United Rentals, Inc. Q1 FY2022 Earnings Call

Good morning, and welcome to the United Rental's Investor Conference Call. Please be advised that this call is being recorded. Before we begin, 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, 2021, and as well as subsequent filings with the SEC. You can access these filings on the Company's website at www.unitedrentals.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations. You should also note that the Company's press release and today's call include references to non-GAAP terms such as free cash flow, adjusted EPS, EBITDA and adjusted EBITDA. Please refer to the back of the Company's recent investor presentations to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer; and Jessica Graziano, Chief Financial Officer. I will now turn the call over to Mr. Flannery. Mr. Flannery, you may begin.

Thank you, operator, and good morning, everyone. Thanks for joining our call. I want to frame my comments today around one word, demand. 2022 is shaping up to be a year of record demand for our services, and this is the driving force behind the strong first quarter results we reported, and it underpins our decision to update our guidance. As you saw yesterday, we now expect our total revenue, adjusted EBITDA and free cash flow to be above our original outlook. This reflects the positive impact of the new cycle we talked about in January, and we're excited to continue that conversation today. I'll start with some highlights in the quarter. It became clear that this was not typical seasonality. Our rental revenue tends to be down from Q4 to Q1 due to winter conditions, and that's true for the industry as well. But this year, we saw only about half of that normal decline. As you may recall, we brought in more fleet than usual at the end of last year, and that capacity helped us to capitalize on demand and deliver strong results in key metrics. Our first-quarter rental revenue and adjusted EBITDA both increased by 31% year-over-year to record levels, and we improved our adjusted EBITDA margin by 270 basis points to 45%. This gave us a strong flow-through of 57% for the quarter, and we also drove a 200 basis point improvement in return on invested capital to 10.9%. And while the numbers speak for themselves, it's the drivers behind the numbers that we want to focus on today. First, the underlying macroeconomic growth, which continues to move in the right direction; also, the sustained rebound in many of our end markets coming out of COVID; and lastly, rental penetration in the construction and industrial sectors. We expect all three tailwinds to continue for the foreseeable future. We're also confident that we're gaining share with key customers as we leverage our ability to solve their problems. This is the best way to further differentiate United Rentals in the customer's eyes. And importantly, we see runway here as well. There's a future tailwind emerging from the infrastructure legislation. We're starting to have conversations with customers about federal projects that should kick off in 2023. It's a diverse mix with projects for road and bridge work, water control, harbors and ports, and also on the power grid. I also want to call attention to something that may not be so apparent on the surface, which is just how good our team is at managing growth. When demand ramps up in our business, it requires a tremendous amount of operating discipline, especially with customer service. We're very fortunate to have a world-class team standing behind our strategy. There's tangible value to this, and we've set the Company up to be opportunistic, and our people excel at execution. I'll give you some quick examples. The first quarter gave us a big lever for growth, with demand running above seasonality. We have the right people and the right fleet in place to pull that lever. As a result, we achieved a 13% year-over-year increase in fleet productivity, with strong incremental flow-through to the bottom line. The team also excelled at safety, keeping our recordable rate below one for the quarter while safely onboarding and training over 1,400 new employees. On the ESG front, we made headway on a number of initiatives. For example, in March, we added power bank systems to our fleet. These lithium battery packs have zero emissions and replaced some of the diesel fuel used by generators. The OEMs are beginning to move faster with R&D, which should make hybrid and electrical solutions more viable on job sites, and we welcome that because we're firmly committed to a sustainable future that makes sense for our customers. So stay tuned for more updates on that going forward. To flesh out the backdrop for everything I just described, our operating environment is, in many ways, the same positive broad-based outlook we shared with you in January, but with an extra layer of visibility. Our line of sight for the balance of 2022 has improved based on what we saw in Q1, including the number of projects underway, solid backlogs, and a high level of customer bid activity. Not surprisingly, our customer confidence index improved as well, and the underlying data supports it. All of our regions had significant double-digit increases in rental revenue. Year-over-year growth in the first quarter outpaced the growth we saw in Q4. Another positive indicator is the continued strength in the pricing environment for used equipment. We made a strategic decision to sell less equipment in the quarter relative to our initial plans to ensure we could take care of the customers in the robust demand we were seeing. But when you look at what we did sell, our OEC recovery levels improved from the fourth quarter, and our used margins set a new record. Broadly, the data on construction starts and backlogs, the ABI and the Dodge Momentum Index all remain positive. It's hard to find a leading construction indicator that isn't flashing green right now. We factored all of this into our guidance, along with some projected headwinds like inflation. We're not immune to the challenges in the macro, but we mitigated the impact of inflation in Q1, and we're confident that we'll continue to manage through any challenges successfully. That's the big picture. I'll round it out with some details at the market level. In the first quarter, our rental revenue from non-residential construction was up 28% year-over-year, and infrastructure was up 17%. Industrial also trended up, with 13% year-over-year growth. That 13% growth is encouraging because industrial was on its way to recovery before the pandemic hit. Once the supply chain is sorted out, we expect that industrial, like infrastructure, will be another sizable runway for us beyond 2022. Our Specialty segment had another excellent quarter, led by our power business. Every specialty line delivered double-digit year-over-year growth in rental revenue, and the segment as a whole grew almost 48%, including the benefit from General Finance. It's been 11 months since we completed that acquisition. The mobile storage and modular office business has clicked right into place. We've given these specialty businesses more resources, and they're cross-selling ahead of schedule. This has all the hallmarks of a home run for our customers. When we said at the time we closed that deal that we wanted to double the size of that business in five years, while we're 11 months in, we're firmly on track to make that happen. Additionally, in specialty, we opened 13 cold starts in the first quarter towards our target of about 40 cold starts this year. To sum it up, I've conveyed the scope of the market opportunity going forward and our competitive positioning to capture that growth. The prevailing trends that matter to our business are market-driven, and our markets are healthy. It's why we've been bullish about this year from day one, and why we raised our guidance when demand continued to track above our initial forecast. 2022 is off to a very strong start with all the makings of a year of record results. Now, Jess will go over those results, and then we'll go to Q&A. Jess, over to you.

Thanks, Matt, and good morning, everyone. I'll build on Matt's comments by saying we are very pleased to have delivered record first quarter results across virtually every financial metric. That momentum carrying into the second quarter, along with strong customer confidence and our increasing visibility, supports the increase to our 2022 guidance for revenue, adjusted EBITDA, and free cash flow. I'll share more on our updated guidance in a bit. Let's start with a closer look at the results for the first quarter. Rental revenue for the first quarter was a record $2.18 billion. That's up $508 million or 30.5% year-over-year. Within rental revenue, OER increased by $392 million or about 28%. Our average fleet size was up 16.4%, which provided a $231 million tailwind to revenue. Fleet productivity was better by a healthy 13%, contributing $183 million, and fleet inflation of 1.5% was a drag on revenue of $22 million, rounding out the change in OER. Additionally, within rental, ancillary revenues in the quarter were higher by about $99 million or 43%, mainly due to increased recovery of delivery fees and other pass-through charges. Re-rent was up $17 million. Used sales for the quarter were $211 million, a decline of $56 million or about 21% from the first quarter last year. We decided to sell less fleet so far this year, mainly to support the robust rental demand we've seen through the first quarter, which we expect will continue into our busy season. The market for our used equipment continued to be very strong, supported primarily through better pricing and a higher percentage of fleet sold through our most profitable retail channel. Adjusted used margin was 57.8%, representing sequential improvement of almost 560 basis points and year-over-year improvement of just over 1,500 basis points. Now moving to EBITDA. Adjusted EBITDA for the quarter was $1.14 billion, another record for us, and an increase of 30.5% year-over-year or $266 million. The dollar change includes a $317 million increase from rental. Within that, OER contributed $278 million, ancillary was up $37 million, and re-rent added $2 million. Used sales helped adjusted EBITDA by $8 million, while other non-rental lines of business provided $11 million. FC&A was a headwind to adjusted EBITDA of $70 million driven in part by higher commissions on higher revenue. As expected, we saw certain discretionary costs continue to normalize. Also coming in as expected were adjusted EBITDA margin and flow-through for the first quarter. Adjusted EBITDA margin was a solid 45.1%, up 270 basis points year-over-year, with a strong flow-through of 57%. This reflects, in large part, excellent cost discipline across the business as we manage inflation, including in areas like delivery and fuel. Increased fleet productivity and higher used margins also helped to offset not just inflation pressures, but the impact of normalizing costs like overtime and travel and entertainment. I'll shift to adjusted EPS, which was a company best of $5.73 for the first quarter. That's up 66% or $2.28 versus last year, primarily from higher net income. Looking at CapEx, gross rental CapEx was $482 million in Q1, which is higher than a typical first quarter and followed the fourth quarter last year where we brought in a record amount of fleet. To Matt's earlier point, we've managed our fleet levels to service robust customer demand, so while our fleet levels grew sequentially in what is typically our slowest time of the year, we've put that additional fleet to work, supporting the 13% increase in fleet productivity I mentioned earlier. Our proceeds from used equipment sales were $211 million, resulting in net CapEx in the first quarter of $271 million. That's up $243 million versus the first quarter last year. Now, turning to ROIC, which was a healthy 10.9% on a trailing 12-month basis. That's up 60 basis points sequentially and 200 basis points year-over-year. Importantly, our ROIC continues to run comfortably above our weighted average cost of capital. Let's turn to free cash flow and the balance sheet. We generated $572 million in free cash flow in the first quarter after investing a record amount in CapEx. We've continued to delever the balance sheet, which is rock solid. Leverage was 2.0x at the end of the first quarter, down 20 basis points sequentially and 30 basis points from first quarter 2021. I'll note that our leverage is currently at the lowest level in our history. Liquidity at the end of the quarter was a very strong $3 billion, made up of ABL capacity of just over $2.9 billion and cash of $101 million. A quick note on our share repurchase program. We spent $262 million through March 31 on our current $1 billion program, having bought back just over 800,000 shares. We still expect to finish that program this year. Let's look forward now and talk about our updated guidance for 2022, which we shared in our press release last night. Total revenue is now expected in the range of $11.1 billion to $11.5 billion, an increase of $450 million. That shared a number of insights on the demand environment, which underlies this raise, broad demand we are seeing across the geographies in which we operate and the end markets we serve. We have confidence that we can capitalize on that strength in our end markets and flow that through to the bottom line. That will come largely from a combination of better fleet productivity and a continued focus on costs as we manage inflation in our business. As a result, we have raised our adjusted EBITDA range to be $5.2 billion to $5.4 billion, up $250 million from our previous guidance. At the midpoint, we will increase EBITDA margin by 150 basis points and deliver strong flow-through for the year of about 56%. Our range for growth in net CapEx is unchanged. We still expect to source $3 billion of gross CapEx at the midpoint. Similar to our actions in the first quarter, for the full year, we expect to sell less fleet than planned given the demand opportunity. However, we expect proceeds on those sales will remain consistent with our original guidance considering the current strength in our used market. That leaves our net CapEx guide unchanged as well. Finally, our free cash flow guidance has increased by $200 million to generate between $1.7 billion and $1.9 billion. That increase is mainly due to higher operating profit expected for our business this year. Now, let's get to your questions. Operator, would you please open the line?

And our first question comes from David Raso. Your line is open.

My question leads to the decision for the gross CapEx. The decision not to increase the gross CapEx, how much of that is a conscious decision focusing a bit maybe a little more on margins and returns versus just the inability from what you're hearing from your suppliers to get higher in the rest of the year above the original plan?

Sure, David. The margins and returns will always be central concerns for us each year. Currently, despite the existing demand environment, we advanced our spending in Q4, as I noted earlier. This gave us a head start, and we even allocated a bit more into Q1 to support that strong demand. However, we do not anticipate having the same opportunity in Q2 since the Q3 orders cannot be moved forward. Our suppliers are putting in significant effort to keep up with our current orders, but I don't believe we'll have the chance to speed things up. This situation, as you mentioned, provides us a solid opportunity to concentrate on returns and margins, which is what our updated guidance reflects.

With that being a focus, and I know the comps get harder on the time utilization, but how should we think about the cadence of fleet productivity the rest of the year?

On fleet, you provided some additional details. I assume you're referring to fleet productivity.

Yes. Correct. Fleet productivity.

Yes. As we discussed in January, we anticipated positive trends in absorption and time during the first quarter. We not only met those expectations but also surpassed them, experiencing a much different seasonal decline in rental revenue from the fourth quarter to the first quarter than typically occurs—almost half of what we would usually expect. This contributed significantly to the 13% growth. However, we will not have that advantage in the second through fourth quarters, as we experienced strong performance last year during these periods. We would be pleased to achieve a similar level of absorption. This leaves us with a full year that still presents a great opportunity to drive mid-single-digit improvements in fleet productivity. While we do not attempt to forecast this precisely, it is important to illustrate the difference between a robust 13% growth and a full-year figure that will likely be closer to mid-single digits, mainly due to the comparison with last year’s performance.

I'm curious about the incrementals for the year, which you're targeting at about 56%. Now that you have visibility for the rest of 2022, how sustainable do you think this 56% rate is? Is it more about focusing on rate to drive margins or some year-over-year cost relief? I'm just trying to understand how to interpret the impressive incremental you're aiming for this year.

David, it's Jess. I'll take that one at least to start. So, we feel pretty good that as we look forward, and to your point, I mean, we haven't even started the budgeting process for 2023. But I will say as we look forward at what we believe could be another good year for us, another growth year for us in 2023. We feel really good that we would continue to deliver flow-through in that 50% to 60% range, right, with the setup of a very constructive top line and then the cost management that you can expect, we will continue to focus on as we go into 2023. So, from our perspective, we're confident that with the right environment, we're still delivering this kind of strong flow-through going forward.

And our next question comes from Rob Wertheimer. Your line is open.

Your margin performance has improved by 460 basis points, reaching some of the best levels you've ever recorded. I'm interested in knowing how much of this is due to rental rates improving, possibly because the industry is somewhat constrained, and whether you have a competitive edge thanks to your substantial supply. Additionally, how much of this increase can be attributed to better utilization and your efforts to enhance operations and maintain margins, especially given the strong volumes you've experienced. Was this performance influenced by standard pricing, or was it a combination of factors this quarter? That's my question.

Yes. I believe it was really the entire package we have been developing, supported by strong demand. It's important to remember that top line growth plays a significant role, and being positioned to leverage that growth profitably is crucial. However, achieving this isn't instantaneous. While we don't disclose the individual aspects of fleet productivity, we consistently focus on those elements at the field level on a daily, if not hourly, basis. We've equipped our team with the necessary tools to manage this effectively. Hence, the foundation rests on demand and the discipline to operate the business efficiently. I'm very pleased to see the industry is also aligning with this approach. Overall, I'm satisfied with both the growth and the professionalism within the industry. I believe these factors contribute to our margins, alongside the processes we've developed over many years, most of which are now ingrained and enhanced by technological advancements. I'm truly pleased.

And our next question comes from Steven Fisher. Your line is open.

Great. So with your view of mid-single digits on fleet productivity for the year, that obviously reflects a big slowdown from the 13% because, as you said, you've got the tough comps against really strong utilization last year. So, I guess maybe just to kind of frame for people, you can just remind us of the metrics that you're really trying to manage to and how much moderating fleet productivity matters to what you're really trying to achieve here because I don't know if you're anticipating somewhere in that back part of the year, fleet productivity being kind of negative or zero in any quarter, but how much does that matter to really what you're trying to achieve?

Yes, I understand it can be a bit confusing with the changes in fleet productivity. To clarify, nothing is slowing down. We have a comparison issue because last year was very busy for us. Fleet productivity is measured year-over-year. I don't believe we will see negative fleet productivity at any point this year. That would not align with the supply-demand dynamics we've discussed. We will need to rely on two other factors to maintain fleet productivity since we no longer have that high utilization comparison from last year. There will still be significant opportunities, and we expect to see growth in the mid-single digits. This is how we are guiding expectations for fleet productivity, and there is no slowdown.

Okay. That's very helpful. And then, it seems like you've been able to manage fuel costs fairly real time. Can you just kind of give us a sense of what it is that differentiates your ability to manage that so well and some of the other cost inflation that you seem to be managing pretty well?

Steve, it's Jess. So the first thing I'd say is the opportunity to pass some of those costs through gives us that ability to absorb the increase and protect the P&L first. Second, I would say, Matt mentioned a couple of minutes ago the processes that we have and the technology that underscores those processes. Built within our technologies is a fuel calculator that stays real-time or as close to real-time as possible with the changes in fuel prices that we then use as part of the equation for how we charge through delivery costs and delivery recovery. We're able to keep pace using technology across the network in ensuring that we're covering as much of that pass-through cost as possible.

And our next question comes from Ross Gilardi. Your line is open.

Could you elaborate on the growth you're observing in the industrial segment of the business? What are some of the key factors that are contributing to this growth, such as semiconductor capacity installation or BV technology?

Yes. It's pretty broad, like most of the rest. I'd say chemical and energy leading the way, oil and gas. The point I made about industrial is, if you remember pre-pandemic, right, industrial had a couple of tough choppy years. We're starting to rebound just before the pandemic, and then it all got stalled. These are markets that were stressed, and now to see that we have 13% growth in the beginning of green shoots, I really believe in some of the end markets we're focused on, like downstream and chemical; they're really going to start taking off, and we think it's going to create a future tailwind next year. That's the point we're making about industrial overall. Now non-residential, as you all know, is up 28% for us, as I said in my prepared remarks. That's been running really hot. This is without tailwinds, all these numbers of infrastructure, which we feel is coming. We haven't even talked about on-shoring, which is another great opportunity as the world tries to work through supply chains. There's a lot of conversation and hopefully funding put behind that opportunity here in North America.

All right. Great. Then one of your suppliers in particular is talking about a transition evolution more to formula-based pricing. Are you hearing that consistently from all of your major suppliers? And does that make it harder to circumvent the cost inflation into next year on equipment? Are you doing anything in terms of committing to longer-term supply agreements to dampen the cost inflation into 2023?

We consistently engage with our vendors about both opportunities and challenges, such as rising costs and commodities. While it makes sense in theory, we haven't implemented this approach yet, but we are open to seeing what it could bring. I appreciate the idea of connecting costs and pricing, provided it works both ways. We maintain frequent discussions with our partners, although we haven't specifically addressed this topic yet. It's crucial for us to have open dialogue about it. I find the concept of linking costs and pricing together very appealing.

Matt, maybe just lastly, what specifically are you hearing on U.S. federal infrastructure into next year? I mean do we have shovel-ready projects ready to go by the end of 2022? Or any subtle timing shifts that you've learned about relative to what you guys said last quarter?

No shifts, but I'd say we always thought it was going to start in 2023. We're starting to hear more real planning conversations, where it's no longer just a discussion about when the funding is going to come, but people are starting to plan how they're going to activate materials and labor. No new information, but I'd say a louder steady drumbeat.

And our next question comes from Jerry Revich. Your line is open.

Really nice performance from a free cash flow statement guidance and also on the balance sheet. I'm wondering if you could just update us on what your M&A pipeline looks like in specialty versus general rental versus how you're thinking about buyback from here?

Sure. I'll take the M&A part, and let's just speak to the buyback. The M&A pipeline remains robust. We look at a broad spectrum of opportunities, including looking for those gems like General Finance that would add new products to our portfolio. We're on the lookout. We don't have anything that's imminent right now, but the pipeline is robust, and we've had a couple of small deals that we've finalized here in Q1. We're working the whole gamut, and we certainly have a lean to specialty, specifically specialty that will add new product lines because using GFN as an example, it's easy for us to grow those businesses once we put them into our network. Then Jess could speak to you on the share repurchase.

Sure. As I mentioned earlier, we're $262 million into the $1 billion program. We'll keep buying against that program, and we'll finish it this year. Expect us to continue to buy in our normal way, right, with pretty consistent buys over the period. We'll definitely look to finish that program this year. What comes after that, we'll see. We'll talk to our Board, and we'll let you guys know accordingly.

Okay. Great. Just the transition to the EBITDA margin performance this quarter. If we were to apply just normal seasonality off the run rate that you folks delivered here, that would get a couple of hundred basis points of upside to your full-year margin guidance. So I know it's early in the year, but are there any one-time items in the first quarter that might not be helpful over the balance of the year? Or anything we should keep in mind compared to that normal seasonal pattern?

Yes. Great question, Jerry. There's actually nothing discrete that we would call out that you should be thinking about as a carry-forward into the rest of the year that affected Q1 or even something that we see affecting the rest of the year.

And our next question comes from Mig Dobre. Your line is open.

I want to go back to the fleet productivity discussion. It sounds like time utilization is no longer a lever, or if so, just maybe a pretty modest one. That mid-single-digit comment you provided, Matt, is largely driven by pricing, I'm presuming. So I guess my question is from a pricing standpoint, what are you seeing out there relative to prior cycles? Because my guess would be that given how tight the supply-demand of equipment currently is, and the fact that we're seeing some pretty unusual inflation in terms of equipment costs, too, pricing right now should be much better than what we have seen over the past decade. If I look at something like 2012, for instance, you should be able to do at least what you've done in 2012 as far as pricing is concerned. I'd appreciate some color here, and if there's anything maybe that I may be misreading in terms of where we currently are from a pricing ability for the industry.

No, I don't think you're misinterpreting it at all, Mig. I believe you're spot on regarding the end market and the supply-demand dynamics. However, I think we may need to approach this from a different perspective. We experienced a technical disruption in 2015, related to the timelines you mentioned in oil and gas, and then, of course, through COVID, but we didn’t see those significant price drops. It wouldn't be unusual not to see a substantial rebound. I agree with your point about the opportunity to continue focusing on and enhancing fleet productivity due to supply-demand dynamics. However, I wouldn't use 2011 or 2012 as a benchmark since there was a significant recovery to achieve. You may have heard from others that pricing has been in the mid-single digits, and we believe that's in line with what the industry should be able to reach, and we are very focused on that.

Yes. I appreciate the point on comps. Then my follow-up, I got to go back to CapEx as well, gross CapEx. At least optically, at the midpoint of your guidance, your gross CapEx is flat relative to what you've done last year. I'm presuming that equipment pricing is probably up year-over-year. So again, I'm going to ask the same question that's been asked. Given the fact that the business is doing well, why should we be looking at flat gross CapEx year-over-year? What's the constraining factor? And then if there is a constraining factor, should we be thinking for maybe increased spend in '23 as maybe OEMs' ability to convert on backlogs and deliver equipment hopefully increases?

Sure. First, I'll touch on the first phase of the part about it being flat. Just remember how back-loaded that CapEx was to get to the $3 billion last year. You could take whatever number you decide would have been a normal Q4 last year. We took in an additional $350 million or $400 million; that's really just a running start into this year. So, you could comp those numbers differently if you wanted to. But technically, by the calendar, you're accurate. It connotes a flat year-over-year spend. We certainly have more fleet than we started that would note in this year. As far as the suppliers, I don't want to pick those guys up. They're working their tails off to keep pace with what already was high expectations of fleet. We did a lot of planning early on so that they can support a $3 billion CapEx year. I don't think it's realistic that they're going to be able to change the delivery slots right now for us to pull forward. I said this earlier, our back half capital can't push into the front half, which is when it matters. If we decide at the end of this year, so we let some more CapEx flow in Q4, maybe the number goes up, but it's not relevant to our conversation about this year's guidance. That's why we think our communication is accurate for the expectations we expect to live.

And our next question comes from Ken Newman. Your line is open.

Once you go back to the leverage, obviously, it's back to the lowest level. I think you have on record. I know you talked a little bit about capital deployment priorities, but I wanted to ask a little bit more of a longer-term question and how we should be thinking about the leverage profile if closer to 2x is kind of the normal, or if there are opportunities to drive that even lower?

We're very comfortable with where the leverage is right now. As we think about it looking forward, the priority for us from a capital allocation perspective is going to be to fund growth and have the dry powder available to support M&A that makes sense for us to continue to grow the business from an inorganic perspective supporting the robust organic growth that you see us delivering this year. Our focus is going to be growth; we want to make sure we have that dry powder to be able to take action on deals that make sense for us going forward. There's nothing magical about falling below 2x for any period of time. We'll look at the pipeline, how we can continue to supplement the growth of the business, and what that cash need could be. Then together with our Board, we’ll talk about where there may be excess cash available to do other returns like a share repurchase program and maybe a dividend in the future. But for now, we're good with continuing with the leverage range we have and keeping focus on growing this business organically and inorganically.

Got it. And then just going back, I think you talked about incremental market share gains in the quarter. Obviously, you were able to pull forward some fleet into the quarter to maybe service that demand. Do you have an idea, or is there a way that you can help us kind of bring out just how much share you think you're taking in this environment relative to some of your smaller competitors?

Not too early, right, not reliable data, but I think this has been a consistent theme of the industry where through growth funding, leveraging scale and consolidation, the top half of the industry continues to take more share. As we said before, the big are getting bigger, and it's good for the industry. It's proven out in this cycle, especially in how we responded to COVID and the way the supply-demand dynamics are being treated responsibly. I don't have numbers that I would point to that are any different than what we've had in our deck from last year, but I'd say the big is getting bigger is a trend that's been going on for quite some time and will continue.

Yes. If I could just ask one more here, I just want to go back to your comments on the infrastructure conversations you're having with your larger customers. I'm trying to get a better sense of just the magnitude of some of these larger projects as you kind of look out into 2023. Obviously, the market is becoming a little bit more cautious on economic conditions. My view is that if things were to come to a hard landing, infrastructure is probably a little more of a resilient catalyst for you given that the funding is already out there. So, maybe a two-part question here. One, do you agree with that? And then two, if that's the case, do you feel like you have the ability to secure a fleet or bring forward and service that demand if those projects are brought forward a little bit?

Yes. I absolutely agree with you that it will be more resilient. Especially, how much of this would be there for this work to be done, I believe it will move forward in just about any environment. As for the fleet, we feel comfortable. Remember that we serve 90% of the fleet to customers; those are the same type of assets we have in our fleet. They’re very fungible, and we can move and add as necessary. Most importantly, it's assets that our team is very comfortable supporting to the end market. By next year, I expect, hopefully, by the end of this year, that the supply chain will be sorted out. I have no concerns about us being able to fund these projects.

And our next question comes from Stanley Elliott from Stifel. Your line is open.

Quick question. You talked about the power bank and, literally, lithium battery packs. Is this something more that you're seeing your customers request from you? You've obviously made a big move on ESG. And then curious how those products rank in terms of the return on invested capital metrics that you guys follow so closely versus the rest of some of your other fleet?

There are pockets of customers that are pulling in this direction, right? This is usually because of where they're working, but also because they have their own goals, their own ESG goals, and what they want to do in being a good responsible company in the world, and we want to support that. The OEMs are the real drivers here to support this need and desire, and then we're a conduit between the OEMs; but we're a conduit that's very active. We're going to partner with OEMs and customers to try new stuff. It's going to take some incremental funding that’s tremendous, but the money we’ll spend. At some point, the viability of all this is going to be scale. Once that happens, it won't just be a pull; it could be table stakes. We’re excited to be part of that. I don't know how long it will take, but it's good to see some movement happening, and we're going to participate aggressively in that move.

For the second part of your question, Stanley, it's still too early to fully assess the return profile of these specific categories of fleet. Once we achieve scale, we will have a clearer understanding of the consistent or complementary or enhanced return on invested capital that would result from the investment in these fleet categories.

Yes, it seems this could provide a positive boost to our return on invested capital. Regarding the 40 specialty branches, will these be new locations to enhance your storage capabilities in the office, or will they be spread across the wider portfolio? Also, considering the variations in some of the newer specialty sizes, is it becoming more challenging to secure real estate and arrange for product shipments?

We are looking to expand our modular presence in mobile storage, and this applies to all areas. We have a dedicated team focused on this, and while there are challenges related to real estate that vary by product line, we are confident in our efforts. The situation with the fleet mirrors the rest of the supply chain, though I would note that acquiring steel boxes is currently easier than obtaining items like engines or chips. Despite a slow initial phase for the modular team after our acquisition last year, they have begun to see progress, especially in the latter half of last year. We are receiving supplies actively and performing well. I am optimistic that the growth in our specialty areas will be well supported, and the OEMs are addressing current challenges, allowing us to effectively manage these new initiatives this year and in the future.

And our next question comes from Scott Schneeberger from Oppenheimer. Your line is open.

Great. On the theme of specialty, I think you all back in 2019 were targeting five years out about $3 billion of specialty revenue at the end of last year, and then commentary today on the call that GFN is going well and feel really good about doubling that within five years. I'm just curious, maybe a progress update, Matt, on where you think specialty is in the next few years and how much of that is organic. I know it was addressed earlier on M&A. There are usually big targets out there. But just thoughts on organic and how you get there, and please put in any M&A comments as well.

Sure. As you can hear, it's an end strategy for us, not an old strategy on organic and acquisition. The part that we control is organic. We don't need anybody else to dance with us to do that. We've been aggressive with cold starts over the past few years in specialty. Specifically in modular storage, we have a lot of white space to grow organically. We’re growing all our specialties with cold starts, and we feel good about that growth. We've been saying this for a while now. Power, one of our more established specialties, is still showing tremendous growth. We think penetration is part of the story, even for those moving along the maturity level of filling out their distribution points. We're at different levels depending on the product, but all in, we still have a lot of opportunity, both in filling white space and more secular penetration with our specialty products. We feel good about it.

Thank you for that. As a follow-up, oil and gas are clearly doing very well at the moment. You mentioned earlier in this call that back in 2015, the oil prices had an effect. We are currently in a very different situation. I'm interested in your thoughts on how things are progressing, the percentage of revenue from this sector, and any limitations you foresee regarding its size, considering its cyclical nature and what you think will drive growth in this area.

Sure. We'll look at oil and gas in two spots; upstream and downstream. Overall, oil and gas grew, when you just look at upstream, downstream, and midstream, 19% in Q1. They're showing great growth. The area where we're even more focused will support the upstream for the right customers. We’ve stated clearly that we’ll manage how far and how hard we go with this business. Downstream is a totally different animal for us. We're inside the gates in so many of these refineries, and we have long-standing strong relationships with these folks which we will support with all our might. I’m excited about that growth. Those markets were down for a while, so seeing it growing right now is important. Energy represents about 10% of our total revenues, with downstream accounting for about half of that. This is a significant part of our growth opportunity.

And our next question comes from Seth Weber from Wells Fargo. Your line is open.

I want to connect a couple of questions that have been discussed. I noticed that specialty capital expenditures were more than 25% of your total for the quarter, specifically 27%, which seems quite high. Is this the right proportion to expect moving forward this year? On the other hand, why aren't you increasing your fleet? There are concerns regarding equipment supply in the market. Could you explain your capital expenditure mix for the future?

Sure. That mix isn't too far off of how revenues are distributed. We were able to get specialty products like containers faster; they're not really supply constrained there. Some of the specialty products we were able to accelerate when looking at it by the quarter. But full year, that's not too far off how we want to fund specialty. It might dampen a hair from there, but not tremendously. We're all in on supporting our specialty growth as well as our full portfolio grow.

Right. Okay. And then, Matt, in your prepared remarks, you talked about cross-selling with General Finance and the Specialty business. Are there any metrics that you can share around cross-selling or share of wallet with some of your national customers? Anything that would help us understand the progress you’re making?

That's a little too much secret sauce for my liking on open mic. But all kidding aside, we believe that the philosophy behind having a broader portfolio, solving more problems for customers, has been key to our strategy for many, many years. We’re just furthering that line of thinking with adding new products and a broader network. Not metric-driven, but certainly retention-driven, and we're really pleased with the level of retention that cross-sell brings as well as growth. So, very pleased.

And our next question comes from Stephen Volkmann from Jefferies. Your line is open.

Just a couple of really quick clean ups. I think you said seasonality in the first quarter was a little better than you expected. Do we get normal seasonality as we move into the second quarter?

Yes. What we have embedded in our guidance is what we expected for the normal seasonality in the balance of the year. This was more than just a little bit better. It was, in 31 years, the best I've seen in Q1. We're starting off at a higher base and adding our normal seasonality. That's how we look at the year, and the trends are heading in that direction. The updated guide is appropriate.

Okay. Great. I think you said some discretionary costs normalized in the first quarter. Does that also occur in the second quarter, and then maybe it's sort of done in the second half, but just any thoughts there?

Sure. It'll carry through the year. One of the biggest areas is T&E; that's something that's recovering from essentially nothing during the COVID period. We do expect we're going to see that through the end of the year, and that's assumed in our guidance as well. Over time, another area has a similar phenomenon.

And with that, I would like to turn it back to Matt for closing remarks.

Thank you, operator, and thanks, everyone, for joining us. As you can see, we're clearly bullish about how this year is playing out, and we have a high level of confidence in our outlook for 2022. We'll have more to share in July. So look forward to talking to you then. In the meantime, you can give Ted a call at any time with any questions or comments. With that, have a great day.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.