United Rentals, Inc. Q3 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. Consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the company's press release. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31, 2024, as well as the subsequent filings with the SEC. You can access these filings on the company's website at www.unitedrentals.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances, or changes in expectations. You should also note that the company's press release and today's call include references to non-GAAP terms such as free cash flow, adjusted EPS, EBITDA, and adjusted EBITDA. Please refer to the back of the company's recent investor presentation to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer; and Ted Grace, Chief Financial Officer. I will now turn the call over to Mr. Flannery. Mr. Flannery, you may begin.

Thank you, operator, and good morning, everyone. Thanks for joining our call today. I apologize in advance for my voice as I'm fighting through a little cold here, but I'm sure we'll get through it okay. Yesterday afternoon, we were pleased to report our third quarter results. The hard work of our nearly 28,000 employees enabled record revenue and adjusted EBITDA. The year is playing out better than we originally expected. Our updated guidance reflects the demand environment we continue to successfully serve. In short, our unique value proposition, experience, and ability to support a broad range of our customers' needs distinguishes us from the competition. Last quarter, I spent a lot of time on the road visiting branches, job sites, and meeting with customers. While this is nothing new, it did make the quarter's results and our subsequent guidance update no surprise from my perspective. Our branches are very busy, and the team is working hard to serve customer demand. Our people are true differentiators in the rental industry. Their professionalism and knowledge, expertise, and commitment day in and day out shows. We often talk about putting the customer at the center of everything we do as it feeds our flywheel of growth. Without the dedicated United Rentals team members safely executing our customer-centric model, we could not generate the success we continue to deliver. From where I sit today, I expect this momentum to carry into 2026. In the third quarter specifically, we again saw growth across both our General Rental and Specialty businesses, with optimism from the field and our customer confidence index reinforcing our expectations going forward. The demand for used equipment also remains healthy. Now with that said, let me get into the review of our third quarter results and our updated 2025 guidance. And then Ted will review the financials in detail before we open the line for Q&A. Let's start with the quarter's results. Our total revenue grew by 5.9% year-over-year to $4.2 billion. Within this, rental revenue grew by 5.8% to $3.7 billion, both third quarter records. Fleet productivity increased 2%, contributing to OER growth of 4.7%. Adjusted EBITDA increased to a third quarter record of over $1.9 billion, resulting in a margin of 46%. Finally, adjusted EPS came in at $11.70. Now turning to customer activity, as I mentioned, we saw growth across both our Gen Rent and Specialty businesses in the quarter. Specialty continues to post double-digit increases with rental revenue up 11% year-over-year driven by growth across all our product offerings and an additional 18 cold starts. Year-to-date, we've opened 47 cold starts as we continue to fill out our specialty footprint. We see this combined with the power of cross-sell and the addition of new products to our portfolio as critical points of competitive differentiation which benefit our customers while also providing important drivers of long-term growth. By vertical, our construction end markets saw strong growth across both infrastructure and nonresidential construction, while our industrial end markets saw particular strength within power. We continue to see new projects kicking off. While data centers are certainly one area of growth, we also saw new projects across infrastructure, semis, hospitals, LNG facilities, and airports to name just a few. Our end market exposure by vertical is intentionally diversified and our equipment is fungible to ensure we can serve demand no matter where it presents itself. Now turning to the used market. We sold $619 million of OEC at a recovery rate of 54%. The demand for used equipment is healthy, and we're on track to sell approximately $2.8 billion of fleet this year. As I mentioned in my opening remarks, the year is playing out better than we initially expected. To meet this demand, we spent nearly $1.5 billion of CapEx in the quarter and now expect to spend over $4 billion on fleet this year. This positions us not only to capitalize on the current environment but also for the anticipated growth in 2026. Our customers and the field remain optimistic, particularly around large projects and key verticals. Thanks to our go-to-market approach and one-stop shop value proposition, we believe we're well positioned to be the partner of choice for these projects. Year-to-date, we've generated free cash flow of $1.2 billion, with the expectation to generate between $2.1 billion and $2.3 billion for the full year, including the impact of our higher CapEx spend. As a reminder, the combination of our industry-leading profitability, capital efficiency, and the flexibility of our business model enables us to generate meaningful free cash flow throughout the cycle, and in turn, allocate that capital in ways that allow us to create long-term shareholder value. Speaking of capital allocation, we always start with ensuring the balance sheet is in a good place, and it is. We then fund organic growth through our CapEx and complement this with inorganic growth that makes financial and strategic sense. In the remainder, we returned to shareholders. This quarter specifically, we returned over $730 million to shareholders through a combination of share buybacks and our dividend. For the full year, we remain on track to return nearly $2.4 billion to shareholders. Our leverage of less than 1.9x leaves plenty of dry powder to support disciplined M&A, where we continue to pursue opportunities to put capital to work with attractive returns. Our M&A pipeline remains robust within both Gen Rent and Specialty and across the spectrum of deal sizes. While it's difficult to predict the timing of M&A, this is an important capability we've built over our company's history, and we'll continue to use it to enhance our business and drive shareholder value. As we enter the final months of 2025, we're focused on execution and delivering the results outlined in our updated guidance, including total revenue growth of 5% or 6% excluding used, strong profitability, robust free cash flow, and returns above our cost of capital. Although our growth is coming with some additional costs, which Ted will cover in his remarks, we're working through these challenges and are taking proactive measures, including bringing in additional fleet to help mitigate fleet movement costs. I'm very pleased with 2025 and how it's playing out ahead of our initial expectations and see good momentum heading into next year. Based on what we see today, 2026 will be another year of healthy growth. We believe the tailwinds we've discussed throughout this year will carry over, and our unrelenting focus on being the partner of choice for our customers positions us very well to win this business and to outperform the industry. For now, we won't get into the specifics about '26 as we're in the middle of our planning process, but we will share more details in January as we always do. In closing, I'm pleased with the outstanding job the United Rentals team is doing to support our customers. That's the starting point for everything we do. Not only do we have the scale, technology, and value proposition to make us the preferred partner, but we have a history of execution our customers can rely on. By working together with our customers to meet their goals to drive safety, productivity, and efficiency, we ensure we build a relationship with trust that positions us to win in the marketplace. Subsequently, our strategy, business model, competitive advantages, and capital discipline allow us to generate compelling shareholder returns for the long term. So with that, I'm going to hand the call over to Ted, and then we'll take your questions. Ted, over to you.

Thanks, Matt, and good morning, everyone. As you just heard, the year continues to progress well with third quarter records across total revenue, rental revenue, and EBITDA. More importantly, based on both what we're seeing and hearing from customers, we expect the strong demand to continue, which is supporting our increases in both rental revenue and CapEx guidance. More on that in a minute, but first, let's go through this quarter's numbers. As you saw in our press release, rental revenue increased $202 million year-over-year or 5.8% to a third quarter record of $3.67 billion supported again by growth from large projects and key verticals. Within this, OER increased by $133 million or 4.7% and was driven by 4.2% growth in our average fleet size and fleet productivity of 2%, partially offset by some fleet inflation of 1.5%. Also within rental, ancillary and re-rent grew over 10%, adding a combined $69 million of revenue. Consistent with our first half results, third quarter ancillary growth again outpaced OER as we continue to focus on supporting our customers. Moving to used, we generated $333 million of proceeds at an adjusted margin of 45.9% and a 54% recovery rate, while OEC sold set a third quarter record at $619 million. Combined, these results speak to the continued strength and health of the used equipment market. Turning to EBITDA, adjusted EBITDA increased $42 million year-on-year to an all-time record of $1.95 billion. Within this, a $69 million increase in rental gross profits was partially offset by a $6 million decline in used gross profit dollars. SG&A increased $23 million, which is in line with revenue growth, while other non-rental lines of businesses added $2 million. Looking at profitability, our third quarter adjusted EBITDA margin was 46.0%, implying 170 basis points of compression on an as-reported basis and 150 basis points excluding used. At a high level, margin dynamics in the third quarter were similar to what we've discussed the last several quarters. This includes the impact of ancillary, the strategic investments we're making in the business, and still relatively elevated inflation. An area I might call out again this quarter was delivery, which was impacted both by higher fleet repositioning costs in support of large projects and our use of third-party outside haul to serve the stronger-than-expected demand seen during our seasonal peak. To try to put this in perspective, our third quarter delivery costs increased 20% year-on-year versus a roughly 6% increase in rental revenue. Simply assuming that these costs increase proportionally to revenue, this gap implies over $30 million of additional cost year-on-year and translates to an almost 80 basis points drag in our EBITDA margins. I'm sure we'll talk more about this during Q&A, but this provides a great example of the balance we are constantly managing between capital in the form of fleet and costs, both fixed and variable, with the goal of serving customers as efficiently as possible. Shifting to CapEx, third quarter gross rental CapEx was $1.49 billion. I'll speak more to this in a moment, but this included the acceleration of some purchases to help us support the stronger-than-expected demand we are experiencing. Moving to returns and free cash flow, our return on invested capital of 12% remains comfortably above our weighted average cost of capital, while year-to-date free cash flow was $1.19 billion. Our balance sheet remains very strong with net leverage of 1.86x at the end of September and total liquidity of over $2.45 billion. Notably, this was after returning $1.63 billion to shareholders year-to-date, including $350 million via dividends and $1.28 billion through repurchases. In total, between dividends and share repurchases, we still plan to return almost $2.4 billion in cash to our shareholders this year. This equates to a little better than $37 per share or a return of capital yield of almost 4%. Now let's shift to the updated guidance we shared last night, which reflects our confidence in delivering another year of solid results. As you've heard us say a few times this morning, we are seeing stronger-than-expected demand. In response, we accelerated the landing of some fleet into Q3 while also raising our full-year CapEx guidance by $300 million at midpoint to a range of $4 billion to $4.2 billion. In turn, we are increasing our total revenue guidance by $150 million at midpoint while narrowing the range to $16 billion to $16.2 billion, implying full-year growth of roughly 5% at midpoint. Within this, our used sales guidance remains unchanged at around $1.45 billion, which implies total revenue growth excluding used of 6% at midpoint. I'll note that the additional CapEx accounts for roughly half of the increase to our revenue guidance, given we'll only realize a partial year of OER benefit, with the balance coming from ancillary. On the EBITDA side, we are narrowing our range to $7.325 billion to $7.425 billion while maintaining the midpoint of $7.375 billion. Ahead of Q&A, I'll quickly mention that the lack of implied pull-through from this additional revenue reflects our expectation that, as I just mentioned, a portion of the increase will come from lower-margin ancillary while we also expect to manage through similar cost dynamics in Q4, especially delivery. Turning to cash flow, we reaffirm the midpoint of our guidance for cash flow from operations at $5.2 billion, while our revised free cash flow guidance of $2.1 billion to $2.3 billion simply reflects the additional investment in CapEx that we plan to make. Importantly, our updated free cash flow guidance does not impact our share repurchase program. I'll remind you that we intend to repurchase $1.9 billion of shares this year, which highlights our strategy of both investing in growth and returning excess capital to our shareholders. To wrap up my prepared remarks, overall, we were pleased with how the quarter played out, especially on the demand side. While our margins were burdened by the costs mentioned, we remain focused on supporting our customers' growth as efficiently as possible as we lean into their demand. With that said, let me turn the call over to the operator for Q&A. Operator, please open the line.

Obviously, we have the demand positive and the cost negative here. So I just wanted to dive into the demand side first. The cadence of the CapEx, when I think about '26, and the comment you accelerated equipment for the third quarter. But just so we're clear, when you're thinking of the demand profile that you said was better than you expected, is any of this '25 CapEx increase pulling forward 2026? And if not, just thinking about the cadence of sort of the CapEx for '26, obviously, when you bring this much fleet on the third quarter, people wonder how do we go into '26 with a level of fleet just given the seasonal weakness? So that's a demand question. I'll follow up with a quick cost question.

Sure, David. I'll take that. This was not a pull forward from 2026. The accelerated CapEx in Q3 was to meet the demand that we were already seeing and to be responsive to specifically some large project wins throughout the year, which created a little more need for fleet here in the back half. Then we let the Q4 CapEx flow through as normally would. Some of that's seasonal. To your point about all of this, although not a pull forward, we are very comfortable that we expect 2026 to be a growth year, which is why we felt comfortable raising this full year CapEx. As far as CapEx cadence for next year, we haven't finished our planning process, but you can expect there to be the standard, let's say, we're going to sell $2.8 billion, maybe a little bit more in CapEx next year. The replacement for that is going to be $3 billion, $4 billion plus depending on how much more we sell. And then there will be growth on top of that. That's the part that we're going to work through in the planning process this year. But to be clear, we certainly expect to have some growth CapEx here in 2026. Then we'll let you know about the cadence of that as we see how the demand plays out.

On the cost side, ancillary revenues have increased to nearly 18% of total rental revenue. How should we consider pricing for those services? I understand that providing these services contributes to winning a larger share of major projects. However, it has shifted from being an afterthought to representing 20% of rental revenue if we include a re-rent. Is there a way to reevaluate that pricing, perhaps through annual contracts, to prevent it from being a burden? Additionally, regarding fleet productivity, while I know you prefer not to delve into specifics, could you share some insights into the components of fleet productivity? Were both utilization rates up, or was one up and the other down? I'm trying to understand those components as we work on controlling costs.

I will address the latter part regarding fleet productivity, and then Ted can provide additional insights on the ancillary aspect. I want to emphasize that a significant portion of this relates to delivery, which primarily involves pass-through fuel and comes with minimal markup. There are historical factors to consider here. Your point about pricing is valid, and as we evaluate this, Ted can explain how it affects us mathematically. What's important to note is that we are simply increasing our efforts as we expand our array of products and services. Regarding fleet productivity, as I've mentioned previously, we're satisfied with how rates and time have performed throughout the year, especially in the third quarter. The discrepancy between the 3.3% fleet productivity in the second quarter and 2% in the third quarter can largely be attributed to mix. While mix served as a positive indicator for us in the second quarter, it did not have the same effect in the third quarter, which we consider to be normal variability. It's crucial to recognize that the mix is something we are responding to rather than actively driving. It depends on factors such as who you rent to, rental terms, duration, and geographic location, which are not easily predictable since they are reactive to demand. We want to make that clear. To reiterate, both rates and time have increased this year, and we feel optimistic about it.

And on the margin side within ancillary, David, obviously, the thought there is you want to be responsive to the customers. That all ties back to this concept of being the partner of choice. Frankly, it's hard for us to predict what that mix will look like between something like pickup and delivery or installation, breakdown, and setup, fueling, etc. The margins themselves don't fluctuate a tremendous amount, but they are what they are. So delivery, to Matt's point, is probably the thinnest of that. That's really kind of just the convention of the industry. Others are certainly not going to have the kind of margins that we have in rental. But as we've said, they're definitely positive, and they add gross profit dollars with very little capital coming along with that. So we think they benefit us both strategically and financially, but it's going to drive kind of variability depending on what that composition looks like.

You've mentioned a few times across the call solid demand indicators kind of driving some of the CapEx move. Could you talk a little bit qualitatively about what that looks like in the field? Is this mega projects that we all knew about and are probably coming online? Is the share gain as people appreciate? Is this interest rate intensive construction having what's kind of going on?

Sure, Rob. As we've discussed over the past year, we feel optimistic about our involvement in large projects. What caught us off guard was our higher win rate compared to our initial expectations, which is what the additional capital expenditures were intended for. In terms of local markets, I would describe them as fairly flat overall. There is variability, with some markets presenting more opportunities than others, but generally, the performance across the network seems stable. The real growth is coming from the major projects, which are strong, and we are pleased to see the teams executing effectively on them.

And then the fleet repositioning that's been there this quarter and before, related to that shift in demand. Does that have an end date to it? Or do you have stuff moved around where you want it? Or is that just a new world where projects are bigger and in different places? I'll stop there.

So part of that is think about the disbursement of revenue. Think about a couple of years ago when we talked about broad-based demand and our network was a real advantage for us because we could just serve more demand out of our same cost basis basically with some variable costs. Now as these major projects occur throughout our network, there are chunks of revenue that we have to move fleet to from certain places. In many instances, there is additional cost with these mega projects of building an on-site and a support team there. I'd say that's a dynamic, and the part that surprised us the most, and we've been very upfront about this is the delivery and mobilizing of that fleet to these sites. Whether they be remote or not, you're mobilizing it from multiple areas. So that's a little bit different cost that we have to absorb that when we were spreading it throughout the network in the local markets just didn't have that additional cost burden. Outside of that, I wouldn't call out anything different. When you look at these decisions on their own, the math makes sense. They're good decisions. It's just some additional costs that you don't have to incur when you're not so weighted on the large projects.

Matt, just on the local market, it seems like you're signaling 2026 as a growth year. Is that inclusive of the local market? Or is that more on the larger projects? If we see rate cuts, does that alone get the local markets back? Historically, there's been a delay between rate cuts and construction picking up, but those rate cuts happened in deep recession. So I'm curious if you feel the feedback loop from rate cuts is a little shorter than normal in terms of when that pipeline might fill up. That's more of the second half next year type of event.

Yes. We don't pretend to know, right, how that works. If you look at history, there are different outputs, so if you can't even look at history and hope it will repeat itself because it's been different during different cycles. But sentiment feels a little bit better with there being a rate cut and talk of more rate cuts, but you don't take sentiment to the bank. Right now, we call local markets flat. We're going to go through our planning process for the balance of this quarter. That will inform our guidance. We will get a bit closer to the local market as we talk to the branch managers and the district managers that are much closer to that. They will give us their feedback on what they think the growth potential is locally, outside of large projects. We’ll have a better idea, but I agree with the tone of the sentiment. We just have to see if our team thinks when that's going to manifest and how we're going to capitalize on that growth. But we’ll be excited for that to happen. We do think it's potential upside, whether that's to '26, the back half of '26, '27. We're not even sure yet. It’s something that we'll communicate when we give out guidance.

Perfect. Matt, you mentioned increasing capital expenditure to meet demand. Did any large projects that were pending get approved? Or are you noticing that your typical win rate is beginning to improve compared to previous years? Additionally, Ted, could you help clarify the current size of the power vertical for your company? How does it compare to a few years ago?

Yes, I would just say we've just had greater success and the customers that rely on us have had greater success in these large projects, and the pipeline is robust. That's what drove the extra demand. It's really just good execution from the team. I'll let Ted talk to the power vertical.

Yes, Mike, thanks for the question. So it's currently in low double digits, say, 11%, 12%. That's a reasonable area, and if you go back to when we introduced what we called our power vertical strategy. Just to be clear, this is really a focus on investor-owned utilities, including generation, transmission, and distribution. At the time, in 2016, it was probably around 4%. So we're getting close to nearly tripling that relative exposure to what we think is a very large stable business with significant investment, and we expect that to continue for the foreseeable future. I feel like we're really well-positioned there. We spent the better part of a decade building what we think are a lot of competitive advantages to serve those customers in that market uniquely.

I just wanted to ask about the margin dynamics here. Looking at the Q2 versus Q3 year-over-year specialty going from a 220 basis points to 490 basis points headwind. It sounded like qualitatively, the drivers weren't really that different categorically, but just curious what accounts for that difference in year-over-year? Was there sort of faster growth in Yak that was driving more of that delivery impact? Or what just accounts for the 220 versus 490?

Yes, absolutely, Steve. Thanks for the question. Overall, I would say the cost dynamics within specialty and frankly, the whole business have been pretty consistent across the year. When you look specifically at specialty Q2 versus Q3, the big difference was the increase in depreciation we had in that, and that spoke to kind of the aggressive investment we're making in Yak more than anything in matting. Those assets get depreciated at a far faster pace than any other asset class we have in that business. When you look at the 490 basis point decline, about 200 basis points of that was depreciation, so call it 40%. The other pieces were the same things we've talked about like delivery and really ancillary being the other big piece.

So we haven't finished the planning process yet, as I said earlier, and that's where we'll make those decisions. As far as with the balance of the year, we're in a small period here in Q4. Maybe there’ll be another 10 to a dozen in Q4. It really depends on the timing of whether the team finds the real estate and the bodies to be able to do it. So as far as '26, stay tuned. The teams executed really well on cold starts here in '25, and they'll propose the plans for '26 in the next six weeks.

I guess just two questions. The setup for 2026. Obviously, ancillary is just becoming a larger part of the business. It just sounds like structurally, that will be a headwind on margins. But I guess, Matt or Ted, I'm just trying to think about, obviously, you're seeing demand or demand is starting to improve, or maybe your share is just improving. I'm just wondering, the setup in 2026 with a lot of the inflationary pressures, in particular with tariffs and Section 232. Do you think we can start to push through higher rental rates? Is the market strong enough that they could absorb that just given some of the cost headwinds that we could see continuing into 2026?

Yes, good question, Jamie. We don't want to get too far ahead of ourselves. But certainly, if you just take a step back and look at what's happened in 2025 as a starting point. A lot of the margin dynamics have been responsive to customers. You touched on ancillary, but obviously, that is dilutive. You could ask yourself why are you doing that? Again, it's to really be the partner of choice and be responsive and frankly, use that as a tool to take share. We think that's absolutely worked out. While it is dilutive to margins, we’ve talked about, there are a lot of benefits to it. So how does that play out next year? Time will tell. We don't think that's a bad business. We will have a sense for what that looks like over the next six weeks as we get through the business planning process.

So maybe to follow up on that answer, that response now, Ted. I think, Matt, you mentioned growing the fleet for both stronger demand, but also maybe to better address the fleet movements. I know you don't want to talk about '26 yet, but just higher level, how do you think about balancing those two dynamics, right, to keep time yet strong into next year? How long do you think it takes to tackle some of these cost inefficiencies? Do you need to accelerate cold starts in order to tackle the movements or the fleet repositioning costs?

Yes, it's a great point, Ken. One that we're discussing. First off, it gets down to communicating better with our partners, our customers, and fleet planning, right, a little more accurately. To be fair to them, these big jobs are dynamic, and we often get a heads-up on the need for additional fleet. So we have a choice to make in that situation. I would say it's important for us to ensure we are prepared and efficient with our fleet planning. There is a balance between operational efficiency and capital efficiency, both are vital. We will work on that as we go through our planning process. These decisions to ship fleet through third parties are often right decisions mathematically, but we have to minimize that incremental cost.

Right. No, that makes sense. And then just for my follow-up, I appreciate all the color around the drags on the fleet repositioning costs. When we think about core profitability, excluding some of these higher ancillary and delivery mix, is there any reason to think that you can't drive flow-through in line with your more normalized type of margins? Because you're signaling a growth year for next year excluding some of these more volatile mix impacts. Anything to suggest that you can't get back to that 40% plus type of flow-through?

I guess what I’d say is the core profitability of the business, we think, is performing well. We've talked about the impact of delivery this year, which is a function of serving our customers efficiently. It comes down to balancing operational efficiency with cost efficiency. We believe we’re executing that well, and the underlying business is performing as expected. In terms of what it looks like going forward, we would expect the core to perform well. This is really responsive to market demand.

I have just one question. It sounds like customer demand has accelerated on the large project side. Is it fair to assume your raised equipment purchase plans would be across Gen Rent and Specialty equipment? Or are there any specific categories where you are seeing better demand?

No. You raise a good point. Historically, we've been putting a lot more growth into specialty. Think about these large projects as utilizing our full portfolio. The incremental investments would be more broad than maybe our earlier growth expectations of the mix. We know where the high-time categories are, and we will make sure that we're running a good balance of capital efficiency and responsiveness in those. So I'd say it looks like our overall portfolio in terms of investments.

Your earlier commentary indicated that the larger project side of the business continues to trend well. With some of these really taken on as the IIJA really got going. When you look ahead one, two, three years, do you think the business or the industry needs some sort of a renewal to that IIJA program? Or is the industry just generally inflecting towards these larger mega projects? Just some thoughts there.

Yes, absolutely. Certainly, infrastructure broadly has been a very strong market for us, and the IIJA has supported that. Our best sense is there's still a healthy amount of that initial money left to support it. There is certainly not a lack of demand in the sense of the need to reinvest in infrastructure. We expect that to continue, whether it's funded by state initiatives or local initiatives or federal dollars. Ultimately, what that funding looks like remains to be seen, but there’s no question that the country needs to invest aggressively in reinvigorating infrastructure. We've talked about a lot of tailwinds. We are riding a lot more waves than just one in terms of power, technology, and other sectors, giving us a really optimistic outlook for demand in the foreseeable future.

Great. As a follow-up, I understand there have been previous comments indicating that this might not necessarily involve larger, lower-margin projects. Considering that larger projects may become a more significant part of your portfolio and that you're increasing your efforts in that area by reallocating your fleet, do you see a specific turning point in your business where larger projects will stabilize at this level? At that point, will we start to see operational efficiency concerning the cost structure you've established to respond to the demand from larger customers? I'm curious if you have insights on whether this business growth signals a turning point for overall margins and operational leverage.

Yes, that's a good point. What we've talked about historically is that when you consider large projects versus our base margins, we have always believed that while some of those large projects do receive discounts leveraging bulk spending with us, we can serve them more efficiently on site versus spreading costs overall. The one area that has changed is the repositioning of the fleet, which is different than we anticipated. That's a little bit of where the jobs are, where you need to position fleets. How well you can plan with customers to get the fleets where you need them will dictate the results. These decisions result in variable costs, but they aren’t significant within the overall costs in the grand scheme of a large company.

Maybe just the first question is for you, Matt, just in terms of customer dialogue. What you're hearing from our national account customers, it's been a couple of months since we've had the tax reform passed. Some of the sentiment readings have been all over the board, but it doesn't seem to be much change in terms of forward-looking CapEx and growth plans. Have you detected or seen any change in thoughts around big project spending now that some time has elapsed since the OBBBA has passed?

Yes. Our customers remain optimistic. Our customer confidence index shows that feedback when we talk to our national account teams dealing with the largest contractors in North America. We're getting positive feedback, even as they are asking for more support from a fleet perspective throughout the year. We don't see any negative trend there or the need for a reboot of spending. The pipeline we have visibility to looks pretty good for '26, and the feedback from our customers and field teams matches that sentiment.

Okay. Looking ahead, the goals set for 2028 at the Investor Day in 2023 are still included in the slides, indicating they remain realistic. The expected flow-through appears to be a bit more challenging. Do those targets depend more on mergers and acquisitions moving forward? Any updates on our progress toward those targets? Again, aspirational.

Yes, absolutely. Starting with growth, we feel like we're tracking well. We talked about this aspirational goal of $20 billion by '28. If you do the math, you need to keep compounding something like 7%. We believe that is still very much in play. I feel good about that. The margins will be more challenging to hit that kind of roughly implied margin and the flow-through. The acquisitions pull us in the opposite direction regarding margins. We've long discussed this, Tim, and you and I have talked about it, and Matt and I have talked to the investment community about acquisition impacts. The margins could experience dilution of 70 to 80 basis points since 2022. The acquisitions we’ve made have been good strategically, but financially, they’ve been dilutive. Margins are also affected by ancillary services, which have grown from 15% to high teens of our rental revenue mix. It hasn’t been anticipated but will exert a dilutive effect; however, those services have been beneficial for share of market and operations. The broader inflationary environment has been worse since '22 than anyone expected. We believe we’ve managed efficiently, but the challenge is the margins will be a stretch. That’s not a surprise. We are focused on better core profitability overall.

It is an aspirational plan, and I think it was the right one. There have been some dynamics that have changed in the construct of the business. We’ll keep informing everybody as it goes along, but we do feel good about the core profitability overall.

I have a couple of questions. First, could you discuss your current discussions with OEMs regarding pricing? I understand it’s early and you're not providing guidance for next year, but with tariffs in play, what are these conversations like? Should we expect the rate increases to follow a normal pace next year, or could there be unexpected developments?

Yes, Scott. As I said before, we try not to share information with our partners and suppliers on open mic, but we feel like we're in a good position. Our scale of spend supporting our partners has proven valuable. We’ll be in good shape for purchases in '26 regarding cost and support.

Thanks, Matt. On the theme of the day, I want to ask a question in a different way. If you have strong demand and the seasonal uptick next year, which looks like you're expecting with the elevated level of re-rent, ancillary and large projects along with the need for delivery, you’re addressing that with some CapEx. It’s been mentioned in earlier questions that you're looking to improve operational execution. Are there ideas with regards to relationships with transportation providers for bulk pricing? Are there operational initiatives? That's one part of this question. The second part is regarding M&A. Obviously, H&E stepped away, but you haven’t done an acquisition in a while. What is the appetite there?

Sure. On the outsourcing, we do a lot and have some partnerships within that spend. We’re looking at whether we can in-source or outsource for flexibility. We lean towards in-sourcing as it tends to be more efficient, but it's challenging with longer hauls. That’s something we’re discussing. As for M&A, we’ve built a strong capability throughout our history. We remain active in working a robust pipeline. We just haven't found the right deals yet. We did do one small deal this year, but we don’t forecast or plan M&A because that leads to poor decisions. We look at it as opportunistic, but we’re always working the pipeline in both Specialty and Gen Rent. If we find something that enhances our footprint or offers products for our customers, we’ll pursue it. It’s essential that the deal meets our cultural, strategic, and financial goals.

We'll take our next question from David Raso with Evercore ISI. Thank you. This does conclude today's program. We appreciate your attendance. You may now disconnect.