Securities.
Jamie Cook: I guess just 2 questions. The setup for 2026. Obviously, ancillary is just becoming a larger part of the business, it just sounds like structurally, that will be a headwind on margins. But I guess, Matt or Ted, I'm just trying to think about, obviously, you're seeing demand or demand is starting to improve or maybe your share is just improving. But I'm just wondering, the setup in 2026 with a lot of the inflationary pressures in particular with tariffs and Section 232. And you have the ancillary business becoming larger. To what degree do you think we can start to push through higher rental rates. Is the market strong enough that they could absorb that just given some of the cost headwinds that we could see continuing into 2026?
William Grace: Yes, good question, Jamie. We don't want to get too far ahead of ourselves. But certainly, if you just take a step back and you decompose what's happened in 2025 as a starting point. A lot of the margin dynamics have been being responsive to customers. You touched on ancillary, but obviously, that is dilutive. And you could ask yourself why are you doing that? And again, it's to really be this partner of choice and be responsive and frankly, use that as a tool to be a better partner and take share. We think that's absolutely worked out. And while it is dilutive to margins, as we've talked about, there are a lot of benefits to it. So how does that play out next year? Time will tell. We don't think that's a bad business. But we'll have a sense for what that's going to look like over the next 6 weeks as we get through the business planning process. Then you think about things like cold starts and investments, and I don't think anybody would dispute the logic, strategic or financial of the cold starts we're doing in specialty. To your question on inflation, broader inflation, it's still elevated, as I said in my prepared remarks, is it going to subside in '26? Time will tell, but certainly, we are very aggressively managing our costs in any environment, but certainly in this one. So then you come to the delivery piece. And that's obviously been kind of the biggest discrete challenge we faced this year, and that's driven a lot by being responsive to customers. That's what just helped support the demand and the growth you've seen. We're trying to figure out that piece next year, what is the growth? What does it look like from a physical footprint standpoint? And then how do we most effectively serve it. Matt talked about the idea of managing CapEx differently such that you could mitigate some of that incurred cost moving fleet. We're working through that, but that again is being responsive to where demand is and supporting our customers. So all that is to say that we're looking at those things, they will all affect 2026 margins and flow-through. But the focus, as always, is on profitable growth. And from that standpoint, we think the team is managing the business really well.
Operator: We'll take our next question from Ken Newman with KeyBanc Capital Markets.
Kenneth Newman: So maybe to follow up on that answer, that response now, Ted. I think, Matt, you mentioned growing the fleet for both stronger demand, but also maybe to better address the fleet movements. I know you don't want to talk about '26 yet, but just higher level, how do you think about balancing those 2 dynamics, right, to keep time yet strong into next year? And just how long do you think it takes to tackle some of these cost inefficiencies. And maybe to that point, do you need to accelerate cold starts in order to tackle the movements or the fleet repositioning costs?
Matthew Flannery: Yes, it's a great point, Ken. And one that we're talking about. First off, and getting together with our partners, our customers and fleet planning, right, a little more accurately. But to be fair to them, these big jobs are dynamic and all of a sudden, any 50 units that we weren't given a heads up on and they need to make up. So we have a choice to make in that -- to give you that example in that instance. So first, it starts with me challenging our team in the field, hey, let's make sure we're communicating. The earlier we know, the more efficient we could be. And then there is a component of why there are some categories in our desire to drive high time -- high fleet productivity, we've been running hot for a while, for quite a few years. There's certainly some categories that we're going hand to mouth again. And we just got to be careful about that. So we are going to look at that. There's a balance between operational efficiency and that capital efficiency. But both are important. So that's something we'll look at as we're going through the planning process. So these are all, like I said earlier, individually, when you look at the decisions to ship this stuff through third parties, it's the right decision, mathematically. It's just how can we avoid that incremental cost? How can we minimize it as best we can. And that's something that we'll have some learnings from this year, and we'll work on it. But that will all be embedded in our guidance for 2026. Because I don't think the dynamic of big projects carry and evolve is going to change a lot in '26. We'll see if the local market gets some more growth. But big jobs, we already have that visibility. We know that's going to be a big part of the opportunity.
Kenneth Newman: Right. No, that makes sense. And then just for my follow-up, I appreciate all the color around the drags on the fleet repositioning costs. When we think about core profitability, ex some of these higher ancillary and delivery mix, is there anything -- is there any reason to think that you can't drive flow-through kind of in line with your more normalized type of margins, right? Because you're kind of signaling a growth year for next year ex some of these more volatile mix impacts. Anything to suggest that you can't kind of get back to that 40% plus type of flow-through ex those items?
William Grace: I guess what I'd say is the core profitability of the business, we think, is performing well, right? And we've talked about the impact of delivery this year, which is just a function of serving our customers as efficiently as we can. And to Matt's point, it's balancing operating efficiency with cost efficiency or call it capital efficiency with margin. So we think we're doing those things well, and we think the underlying business is actually performing as expected. In terms of what it looks like going forward, again, we would expect the core to perform well. A lot of this, and I hate to repeat myself, but it is being responsive to what customers ask of us and how demand is evolving. And so when you think about it, that again explains a lot of what we're doing with ancillary, what we're doing with cold starts. And so I come back to what I just said to Jamie, we feel really good about that core profitability, and our goal is always to be as efficient as possible serving demand. That doesn't change. But when you look at kind of what those margins look like when we talk about updated guidance or whatever, we would say that this is really being responsive to the market itself.
Operator: We'll take our next question from Tami Zakaria with JPMorgan.
Tami Zakaria: I have just 1 question. It sounds like customer demand has accelerated on the large project side. So is it fair to assume your raised equipment purchase plans would be across Gen Rent and Specialty equipment? Or is there -- are there any specific categories where you're seeing better demand?
Matthew Flannery: No. I think you raised a good point. It is -- historically, we've been putting a lot more growth into specialty. And you see that in the results. This -- think about these large projects are taking our full portfolio. So the incremental investments would be more broad than maybe our earlier growth expectations of mix. So we know where the high time categories are and we'll continue to make sure that we're running a good balance of capital efficiency and responsiveness in those. So I'd say it's more looks like our overall portfolio. It's what these investments look like.
Operator: And we'll take our next question from Sabahat Khan with RBC Capital Markets.
Sabahat Khan: So your earlier commentary indicated that the larger project side of the business is continuing to trend well. Some of these really took on as the IIJA really got going. I guess when you look ahead 1, 2 years, 3 years, do you think the business or the industry needs some sort of a renewal to that IIJA program? Or is the industry just generally inflecting towards these larger mega projects, just some thoughts there.
William Grace: Yes, absolutely. Certainly, infrastructure broadly has been a very strong market for us. And certainly, the IIJA has helped support that. Our best sense is there's still a healthy amount of that initial or that money left. So that should support it. The thing we've always talked about infrastructure, there's certainly not a lack of demand in the sense of the need to reinvest in infrastructure, we certainly expect that, that will continue, whether it's funded by state initiatives or local initiatives or federal dollars. So we'll see ultimately what that funding looks like. But there's no question that the country on the whole needs to continue investing aggressively in reinvigorating infrastructure. And the other thing we've talked about, just maybe as a corollary to that question is, infrastructure has been a great market for us. It's an important part of our business, but we've got a lot of these tailwinds. And certainly, we're writing a lot more than just 1 wave of infrastructure. When you think about a lot of the onshoring, a lot of the remanufacturing in the U.S. and power and other things in technology, all those come together to give us a really optimistic outlook for the foreseeable future on demand.
Sabahat Khan: Great. And then just as a follow-up, I think there's been commentary in the past that it may not necessarily be a larger project, lower margin type of a setup. But as you think about larger projects becoming a bigger part of your mix, and it sounds like you're ramping up that side, you're moving fleet around to meet these large projects. Is there sort of an inflection point that you see in your business at which, look, larger projects are going to be stable at this space and now we'll get operating leverage on the sort of the cost base that we install to perhaps meet that demand that the larger customers looking for? Just any view on how -- as that business grows, is there a view on sort of an inflection point on overall margins and operating leverage?
Matthew Flannery: Yes, it's a good point. What we've talked about historically is when you think about large projects versus our base margins, we have always. And still believe, by the way, that although some of those large projects do get some discount as they leverage the bulk spend with us, that we get to serve it more efficiently on site versus spreading that overall. The 1 area that has changed as it's become a bigger part of the portfolio that, quite frankly, we didn't anticipate was the repositioning of the fleet. So it's a little bit of where the jobs are, where you're positioned, and what I said earlier, how well you can plan with the customers to position the fleet, that's going to decide that. Just to put it in context, in the relative scheme of things, we're talking about small numbers, right? You're talking about 1% of your operating costs, but it does make noise within the metrics, which is why we explain it to you all. So even with this extra burden transportation costs, it's still relatively close to the same. It's just the challenges where the fleet is versus where the need is and how you continue to improve that operating efficiency is what will make that decision. But I wouldn't see it as terribly different even in its current environment with these extra costs because in the scheme of a $15 billion company and the cost base we have, it's not a big number.
Operator: We'll take our next question from Tim Thein with Raymond James.
Timothy Thein: Maybe just the first question is maybe for you, Matt, just in terms of the customer dialogue and what you're hearing from -- in terms of some of the national account customers, it's been a couple of months since we've had the tax reform passed. And if you -- and some of the sentiment readings have kind of been all over the board, but it doesn't seem to be much change in terms of kind of forward-looking CapEx and other growth plans. But I'm just curious, have you detected or seen any change in terms of -- again, just kind of thoughts around big project spending and now that some time has elapsed since the OBBBA has passed?
Matthew Flannery: Yes. Our customers remain optimistic. And when we look at our customer confidence index, we get that feedback when we talk to our national account teams which are dealing with the largest contractors in North America, we get positive feedback, and we're getting it from the field as they're asking for more support from a fleet perspective throughout the year. So we don't see any negative trend there at all or any kind of need for a reboot of any kind of spending. And the pipeline that we have visibility to it looks pretty good for '26. And the feedback from our customers and our field teams matches that sentiment.
Timothy Thein: Okay. And maybe looking a little bit further out, the 2028 goals that you outlined at the Investor Day back in '23, you obviously wouldn't have kept it in the slides if you didn't think it was still realistic. But the elements of it is, specifically around what the implied flow-through look to be a bit more challenging. Does that -- do those targets maybe rely a bit more on M&A from here? Or maybe just kind of an update as to how we're tracking towards those. Again aspirational -- go ahead.
William Grace: Yes, absolutely. So starting with the growth. I mean we feel like we're tracking well, right? We talked about this aspirational goal of $20 billion by '28. And I think if you do the simple math, you need to keep compounding something like 7%. And so we feel like that is still very much in play, I feel good with that. The margins, frankly, will be more challenging to hit that kind of roughly implied margin and the corollary to flow-through. But when we look at kind of why, there are a few things that we point to. You mentioned about acquisitions. Frankly, acquisitions tend to pull us in the opposite direction to getting there. We've long talked about this Tim, you and I have talked about this and probably Matt and I have talked to the entire investment community about this, but acquisitions tend to be dilutive to our margins. And that's why we take the time to explain what that margin profile looks like, but we really talk about the returns and most specifically, those cash-on-cash returns because that's how we think about allocating capital. But if you look at the acquisitions we've done since '22, they've virtually all been dilutive. That doesn't mean they weren't good deals. We would say strategically, they were all 10s, and I'd say financially, they've all been 10s but they're going to have that dilutive effect. So just to put some numbers around that, I've looked at the math. The acquisitions probably account for 70 or 80 basis points of margin dilution since 2022 in isolation. I think if Matt and I could go back in time, we would have done every one of those deals. And frankly, we probably would have done -- we would have loved to do twice as many deals if they had the same financial profile. But the margins are also impacted by the ancillary. This is -- if you think about that evolution of being responsive to customers and how ancillary has grown from, let's say, 15% of our rental revenue mix to now approaching the very high teens. That's probably not something we would have anticipated back then. It's had this dilutive effect. We've talked about it today. We've talked about it for a while. But again, these are really beneficial things we're doing to take care of customers to frankly use its competitive advantages over incumbents, and they've helped support the growth you've seen us achieve. So there, again, like we would not go back and do things any differently with ancillary. And certainly, I would just say the broader inflationary environment has been worse than probably anybody expected since '22. That being said, we feel like we've managed it really well on an underlying basis. And so again, the margins, it will be a stretch. I'll say that. I don't think that surprises anybody. That doesn't mean we're not going to keep pushing for it. And it doesn't mean we're not incredibly focused on driving better core profitability of the business. So Matt, I don't know if you'd add anything.
Matthew Flannery: I think that's right. It was an aspirational plan, and I think it was the right one. There's been some dynamics that have changed in the construct of the business. And we'll keep informing everybody as it goes along. So -- but we do feel good about basically the core profitability of this.
Operator: We'll take our next question from Scott Schneeberger with Oppenheimer.
Scott Schneeberger: A couple from me. First one is just if you could speak to -- I know it's early and you're not giving guidance for next year. But your conversations right now, it's that time of year where you're speaking with the OEMs on pricing looking forward. Just with tariffs hovering, what are the conversations like is it's going to be anticipated as a normal pace of rate increases for the upcoming year? Or might there be something that could surprise us?
Matthew Flannery: Yes, Scott. As I said before, we try not to share information with our partners and suppliers on open mic, but we feel like we're in a good position. The consistency of the scale of spend that we've shown just to support our partners with, I think it's valued as much today as it ever has been, specifically in this past year. And we think we'll be in pretty good shape for purchases in '26, both from a cost perspective and from being able to support perspective. And our partners have done a really good job when you go back a few years ago when supply chain disruption. Getting back to normalized expectations, and we're very pleased with how they've responded.
Scott Schneeberger: Thanks, Matt. And then on the theme of the day, just want to ask the question kind of in a different way. If you have a strong demand, the seasonal uptick next year, which it looks like you are expecting with the elevated level of re-rent, ancillary and large projects and need for probably still delivery, you're addressing it with some CapEx. But -- and it's -- you guys have mentioned on these earlier questions, hey, we're going to look and see what we can do to improve. But are there some ideas with regard to relationships with transportation providers on the outside, maybe where you can get some bulk pricing? Are there operational execution initiatives that you're looking at, is one part of this question. And then the second part of the question is, you haven't done -- obviously, H&E stepped away, but haven't done an acquisition in a while. What is the appetite there? I just heard Ted's response to Tim's question, but curious on where that may be applicable on this issue or just general appetite for M&A overall?
Matthew Flannery: Sure. So on the outsourcing, we obviously already do a lot of outsourcing. And we do have some partnerships within that spend. It is something we look about -- look at, whether it's in-sourcing or outsourcing more for that flexibility. I think we lean more towards -- we seem to do things more efficiently when we can in-source, but that's a little bit harder when you're talking about some of these longer hauls. So that is something that we're wrestling with, and it's a great point, something that we're talking to people about in the space. As far as M&A, listen, we've built a great capability throughout our history as good purchasers and good integrators. And we do feel one of our mantras is can we make this business better, when we make that decision. So we continue to work a pretty robust pipeline. We just haven't found the right deals yet. I think we did $20 million of M&A this year. We did 1 small deal. We don't predict forecast or even planned M&A because I think that's how people end up doing bad deals. So we talk about our organic growth and we look at M&A as opportunistic. But to be clear, if we are always work in the pipeline, both in Specialty and Gen Rent, and if we find something that fills out our footprint better or a new product that our customers can rely on us for, like we've done in the last couple of big deals, matting and mobile storage, we're going to lean in. It's just a matter of finding that right deal where the -- where it meets all 3 legs of that stool we talk about of cultural, strategic and most importantly, financial.
Operator: And there are no further questions on the line. I'll turn the program back to Matt Flannery for any additional or closing remarks.
Matthew Flannery: Thank you, operator. And to everyone on the call, I appreciate your time. I'm glad you could join us today. Our Q3 investor deck has the latest updates. And as always, Elizabeth is available to answer your questions. So until we speak again in January. I hope you all have a safe and happy holiday season and a happy new year, and we'll talk soon. Take care. Operator, you can now end the call.
Operator: Thank you. This does conclude today's program. We appreciate your patience. We appreciate your attendance. You may now disconnect.