United Rentals - Earnings Call - Q2 2025

Executive Summary

• Q2 delivered second-quarter records in rental revenue ($3.415B), adjusted EBITDA ($1.810B, 45.9% margin), and adjusted EPS ($10.47), while total revenue reached $3.943B; net income was $622M (15.8% margin).
• Versus S&P Global consensus, revenue beat ($3.94B vs ~$3.89B) while adjusted EPS was modestly below ($10.47 vs ~$10.54); Q1 also beat both top-line and adjusted EPS consensus, reinforcing demand resilience (Values retrieved from S&P Global).*
• Guidance raised: FY25 total revenue to $15.8–$16.1B, adjusted EBITDA to $7.3–$7.45B, operating cash flow to $4.9–$5.5B, and FCF to $2.4–$2.6B; 2025 share repurchases lifted by $400M to $1.9B, supported by tax reform tailwinds.
• Key stock catalysts: stronger ancillary-driven top-line, higher FCF via tax reform, increased buybacks, and continued specialty outgrowth; offset by margin dilution from ancillary/service mix and delivery/repositioning costs called out on the call.

What Went Well and What Went Wrong

What Went Well

• Specialty strength: Specialty rental revenue +14.0% YoY to $1.147B; management highlighted continued outgrowth and “particular strength in our specialty business and in large projects,” underpinning raised guidance.
• Free cash flow and capital returns: YTD FCF $1.198B and net leverage at 1.8x; planned 2025 repurchases increased by $400M to $1.9B, aided by reinstated full expensing of CapEx under tax reform.
• Positive fleet productivity and disciplined execution: Fleet productivity +3.3% YoY with CEO citing momentum and best-in-class telematics/Total Control enhancing customer productivity (“our best-in-class technology offerings…will enable us to continue to generate profitable growth”).

What Went Wrong

• Margin pressure: Adjusted EBITDA margin down 100 bps YoY to 45.9% and net income margin down 110 bps to 15.8%, driven by lower rental gross margin and used equipment normalization, plus delivery and labor/benefits cost headwinds.
• Ancillary mix diluting margins: CFO emphasized outsized ancillary growth (delivery, fueling, services) is “dilutive to the margin,” contributing to flow-through pressure, though still accretive in EBITDA dollars.
• Used equipment margins normalized: Used proceeds $317M with adjusted margin 48.3% (vs 51.8% a year ago), reflecting market normalization; GAAP margin 46.1%.

Transcript

Operator (participant)

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 U.S. 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.

Matt Flannery (President and CEO)

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 One UR 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.

Having said all this, today I'll review our second-quarter results and touch on our updated 2025 guidance. I will discuss a 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. 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. 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%. Finally, adjusted EPS came in at $10.47. Now, let's turn to customer activity. We continue to see growth in both our gen rent 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 market saw impressive growth across both infrastructure and non-residential construction, while our industrial end market saw particular strength within power, metals and minerals, and chemical processing. We continue to see new projects kicking off, with a few recent examples including data centers, hospitals, and airports. 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're 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 our dividend. 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. 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%-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 five-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 them 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 of 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. 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.

With that, I'll hand the call over to Ted, and then we'll take your questions. Ted, over to you.

Ted Grace (CFO)

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. 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%. 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 used 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. 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 and free cash flow, our return on invested capital, 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-$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 used of about 5%. Importantly, the increase to 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-$7.45 billion. Notably, this primarily reflects the net impact of the H&E termination benefit. As was the case with 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-$3.95 billion.

Finally, we are raising our free cash flow guidance by $400 million to $2.4-$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. 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. With that, let me turn the call over to the operator for Q&A. Operator, please open the line.

Operator (participant)

Absolutely. At this time, if you would like to ask a question, please press the star and one keys on your telephone keypad. Keep in mind you can remove yourself from the question queue at any time by pressing star and two. Again, it is star and one to ask a question. We'll take our first question from David Raso with Evercore ISI. Please go ahead. Your line is open.

David Raso (Senior Managing Director)

Hi. Thank you for the time. I mean, it appears that the time utilization year-to-date is probably a little better than you'd say was feared six months ago. The kind of capturing of inflation, the price cost, as well as the ancillary mix has sort of been 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? I have a quick longer-term question after that. Thank you.

Matt Flannery (President and CEO)

Sure, David. This is Matt. I'll take the latter part of that question, right, and talk about the ancillary. When you think about everything that's in ancillaries, whether that's fuel, whether that's setup and breakdown of engineered solutions, anything from power solutions to job trailers and mobile storage, right, those would all fall in the ancillary bucket. The one that we're pointing to as outsized, for lack of a better word, is delivery, which is also an ancillary. When you think about the first half of the year, one of the big movers there is the Yak acquisition that we lapped in March. That business comes with a lot of ancillary and specifically a lot of delivery costs. That's really a pass-through.

When we think about that impact, not just on the top-line revenue, but also why you don't get a lot of margin for it, it's because it's not intended for that. It's something we're going to do for our customers and we continue to do. You saw a deceleration of that from Q1 to Q2 as we lapped Yak. We expect as that becomes less prevalent that we won't have that same level of impact and drag of ancillary in the back half of the year. That's in our expectation. We'll update you guys how that's come along in October. As far as price cost, I'll let Ted take that.

Ted Grace (CFO)

Yeah. Thanks, David. 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. 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 discreetly, consistently, has been delivery. 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 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 managing through that really well. We've talked about the investments we continue to make that we think are smart investments that we don't want to forego simply for the sake of chasing some arbitrary margin.

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. We do think we're managing price cost very effectively as we continue to manage both through those cost dynamics I talked about and the investments we continue to make. We can dig into any of that if you want.

David Raso (Senior Managing Director)

Yeah. 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 it may be. I was just curious on that price cost dynamic. It sounds like it's more ancillary back in line is really what's going to improve.

Matt Flannery (President and CEO)

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

Ted Grace (CFO)

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. 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. Just to kind of help with the numbers, if you think about, call it 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'll give you a sense for how that margin performed ex ancillary, right? 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 pass-through, as Matt, I think, mentioned. At least that'll allow people to start playing with sensitivities to understand how two-half versus one-half, we expect to play out.

David Raso (Senior Managing Director)

Yeah. At 17%-18% of rental revenue, ancillary is large enough. I just was not sure if maybe there is a way to start pricing for that better, right? It is a service. I know it is 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? That is sort of what I was fishing for on the price cost. No, I appreciate the growth rates. Getting closer to each other is going to be a help on the year-over-year drag. Lastly, real quick, the comment about 2026, 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 2026 versus, say, this time last year looking at 2025?

I am 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 2026 versus the visibility you had this time last year? Thank you. That is it for me.

Matt Flannery (President and CEO)

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 do not have any comments on visibility of 2026. That being said, we do expect the tailwinds that we have been talking about, whether that is to make a project, whether that is power, whether that is infrastructure, continue to be tailwinds. We will update as we get through our planning process in the fourth quarter and update you guys on that. Thanks.

Operator (participant)

We'll take our next question from Michael Feniger with Bank of America. Please go ahead. Your line is open.

Michael Feniger (Equity Research Analyst)

Yes. Good morning. Thanks for taking my questions. Ted, you raised the free cash flow outlook. I understand it's the Big Beautiful Bill Act. You're targeting now to deliver a record free cash flow level of $2.5 billion. Two to three 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? What are, do you think, the moving pieces that we should think about for free cash flow growth in 2026? We're thinking of fleet age, on CapEx, disposal of use, maybe even shifts within that CapEx if specialty continues to grow. What are some of the moving pieces there if this is our new baseline free cash flow going forward?

Ted Grace (CFO)

Yeah. So, you're right, Mike. We did talk about $2 billion as kind of a normalized free cash flow number. This is additive, at least in the foreseeable future, based on what we've got from this new tax bill. I do think it's fair all else equal that you can kind of tack it on and assume that that number's gone up on the order of $400 million. The benefit, obviously, immediately accrues to the cash flow from operations. The reason I bring that up is that net free cash flow is obviously dependent on a lot of factors. It is inherently assumptive. If and as you see ebbs and flows in CapEx based on different growth rates, we assume that would be something you'd have to think about. I'd say as it relates to kind of a normalized expectation, calling it $2.4 billion, something like that is not unreasonable.

Matt Flannery (President and CEO)

Yeah. I think Ted captured it right. That would be with similar levels of growth CapEx. The more organic growth you're going to achieve, obviously, you're going to spend more on CapEx that'll have some impact on the cash flow, but it certainly would be a good business decision.

Michael Feniger (Equity Research Analyst)

Fair enough. Matt, just with these data centers that we keep seeing in the headlines and CapEx on the AI side, that should be breaking ground in the next few years. I believe 40% of your rental budget there is specialty. Just as we see this theme continue to evolve this year, next year, how does this drive your mix going forward? How does this drive your mix when you think of your business, in terms of your CapEx spend, how those budgets work? When you talk about the power vertical specifically, are you seeing a tighter market there? Is that better conditioned for rate? Is that where incremental dollars have to go? Thank you.

Matt Flannery (President and CEO)

As we've talked to you guys about for a while, we continue to invest in specialty at a faster pace of growth CapEx in the overall business for a couple of reasons. They have white space. Specifically in these major projects and cold starts as well. In these major projects, the more complex the project, the more opportunity we have to cross-sell. There certainly is a bigger opportunity than in the general market on these major projects and with these major customers. That's why it's a big part of our go-to-market strategy. Outside of that, I wouldn't call out any uniqueness to the data centers versus other projects. It is a big chunk of work right now and one that we feel really good about, both currently and forward-looking. I wouldn't say there's going to be any change.

As far as for the CapEx and any change of the spend, because we do believe we have white space and strong growth opportunity for specialty, both existing and maybe getting to find new products as well, we expect to continue to outpace our CapEx. Outside of that, I wouldn't call out anything specific for data centers.

Operator (participant)

We will take our next question from Angel Castillo with Morgan Stanley. Please go ahead. Your line is open.

Angel Castillo (Executive Director of Machinery and Construction Equity Research)

Hi. Good morning. Thanks for taking my question. Just wanted to ask just on the conversation of the One Big Beautiful Bill, curious. Understand what the implications are for your cash flow. Are you hearing, as you have your kind of customer confidence index and conversations, are you seeing any step change or difference in behavior of kind of projects, how quickly they might be moving forward, or kind of the appetite to move forward with things. On kind of CapEx projects given the OBBB reform?

Ted Grace (CFO)

Yeah. I'll take that one. I guess what I'd say is we always caution people from confusing correlation and causation. Certainly, we've seen our customer confidence feedback stay at high levels and probably get fractionally better versus where we would have been in April. That trend has continued since early July. We feel really good about it. Our customers obviously feel very good about their own prospects. In terms of what that translates to, time will tell. All else equal, you would say that some of these tax policies obviously should be advantageous to project economics.

Angel Castillo (Executive Director of Machinery and Construction Equity Research)

Understood. Maybe a little bit of a bigger or longer timeframe type of question. In your slides, you have the rent versus buy kind of benefits to your customers, and you show how rental market has steadily exceeded the non-Resi market and essentially gaining share here of the customer's wallet. Some of the data, I guess, on the slides only goes through 2022. Just given a lot of the 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 the customer, can you talk about what you're seeing on the ground today in terms of rental equipment penetration of the market in equipment and just any anecdotal or data evidence as to how is that trending?

Is it accelerating in terms of the customer's appetite to buy versus rent, particularly thinking about specialty and the heavier construction equipment outside of areas? Anything you can share there.

Ted Grace (CFO)

Yeah. I'll start, and then Matt can kind of jump in after. Just to speak specifically to that chart, the American Rental Association restated the market. The reason we cut that off in 2022 is you could no longer have an apples-to-apples comparison, and I hope that's footnoted. It was previously. To the core of your question, however, we do absolutely think penetration continues to improve, and we think there's a lot of runway there. That, to us, is very clear. I think for a lot of reasons, which we've talked about, and we can get into specifics. It's just so much more appealing at so many levels for the vast majority of customers to rent over own.

As we just do more and more for them and consolidate kind of that one-stop shopping value proposition and deliver for them every day, we're just going to continue to be a better partner. I think that's going to continue to drive that secular penetration and the outgrowth.

Matt Flannery (President and CEO)

Angel, I would just add that at the end of the day, the industry has matured and become a much more reliable partner, which was one of the reasons people would have owned in the past. We're also here to drive safety and productivity. Even penetration from self or non-compliance, self-performance or non-compliance, like we do in our Trend Safety business, is another opportunity. I think awareness increased, and improved product offerings will continue to drive penetration to Ted's point.

Angel Castillo (Executive Director of Machinery and Construction Equity Research)

Very helpful. Thank you.

Matt Flannery (President and CEO)

Thanks.

Operator (participant)

We'll take our next question from Jerry Revich with Goldman Sachs. Please go ahead. Your line is open.

Hi. This is Clayton for Jerry. 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? Also, how do you view the disconnect with some of the slowing non-Resi construction indicators over the quarter?

Matt Flannery (President and CEO)

Sure, Clay. We feel really good about the fleet productivity to your point. We had committed to the beginning of the year that we expected to drive positive fleet productivity this year, which in its basic form means we are going to have rent revenue growth greater than fleet growth. That is happening. I would say, qualitatively, the industry continues to get positive rate. That is necessary because we still have to overcome the inflation that we have 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. We are really pleased with that, and that has taken a lot of focus, and admittedly, some costs, as Ted pointed to, on the delivery, on the outside hauling costs.

That is a smart capital decision. We have continued to do that. The rest of it was mix, fell in our favor this quarter. That is 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, to name a few—and to absorb any extra inflation over and above the one and a half peg that we put out there. We feel really good about that output, and we expect to drive positive productivity for the full year. Thank you.

Ted Grace (CFO)

Maybe on the second part, just tying it to those non-Resi indicators. Look, we pay attention to them. There is 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.

Those are the things that really are going to be, to us, more important and more indicative than kind of looking at a mosaic of data points.

Got it. Thanks for that. Quick follow-up for me on just how you guys are viewing the M&A pipeline currently and how that's evolved over the year. Thanks.

Matt Flannery (President and CEO)

Sure, Clay. Yeah. We continue to work a pretty robust pipeline. As we've proved with this in the first quarter, we're still very disciplined. It has to get to that last hurdle of financial after we find the strategic partners and the ones that we think will fit in the organization well. This is not a lack of opportunity. It's just making sure that we cross all three of those hurdles on our three-legged stool and find the right dance partners. We continue to work the pipeline. This is a capability we've built and one that we expect to utilize. We're not going to force it. We're going to make sure we get a lot of credit for being smart integrators. I think it starts on the front end where we're smart buyers. We'll continue to work the pipeline.

Thanks. I'll pass it on.

Thanks, Clay.

Operator (participant)

We'll take our next question from Jamie Cook with Truist Securities. Please go ahead. Your line is open.

Jamie Cook (Analyst)

Hi. Good morning. I guess two questions for me. Ted, sorry, getting back to the ancillary business. Just thinking about it from a long-term perspective, this and re-rent, it's 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, its lower margin, to what degree should we start to think about United Rentals as more of an EBITDA story and sort of take the 50-60% incremental margin target off the table. Because it's not relevant anymore, and maybe you're not an incremental profit story anymore. I'm just trying to think how you're thinking about that longer term. I guess, why don't we start there, and then I'll ask my second question.

Ted Grace (CFO)

Yeah. 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. The mixed dynamic that you're getting at is something that we need to make sure people do understand. 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. I think I touched on this with one of David's questions. At the end of the day, we need to serve our customers. That is the most important thing.

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. 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. Ultimately, you're driving underlying margin improvement. We do think that the team's done a great job managing costs over the last several years in this kind of higher inflationary slower growth environment. Once we kind of start moving forward, we do think we'll get more positive absorption of fixed costs that'll support kind of driving margin expansion.

Jamie Cook (Analyst)

Thanks. I guess my second question, understanding you, again, do not want to talk too much about 2026, but one of your peers put out a CapEx guide, understanding it is not calendar year, but implied CapEx for next year down, I think, in the high teens. Just trying to think about how you are thinking about the setup. I mean, you tend to replace your equipment more regularly. You are growing in specialty. We have some positive dynamics from the bill. Just wondering, as you think about things, would that be something more specific to a competitor? 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? Thank you.

Matt Flannery (President and CEO)

Yeah. I'm not going to get into forecasting 2026, but I will say that we feel good about the environment that we're in right now. I talked about how we believe some of the tailwinds we've been pointing to for a couple of years are going to continue. The local markets may be not growing, but we don't think it's retreating. That narrative kind of tells you where we are with it. We don't have to make that decision today. I would be surprised if we were to cut forward-looking because, to your point, the biggest spend is replacing fleet. We're very, very diligent about that so we can keep the fleet refreshed and give a good value prop to our customers. The end markets are good for used sales, as you see in our results. There's nothing that tells me that we would lean that direction. We'll stay tuned.

We'll tell you in January.

Jamie Cook (Analyst)

Thank you. I appreciate the caller.

Matt Flannery (President and CEO)

Thanks, Jamie.

Operator (participant)

We'll take our next question from Kyle Menges with Citigroup. Please go ahead. Your line is open.

Kyle Menges (Equity Research Analyst)

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

Matt Flannery (President and CEO)

Yeah, Kyle, I would say that. I think Jamie just pointed to as far as the supply-demand, some other folks had extra capacity coming into this year that they were going to utilize. That's great. We think that shows the discipline of the industry. You'd rather see people absorb the capacity they have versus add to that pile and therefore have unnatural actions to put it into the market. That's great news, and that's part of the supply-demand dynamic. The other part of the recovery is, we've built an engine where we do a lot of retail. That's also a sign that the end markets are good because customers don't buy equipment to sit on it. I would say that after the adjustments post-COVID, and if you want to take Q1 to Q2 sequential improvement in recovery, I think went from 51 to 53, we are seeing it stabilize.

Where that ends up, I think our full-year guide is somewhere in the middle of that, what we kind of inferred. Where we'd be on that, I would say we feel it has stabilized. We'll continue. Mix will have some impact on that, how much you do in retail in a quarter. For the full year, we think we've targeted the right area and the right ballpark.

Kyle Menges (Equity Research Analyst)

Got it. Thank you. And then just on the guide and taking the adjusted EBITDA up by that $50 million for that H&E termination fee, I'm just trying to understand that. I thought that you guys got that in Q1. I guess, just why was that not included in the guide in Q1 and not until this quarter? Just trying to understand that dynamic. Thanks.

Ted Grace (CFO)

Yeah. Obviously, you saw us kind of reaffirm the guidance in April. At that stage of the year, it's very unusual for us to kind of update guidance, right? Those ranges were maintained versus what we introduced in January. As we get to the second quarter in July, we start tightening those ranges. It was really we felt more appropriate to call it out in the context of that updated range, which is just tighter. I think that explains it. Yeah. If I remember correctly, in the April call, we did tell everybody it wasn't in there and that we would be updating it. Obviously, we'll live up to the commitment that we made.

Kyle Menges (Equity Research Analyst)

Got it. Thank you.

Ted Grace (CFO)

Thanks, Kyle.

Operator (participant)

We'll take our next question from Steven Fisher with UBS. Please go ahead. Your line is open.

Steven Fisher (Research Analyst)

Thanks. Good morning. Just thinking about the unchanged CapEx guidance for the year, does that include any higher costs for 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, do you still have the same number of units planned for the year as you had earlier?

Matt Flannery (President and CEO)

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. We feel good about that. We'll move forward with 2026 once things settle down. We feel we're in a really good position. Our partners have done a great job replacing their supply chain. 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 in reliability.

Steven Fisher (Research Analyst)

Okay. That's helpful. I guess, bigger picture here, you guys have talked about being in a bit of a slower phase of growth here. I know you don't have a crystal ball, but maybe just based on some of the visibility that you have at the moment, what do you think is the most likely driver of acceleration from here? Is it more of the large projects coming to market? Does it have to be from the more interest-rate-sensitive kind of commercial and developer markets come back around? Does it have to be M&A-driven? Obviously, there's a lot of theoretical paths. Based on sort of the visibility that you have, what do you see as the most likely path to re-acceleration?

Matt Flannery (President and CEO)

I think all the above are on the table, right? The only ones I'd point to is what we said earlier, is that we do feel the tailwinds we've discussed for the last couple of years will continue on. We spend a lot of time in infrastructure, power. I talked a little bit about utilities and areas that we understand the need is there so that regardless of the macro, there's just going to be work in these areas. That is why we focused on them strategically. We also continue to look at M&A. Whether we end up, we do not budget or plan for M&A because we do not want any unnatural decisions. We do work the pipeline. I'd find it unlikely that over the next year we will not do any deals. It is just a matter of finding the right partner.

I think there are multiple paths to growth. Once we do our planning process, which will be mostly organic-driven, we will update everybody in January.

Ted Grace (CFO)

Steve, the thing I might add to that, I think we've talked about those tailwinds. Obviously, we've come through an election this year. I think you've found kind of stability 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. Obviously, the prospect that the Fed may be becoming more accommodative. Certainly, that is what the market continues to discount. I mean, all these come back supporting good sentiment that I think drives the willingness to reinvest in America and frankly in North America.

Those are 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.

Steven Fisher (Research Analyst)

Thank you very much.

Ted Grace (CFO)

Thank you.

Operator (participant)

We'll take our next question from Kenneth Newman with KeyBanc Capital Markets. Please go ahead. Your line is open.

Kenneth Newman (VP and Equity Research Analyst)

Hey, good morning, guys.

Ted Grace (CFO)

Hey, Ken.

Kenneth Newman (VP and Equity Research Analyst)

Hey. For my first question, I know it's a smaller piece of your customer mix, but I'm curious if you 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? If you have an updated thought on when those local accounts start to re-accelerate.

Matt Flannery (President and CEO)

It has certainly improved just because of seasonality sequentially from Q1 to Q2. What you are probably more interested in is how it looks on a year-over-year basis. I would just say it has stabilized. We are not seeing growth in those areas in aggregate. Some markets, they are, and some markets, they are not. I think in aggregate, it has kind of stabilized. As far as what is going to spur further growth in that, we talk a lot about interest rates. We talk about that. At the end of the day, I do think sentiment matters. I do think people believing in the consistency of the opportunity so they can make smart business decisions matters.

I would argue, and I am not sure how long it would take, but even absent cuts, at some point, people have to decide how they are going to play in the new normal. Interest rates certainly would help, and it would help the sentiment. I think more about stability of the macro would help people invest more locally. We think that is a future opportunity. When and where that shows up, we will continue to talk to our customers and talk to our people on the ground. I would say in aggregate around the U.S. and Canada, that local market has stabilized.

Kenneth Newman (VP and Equity Research Analyst)

Yep. That's very helpful. Maybe for my follow-up here, I do want to go back to the tax bill implications. I think you mentioned some fractional improvement in the customer confidence index. There's a thought out there that the accelerated phase-outs for renewable tax credits could drive some pull forward on the construction timelines for the power projects. I know it's around 10% of your rental revenue. Do you have any specific color on power project timelines as it relates to those conversations you're having with your customers?

Ted Grace (CFO)

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. 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. In terms of what specifically may happen within solar in particular, I don't have any great insight. I don't know if you've seen anything.

Matt Flannery (President and CEO)

No. I mean, where we have had solar farms and projects, we've done very well. As far as future, I mean, we'll be responsive to the customer's requests. We're not reliant upon that either happening or not happening. I wouldn't think it'd change our forward-looking plans much.

Ted Grace (CFO)

Yeah, I think that's a really important point because, I mean, there has been this ongoing debate about this administration versus the prior administration and the focus on clean energy and renewables and all these sorts of things. At the end of the day, the bet we've made is that demand for power in the United States will continue to go up as a function of electrification, onshoring, investment, etc. We're going to serve that customer however they generate that electricity. Whether it is solar or wind or nuclear or hydro or gas or coal, whatever that ends up being, our business really is indifferent to what that generation source is. It's making sure we are there to be the best partner to that customer. I think Matt's story about that utility customer is a great illustration of the value we offer customers in this vertical and many others.

Kenneth Newman (VP and Equity Research Analyst)

That's very helpful. Thanks, guys.

Matt Flannery (President and CEO)

Thanks, Ken.

Operator (participant)

We'll take our next question from Steven Ramsey with Thompson Research Group. Please go ahead. Your line is open.

Steven Ramsey (Senior Equity Analyst)

Hey, good morning. General rental had a better year-over-year comp than the prior four quarters. Can you talk about what is happening there? Is it a correct assumption that ancillary is less of a benefit to the general rental line than it is specialty?

Matt Flannery (President and CEO)

If you just take the—to your ancillary question—if you just take the conversation we had about Yak and the matting business so heavily. Delivery burdens, you'd say yes, right, just from that factor alone. It is still part of our general rental delivery system. I would say that we insource almost all, if not all, of our general rental, which makes that a little more consistent. We also have to move around general rental equipment. There are costs that may not be delivery-related but repositioning-related. Overall, I think the construct of your question is accurate just from the Yak matting acquisition alone.

Ted Grace (CFO)

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

Steven Ramsey (Senior Equity Analyst)

Correct. Yes. That's what I'm asking.

Ted Grace (CFO)

Yeah. Okay. I think it's broad-based demand. We've talked about. The market really holding in well and customers feeling good. The general rental business obviously saw that acceleration consistent with what we would have expected. 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.

Steven Ramsey (Senior Equity Analyst)

Okay. That's helpful. To add on to the utility topic, being a long-term grower, can you talk about how Yak is helping you make fundamental progress there? Is it adding customers? Is it going deeper with customers? If you think about the next couple of years, maybe which way it leans between wallet share and customer addition?

Matt Flannery (President and CEO)

Yeah. It's both. Obviously, the cross-selling to our existing customers has really been the initial takeoff here. They were already the leader in that space, and they didn't have access to the network that we had. Broadening their capabilities to our network has really driven a lot of growth. There's opportunity the other way where they've had great relationships, and we've been able to cross-sell. I would say the first is probably more of it because of the size and scale of our network. That's one of the reasons we felt comfortable making the acquisition because we had been testing this ourselves by doing some matting on our own. Once we saw that we had a right-of-way to supply the customer with that, it gave us confidence to add a real quality team to the fold here.

Steven Ramsey (Senior Equity Analyst)

Okay. Thank you.

Matt Flannery (President and CEO)

Thanks.

Operator (participant)

We'll take our next question from Neil Tyler with Rothschild Redburn. Please go ahead. Your line is open.

Niel Tyler (Director)

Yeah. Good morning. Thank you. A couple of follow-ups, really, please, guys. Firstly, on the comments, Matt, you made about the shift away from ownership. I guess we've had a little bit more water under the bridge since the tariff announcements. Do you have any sort of anecdotes or specific thoughts in the last three or four months, with examples with customers having broken away from perhaps historic trends to own or proportions of their fleet that they might own? I wonder if you could just expand a little bit on that. On the expansion of your previous comments, you mentioned rate discipline and CapEx discipline across the market. Could you talk a little bit more about whether that's broad-based, whether there are exceptions to that in any verticals or regions? Thank you.

Matt Flannery (President and CEO)

Yeah. I'll take the latter part first because that's real easy. We don't talk about our rate. So, I'm certainly not going to talk about our competitor's rate. I think the proof is in the pudding, right? When you look at the supply-demand dynamics and you look at how people are managing their business and you look at the inflation that we've all had that the industry's had to absorb on the fleet, I think that gives you the answer there, so to speak. I wouldn't talk about any gaps in any specific industries or sectors or end markets. To the first part of your question, the shift from ownership, it doesn't move in that manner. There's no recent examples. I think this is a steady drumbeat to what the industry's been doing for secular penetration for years. It starts with, as I said earlier, number one, being more reliable.

The industry, not just us. I mean, I think we've kind of led from the front. I think the industry's become more reliable to customers, which gives them that confidence. Then the widening of our offerings, right, and the depth of our offerings alone. We're offering mat. We just talked about matting for a minute. That's a product that we didn't offer a lot of our customers before. That helps penetration. Even the information and technology that now with telematics is embedded in the fleet can help drive more productivity for the customer. I talked about that in my opening comments. That's a big part of the pull for us to be a better option than for people to self-perform and to deal with all the soft costs and the hard costs of owning their own equipment. We can take that burden for them.

Once they trust the supply chain from rental, the math is always going to work that rental's a better decision for them.

Ted Grace (CFO)

Yeah. Maybe I'll just tack on there. I don't know if this is woven into your question, Neil, but if you rewind to 2017, there was kind of this question with full expensing, would that change the relative economics and make the case for ownership more appealing? I would say, well, it's hard to A/B test. If you went back to that period of time, secular penetration continued to improve. It certainly did not go backwards. When we think about basically the reintroduction of full expensing, we certainly wouldn't expect to see anything different. I think the secular forces that have driven that are very clear and been very steady to Matt's point. We expect that to continue. We would not expect to see any shift there, frankly.

Niel Tyler (Director)

Great. That's super clear. Thank you.

Operator (participant)

We will take our last question today from Scott Schneeberger with Oppenheimer. Please go ahead. Your line is open.

Scott Schneeberger (Managing Director)

Thanks. Good morning, guys. I think largely over a series of questions, you've answered this. But I'm going to ask it a little bit more directly. Ted, you mentioned we kind of had a step function higher now with this new federal tax bill, maybe $400 million more of cash available. So, directly to the M&A. It just sounds like just where you are in your leverage, obviously, Matt, you've mentioned, "Hey, we're looking for the right deal. We have an active pipeline." And you guys addressed this excess as, "Hey, let's use it for repurchases." How married are you to the repurchases? Just, is this very beneficial for your propensity to enact M&A?

Ted Grace (CFO)

Let me just touch on the M&A piece. I mean, we are going to evaluate every deal on its own merits and do them when they make sense. I'd almost take a step back and remind everybody of what our capital allocation framework is because it dictates how we think about deploying excess free cash flow. We always start with the balance sheet, right? Are we confident we've got the balance sheet where we want it? If you look at it where it is today, current leverage, obviously, certainly in the lower half of the range we've talked about, we feel really good about that. We look at where's the liquidity. We look at maturities and all those sorts of things and make sure we feel like we've got a rock-solid underpinning to the whole business. We're there.

After that, it's allocating capital to fund growth, profitable growth being the key thing there. Organic, again, check that box this year. M&A, when it comes along and it kind of checks all three boxes, then yeah, we feel really good about moving forward. Once you get beyond that, you're then talking about what we internally call discretionary excess free cash flow. That is what we want to return to our shareholders. The first part is obviously going to be committed through the dividend. It's that residual piece that comes through buyback. When you think about the benefits of tax, that's really kind of that cascading approach that dictates how do we manage that windfall, if you will. Certainly, you can see what we're doing with the buyback. That'll be kind of how we think about allocating excess free cash flow going forward. It is that residual piece.

If and as we can find opportunities to invest capital, attractive returns, and benefit our customers by adding capabilities or augmenting capabilities, we're, of course, going to want to do that as long as they make that strategic sense, make financial sense, and we're comfortable with the cultural considerations. Matt, I don't know if you'd add anything there.

Matt Flannery (President and CEO)

But I think that was a great summation of how we think about capital allocation. Perfect.

Scott Schneeberger (Managing Director)

Thanks. Appreciate that, Ted. Just as a follow-up, I think, Ted, you specifically at the start of your part spoke about value-added services, the important role. You all press released the introduction of workplace-ready solutions at the end of the quarter. Maybe you just want to elaborate on where you see the opportunity there and kind of where you are in that process. Thanks.

Matt Flannery (President and CEO)

Without getting too much into what we would call proprietary detail, right, I would just say that we continue to talk to our customers and learn more and more. I said this in my opening remarks example about how can we be a better partner for them. It does not all have to, as we talked about with the ancillaries, it does not all have to be high-margin business. It all does not have to be capital-intense, which is a great part of that ancillaries as well. If it is going to add more value to the customer, we are going to be a more consistent partner with them. That is really how I would think about any of these value-added, including anything we can do in technology investments to help them drive more safety and productivity in their business.

If we are helping them achieve that, we are not going to have to live in a world of three bids and a buy. That is not the world we want to live in. We want to live in where we are a partner with our customers and a value-added partner where we can make them more productive. I would just say overall, we continue to look for opportunities to drive more value for them in that manner.

Scott Schneeberger (Managing Director)

Great. Thanks. Appreciate that.

Matt Flannery (President and CEO)

Thanks, Scott.

Operator (participant)

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

Matt Flannery (President and CEO)

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

Operator (participant)

Absolutely. This does conclude the United Rentals second quarter 2025 earnings call. Thank you for your participation. You may now disconnect.