United Rentals, Inc. Q1 FY2023 Earnings Call

Good morning, and welcome to the United Rentals Investor Conference Call. Please be advised that this call is being recorded. Before we begin, please note that the 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 could 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, 2022, as well as to subsequent filings with the SEC. You can access these filings on the company's website at www.unitedrentals.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations. You should also note that the company's press release and today's call include references to non-GAAP terms such as free cash flow, adjusted EPS, EBITDA and adjusted EBITDA. Please refer to the back of the company's recent investor presentations to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer; and Ted Grace, Chief Financial Officer. I will now turn the call over to Mr. Flannery. Mr. Flannery, you may begin.

Thank you, operator, and good morning, everyone. Thanks for joining our call. Three months ago, after our record full year financial performance in 2022, we told you that we'd continue raising the bar in 2023. And I'm pleased to say that the year is off to a strong start, which you can see in the results that we shared last night. The integration of Ahern is on track, and our team is doing a great job executing our plan and delivering for our customers. And as always, we're very pleased that we did this safely with another recordable rate below one. This execution and the continued strength of our end markets give us the confidence to reaffirm our full year 2023 guidance for substantial growth, solid margin expansion and significant free cash generation. Let's start by digging into our first quarter results. Total revenue grew by 30% to a first quarter record $3.3 billion. Within this, rental revenue increased by 26%. The EBITDA increased 32% to $1.5 billion, while margins expanded to 45.8%, both first quarter records. And finally, our return on invested capital set a new high watermark at 13.1%. During the first quarter, we invested $797 million in gross CapEx. And year-to-date, we've closed two local acquisitions that nicely complement our strategy. Combined with the actions that we took during the first quarter and fourth quarter of last year, we're well positioned to support the demand our customers see. Looking more closely at the first quarter demand. Key verticals saw growth across the board, led by non-residential construction, industrial manufacturing and power. Geographically, we saw much of the same, including double-digit growth in all of our regions. Our specialty business delivered another excellent quarter with rental revenue up 24% year-on-year and strong growth across all lines of business, led by our mobile storage team. Within specialty, we opened six new locations and are on track for around 40 cold starts this year. Used sales were another positive in the quarter, with revenue up 84% year-on-year, largely due to the normalized volumes after holding back on sales in 2022. And not only were we seeing recovery rates and margins strong, but the level of demand provides another positive indication of how our customers are feeling about their outlook and the need for equipment. Turning to capital allocation. Our focus remains on driving profitable growth and returning excess cash to our shareholders. We view this as a hallmark of a good company and a means of maximizing value. During the quarter, we returned over $350 million to our shareholders, supported by the strength of our balance sheet and free cash flow generation. Looking ahead, we see continued reasons for optimism regarding our business in the balance of '23 and beyond. Near term, we're encouraged by the momentum we're carrying into our busy season, combined with a variety of positive industry indicators. First off, both internal and external measurements of customer confidence continue to point towards growth in 2023. And this is underpinned by current activity as well as the strength of customer backlogs. Additionally, non-residential construction starts increased over 30% in March and the Dodge Momentum Index was up 24% year-over-year. And the ABI points to growth as well, where the forward-looking inquiries component continues in the right direction. Together, these factors support our reaffirmed full year 2023 guidance. Longer term, we remain confident in our ability to capitalize on several significant multiyear tailwinds for our industry that we view as resilient in any economic environment. First is infrastructure. It remains early, but we continue to see a ramp in spending from the federal infrastructure bill across a variety of project types, including airports, bridges and roads. We're also well positioned to support our customers as they undertake projects across clean energy and advanced manufacturing funded by the Inflation Reduction Act. Within private construction, we continue to see strong investments across manufacturing, led by autos, semiconductors and energy and power. Combined reports indicate that these tailwinds hold the potential for over $2 trillion in project spend in the U.S. over the next decade. We're very well positioned to leverage our competitive advantages on these projects. Whether through the size of our network or the breadth and depth of our products and services, our team is prepared to serve our customers and drive value creation for our shareholders. Before I wrap up, I want to highlight some of the other significant achievements that Team United had in the first quarter. And you've long heard us talk about doing well by doing good. And our team continues to be recognized for their efforts in this area, including recent wins from the Wall Street Journal, where we made their Management Top 250 list, recognizing companies for doing the right things well, and the Just 100, which recognizes companies that are doing right by all their stakeholders while also generating strong performance for shareholders. So to sum it up, we continue to feel good about 2023 and beyond as our long-term strategy has us well positioned. Our team is executing and our customers know we're there to support them with unmatched capabilities. And as we've consistently demonstrated, we know how to manage the flexibility of our business model while leveraging the strength of our balance sheet and the durability of our cash flow. And this gives us multiple options for creating value. Lastly, before I hand it over to Ted, I want to quickly highlight that we'll be hosting an Investor Day on May 31, during which we'll provide an in-depth review of our strategy, key initiatives and financial performance with a Q&A session to follow. The event will be held both virtually and in person in New York City, and we hope that you can join us. With that, I'll hand the call over to Ted to review our financial results, and then we'll take your questions.

Thanks, Matt, and good morning, everyone. In our first quarter press release, we reported excellent results that align with our expectations and set us up well for the year ahead. Matt expressed that we feel optimistic about both 2023 and the future, considering the market opportunities, our strategy, our team's strong execution, and our commitment to serving our customers with unmatched capabilities. Before I delve into the numbers, the figures I'll discuss are as reported, except where noted as pro forma, which includes Ahern's first quarter 2022 standalone results for comparison. First quarter rental revenue reached a record $2.74 billion, marking an increase of $565 million or 26% from the previous year. Within that, OER rose by $469 million or 26.1%. Our average fleet size grew by 25.6%, contributing $460 million, and fleet productivity increased by 2%, adding another $36 million, offset partially by our usual fleet inflation of 1.5% or $27 million. Additionally, ancillary revenues were up by $93 million or 28.3%, and re-rent contributed another $3 million or 6.1%. On a pro forma basis, rental revenue increased by 16.6%, and fleet productivity saw a healthy rise of 5.9%. First quarter used sales shot up by 84% to $388 million as we returned to a more normalized volume after holding onto our fleet for much of 2022. Adjusted used margins rose by 170 basis points to 59.5%, benefiting from strong retail pricing. Moving to EBITDA. Adjusted EBITDA for the quarter surpassed $1.5 billion, another record for the first quarter, reflecting a $364 million increase or 32%. This change included a $313 million increase from rental, with OER contributing $285 million. Ancillary revenues added $29 million while re-rent decreased by $1 million. Used sales outside of rental added about $109 million to adjusted EBITDA, and other non-rental business lines contributed another $5 million. SG&A rose by $63 million, mainly due to higher commissions and the return to normal levels of certain discretionary costs. However, as a percentage of sales, SG&A declined by 120 basis points year-on-year to 11.6% of total revenue. Regarding first quarter profitability, our adjusted EBITDA margin climbed by 70 basis points on an as-reported basis and 160 basis points on a pro forma basis, reaching a record 45.8%. This corresponds to 48% flow-through on an as-reported basis and over 53% on a pro forma basis. Finally, adjusted EPS was 5, another first quarter record, reflecting a year-over-year increase of $2.22 per share or nearly 39%. In terms of CapEx, gross rental CapEx was $797 million, while net rental CapEx was $409 million, indicating a year-over-year increase in net CapEx that positions us well for growth in 2023. Our return on invested capital and free cash flow reached a new record at 13.1% on a trailing 12-month basis, up 40 basis points sequentially and 220 basis points year-on-year, which is 310 basis points above our current weighted average cost of capital. Free cash flow for the quarter stood at $478 million or an LTM free cash margin of 13.5%, all while we continue to fund significant growth. Looking at the balance sheet, our leverage ratio improved to 1.9x at the end of the quarter, showing a 10 basis point reduction both sequentially and year-over-year. Our liquidity exceeded $2.65 billion at the end of March, with no long-term note maturities until 2027. Importantly, all this comes after we returned $353 million to shareholders in the quarter, which included $103 million in dividends and $250 million through share repurchases. Looking ahead, we reaffirmed our guidance for all metrics. Given the diverse momentum across our markets and feedback from our customers, we are confident that 2023 will be a record year for the company. To recap, total revenue is projected to be between $13.7 billion and $14.2 billion, suggesting full-year growth of about 20% at midpoint and pro forma growth of 12%. Within total revenue, our used guidance is implied at $1.3 billion. Our adjusted EBITDA range remains between $6.6 billion and $6.85 billion. On an as-reported basis, this suggests flat full-year adjusted EBITDA margins and flow-through of around 48%. On a pro forma basis, our guidance still implies approximately 80 basis points of EBITDA margin expansion and flow-through in the mid-50s. For the fleet, our gross CapEx guidance is $3.3 billion to $3.55 billion, with net CapEx of $2 billion to $2.25 billion. Finally, our free cash guidance is between $2.1 billion and $2.35 billion before dividends, repurchases, and bolt-on M&A. Now, let me turn the call over to the operator for Q&A. Operator, please open the line.

So my first question is basically on demand. And you gave a pretty good overview. But if we just leave aside the Dodge and all the surveys and everything and just think about what you're seeing on the ground and hearing from your customers. Are you seeing the mega project funding start to flow through? Are you seeing lots of activity in sort of quoting or proposals on loans? And does it give you any differential, I guess, versus other years look into supply/demand as we move through the year? Does it continue to look tight does pricing continue to look well supported by supply-demand dynamics as we go through the balance of the year?

I will begin with the demand side. We have seen broad-based demand across all of our business units and specialist areas, each experiencing double-digit growth this quarter. This momentum has been consistent over time, and all the sectors we operate in are performing positively. To be precise, disaster and recovery saw a slight decline, but this follows an impressive 132% growth comparison from the first quarter last year, and it only represents 1% of our overall business. Therefore, the overall strength of demand remains robust across all sectors, regions, and product lines. We are optimistic about this. Considering the supply-demand dynamics, influenced by mega projects as well as the broad-based demand I mentioned, we anticipate a favorable market for continued strength across the industry, complemented by our disciplined approach. We have confidence in the rates and the overall positive environment, which allows us to reaffirm our guidance based on this demand.

So that's pretty responsive. And then just on gen rent gross margins, is that any indication of rate versus cost balance? Or is that largely explained by Ahern coming in or other factors? And I'll stop there.

Yes, Rob, this is Ted. I'll take that one. That is an indication of the impact of Ahern. And just to be clear, that was in line with expectations. When you look at those margins, it reflects the fact that we bought a business that we knew had lower margins. As we integrate it, that's the effect you see.

I think for most people, the drag that Ahern brought to the reported numbers was a bit of a surprise, the magnitude of it. And I'm just trying to get a sense of productivity going forward, and I know the rate comp gets harder. But the improvement you would think you'd have around an Ahern and the smaller acquisition able, but particularly Ahern, can you tell us about why the drag is that much? And the implications for productivity the rest of the year, can you improve that mix or whatever they're dragging on the reported numbers? And then I know you have the offset, though, of course, the rate comp gets harder. I think we're all just trying to figure out in the reported numbers, the whole year, is it going to be sub 2? Because the base case had been productivity would slow through the year. But now that we have a reported number of 2, I think we're just trying to figure out, as productivity flat to down by the end of the year on the report.

Yes. Let me clarify that. First, I encourage everyone to review the pro forma figures. Those reflect the Ahern base, which is how we manage our business. We incorporate that asset base into the base year for our comparisons. Not including it in the base year results in a gap of about 4 points. We anticipate that this gap between pro forma and as reported figures will persist. To put it simply, the amount of capital Ahern had, which we are adding to the base year, generated about 40% rent revenue, or $0.40 for every dollar. In contrast, our experience is closer to 60% per dollar, leading to a dilutive effect. We expect the gap to remain at around 4% for the remainder of the year between our reported and pro forma numbers. This baseline adjustment is established and does not represent a change because it has already occurred. Any improvements in those assets will positively impact our fleet productivity. As you know, we consolidate our stores into a unified market approach, which includes combining customer statements that overlapped. This consolidation will contribute to the improvement we will continue to report both as reported and on a pro forma basis. Does that address your question adequately, David?

It does maybe for one quarter, but the idea that the gap has to be that wide throughout the year. you would think you'd be able to position the fleet, sell off some inefficient fleet, maybe the rates they were getting. Now under your umbrella, you'd get better rates?

But that would be added back in as indiscernible.

About 10% of the fleet. About 10% of your fleet now, right? So it's not immaterial, but it's not a massive acquisition. I think the idea of the first quarter was the challenge of modeling a big acquisition coming in fine. But that the gap won't be able to close throughout the year is a bit interesting when you would think you'd be able to improve that drag, make it less?

Over time, we aim to reduce the gap. That was part of the opportunity we discussed—becoming better stewards of our assets, but it does require time. When we consider the approximate figures we have, we don't expect them to remain at 40% indefinitely. Our goal is to bring them to a more suitable level over time, but this process will take time, which is true for every acquisition.

Yes. So where we'll start to see improvements as we get time better as we get cross-selling better, that's not all going to show up in that debt, right? It will create will create a little bit better pro forma, but it's all going to be mixed in to your point, only 10% of our overall performance. The real needle mover will be the improvement that we get on our own asset base, right, in the other 90%. So we can walk through the math, but it's not going to be exactly for, but it's going to be in somewhere between 3.5% and 4% for the balance of the year is our expectation.

The improvement in our own asset base, which makes up the other 90%, will be the real driver of our performance. While we expect some benefits from cross-selling, it won't significantly impact the overall debt performance. We can discuss the specifics, but our expectation for the balance of the year is a growth rate somewhere between 3.5% and 4%. I was going to ask just kind of what trying to think about 2024 a little bit. You hear some of your suppliers have taken orders for 2024 people are curious about projects starting to hit the ground that have kind of a multiyear aspect to them. By no means am I asking for '24 guidance, but I'm just trying to get a sense of when you went through your CapEx thoughts for the year, what you're hearing from suppliers business beyond '23. Can you give us a little color on kind of what you're sitting on right now when you think about 24 projects, willingness to order earlier working with kind of 3-year kind of conversations, which we haven't historically heard in the industry? I think they were just trying to figure out how to think about beyond '23.

Yes. We think that the supply chain will get better next year. So we don't think we'll need to pull forward as much as we did. You remember, we brought in probably 700 extra in Q4. And another 400, let's say, extra in Q1. So we still feel that we needed to do that for this year. We're not expecting that for next year. What would change that if we started to see a lot of slippage throughout the peak season this year than maybe we'd have to revisit with the vendors. But we think we'll get back to more normalized talks about this in the end of the third quarter, fourth quarter type conversations and making sure we're securing slots. Now we're talking to them all along. But as far as trying to put hard numbers down, we don't feel the supply chain will be in a position for us to have to do that today.

On the demand side as well, though too. Anything you can tell us about multiyear projects, how are we thinking about it? Or please go ahead.

Yes, there are projects I visited at a few electric car plants last month that will require a significant amount of equipment over several years. We observe this in our reporting and project starts. As I mentioned earlier, many of these large projects will extend over multiple years. We anticipate that infrastructure spending will also be a long-term investment, and we believe the IRA hasn’t fully begun to influence things yet. So, we see positive trends on the horizon. Ted, do you have anything to add?

Yes, David, I think we talked about this at your conference to some degree. But certainly, when we think about infrastructure, as an example, right, at run rate, that legislation is intended to produce about $100 billion a year of infrastructure spend. We're still in that ramp phase. So obviously, we're not going to get anything close to that in 2023. But that provides a tailwind in 2024, right, so just to dimensionalize numbers. If you thought that you got half of that spend in 2023, that's an incremental $50 billion of infrastructure in the context of a $900 billion total non-residential construction market in the U.S. When you get to 2024, you get the second half of that as you get to an annualized run rate, right? And we thought about this logic across IRA, auto, semis and LNG as just kind of five key tailwinds. So certainly, those are, at a high level, the tailwinds we think about. Coming back to the CapEx question, the visibility and the trajectory those will imply to '24 will be critical to dictating how we think about CapEx in the back half of this year because that will determine obviously how we want to have the fleet positioned. Is there anything you'd add? Does that help, David?

I wanted to just come back to the margins for a minute. So the rental gross margin drags from Ahern that we had in the quarter, how onetime-ish would you say are those drags? In other words, as we model those gross margins year-over-year for the rest of the year, is that still a reported year-over-year drag?

Yes, it will be. Just to remind you, when we acquired them, their reported EBITDA margin on an LTM basis was in the mid-30s, which is significantly lower than where we were, even after synergies. This impact will continue until we surpass their performance. To give some context, the gross margin reported decreased by 170 year-on-year, while on a pro forma basis, it increased by 10 basis points. This clearly illustrates the effect that Ahern had in the quarter. We can expect this effect to persist as we move through 2023, particularly noticeable in the rental segment's gross margin. Does that help clarify the question?

Yes, it does. But does that 170 kind of get smaller over the course of the year? Or that's kind of a steady 170?

So certainly, the significant difference aside from the fact that it's lower margin as the synergies come in is one aspect to consider. However, we're discussing this in isolation.

So I guess then, were there any other factors affecting gross margins outside of Ahern, like lower utilization or anything else?

No, if you look at it in isolation, there are always fluctuations in costs. However, Ahern is a key example; when examining the general rental gross margin, it decreased from a decline of 320 year-on-year to a decline of 100 on a pro forma basis. The pro forma figure only takes into account Ahern from the previous year, but other accounting adjustments, like fair market value of the fleet, account for most of that 100 basis point change. Additionally, there are some short-term one-time expenses related to getting the fleet in shape and integrating their facilities, which further explain the difference.

And then just one quick follow-up. How should we think about the cadence of used sales? Would you say it's more front-end loaded because the prices are still good right now, but typical seasonality would suggest you would more likely to sell used equipment at the back end of the year. So how do we think about that cadence for the rest of the year?

Yes, your observation is right. When you think about the cadence, normally, the first quarter and fourth quarter are larger, right, with fourth usually being the largest historically. We think we'll return to a more normalized cadence as we open up other channels as opposed to the last couple of years where we've been primarily retail. So think about a little bit less in two and three, and then ramping it back up again in four, as the fleet comes off rent, right? It makes sense. Q1 and 4, your lower utilization period. So it's when you have the opportunity to sell the fleet a little easier.

I guess just two follow-up questions. Just back on the margin again, Ted, when do you expect to get back to more normalized incremental margin in the mid-50s? Can we expect that sort of by 2024 as we integrate Ahern? And then just my follow-up question. I know you're seeing broad-based strength sort of everywhere. Is there any difference in the type of customer or the size of customer? Maybe the larger customers are stronger just because they might have more visibility into some of these larger infrastructure projects you're talking about? So anything on the customer side as well?

Sure. Matt, I'll address the first question, and you can take the second. Jamie, regarding flow-through, we evaluate it on a pro forma basis. In the first quarter, our pro forma flow-through was 53%. We consider this consistent with our full-year guidance, which is in the mid-50s. While we do not provide sequential or quarterly guidance, we are confident that the flow-through remains as expected from the start of the year, and we don't see the first quarter as a deviation from that. When discussing flow-through, there are natural fluctuations. We aim for a flow-through target of 50% to 60% throughout the cycle. At times, we will be closer to the higher end of that range, and at other times, lower. However, we believe this is right in the middle of where we want to be during the growth phase of the cycle, and it aligns with our guidance.

Our guidance that we just reaffirmed so.

Yes.

We see this as a very positive pull-through. On the customer front, we are noticing a tendency towards larger clients, which aligns well with our strengths. Overall, demand is increasing, likely due to the extensive planning required for some of these projects. We have been engaging in more discussions during the first quarter, which continue to this day, and even through the fourth quarter of last year, to ensure we are prepared to meet their needs. This is one reason we believe larger companies will benefit from the trend of mega projects, as they require significant resources, fleet, personnel, and capabilities to handle these large tasks. Consequently, our conversations have been increasingly focused on our larger accounts, which, as you know, represent a significant portion of our business.

Slide 34 in your slide deck is pretty interesting. So your margins have been above 45% from the past decade through a range of economic environments. And I'm wondering if you could just talk about what's your level of confidence that you can maintain above 45% margins in the next downturn, obviously, different views on the macro out there, whether it's two quarters from now, a year from now, two years from now. Can you maintain that level of performance that you've had over the past decade in the downturn?

So I guess what I'd say is we feel very confident about the ability of the business and that this is a structural gain. In terms of what the business would do in a downturn, it's critical to dimensionalize what kind of downturn you're talking about for multiple reasons, including that will dictate the actions you take. I think if you look at the performance we had during COVID in the face of a 9% decline in rental revenue, we had 50 basis points of margin compression, EBITDA margin. So in that kind of scenario, you've seen what we can do, we will lean hard on costs. So I guess what I'd say is we feel very confident that the structural improvement, call it 1,500 to 2,000 basis points is absolutely sustainable. In terms of giving kind of a threshold of where you would get, that's harder to say simply because it is assumptive. I would also just remind people, when you look at the margins, what we've done actually understates what the core business has done. Matt and I talked about this a lot. But if you were to back out the acquisitions we've done since 2014, our EBITDA margin would be in the 51% to 52% range. So we've integrated those businesses. They've benefited us strategically. Financially, they've been home runs from a returns perspective and the benefits they've delivered to the shareholders, frankly. But they have been dilutive to margins as we've always talked about when we've done them. So I bring that up only because I think when you look at that chart, Jerry, and it's a great chart, it does even understate how strong the profitability improvement has been in the core business. Matt, anything you'd add there?

No, you said it well. That's the only thing I would add.

And Ted, can I just pull on that M&A part of the conversation? Can you talk about what the specialty pipeline looks like for you folks? Any interesting meaningful opportunities to structurally increase specialty as a percent of total from here based on the types of businesses you're looking at?

Yes. I mean after 24% organic growth, they might not need it, but we are still looking, and we'll lean towards anything that is a new product offering as our first filter but even creating some scale and filling out the coverage model for some of the businesses is an opportunity. We continue to look at a pretty robust pipeline. But as you can see, it takes a lot to get to get one over the trends to make financial sense. And that doesn't mean we're not working the pipeline. So we don't really have anything imminent, and there's certainly nothing that we would discuss on open mic, but we do continue to look. We believe it's a strength of ours. We believe M&A and integrating the M&A more importantly and cross-selling products is a real opportunity for us. So we'll continue to work that pipeline, Jerry.

I would like to discuss how you view the relationship between your shift towards larger customers and long-term contracts. What impact do you anticipate this will have on both gross margins and EBITDA margins? I assume pricing is somewhat more competitive, but perhaps you can capture some margin opportunities later by reducing equipment drop-offs and minimizing maintenance. How are you assessing long-term margins with the focus on larger clients and longer-term projects?

Sure. As indicated in our guidance, we do not anticipate much variability. This is partly because, as you mentioned, our largest customers will receive slightly better pricing compared to the spot prices. However, if we invest $100 million into a project and manage it with a few long-term rentals that maintain high utilization rates, it will result in lower serving costs. This is more efficient than having to divide $1 million across many smaller jobs. Overall, the logistics and reduced costs balance out, leading us to expect no significant changes in our margin profile, whether in gross margin or EBITDA margin.

I guess the thing I'd say is we have consistently been a very comfortable and consistent buyer of our stock. So we feel very good about that philosophically. From the standpoint of changing our strategy, it's certainly not something that we're contemplating at this point. We've consistently been kind of a believer in dollar-cost averaging systematic execution. So you saw us buy back $250 million in the quarter, which is obviously exactly one quarter of the full year in terms of the buyback. So we have not historically kind of leaned in or been tactical. Some people call it opportunistic. We think that it served us well. And we think, frankly, when you look at most of these studies on the most effective way to execute buybacks, this is the right strategy.

Most of my questions have been asked, but maybe just a couple of quick ones here. Sorry if I missed this, Ted, but could you talk about where the internal customer survey ended up moving this order versus last?

So we don't get too specific on it, but I will say that it remains very encouraging in customer confidence, not showing any deviation in the last number of weeks or months. So yes, we've gotten this question. And certainly, people have obviously wondered about what's happened since some of the issues with small banks, et cetera. I can tell you that we have not seen that manifest itself in any indicator but including our customer confidence in mix.

And then I know you've talked a little bit about return on invested capital and that continuing to improve. Maybe this is more of a conversation for when you do your Investor Day, but any kind of broad thoughts on how you think about driving that number up over the longer term? And what are the levers you can pull, especially as you kind of work through some of these margin impacts on Ahern?

Yes. No, that's something we talk about as a leadership team often. So really, when we think about it, and there are a lot of different ways to decompose returns, but you've got margins times capital velocity. We think we can continue to drive improving margins for the business. We talk about targeting 50% to 60% flow-through. If and as you do that, that is naturally accretive to your margins. On the capital velocity side, there are a lot of different ways we try to improve this, but obviously, we task ourselves as driving higher fleet productivity, Matt talked about it improving dollars. That is another way to think about capital turnover. And so yes, it is fully our expectation that we should continue to drive higher margins and higher returns over time. Matt, anything to add?

No, we believe that we will be able to overcome that based on our guidance.

Yes. I think that answers the question.

Maybe one last one if I could just squeeze it in. Relative to the proceeds on OEC for fleet sales that's implied for the full year, can you just remind us where did proceeds this quarter end up? And what's kind of embedding that point of the guide for the full year?

For the quarter, we achieved 71.5%. We sold $543 million of OEC with proceeds of 388. Looking at our full year guidance, we still anticipate selling about $2 billion of OEC and generating approximately $1.3 billion in proceeds, which translates to around $0.65 on the dollar. This outlook has not changed since January. As we move through the year, we plan to increase the volume of use while relying on other channels that were not utilized in 2022, specifically wholesale. Although these channels are less efficient for recycling capital, we will depend on them. Additionally, as we introduce more Ahern sales, that will also have an impact. This is part of the reasoning behind the 55% expectation compared to 71%. In the first quarter, we demonstrated strong performance with $0.715 on the dollar for selling 92-month-old equipment, indicating robust demand for this equipment and reflecting positively on the end market. I'm not sure if that clarifies things, but that’s the perspective we wanted to share.

I have a couple of questions. First, regarding the end market and customer mix, particularly the non-residential sector, could you provide a rough estimate of how much your current base business includes projects in areas like lodging, offices, and physical retail? That would be my first question. Secondly, could you elaborate on the integration of Ahern? Although I understand it’s still early, it would be helpful to know if, and how, you are changing commercial practices at that company. You mentioned branch consolidation, so any additional details you can provide would be greatly appreciated.

Sure. I'll address the Ahern integration, and then Ted can elaborate on our exposure to commercial, especially in the office sector. This is an area that many are focused on, though I expect it won't be a major issue. Regarding the Ahern integration, as I mentioned previously, everything is progressing as planned. This acquisition was primarily about enhancing our capacity in fleet, real estate, and personnel. We're making good headway with the fleet and real estate and have developed a strategy to unify our go-to-market efforts. In some cases, this requires repurposing certain real estate to support some of the 40 cold starts we’ve discussed. We still have adequate capacity even during consolidation, since one of our locations has sufficient capacity to absorb others. We're leveraging that additional real estate to help grow some of our specialty business. From the fleet perspective, as previously discussed, we'll continue to adapt it to better align with our standards and likely phase out some older equipment throughout the year, which connects to Ted's comment about exploring other channels. The personnel aspect has been a surprisingly positive development. We always hoped for a successful integration of the staff, and it has exceeded our expectations. Notably, their standalone operation had considerably higher turnover, and we're pleased that we've managed to reduce that to more closely resemble our levels, which is crucial. Overall, we are very satisfied with this final aspect of our capacity.

Yes, Neil, I will address the other aspect. To clarify, I will refer to the Census Bureau's construction put in place data. We don't closely track the sectors as you are asking, so it's simpler to discuss it in terms of government data. Based on that, if we consider the total commercial sector, which is quite broad, it makes up about 12% of total non-residential, translating to around $110 billion out of a $900 billion market. Office spaces represent a separate category worth approximately $75 billion, or about 8%. In total, this accounts for roughly 20%. This includes a wide range of properties like office buildings, grocery stores, gas stations, etc. It's also important to provide additional context. The manufacturing sector is valued at $110 billion, which is 12% of the total. The power sector stands at $100 billion, or 11%. Meanwhile, the public sector is a $355 billion market, representing 40%. When considering these sectors, which may raise some concerns, alongside the sectors where we see strong multiyear economically insulated opportunities, we find that manufacturing, power, and public sectors make up over 60% of total construction, while the areas you mentioned are around 20%.

At this time, I'll turn the floor back over to Matt Flannery for any additional or closing remarks.

Thanks, operator. And that wraps it up for today. I want to thank everyone for joining us. And we look forward to our Investor Day in about six weeks and speaking with you all again in late July. In the meantime, if you have any questions, please feel free to reach out to Ted at any time. Operator, you can now end the call.

Thank you. This concludes today's call. We appreciate your participation. You may disconnect at any time.