United Rentals, Inc. Q2 FY2025 Earnings Call

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 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 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.

Thank you, operator, and good morning, everyone. Thanks for joining our call. Yesterday afternoon, we were pleased to report solid second quarter results, which reflected a continuation of the momentum we reported last quarter. More importantly, our updated guidance speaks to the confidence both we and our customers have in the remainder of the year. Critical to the success is our team of over 27,000 individuals who focus on being the partner of choice for our customers and live our 1UR culture every day. This includes putting safety at the forefront of everything we do to enable us to deliver a superior value proposition and ultimately, the results our shareholders have come to expect. In the second quarter specifically, we again saw growth across both our industrial and construction end markets. Healthy demand for used equipment and ongoing optimism from the field, which is reinforced by our Customer Confidence Index. So having said all this, today, I'll review our second quarter results and touch on our updated 2025 guidance. Then I'll discuss the recent win, which illustrates our strategy in the utility vertical, followed by a look into how our best-in-class telematics is helping our customers improve their own productivity. Afterwards, Ted will review the financials in detail before we open up the call to Q&A. So with that, let's start with the second quarter results. Our total rental revenue grew by 4.5% year-over-year to $3.9 billion. And within this, rental revenue grew by 6.2% to $3.4 billion, both second quarter records. Fleet productivity increased by 3.3%, supported by disciplined execution. Adjusted EBITDA increased to a second quarter record of $1.8 billion, translating to a margin of nearly 46%. And finally, adjusted EPS came in at $10.47. Now let's turn to customer activity. We continue to see growth in both our GenRent and Specialty businesses. Specialty rental revenue grew 14% year-over-year, while opening 21 cold starts in the second quarter. We remain on track to open at least 50 this year. By vertical, our construction end markets saw impressive growth across both infrastructure and non-residential construction, while our industrial end markets saw particular strength within power, metals and minerals and chemical processes. We continue to see new projects kicking off with a few recent examples, including data centers, hospitals and airports. Now turning to the used market. We sold $600 million of OEC, in line with our expectations. The demand for used equipment remains healthy, and we're on track to sell approximately $2.8 billion of fleet this year. In response to the continued customer demand I discussed earlier, we spent nearly $1.6 billion on rental CapEx in the quarter, also in line with our expectations. Specialty and large projects continue to fuel growth. And we feel that we are well positioned to serve these based on our go-to-market approach and our one-stop-shop value proposition. Subsequently, year-to-date, we've generated free cash flow of $1.2 billion, with the expectation to now generate between $2.4 billion and $2.6 billion for the full year, which includes the benefit from the recent changes in federal tax policy. Our ability to generate free cash flow remains a distinguishing feature of the company. As you've heard me say repeatedly, 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. In regards to capital allocation, our balance sheet is in excellent shape. This quarter, after funding organic growth, we returned $534 million to shareholders through a combination of share buybacks and dividends. And for the full year, we now expect to return nearly $2.4 billion to shareholders, and Ted will get into more details in a bit. Our leverage of 1.8x remains towards the lower end of our targeted range, leaving plenty of dry powder to support growth and return excess capital to our shareholders. And M&A remains a core element of our strategy with the team focused on finding opportunities to put capital to work at attractive returns. Now let's turn to the rest of 2025. As evidenced by our updated guidance, our expectations for the year at the midpoint are total revenue growth of 4% or 5% ex used, with EBITDA margins north of 46%. Our CapEx expectations are unchanged, while we do expect higher free cash flow, as I discussed earlier. Looking beyond 2025, we continue to focus on driving profitable growth. Key to this is partnering with our customers so we're able to meet their demands and improve their own productivity. Through our one-stop-shop offering supported by unmatched technological capabilities, we're able to serve our customers and drive repeat business. The rental business is very much based on trust, and we're diligent in our approach to building this by delivering on our commitments. Our value proposition to the customer goes beyond just equipment. We have a large and reliable fleet, enabled with technology to further customer productivity, all of which is supported by the best team in the industry. One of the vertical strategies we focus on since 2016 is utilities. The acquisition of Yak last year was the perfect opportunity to marry this strategy with an additional product. Case in point, the utility vertical is now north of 10% of our revenue versus 4% fewer than 10 years ago. Just recently, a large utility customer awarded us a 5-year agreement because we took the time to work with operators across their business, functioning like we were part of their company. We offered a wide range of solutions the customer needed, and through the power of cross-sell, now rent then products across every specialty business we have. Furthermore, they're now asking how else can we partner together, which is exactly where you want to be as a value-added service provider. On the technology front, this year, we continue to enhance our advanced telematics offering, which helps customers operate even more efficiently. By utilizing the unique functionality of our telematics and total control software, customers can realize meaningful savings across all their fleet needs. With complete visibility to their rental fleet and aggregated information across multiple projects, optimizing consumption and productivity becomes a reality. Our capabilities also help customers reduce unauthorized equipment use and subsequent fuel consumption and overage fees. Instances such as these, where we help boost productivity and budget efficiency, make us a better partner to our customers and enable repeat business. And while these are just a few examples of the things we're doing to be the partners of choice for our customers, I think they provide concrete examples of how our strategy is allowing us to win. In closing, the year continues to play out as expected, with our team doing an outstanding job supporting customers to drive profitable growth. Our business model, strategy, competitive advantages and capital discipline will allow us to generate compelling returns for shareholders in the long term. And with that, I'll hand the call over to Ted, and then we'll take your questions.

Thanks, Matt, and good morning, everyone. As Matt just shared, 2025 continues to progress as expected, with second quarter records across total revenue, rental revenue and EBITDA. Looking ahead, our updated guidance reflects the demand we see across our end markets supported by our differentiated strategy and strong execution. So with that said, let's jump into the numbers. Rental revenue increased $200 million year-over-year or 6.2% to a second quarter record of over $3.4 billion, supported again by growth from large projects and key verticals. Within this, OER increased by $141 million or 5.4%, driven by 3.6% growth in our average fleet size and fleet productivity of 3.3%, partially offset by assumed fleet inflation of 1.5%. Also within rental, ancillary and re-rent grew by roughly 10% year-on-year, adding a combined $59 million of revenue. Similar to Q1, ancillary growth continues to outpace OER by a healthy margin, driven largely by Specialty, where value-added services are a key element of our strategy to be the partner of choice for our customers. Turning to our used results. We generated $317 million of proceeds at an adjusted margin of 48.3% and a 53% recovery rate, both of which reflect sequential improvements. Underpinning these results, we sold $600 million of OEC in the quarter, which is essentially flat year-on-year. Moving to EBITDA. As I mentioned, adjusted EBITDA was a second quarter record at $1.81 billion, translating to an increase of $41 million. Within this, rental gross profit contributed $86 million. This was partially offset by used where the normalization of the used market drove the majority of the $36 million decline in used gross profit dollars. SG&A increased $18 million year-over-year, but was flat as a percent of sales at 10.7%. And finally, the EBITDA contribution from other non-rental lines of businesses increased $9 million. Looking at profitability. Our second quarter adjusted EBITDA margin was 45.9%, implying 100 basis points of compression, including the impact of normalizing these margins. Excluding the impact of used, our second quarter margin compression was a bit better at 70 basis points. With the usual caveat that year-over-year quarterly comparisons are always going to be subject to normal variability. In general, we continue to see the same margin dynamics that we discussed in April. The biggest of these includes the relative outgrowth of lower-margin ancillary revenue versus core rental growth, which obviously has a dilutive impact on our rental margins, as we've discussed the last several quarters. Our second quarter profitability was also impacted by higher delivery costs, driven largely by strong growth in our matting business and the ongoing fleet repositioning tied to the increased dispersion of growth across our footprint. Finally, and more generally, it remains a relatively inflationary environment, while we continue to make important investments in areas like specialty cold starts and technology. And while these decisions do drag on margins, we view them as smart choices that both support future growth and provide attractive returns. The last thing I'll mention on the P&L side of things is our adjusted earnings per share of $10.47. Shifting to CapEx. Second quarter gross rental CapEx was $1.57 billion, consistent with normal seasonality. Moving to returns on free cash flow, our return on invested capital of 12.4% remained well above our weighted average cost of capital, while year-to-date free cash flow of $1.2 billion keeps us on track to hit our full year target. Our balance sheet remains very strong with net leverage of 1.8x at the end of June, and total liquidity of $3 billion. I'll note, this was after returning $902 million to shareholders year-to-date, including $235 million via dividends and $667 million through share repurchases. As you saw in our press release, supported by the strength of our underlying business and the benefits from recent tax reform, we have increased our planned share repurchases for the year by $400 million to $1.9 billion. This represents roughly 3.8% of our current market capitalization. In total, between dividends and share repurchases, we now intend to return almost $2.4 billion in cash to shareholders in 2025, equating to close to $37 per share or a return of capital yield of about 4.7%. Now let's shift to the updated guidance we shared last night, which reflects our confidence in delivering another year of solid results. As previously mentioned, we are raising the midpoint of guidance for total revenue, adjusted EBITDA and free cash flow while narrowing the ranges for both revenue and EBITDA as we normally do at this point of the year. In terms of specifics, for total revenue, we're increasing the midpoint by $100 million while narrowing the range to $15.8 billion to $16.1 billion, implying full year growth of roughly 4% at midpoint. Within this, I'll note that our used sales guidance is unchanged at $1.45 billion on approximately $2.8 billion of OEC sold, implying total revenue growth ex use of about 5%. Importantly, the increase in total revenue guidance is primarily due to stronger growth from lower-margin ancillary with our underlying expectations largely unchanged as the years continue to play out as expected. On adjusted EBITDA, we increased the midpoint by $50 million while narrowing the range to $7.3 billion to $7.45 billion. Notably, this primarily reflects the net impact of the H&E termination benefit. As was the case of revenue, our underlying expectation for EBITDA is largely unchanged as again, the year has continued to play out as expected. On the CapEx side, no changes with the year still expected in the range of $3.65 billion to $3.95 billion. And finally, we are raising our free cash flow guidance by $400 million to $2.4 billion to $2.6 billion translating to a free cash flow margin of 15.7% at the midpoint of updated guidance. The increase in free cash flow primarily reflects the benefits of recently enacted tax reform, which reinstated full expensing of CapEx and thus, will reduce our cash taxes. As was the case with both revenue and EBITDA, our core expectations for free cash flow are largely unchanged. So to wrap up my prepared remarks, overall, another solid quarter with, and I promise this is the last time I'll say it before Q&A, the year playing out in line with our expectations. So with that, let me turn the call over to the operator for Q&A. Operator, please open the line.

We'll take our first question from David Raso with Evercore ISI.

I mean, it appears that the time utilization year-to-date is probably a little better than you'd say, was feared 6 months ago. But the kind of capturing of inflation, the price cost as well as the ancillary mix as sort of maybe a little disappointing on the drop-through on the margins. Can you help us how you're thinking about price cost for the second half of the year? Any actions you're taking on the cost side, some of the moving equipment between branches? How to maybe minimize those costs and how you think about ancillary growth versus the growth in owned equipment fleet in the second half versus, as you mentioned, right, the first half ancillary has grown a lot faster than the OER fleet? And then I have a quick longer-term question after that.

Sure, David. This is Matt. I'll address the latter part of your question regarding ancillaries. When we consider everything that falls under that category, which includes fuel, the setup and breakdown of engineered solutions, as well as power solutions, job trailers, and mobile storage, they all fit into the ancillary category. The one area we are highlighting as particularly significant is delivery, which also falls under ancillaries. In the first half of the year, a major influence in this area was the Yak acquisition we completed in March. That business brings with it numerous ancillary costs, especially in delivery, which are essentially pass-through costs. Therefore, when we analyze the impact on overall revenue and understand why the margins aren't as high, it becomes clear that it's not intended to generate those margins. We will continue to provide these services for our customers, but we saw a slowdown in that from Q1 to Q2 after we lapped Yak. As this situation becomes less prominent, we anticipate that the impact and drag of ancillaries will lessen in the latter half of the year. We expect this trend and will provide updates on its progress in October. Now, regarding price costs, I'll pass that over to Ted.

Yes. Thanks, David. So I'd say, overall, we've been pleased with how both price, which is French for rate, has played out, and costs. In line with expectations, we continue to see very good discipline across the market. So that's one of the things that's critical. When you think about kind of how costs have played out, again, in line with expectations, there are a couple of things that go into this. Matt touched on the ancillary, and certainly that's something we've talked about the last few quarters. That is dilutive to the margin that you see. That kind of is what it is from the standpoint of taking care of our customers, and it doesn't "cost us dollars," right? It's a pass-through in many regards, but you do see that manifest in both margins and flow-through. Beyond that, the one cost that we have called out more discretely, consistently has been delivery. And I'd say within that, again, it gets to ancillary, the other part has been that repositioning of fleet. In the quarter, we think that was probably another $15 million of moving fleet across our network to ensure high time utilization and efficient capital utilization. That to us is smart spending, but it does obviously kind of provide something like $15 million of drag on EBITDA. Beyond that, really, we continue to be in a pretty inflationary environment. We've talked about that. We're mentioning through that really well. And we've talked about the investments we continue to make that we think are smart investments that we don't want to forgo simply for the sake of chasing some arbitrary margin, and I'm not suggesting that you're saying we should do that. But that's why we've gone as far as calling these out and helping people understand what's going on. So we do think we're managing price costs very effectively as we continue to manage both through those cost dynamics I talked about and the investments we continue to make, and we can dig into any of that if you want.

Yes, it sounds like the second half of the year, the reason the year-over-year incrementals ex used are going to improve is more that ancillary growth getting more in line with owned fleet, not necessarily a better price cost. Is that a fair comment? I was just fishing if there was any maybe less equipment being moved the second half versus the first half, whatever maybe, I was just curious on that price cost dynamic. It sounds like it's more ancillary back in line is really what's more important...

Yes, that's fair. That's fair. That will be the biggest mover. But I mean, we'll never stop going after the cost and the price cost balance. That's what we do every day, but that's a fair characterization.

I would agree. I mean, certainly, we've talked about that increased dispersion of growth, and that's really what's driving the repositioning of fleet. We do expect that to continue. And frankly, that was a normal dynamic prior to that kind of really high-growth period where it was so broad-based that we didn't have to kind of move fleet. But just to kind of help with the numbers. If you think about, call it, a roughly $100 million of higher ancillary in the first half than OER might have otherwise suggested. If people just want to play with sensitivity, start applying a margin to that and back it out, and that will give you a sense for how that margin performed ex ancillary, right? And so we've talked about ancillary being maybe on the order of 20% contribution margin. It does depend what that composition looks like. Delivery, frankly, is going to be at the lower end of that because that's really a path through is that, I think, mentioned. So at least that will allow people to start playing with sensitivities to understand how 2 half versus 1 half we expect to play out.

Yes, at 17%, 18% of rental revenue, ancillary is large enough. I just wasn't sure if maybe there's a way to start pricing for that better, right? It's a service, I know it's stickiness for the customer. But I was just wondering if you saw it as now core enough to the business, do we try to get paid for it a little bit more? And then that's sort of what I was fishing for on the price cost. But no, I appreciate the growth rates getting closer to each other is going to be a help on the year-over-year drag. And then lastly, real quick, the comment about '26 profitable growth, given your mix today is a little more toward larger projects than say in the past years. How would you describe your visibility on '26 versus, say, this time last year looking at '25? And I'm not looking for a big macro view on interest rates or tariffs. Just kind of broadly, truly what do you have in conversations with customers, maybe even things already booked for spring delivery of '26 versus the visibility you had this time last year?

Sure, David. I would just say outside of large projects, right, the bigger the project, the more planning takes place. Outside of those large projects, we don't have any comments on the visibility on '26. But that being said, we do expect the tailwinds that we've been talking about whether that's the mega projects, whether that's power, whether that's infrastructure, continue to be tailwinds. And then we'll update as we get through our planning process in the fourth quarter and update you guys on there.

We'll take our next question from Michael Feniger with Bank of America.

Ted, you raised the free cash flow outlook. I understand it's the big beautiful bill act you're targeting now to deliver record free cash flow level of $2.5 billion, 2 to 3 years ago, we were kind of discussing that $2 billion was the baseline free cash flow for the business. Is $2.5 billion now your new baseline free cash flow going forward? And what are do you think the moving pieces that we should think about for free cash flow growth in 2026 when taking a fleet age on CapEx, disposal use, maybe even shifts within that topic as Specialty continues to grow. Just what are some of the moving pieces there if this is our new baseline free cash flow going forward?

Yes, you're correct, Mike. We discussed $2 billion as a normalized free cash flow figure. This is likely to increase in the near future due to the new tax bill. I believe it's reasonable to add about $400 million to that estimate, assuming all else remains constant. The immediate advantage is that it enhances our cash flow from operations. However, net free cash flow is influenced by various factors, making it somewhat uncertain. Therefore, fluctuations in capital expenditures, depending on our anticipated growth rates, should be considered. In terms of a normalized expectation, suggesting around $2.4 billion seems reasonable.

Yes, I believe that with similar levels of growth in capital expenditures, achieving more organic growth will naturally require increased spending on capital expenditures, which will affect cash flow. However, this would clearly be a wise business decision.

Fair enough. Matt, regarding the data centers we keep seeing in the headlines and the capital expenditures related to AI, we should start seeing the effects over the next few years. I believe that 40% of your rental budget is related to specialty. As this trend continues to develop this year and next, how will this influence your mix moving forward? How does it affect your business in terms of capital expenditures and budget allocation? Specifically in the power vertical, are you noticing a tighter market? Does this create better conditions for rates? Will additional investments need to be directed there?

We have been discussing our ongoing investments in specialty at an increasing rate compared to our overall business for a couple of reasons. There is untapped potential in these major projects and cold starts, and with more complex projects, we have greater opportunities for cross-selling. This creates a more significant opportunity with major customers than in the general market, which is why it is a critical aspect of our go-to-market strategy. I don't see any specific differences between the data centers and other projects; this is a substantial amount of work that we feel very positive about both now and in the future. However, I don't anticipate any changes in our capital expenditures. We believe there is room for growth and strong opportunities in specialty, both with existing products and potentially new ones. Therefore, we expect to continue to exceed our capital expenditure targets. Aside from that, I don't have anything specific to highlight regarding data centers.

And we'll take our next question from Angel Castillo with Morgan Stanley.

I wanted to ask about the One Big Beautiful Bill and its implications for your cash flow. Are you noticing any changes in customer confidence or behavior regarding projects, such as how quickly they are progressing or their willingness to proceed with CapEx projects in light of the OBBB reform?

I'll take that one. I would say we always advise people to be careful not to confuse correlation with causation. However, we've observed that our customer confidence feedback remains at high levels and has likely improved slightly compared to where we were in April. That trend has continued since early July, and we feel very positive about it. Our customers clearly have a strong outlook regarding their own future. As for what this means going forward, only time will tell. However, all else being equal, one could argue that some of these tax policies should be beneficial to project economics.

Understood. And then maybe a little bit of a bigger or a longer time frame type of question. In your slides, you have the rent versus buy kind of benefits to your customers and you show how kind of rental market has kind of steadily exceeded the non-resi market, essentially kind of gaining share here of the customer's wallet. But some of the data, I guess, on the slides only go through 2022. So just given a lot of the kind of big changes we've seen due to inflation or the varying challenges around macro, geopolitics and that project space today as well as the benefits we just talked about with OBBB or even your telematics kind of benefits that you now provide to customer, can you talk about what you're seeing on the ground today in terms of rental equivalent penetration of the market in equipment? And just kind of any anecdotal or data evidence as to how is that trending? Is it accelerating in terms of the customers' appetite to buy versus rent, particularly thinking about the specialty and the heavier kind of construction equipment outside of area? Just anything you can share there?

I'll start and then Matt can jump in after. Specifically regarding that chart, the American Rental Association revised the market statistics. The reason we stopped referencing data from 2022 is that it no longer allows for a direct comparison. To the core of your question, we absolutely believe that market penetration continues to improve and there is significant potential for growth. This is evident for numerous reasons we’ve discussed, and we can delve into specifics. It is increasingly more appealing for the majority of customers to rent rather than own. As we provide more services and enhance our one-stop shopping value proposition, we will continue to strengthen our partnership with customers, driving ongoing growth in market penetration.

And Angel, I would just add that the industry has matured and become a more reliable partner, which was one of the reasons people would have owned in the past. We're also focused on driving safety and productivity, so even the opportunity from self-performance or noncompliance, like we see in our Trench Safety business, is significant. I believe that increased awareness and improved product offerings will continue to enhance penetration, supporting Ted's point.

We'll take our next question from Jerry Revich with Goldman Sachs.

This is Clay on for Jerry. A quick one for me. Your fleet productivity growth accelerated year-over-year, and we estimate sequentially as well. Can you expand on the drivers of the acceleration? And also, how do you view the disconnect with some of the slowing non-res construction indicators over the quarter?

Sure, Clay. So we feel really good about the fleet productivity to your point. We had committed at the beginning of the year that we expected to drive positive fleet productivity this year, which, in its basic form, means we're going to have rent revenue growth greater than fleet growth, and that's happening. I would say qualitatively, the industry continues to get positive rate. That's necessary because we still have to overcome the inflation that we've absorbed and the cost of fleet over the last couple of years and the supply/demand dynamics are allowing that to happen. We specifically have been continuing to drive very high levels of time utilization for a couple of years now. So we're really pleased with that. And that's taken a lot of focus and admittedly some costs, as Ted pointed to, on the delivery and the outside hauling cost. But that's a smart capital decision. We continue to do that. And then the rest of it was mix fell in our favor this quarter. That's a variable that, frankly, is a result of a lot of different decisions customers make where they rent, what they rent, how long they rent, so to name a few. And to absorb any extra inflation over and above the 1.5 peg that we put out there. So we feel really good about that output, and we expect to drive positive productivity for the full year.

Maybe on the second part, just tying it to those non-resi indicators, look, we pay attention to them. There's an ebb and flow. Certainly, we see a lot of things that are quite positive. You can look at our results, probably first and foremost. You can look at our customer confidence. So those are the things that really are going to be to us more important and more indicative then kind of looking at the mosaic of data points.

Sure, we will continue to maintain a strong pipeline. As demonstrated in the first quarter, we are still very disciplined. We need to clear the final hurdle of financing after identifying strategic partners that are a good fit for our organization. This is not due to a shortage of opportunities; it's about ensuring we overcome all three hurdles in our approach and find the right collaborator. We will keep working on the pipeline. This is a capability we've developed and intend to utilize. We are not going to rush this; we want to ensure we earn a reputation as smart integrators. This begins with our approach as astute buyers. So, we will keep working on our pipeline.

We'll take our next question from Jamie Cook with Truist Securities.

I guess 2 questions for me. Ted, sorry, getting back to the ancillary business. Just thinking about it from a long-term perspective, this and re-rent is becoming a bigger part of your business, I'm just wondering, given the importance of the business and the value that it adds to customers, it's lower margin. To what degree should we start to think about United Rentals as more of an EBITDA story and sort of take the 50% to 60% incremental margin target off the table because it's not relevant anymore and maybe you're not an incremental profit story anymore. Just trying to think how you're thinking about that longer term. I guess, so why don't I stop there, and then I'll ask my second question.

Yes. And it's something you and I have talked about a bunch, Jamie. I mean, I do think, at the end of the day, EBITDA generation is critical to us. How you get there matters a ton. Obviously, we need to be efficient in every regard, but the mix dynamic that you're getting at is something that we need to make sure people do understand. So our goal always has been and always will be driving margin expansion on an underlying basis. Sometimes that's a little easier, sometimes it's more challenging for a number of reasons. In this case and most recently, obviously, this ancillary dynamic has been kind of the biggest headwind, and I think I touched on this with one of David's questions. But at the end of the day, like we need to serve our customers. That is the most important thing and we need to make sure we're doing it in a profitable fashion and then explaining the results to the investment community and anybody else. So I would say, going forward, our goals are always going to be driving margin expansion. What that flow-through looks like will be dependent on a host of factors, but ultimately, you're driving underlying margin improvement. And we do think that the team has done a great job managing costs over the last several years in this kind of higher inflationary, slower growth environment. And once we kind of start moving forward, we do think we'll get more positive absorption of fixed costs that will support kind of driving margin expansion.

And then I guess my second question, understanding you again, don't want to talk too much about 2026, but one of your peers put out a CapEx guide, understanding it's not calendar year, but implied CapEx for next year down, I think, in the high teens. Just trying to think about how you're thinking about the setup, I mean, you tend to replace your equipment more regularly, you're growing in Specialty, and we have some positive dynamics from the bill. Just wondering, as you think about things, would that be something more specific to a competitor? And do you still think the environment is robust enough that CapEx, as we look to 2026, could be, I guess, healthier than what your peers are talking about?

Yes. I'm not going to make predictions about 2026, but I want to emphasize that we're feeling positive about the current environment. I've mentioned before that some of the supportive factors we've highlighted for the past couple of years are expected to persist. While local markets may not be growing, we don’t anticipate a decline. That gives you an idea of our current stance. We don't need to reach a decision on this right now. However, I would be surprised if we were to lower our forward-looking expectations because, as you noted, our largest investment is in replacing our fleet, and we are very careful about that to keep the fleet updated and provide strong value to our customers. The conditions in the market are favorable for used sales, as reflected in our results. Therefore, there's nothing suggesting we would take that route. Stay tuned; we'll provide more information in January.

We'll take our next question from Kyle Menges with Citigroup.

I was hoping if you could talk about the used recovery a little bit. It actually improved sequentially in the quarter. So I guess does that signal that we're through this period of normalization for the used sales recovery? And then just what's driving some of the maybe tightness in supply versus demand sequentially?

Yes, Kyle. I think Jamie pointed out the dynamics of supply and demand. Some other companies had extra capacity coming into this year that they were planning to use, which is a good sign. It reflects the industry's discipline; it's preferable for companies to utilize existing capacity rather than adding more and creating artificial pressures in the market. This is encouraging and fits into the overall supply-demand situation. Additionally, our strong retail operations indicate that the end markets are healthy since customers don't buy equipment just to leave it unused. Following the adjustments after COVID, the improvement from Q1 to Q2 was from 51% to 53%, and we are seeing stabilization. Our full-year forecast is positioned within that range we suggested. We believe it has stabilized, although the mix of retail activity will influence it on a quarterly basis. For the full year, we believe we are targeting the right area.

Got it. Regarding the adjustment of EBITDA by $50 million for the H&E termination fee, I'm trying to clarify that situation. I thought that was accounted for in Q1. So, I'm wondering why it wasn't included in the Q1 guidance and appeared only this quarter. I'm trying to grasp that dynamic.

Yes. We reaffirmed our guidance in April, which is uncommon for this time of year to update our projections. The ranges we provided then were consistent with what we introduced in January. As we moved into the second quarter in July, we started to narrow those ranges. We believed it was more appropriate to highlight this within the context of the updated and tighter range. I think that clarifies the situation.

Yes. And if I remember correctly, on the April call, we did tell everybody it wasn't in there and that we would be updating it. So obviously, we live up to the commitment that we made.

We'll take our next question from Steven Fisher with UBS.

Just thinking about the unchanged CapEx guidance for the year, does that include any higher costs or whatever reason, be it tariffs or surcharges or whatever other price increases you may be asked to incur from any suppliers relative to what you had in your initial expectations at the beginning of the year? I guess I'm sort of just asking like, do you still have the same number of units planned for the year as you had earlier?

The short answer is yes. We do have the same number of units. We don't expect any price increases. All of our partners know where we stand on our 2025 negotiations being a full year negotiation, and that's where we're ending up. So we feel good about that. And we'll move forward with '26 once things settle down. But we feel we're in a really good position. Our partners have done a great job replacing their supply chain, and we feel like we're in as good a place as we are with our partners as we've been since pre-COVID, where they're able to respond, and we've been able to be a nice constant for them in spend and reliability.

That's helpful. Looking at the bigger picture, you've mentioned being in a slower growth phase. Although you can't predict the future, based on your current visibility, what do you think will most likely drive acceleration moving forward? Will it be the large projects coming to market? Is it necessary for the interest rate sensitive commercial and developer markets to rebound? Could it be driven by mergers and acquisitions? There are several theoretical possibilities, but with the visibility you have, what do you see as the most likely route to reacceleration?

I believe all options are being considered. However, I want to emphasize that the favorable conditions we've mentioned over the past couple of years are expected to persist. We've dedicated significant resources to infrastructure and power, along with utilities, where we recognize the ongoing demand. Thus, despite broader economic conditions, there will always be work in these sectors, which is why we've strategically prioritized them. We are also actively exploring mergers and acquisitions. Although we do not budget for M&A to avoid making forced decisions, we maintain a pipeline. I think it is unlikely that we will not pursue any deals over the next year; it will simply depend on finding the right partner. I see various opportunities for growth, and after we complete our planning process, which will primarily focus on organic growth, we will provide updates in January.

Steve, the thing I might add to that, I think we've talked about those tailwinds. But obviously, we've come through an election this year. I think you've found kind of stability kind of post-election in the world. People have a better sense for what the ground rules are. I think, obviously, the passage of tax reform in July is a positive for the business community in the U.S. and obviously, the prospect that the Fed may be becoming more accommodative and certainly, that's what the market continues to discount. I mean all these come back supporting good sentiment that I think drives the willingness to kind of reinvest in America and frankly, in North America. So those are kind of also, I think, really important considerations that at least from a top-down perspective, we think, should continue to benefit our end markets and our opportunity.

We'll take our next question from Ken Newman with KeyBanc Capital Markets.

So for my first question, I know it's a smaller piece of your customer mix, but I'm curious if you could just talk about the smaller local accounts, what those have done sequentially from the first quarter to second quarter, was that stable sequentially? Are you seeing any initial signs of modest improvement there? And also if you have an updated thought on when those local accounts start to reaccelerate?

Well, certainly, it's improved just because of seasonality from Q1 to Q2, but probably you're probably more interested in is, has it looked like on a year-over-year basis. And I would just say it's stabilized. We're not seeing growth in those areas in aggregate. Some markets they are, in some markets they aren't. But I think in aggregate, it's kind of stabilized. As far as what's going to spur further growth than that, we talk a lot about interest rates, we talk about that, but at the end of the day, I do think sentiment matters, and I do think people believing in the consistency of the opportunity so they can make smart business decisions. So I would argue, and I'm not sure how long it would take, but even absent cuts, at some point, people have to decide how they're going to play in the new normal. So interest rates certainly would help, and it would help the sentiment. But I think more about stability of the macro will help people invest more locally. And we think that's a future opportunity. When and where that shows up, we'll continue to talk to our customers and talk to our people on the ground. But I would say in aggregate around the U.S. and Canada, that local market stabilize.

Yes, that's very helpful. For my follow-up, I want to revisit the implications of the tax bill. I think you mentioned some fractional improvements in the customer confidence index. There's a suggestion that the accelerated phaseout for renewable tax credits could lead to some advancement in the construction timelines for the power projects. I know this has accounted for about 10% of your rental revenue. Can you provide any specific insights on power project timelines in relation to the conversations you're having with your customers?

So I guess what I'd say is power on the whole is, call it, a little more than 10% of our mix. Within that, renewables is a relatively small fraction right? The core of that opportunity is in the conventional generation, transmission, distribution. So truthfully, I don't personally have any great insight into if there may be a pull-forward demand. I think we feel really good about the opportunity on the whole. But in terms of what specifically may happen within solar, in particular, I don't have any great insight. And I don't know if you've seen any...

We have performed well with our solar farms and projects. However, regarding the future, we will respond to customer requests but are not dependent on specific outcomes. I don't believe it has significantly altered our forward-looking plans.

Yes, that's an important point because there has been an ongoing debate about the current administration compared to the previous one, particularly regarding clean energy and renewables. Ultimately, we believe that the demand for power in the United States will keep increasing. This is driven by electrification, onshoring, and investment. We aim to support our customers regardless of how they produce electricity. Whether it comes from solar, wind, nuclear, hydro, gas, or coal, our business remains neutral regarding the source of generation. Our focus is to be the best partner to our customers. The relationship we have with utility customers exemplifies the value we provide across this sector and many others.

We'll take our next question from Steven Ramsey with Thompson Research Group.

GenRent had a better year-over-year comp than the prior 4 quarters. Can you talk about what's happening there? And is it a correct assumption that ancillary is less of a benefit to the GenRent line than it is Specialty?

If we focus on your additional question regarding Yak and the matting business, considering the significant delivery burden, the answer would be yes based on that factor alone. However, it’s still integrated into our GenRent delivery system. I would say that we handle almost all, if not all, of our GenRent internally, which adds consistency. That said, we still need to move GenRent equipment, leading to costs that might not be related to delivery but rather to repositioning. Overall, I believe your question's premise is accurate, particularly concerning the Yak Mat acquisition.

Yes, I agree with everything Matt said. Steven, just to be clear, were you asking kind of about that acceleration in growth, call it, 3% from, call it, 1-ish. What drove that as well?

Correct. Yes, that's what I'm asking.

Okay. I think it's broad-based demand. We've talked about the market really holding in well and customers feeling good. And so the GenRent business obviously saw that acceleration, consistent with what we would have expected. And I think it again, comes back to kind of what gives us confidence about the full year and kind of where we sit in the macro.

Yes, this provides a great opportunity for retention.

And this does conclude the Q&A session. I'll turn the program back to Matt Flannery for any additional or closing remarks.

Thank you, operator, and thanks to everyone on the call. We appreciate your time, and I'm glad you could join us today. As always, our Q2 investor deck has the latest updates and Elizabeth is available to answer any of your questions. So until we talk again in October, stay safe, and have a great rest of your summer. Take care.

Absolutely. This does conclude the United Rentals Second Quarter 2025 Earnings Call. Thank you for your participation, and you may now disconnect.