Earnings Call Transcript - URI Q2 2021

Operator, Operator

Good morning and welcome to the United Rentals Investor Conference Call. Please be advised that this call is being recorded. Before we begin, note that the company's press release, comments made on today's call, and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the Safe Harbor statement contained in the company's press release. For a more complete description of these and other possible risks, please refer to the company's Annual Report on Form 10-K for the year ended December 31, 2020, as well as subsequent filings with the SEC. You can access these filings on the company's website at www.unitedrentals.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly revise any forward-looking statements to reflect new information or subsequent events, circumstances, or changes in expectations. You should also note that the company's press release and today's call include references to non-GAAP terms such as free cash flow, adjusted EPS, EBITDA and adjusted EBITDA. Please refer to the back of the company's recent investor presentations to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer, and Jessica Graziano, Chief Financial Officer. I will now turn the call over to Mr. Flannery. Mr. Flannery, you may begin.

Matt Flannery, President and Chief Executive Officer

Thank you, operator, and hello, everyone. Thanks for joining us this morning. Three months ago, we said that 2021 was shaping up to be a great year for United Rentals, and that's still very much the case. Our operating environment continues to recover. Our customers are increasingly optimistic about their prospects. And our company is continuing to lean into growth from a position of strength as a premium provider and our industry's largest one-stop shop. We're the supply leader in a demand environment, and we've leveraged that to deliver another consecutive quarter of strong results. The big themes of the second quarter are strong growth in line with our expectations and robust free cash flow even after the step up in our CapEx. Positive industry indicators including a strong used equipment market — pricing was up 7% year-over-year. The expansion of our go-to-market platform through M&A and cold starts, timed to the broad-based recovery in demand. And our focus on operational discipline as we manage the increase in both volume and capacity while driving fleet productivity of nearly 18%. Another key takeaway is our safety performance, and I'm very proud of the team for holding the line on safety with another recordable rate below one while at the same time managing a robust busy season and onboarding our acquired locations. This includes General Finance, which we acquired at the end of May. As you know, this was both a strategic and a financial move designed to build on our strengths. The acquisition expanded our growth capacity and gave us a leading position in the rental market for mobile storage and office solutions. The integration is going well. While we still have more work to do, we're moving steadily through our playbook. As you saw in our release, we raised our outlook to include the expected impact of General Finance and other M&A we closed since the first quarter. It also includes some additional investments we plan to make in CapEx that will serve us beyond 2021. This outlook follows the higher guidance we issued in April when we raised every range compared to our initial guidance. So, as you can see, we're tenacious about pursuing profitable growth. The investments we're making will have a positive impact on our immediate performance as well as future years. Before Jessica gets into the numbers, I want to spend a few minutes on our operating landscape. Almost all of the challenges of 2020 have righted themselves. We have a better line of sight and so do our customers. When we surveyed our customers at the end of June, the results showed that over 60% of our customers expect to grow their business over the coming 12 months, which is a post-pandemic high. Notably, only 3% saw a decline coming over the same period. Customer optimism is a great barometer and the trend that we see in the field supports their view. 2021 is a pivotal year for us. It confirms our return to growth, including our 19% rental revenue growth in the second quarter. I'll point to some of the drivers of that growth, starting with geography. The rebound in our end markets continues to be broadly positive with all geographic regions reporting year-over-year growth in rental revenue. Our Specialty segment generated another strong performance, with rental revenue topping 25% year-over-year, including same-store growth of over 19%. Importantly, we grew each major line of business by double digits, which underscores the breadth of demand. For years, our investment in building out our specialty network has been key to our strategic positioning. These services differentiate our offering to customers and add resilience to our results throughout cycles. This is true of cold starts as well as M&A. This year, we've opened 19 new specialty branches in the first six months, which puts us well on our way to our goal of 30 by year-end. We're also investing in growth in our General Rentals segment, where the big drivers are non-res construction and plant maintenance. Both areas are continuing to gain traction, and most of our end markets are trending up. Verticals like chemical processing, food and beverage, metals and mining, and healthcare are all showing solid growth. While the energy sector remains a laggard, it was up year-over-year for the first time in eight quarters. We also have customers in less mainstream verticals like entertainment, where demand for our equipment on movie sets and events more than doubled in the quarter. While it's a relatively small part of revenue, it's a good sign to see it come back. I also want to give you some color on project types. There are two takeaways: the diversity of the projects in Q2, and the fact that each region contributed to growth in its own way. The recovery has taken root across geographies and verticals on both coasts, with solid activity in heavy manufacturing, corporate campuses, schools and transmission lines. This quarter, we're also seeing project starts in power, transit and technology. These job sites are using our General Rentals equipment and our trench safety and power solutions. Fluid solutions have seen a rebound in chemical processing, sewer bypass work and mining. These are just a few of the favorable dynamics in a very promising upcycle. To put that in context: 2020 was about the temporary loss of market opportunity, particularly in the second quarter. Now the pendulum is swinging back. 2021 is about locking in that opportunity within the framework of our strategy. Our team is managing that extremely well. One proof point is our financial performance and the confidence we have in our guidance. Another is our willingness to lean into growth today to create outsized value tomorrow. It's about more than CapEx and cold starts. We're constantly exploring new ways to capture growth by testing new products in the field, developing new sales pipelines, and forging digital connections with customers. Finally, the most important proof point is the quality of our team. You can see that reflected in our safety record and our strong culture. Here's the thing to remember about 2021: this is still the early innings of the recovery. We're committed to capitalizing on more demand as the opportunity unfolds. We see a long runway ahead to drive growth, create value, and deliver shareholder returns. I'll stop here and ask Jess to go through the numbers and then we'll take your questions. Over to you, Jess.

Jessica Graziano, Chief Financial Officer

Thanks, Matt. And good morning, everyone. When we increased our 2021 guidance back in April, we expected a strong second quarter supported by the momentum we were seeing start the year. We're pleased to see that play out as anticipated with the second quarter results. Importantly, we're also pleased to see the momentum accelerate in our core business and support another raise to our guidance for the year. We've also added the impact from our acquisitions, notably the General Finance deal. I'll give a little bit more color on our guidance in a few minutes. But let's start now with the results for the second quarter. Total revenue for the second quarter was $1.95 billion. That's an increase of $309 million or 19%. If I exclude the impact of acquisitions on that number, rental revenue from the core business grew a healthy 16% year-over-year. Within rental revenue, OER increased $231 million or 16.5%. The biggest driver in that change was fleet productivity, which was up 17.8% or $250 million. That's primarily due to stronger fleet absorption on higher volumes, in part as we come off the COVID-impacted second quarter last year. Our average fleet size was up 0.2% or a $3 million tailwind to revenue. Rounding out OER, the inflationary impact of 1.5% cost is $22 million. Also within rental, ancillary revenues in the quarter were up about $65 million or 31%. Re-rent was up $13 million. We'll talk more about the increase in ancillary revenues in a moment. Used equipment sales came in at $194 million, an increase of $18 million or about 10%. Pricing at retail in the quarter increased over 7% versus last year and supported robust adjusted used margins of 47.9%. That represents a sequential improvement of 520 basis points and is 190 basis points higher than the second quarter of 2020. Used sales proceeds for the quarter represented a strong recovery of about 59% of the original cost of fleet that was on average over seven years old. Moving to EBITDA: adjusted EBITDA for the quarter was $999 million, an increase of 11% year-over-year or $100 million. That included $13 million of one-time costs for acquisition activity. The dollar change includes a $141 million increase from rental. In that OER was up $125 million, ancillary contributed $10 million and re-rent added $6 million. Used sales were a tailwind to adjusted EBITDA of $12 million, and other non-rental lines of business provided $6 million. The impact of SG&A on adjusted EBITDA was a headwind for the quarter of $59 million, which came mostly from the resetting of bonus expense. We also had higher commissions on better revenue performance, and higher discretionary expenses like C&E that continue to normalize. Our adjusted EBITDA margin in the quarter was 43.7%, down 270 basis points year-over-year, and flow-through as reported was about 29%. Let's take a closer look at margin and flow-through this quarter. Importantly, you'll recall that our COVID response last year included a swift and significant pullback in certain operating and discretionary costs. That was especially pronounced in the second quarter. It's impacting flow-through this year, as activity continues to ramp and costs continue to normalize. We expect this will play through the rest of the year, notably in the third quarter. Specifically for the second quarter, we've shared in previous calls that one of the costs that we'll reset this year is bonus expense from the low levels incurred last year. As a result, we had an expected drag on flow-through in the second quarter as we reset and now true-up this year's expense. Flow-through and margins were also impacted as anticipated by acquisition activity, including the one-time costs I mentioned earlier. I also mentioned higher ancillary revenue in the second quarter, which represents in part the recovery of higher delivery costs. Delivery has been an area where we've seen the most inflationary pressure, including higher costs for fuel and third-party hauling. While recovering a portion of that increase in ancillary protected gross profit dollars, it impacted flow-through and margin this quarter as a pass-through. We expect to see that play out over the next couple of quarters as well. Adjusting for these items, the implied flow-through for the second quarter was about 46% with implied margins flat versus last year. With our expenses normalizing, that reflects the cost performance across the core that came in as expected. I'll shift to adjusted EPS, which was $4.66 for the second quarter, including a $0.13 drag from one-time costs. That's up $0.98 versus last year, primarily on higher net income. Looking at CapEx and free cash flow, for the quarter gross rental CapEx was a robust $913 million. Our proceeds from used equipment sales were $194 million, resulting in net CapEx in the second quarter of $719 million. That's up $750 million versus the second quarter last year. Even as we've invested in significantly higher CapEx spending so far this year, our free cash flow remained very strong at just under $1.2 billion generated through June 30. Turning to ROIC, which was a healthy 9.2% on a trailing 12-month basis. Notably, ROIC continues to run comfortably above our weighted average cost of capital. Our balance sheet remains rock solid. Year-over-year net debt is down 4% or about $454 million. That's after funding over $1.4 billion of acquisition activity this year with the ABL. Leverage was 2.5 times at the end of the second quarter. That's flat to where we were at the end of the second quarter of 2020 and an increase of 20 basis points from the end of the first quarter this year, mainly due to the acquisition of General Finance in May. A look at our liquidity, which is very strong: we finished the quarter with over $2.8 billion in total liquidity. That's made up of ABL capacity of just under $2.4 billion and availability on our AR facility of $106 million. We also had $336 million in cash. Looking forward, I'll share some color on our revised 2021 guidance. We've raised our full-year guidance ranges at the midpoint by $350 million in total revenue and $100 million in adjusted EBITDA, as we now expect stronger double-digit growth for the core business in the back half of the year. Our current guidance also includes the impact of acquisition activities since our last update, predominantly to include General Finance. That increase for acquisitions reflects $250 million in total revenue and $60 million in adjusted EBITDA, which includes $15 million of expected full-year one-time costs. Additional CapEx investment will help support higher demand. To that end, we raised our gross CapEx guidance by $300 million, a good portion of which reflects fleet we're purchasing from Acme Lift. While the fleet will provide some contribution in 2021 and is assumed in our guidance, we expect to see the full benefit next year. Finally, our update to free cash flow reflects the additional CapEx we'll buy, as well as the puts and takes from the changes I mentioned. It remains a robust $1.7 billion at the midpoint and we'll continue to earmark our free cash flow this year towards debt reduction to enhance the firepower we have to grow our business. Now let's get to your questions. Jonathan, would you please open the line?

Operator, Operator

Operator instructions: callers, please use the Q&A function or press the appropriate keys to ask a question. Our first question comes from the line of David Raso from Evercore ISI. Your question, please.

David Raso, Analyst (Evercore ISI)

Hi, thank you for the time. A bigger picture question about margins. I think investors are wondering about how the margins can improve from current levels. Over the last, say, four years or so we've seen steady degradation on the rental margins in particular, and EBITDA margins have been under a little pressure. I'm just trying to think through, when you think of the five large acquisitions you've done over the last few years, starting with NES, running through General Finance, you brought on about $2.25 billion of revenues and those EBITDA margins were only around 38%. You used to run high-40s. I appreciate that's a lot of revenue you bought that's dragging down the margin. But when I look at the business today moving forward, how should we think about the rental margin structurally, and if you want to weave that all the way into EBITDA, but particularly the rental margins? Is this as much about a shift towards Specialty that has lower margins but improves returns on capital? So we can level set how we should think about not just top-line growth and growing earnings, but margins?

Matt Flannery, President and Chief Executive Officer

Sure David, a great question. Thanks for taking a longer-term view of this because that's really how we manage and see the business. Although we have some short-term pressures when we acquire businesses that come in at lower margins, if you look over our experience with these acquired assets and what we've done with them pro forma, it validates why we do M&A. We feel we can be a better owner and bring more value to those assets. If it drops EBITDA margin for a period of time, that's one metric, but we also are very focused and model our M&A deals on returns. Our returns continue to be well above our cost of capital. So, I don't think rental margin degradation is a concern for us. We'll continue to drive fleet productivity to overcome natural inflationary costs, as well as efficiencies in our operations. We think that's how we've taken these businesses that were in the 30s and driven them toward mid-40s depending on the time of the year. So that's really what we do. Sometimes when people look at the headline, they may miss the fact that what we've done with these businesses pro forma is driving more value.

Jessica Graziano, Chief Financial Officer

If I can add one thing, David, good morning, there's no structural change in the way that we're managing the business. We're looking at the business longer term and we believe we'll be able to generate continued margin going forward.

David Raso, Analyst (Evercore ISI)

But fair to say from that answer you don't think of this as driving margins or not, but rather improving returns on capital and better cash flow, and then using that cash flow for growth via CapEx or M&A to drive earnings, more so than thinking of this as margin expansion. Is that a fair generalization?

Matt Flannery, President and Chief Executive Officer

We still are focused on margin expansion in the individual businesses, because some of them structurally come in a little bit differently. To your point earlier, some of the acquired assets, General Finance being the most recent example, are not going to be 50% margin businesses, but they will be a very good return. So, we're focusing on margin expansion while recognizing that some businesses are returns- and cash-flow-oriented rather than high-margin businesses.

David Raso, Analyst (Evercore ISI)

Everybody wants everything, right — margins, returns, cash flow — but structurally your pecking order feels like this is more about cash flow, and then growing the business utilizing the cash flow effectively. When we think of 2022 versus 2021, anything you can help us with on the framework in terms of resetting the bonus pool, how should we think about how '22 starts initially? Other costs that came back or how you think about delivery costs on ancillary — can you give thoughts on puts and takes on '22 versus '21 regarding costs?

Matt Flannery, President and Chief Executive Officer

Without attempting to give guidance for '22, it's clear we feel good about the environment. We wouldn't be leaning into capital spending and M&A if we didn't. We will see some of the headwinds from a cost perspective this year, specifically in this quarter as Jess discussed. But we feel good about '22 and the prospects. As I said in my opening remarks, we think we're in the early innings of the cycle here. So, we're excited about the prospects.

David Raso, Analyst (Evercore ISI)

Any color on the cost specifics? I understand the top-line commentary, but people are thinking about leverage. Anything you can do on the bonus pool and other costs, contracting delivery or how you're lining up delivery costs for next year — any color would be appreciated. Thank you. That's it from me.

Jessica Graziano, Chief Financial Officer

It's a little too early for us to quantify guidance numerically for 2022 on these items. Even on how the bonus will play through next year compared to this year, or what the inflation environment will look like next year, it's hard to predict. The takeaway is we'll continue to respond as we have by passing through and mitigating some inflation pressures, particularly in delivery. As we plan for next year, we'll look at all inputs and manage them appropriately, but it's too early to be more specific than that.

Operator, Operator

Thank you. Our next question comes from the line of Mig Dobre from Baird. Your question, please.

Mig Dobre, Analyst (Baird)

Yes. Good morning, everyone. Sticking with costs, Jessica, I think I heard you comment that flow-through and EBITDA in the third quarter will be relatively modest as well. Can you put a finer point on that? And on SG&A, the truing up on the bonus pool — does that impact Q3 as well or was that just Q2 specifically?

Jessica Graziano, Chief Financial Officer

Hey Mig, good morning. Let me start with the third and fourth quarters and the back half of the year. Using the midpoint for color, the back half implied margin would be down about 120 basis points, generating flow-through at the midpoint of about 39%, so think about margins around 46.2%. The bonus headwind will continue more so in Q3 than Q4, because the comp to last year had abnormally low bonuses. If you think about that bonus headwind and anticipated headwinds from acquisition activity and one-time costs, that margin impact moves from down 120 basis points to down 40 basis points, or an implied margin for the back half at midpoint of about 47.8% from 46.2%. Flow-through adjusting for those items is about 50% at the midpoint. The quarterly dynamic will play out: Q3 will have more flow-through pressure than Q4 due to the comp to last year. Also, Q3 last year included $20 million of one-time insurance recoveries that will not repeat this year.

Mig Dobre, Analyst (Baird)

Okay, thank you. Then to ask David's question a bit differently: on SG&A for 2022, is it fair to think you can get leverage on this line item such that revenue growth can exceed SG&A inflation? Is that how you plan to run the business or are there other things that might make it difficult to achieve?

Jessica Graziano, Chief Financial Officer

Yes, that's fair. The 2021 dynamic is in part because of the comp to 2020. In the normal course in 2022, we'll be looking to get leverage on SG&A. There's no structural change in how we're planning to run the business.

Mig Dobre, Analyst (Baird)

Understood. Lastly, infrastructure is in the headlines. If something passes and becomes legislation, how would you change strategy, fleet or go-to-market? Have you anticipated any of that in your CapEx plans or internal planning?

Matt Flannery, President and Chief Executive Officer

Great question, Mig. We began positioning for infrastructure demand even before by acquiring NES, which added to our fleet and expertise supporting heavy civil. We've actually been growing our infrastructure business because demand is there. We view potential infrastructure spending as icing on the cake. Regarding fleet profile changes, about 80% of the fleet we use to support infrastructure is core fleet — very fungible assets. Of course, if specific infrastructure programs ramp, we'll buy more attenuated trucks, message boards, and some infrastructure-specific equipment. But most of what we serve that end market with is core fleet. We're well positioned talent-wise, product-wise and relationship-wise with large civil contractors, so whenever funds are released, we'll be able to participate meaningfully.

Operator, Operator

Thank you. Our next question comes from the line of Ross Gilardi from Bank of America. Your question, please.

Ross Gilardi, Analyst (Bank of America)

Good morning. A couple of Specialty rental questions on growth. Aside from General Finance, what are some of the larger growth opportunities in your legacy Specialty rental business? Specifically, trench — with headlines about burying power lines to reduce wildfire risk, is that the type of project your trench business would be engaged in? Also, what about disaster recovery — how big is that business and how big could it become?

Matt Flannery, President and Chief Executive Officer

Great points about trench. A lot of infrastructure business plays into our Specialty network and also our General Rentals products. Emergency response is an area where we've built capability — power and HVAC teams have responded well. Our Fluid Solutions team has broadened their customer base since we first bought a pump company many years ago. Spreading product knowledge and breadth across our network to serve unique end markets is a core part of our Specialty strategy. So yes, projects like burying power lines would be a high-participation opportunity for our trench business. Disaster recovery and emergency response are meaningful parts of our Specialty and General Rentals offerings, and we continue to invest in those capabilities.

Ross Gilardi, Analyst (Bank of America)

So burying thousands of miles of power lines would be something you'd be engaged in and that's a common project for trench?

Matt Flannery, President and Chief Executive Officer

Absolutely. That would be a high-participation activity for our trench offerings.

Ross Gilardi, Analyst (Bank of America)

Okay, great. For studio entertainment and live events, you have some presence. Do you feel you need to get bigger in that market and are there acquisition opportunities?

Matt Flannery, President and Chief Executive Officer

We continue to grow that market. It's not an urgent gap for us; we're organically building presence and have strong people in that area. If an attractive acquisition arose, we'd consider it, but it's not a strategic must-have at this point. We prefer to grow it organically and will consider M&A opportunistically.

Operator, Operator

Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question, please.

Jerry Revich, Analyst (Goldman Sachs)

Hi, good morning. Matt, can you talk about capital deployment options now that you have a bigger footprint with General Finance and new regions and products? Where are you optimistic about putting capital to work where United Rentals is a good owner for additional assets now that you have those additional regions and products?

Matt Flannery, President and Chief Executive Officer

General Finance is an obvious growth opportunity — it was an acquisition aimed at growth rather than synergies. We can spread GFN's capabilities throughout our network and fill distribution gaps. Continued focus on penetration within existing businesses is also a priority. Specialty continues to grow double-digits; although mature in some markets, there's room to penetrate further. We'll fund organic growth aggressively and evaluate M&A opportunities from our pipeline as they arise.

Jerry Revich, Analyst (Goldman Sachs)

On the General Finance acquisition, Jess, you spoke about line of sight on getting GFN margins closer to industry margins. Now that you've owned the asset for a bit, can you provide more color on logistics, opportunities to leverage pricing tools, and whether market improvement could enable faster margin realization?

Jessica Graziano, Chief Financial Officer

We are doing the system integration in North America for General Finance this weekend, which is a great step to leverage United Rentals' tools to support growth and efficiencies. Part of the growth is cross-sell with the existing United business and expanding into MSAs where GFN currently isn't. That lets us extend their branches and leverage the efficiencies and productivities we have now. We remain comfortable with our thesis of getting those margins closer to where peers in that business operate. We're excited to get the integration underway and to work through these opportunities.

Operator, Operator

Thank you. Our next question comes from the line of Tim Thein from Citigroup. Your question, please.

Tim Thein, Analyst (Citigroup)

Thank you. Matt, can you talk through the opportunity for fleet productivity in the back half of the year? The comps get tougher, but as you think about components — time, rate, and mix — where are you and how do you see the opportunity in the back half?

Matt Flannery, President and Chief Executive Officer

We're very pleased with fleet productivity and have expectations for high productivity in the back half, but keep in mind the 18% number in Q2 was partially driven by an easy comp from last year's COVID-impacted quarter. We don't expect double-digit fleet productivity improvements in the back half, but we do expect significant productivity improvements. Absorption was a big driver in the near term, and market conditions and industry discipline are favorable to continued fleet productivity. The demand is there and that is embedded in our guidance for the back half.

Tim Thein, Analyst (Citigroup)

Got it. And regarding volatility this year in commodity costs and OEM availability, do you expect that to influence how you'll approach planning for CapEx for 2022, or how you're thinking about used sales, perhaps flexing fleet age higher? If the used market remains strong, does that impact next year's budgeting or fleet management?

Matt Flannery, President and Chief Executive Officer

On used markets, it's largely about time utilization. As we drive demand and higher use of our assets, they're less available for sale, and the end market is strong. We'll fill demand rather than sell into a tight market. On supply, we have good partners and expect suppliers to work through supply-chain disruptions. Commodities should normalize somewhat by year-end. We aren't seeing supply as a barrier to supporting customers next year. If it becomes one, we'll adjust, but it's not in our calculus today and not a reason to age the fleet.

Operator, Operator

Thank you. Our next question comes from the line of Ken Newman from KeyBanc Capital Markets. Your question, please.

Ken Newman, Analyst (KeyBanc Capital Markets)

Hey, good morning. One of your suppliers talked about some deliveries slipping due to supply chain tightness. Are you seeing equipment availability issues today? Are you getting equipment on time? You also raised the CapEx guidance this quarter — how were you able to pull that off and where do you see opportunities for increasing the fleet for year-end?

Matt Flannery, President and Chief Executive Officer

We still have a pretty big range in our guidance, but at the midpoint you know about the $300 million change we made, a substantial portion of which reflects Acme assets. We feel good about our ability to source equipment and our team's ability to secure what we need. There has been some slippage and parts may come in a few weeks later, but the team works through it and we drove higher fleet productivity on assets we had. Nothing has inhibited our ability to support customers. We will continue to work with our suppliers to help them help us.

Ken Newman, Analyst (KeyBanc Capital Markets)

I know you're not ready to give guidance on CapEx or fleet growth next year, but in terms of ordering patterns and used equipment, can you give a sense of how much of production slots you have visibility into for next year so far? How tight is supply and how hard is it to get new equipment?

Matt Flannery, President and Chief Executive Officer

It's a little early as we're not in the detailed planning process yet. Strategically, our suppliers know us well and have a good idea of categories and what will return from rental useful life. Growth is the variable we then layer on top. We'll go through the planning process and discuss with vendors as we normally do in Q4. All suppliers are keen to watch opportunities and our fleet team discusses this with them regularly.

Ken Newman, Analyst (KeyBanc Capital Markets)

Last one for me: in the $250 million of incremental acquisition revenue you referenced, how much is expected to be equipment rental versus other lines?

Jessica Graziano, Chief Financial Officer

In that number, there's about $30 million of used sales.

Operator, Operator

Thank you. Our next question comes from the line of Steven Fisher from UBS. Your question, please.

Steven Fisher, Analyst (UBS)

Great, thanks. Good morning. It sounds like the market environment is continuing to get better. To what extent could improvement in the market enable faster realization of synergies on some of these acquisitions?

Matt Flannery, President and Chief Executive Officer

Two different scenarios. Franklin was more of a consolidation in markets we already served; they're already integrated into our existing footprint and we see immediate opportunities. General Finance is a growth play, and we're just converting them onto our system this weekend and getting to work. We're excited about the opportunities but it's still early to accelerate timings materially. Internally we're moving quickly to capture growth, but externally it's premature to indicate a faster realization timeline after just a month.

Steven Fisher, Analyst (UBS)

Got it. And can you talk a bit about the re-rent market — is that a growing opportunity for you?

Matt Flannery, President and Chief Executive Officer

We do re-rents occasionally, but the Acme purchase was not primarily to re-rent assets. We bought assets that fit our profile and customer base. Re-rent activity happens but it's not the main driver of that acquisition.

Operator, Operator

Thank you. Our next question comes from the line of Neil Tyler from Redburn. Your question, please.

Neil Tyler, Analyst (Redburn)

Good morning. Matt, on the Acme deal, could you talk about how it came about? Jessica said the impact from those assets wouldn't be meaningful this year — am I interpreting that correctly, and why would that be? Second, on growth capital and the pace of new branch openings, those branches act as a drag on margin before maturity. Are there not branches you could acquire in those locations at the right price, or is greenfield development more attractive?

Matt Flannery, President and Chief Executive Officer

On Acme: within that $300 million of gross CapEx increase, about $200 million to $250 million relates to Acme assets. The exact number depends because we'll buy these throughout the rest of the year and many of the assets need to come off rent and be delivered in rent-ready condition. If they are not in acceptable condition we won't buy them. We'll know much more by the end of October when we hope to be mostly done. That back-half loading is why you wouldn't see the normal revenue impact this year that you'd expect if the assets had been delivered earlier in the year. The opportunity came organically — we've had a relationship with them for many years and they are changing their model, so we saw an opportunity to buy assets that fit our profile. On build versus buy: we have a dual approach. M&A has been an important part of our strategy, but we also pursue cold starts where appropriate. Franklin was an example where acquisition made sense in a market where we could do a better job. We'll continue to evaluate opportunities and pursue organic growth when appropriate.

Neil Tyler, Analyst (Redburn)

On fleet utilization as it stands, at what point does high utilization introduce inefficiencies in the cost base? Are some of those inefficiencies represented in higher delivery costs, or is that driven by fuel and third-party trucking costs?

Matt Flannery, President and Chief Executive Officer

We've always targeted higher utilization and scale gives us advantages there. We're not seeing a correlated increase in re-rent that would suggest dilution from high utilization. The higher delivery costs are largely driven by third-party hauling and fuel inflation during a rapid ramp-up. Over time, we'll continue to drive efficiencies and consider insourcing where appropriate to optimize delivery. Scale allows us to find efficiencies that may not have existed before, and that's a part of our plan to maintain healthy fleet productivity.

Operator, Operator

Thank you. Our next question comes from the line of Chad Dillard from Bernstein. Your question, please.

Chad Dillard, Analyst (Bernstein)

Hi, good morning. A question on the bonus accrual. Can you quantify the dollar amount you're seeing for this year? It sounds like there was a pretty big catch up in Q2. What's the cadence for the balance of the year?

Jessica Graziano, Chief Financial Officer

In the back half there's about $45 million of year-over-year headwind coming from bonuses. For the full year, the impact is about $90 million versus last year. The way it phases, there will be a little more of that headwind in Q3 than in Q4 based on the comp to last year.

Chad Dillard, Analyst (Bernstein)

Got you, that's helpful. Bigger picture: can you talk about customer acquisition cost in branches versus e-commerce? How much of your sales are made through the e-commerce channel today? Are you segmenting that channel more toward non-key account customers?

Matt Flannery, President and Chief Executive Officer

I wouldn't frame it as a cost play — it's about giving customers the ways they prefer to engage. It's not yet a large part of our revenue, but it's growing. As the industry leader we must offer that option. Beyond acquisition, digital engagement provides customers real-time access to information and is valuable for retention and servicing. The digital channel is only part of the broader customer engagement and it becomes more valuable the more customers use it for information and transactions.

Operator, Operator

Thank you. Our final question for today comes from the line of Scott Schneeberger from Oppenheimer. Your question, please.

Scott Schneeberger, Analyst (Oppenheimer)

Thanks very much. Good morning. When businesses are going well and supply-demand is tight, delivery costs go up due to third-party transportation. How are you thinking strategically about muting that in the future, perhaps by employing more full-time drivers? And as a follow-up, how are you seeing the labor market now and do you feel staffing will be a problem if demand remains robust?

Matt Flannery, President and Chief Executive Officer

That's a key strategic area. Insourcing was emphasized during COVID to keep people working and showed us opportunities. The ramp-up was quick and outside services were necessary in peak season, but longer term insourcing is an opportunity to drive efficiency. Recruiting drivers is a challenge industry-wide, but this is not unique to us. Overall, our labor situation is good outside of getting more drivers and trucks quickly. Low turnover helps us and deciding not to do mass layoffs last year has been beneficial. We see continued opportunity to insource and optimize operations strategically.

Jessica Graziano, Chief Financial Officer

Thanks, Scott.

Operator, Operator

Thank you. This does conclude the question-and-answer session. I'd like to hand the program back to management for any further remarks.

Matt Flannery, President and Chief Executive Officer

Thanks, operator, and thanks everyone for joining us. You can hear we're full steam ahead in a favorable market. Our Q2 investor deck reflects our recent expansion, so please download it from the website. Feel free to reach out to Ted if you have any other questions. We look forward to talking to you soon. Stay safe.

Operator, Operator

Thank you. And thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.