United Rentals (URI) Q3 2026 Earnings Call Transcript

Image source: The Motley Fool.

DATE

Oct. 22, 2026

CALL PARTICIPANTS

• President and Chief Executive Officer - Matt Flannery
• Chief Financial Officer - Ted Grace
• Vice President, Investor Relations - Elizabeth Grenfell

Need a quote from a Motley Fool analyst? Email pr@fool.com

TAKEAWAYS

• Total Revenue -- $4.893 billion, an increase of 15.7% year over year driven by strong demand across large projects and key verticals.
• Rental Revenue -- $4.316 billion, representing 17.8% growth reflecting a 7.9% increase in average fleet size and improved fleet productivity.
• Net Income -- $920 million, resulting in an 18.8% net income margin compared to 16.6% in the same period last year.
• Adjusted EBITDA -- $2.331 billion, an increase of 19.8% year over year due to higher rental gross margin and improved cost discipline.
• Adjusted EBITDA Margin -- 47.6%, an improvement of 160 basis points year over year reflecting efficient leveraging of revenue growth.
• Adjusted EPS -- $15.55, representing 33% year-over-year growth and a third-quarter record.
• Fleet Productivity -- 6.5%, driven by the combined impact of rental rates, time utilization, and mix.
• Specialty Segment Rental Revenue -- $1.704 billion, representing 34.7% growth driven by strong performance across all specialty lines and cold starts.
• Specialty Segment Rental Gross Margin -- 47.6%, an increase of 250 basis points year over year due to favorable operational leverage.
• General Rentals Segment Rental Revenue -- $2.612 billion, an increase of 8.8% year over year supported by nonresidential construction and infrastructure projects.
• General Rentals Segment Rental Gross Margin -- 38.4%, an improvement of 170 basis points year over year reflecting efficiencies in labor and maintenance costs.
• Used Equipment Sales Proceeds -- $348 million, generated from the sale of $677 million of original equipment at cost (OEC).
• Used Equipment Adjusted Gross Margin -- 46.3%, reflecting a normalized used equipment market.
• OEC Recovery Rate -- 51.4%, consistent with management's expectations for used equipment pricing.
• Average Fleet Size (OEC) -- Increased 7.9% year over year as the company invested in additional capacity to meet project demand.
• Ancillary and Re-rent Revenue Growth -- Over 37% year over year, significantly outpacing core owned equipment rental growth.
• Specialty Cold Starts -- 12 in the third quarter and 40 year-to-date, supporting geographic expansion and density in existing markets.
• Year-to-Date Free Cash Flow -- $1.421 billion, including $4.339 billion in gross payments for rental equipment purchases.
• Year-to-Date Return of Capital -- $1.496 billion returned to shareholders, comprised of $1.125 billion in share repurchases and $371 million in dividends.
• Net Leverage Ratio -- 1.8x, remaining well within the target range of 1.5x to 2.5x.
• Return on Invested Capital (ROIC) -- 12.3%, an improvement of 30 basis points year over year.
• Full-Year Revenue Guidance -- $18.0 billion to $18.2 billion, an increase of $450 million at the midpoint from the prior outlook.
• Full-Year Adjusted EBITDA Guidance -- $8.3 billion to $8.4 billion, representing approximately 70 basis points of full-year margin improvement over initial expectations.
• Full-Year Gross Rental CapEx Guidance -- $5.2 billion to $5.5 billion, raised to support continued momentum in large-scale projects.
• Full-Year Free Cash Flow Guidance -- $2.15 billion to $2.45 billion, reaffirmed despite higher planned capital expenditures.

SUMMARY

United Rentals, Inc. (NYSE:URI) reported record third-quarter results driven by increased demand for large-scale projects across energy, manufacturing, infrastructure, and data center end markets. Management reported that business performance exceeded internal expectations, leading to an upward revision of full-year revenue and profitability guidance. The company successfully offset inflationary pressures in labor and maintenance through cost discipline and improved fleet productivity. Strategic expansion continued through the Specialty segment, which achieved record growth and margin expansion supported by a multiyear cold-start initiative. Capital allocation remained focused on organic growth, share repurchases, and dividends, reinforced by a recent investment-grade credit rating upgrade.

• The company's credit rating was upgraded to investment grade by S&P Global Ratings in Oct. 2026, which management noted will provide tighter spreads on future debt issuances.
• Flannery noted that positive fleet productivity was observed across all business units, project types, and customer segments, aiding the recapture of absorbed inflationary costs.
• Management cited internal survey data showing that customers remain consistently positive about their own prospects despite broader macro volatility and interest rate concerns.
• Flannery stated, "Large projects across a variety of end markets are driving our growth, and we expect this momentum will carry for the remainder of this year and into next year."
• Specialty rentals remained a critical growth driver, with management reporting that the one-stop-shop value proposition and surety of supply have become more prominent factors for large-site customers.
• Grace noted that the company is on track to return approximately $2 billion to shareholders in 2026 through a combination of dividends and $1.5 billion in share repurchases.

INDUSTRY GLOSSARY

• OEC (Original Equipment at Cost): The original purchase price United Rentals paid for its equipment, used as a basis for measuring fleet size and recovery rates.
• Fleet Productivity: A comprehensive metric used by the company to measure the combined impact of changes in rental rates, time utilization, and mix.
• Cold Start: A new branch location opened by the company organically rather than through the acquisition of an existing business.
• ROIC (Return on Invested Capital): A financial ratio measuring the company's efficiency at allocating capital to profitable investments.
• Specialty Rentals: A segment providing specialized solutions including trench safety, power generation, fluid containment, and climate control.
• OER (Owned Equipment Rental): Revenue specifically generated from the rental of equipment owned by the company, excluding ancillary services or re-rents.

Full Conference Call Transcript

Operator: Morning everyone, and welcome to the United Rentals investor conference call. Please be advised that this call is being recorded. Before we begin, please note the company's press release comments made on today's call and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control. Consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the company's press release.

For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31st, 2025, as well as the subsequent filings with the SEC. You can access these filings on the company's website at www.unitedrentals.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances, or changes in expectations. You should also note that the company's press release and today's call include references to non-GAAP terms such as free cash flow, adjusted EPS, EBITDA, and adjusted EBITDA.

Please refer to the back of the company's recent investor presentation to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer, and Ted Grace, Chief Financial Officer. I will now turn the call over to Mr. Flannery. Please go ahead, sir.

Matt Flannery: Thank you, operator, and good morning, everyone. Thanks for joining our call. Yesterday afternoon, we were very pleased to report our third quarter results, which are a testament to our strategy, the team's dedication to the customer, and the unmatched breadth and scale of our premier offering. We came into 2026 expecting another year of growth. As evidenced by our results, the business continues to perform better than we expected. Large projects across a variety of end markets are driving our growth, and we expect this momentum will carry for the remainder of this year and into next year.

We remain well-positioned to outperform the industry with our broad footprint, our unmatched one-stop shop offering, accompanied by exceptional levels of service and leading technology, and of course, our unwavering commitment to safety. These capabilities, combined with our customers' confidence and backlogs, support our revised guidance. We came into the year dedicated to being the partner of choice for our customers, accompanied by a laser focus on finding cost efficiencies. I am very pleased with the team's efforts and how the year is playing out. Team United continues to raise the bar, providing an unmatched offering for our customers while also generating strong returns.

Let us get into the details of our third quarter results and our updated full year guidance, and then Ted will get into more details around the numbers before we open up the call to Q&A. Starting with the quarter's results, total revenue grew by 16% year-over-year to $4.9 billion. Within this, rental revenue grew by 18% to $4.3 billion, both quarterly records. Fleet productivity of 6.5% contributed to OER growth of 12.9%. I will note that time and mix all contributed to the quarter's productivity along with rate. Adjusted EBITDA was a record of $2.3 billion, resulting in a margin of 47.6%, an improvement of 160 basis points year-over-year.

Finally, adjusted EPS came in at $15.55, up 33% year-over-year, and another quarterly record. Now, let's discuss customer activity. The third quarter again saw growth across both our gen rent and specialty business. Specialty was a standout with rental revenue growth of 35% year-over-year, including 12 cold starts, which brings us to 40 cold starts year-to-date. Notably, each specialty line of business reported strong double-digit growth in the quarter. By vertical, the trends of the first half of the year carried into the third quarter. Construction continues to grow across non-residential and infrastructure. On the industrial side, power once again posted double-digit growth, as did metals and minerals. As I mentioned earlier, a variety of end markets drive our growth.

This diversified exposure is an important and very intentional part of our strategy. With this in mind, we saw projects kick off in the third quarter across numerous end markets, including energy, manufacturing, infrastructure, and data centers. Now turning to the used market, we sold $677 million of OEC at a 51% recovery rate. The demand for used equipment remains strong, and we still expect to sell approximately $2.8 billion of fleet this year. Given the demand from our customers and our replacement of sold equipment, we spent $1.8 billion on gross rental CapEx in the quarter. This takes us to $4.7 billion year-to-date.

The combination of a strong demand environment and fleet productivity underpins this additional spend as we ensure we support our customers while driving profitable growth. Subsequently, we generated year-to-date free cash flow of $1.4 billion. Even with higher CapEx needs, we are able to generate meaningful free cash flow due to a combination of our industry-leading profitability, capital efficiency, and the flexibility of our business model. This strong free cash flow is redeployed in ways that allow us to augment shareholder value and is a critical part of our strategy. Finally, our capital allocation in the quarter reflects the disciplined framework we employ.

Our balance sheet is very healthy, allowing us to support both organic and inorganic growth, and to also return nearly $500 million to shareholders during the quarter through a combination of share buybacks and our dividend. Our leverage of 1.8x remains well within our targeted range of 1.5x-2.5x, leaving plenty of dry powder to support growth and to return excess capital to our shareholders. We have long talked about the importance of financial strength to support our strategy and to drive long-term value creation. To this point, we were very pleased to see S&P acknowledge our efforts with their upgrade of our credit rating to investment grade earlier this month.

As we enter the last few months of 2026, our focus is unchanged. The demand environment for large projects remains robust, supporting our revised guidance, which reflects over 12% total revenue growth, with EBITDA margins over 46%, all at the midpoint. We increased our CapEx guidance to over $5.3 billion at the midpoint as we see the opportunity to put even more equipment on rent while generating strong free cash flow and returns. In conclusion, the United Rentals team's diligent focus on our strategy day in and day out is delivering results we are all very proud of. Over the last nearly 30 years, we built and continue to expand a value proposition which differentiates us in the industry.

Our business model is truly unique and goes beyond purely equipment rental. By layering on technology, innovation, and unmatched service across both our specialty and gen rent businesses, we support our customers' productivity and drive a better partnership. For our shareholders, this translates to profitable growth, strong free cash flow, and compelling returns. With that, I will hand it over to Ted to review our financial results, and then we will take your questions. Over to you, Ted.

Ted Grace: Thanks, Matt. Good morning, everyone. As Matt just shared, the team delivered strong results that exceeded even our raised expectations from last quarter. Quarterly records for total revenue, rental revenue, EBITDA, and EPS. Beyond that, we raised our full year guidance for revenue and EBITDA to reflect our expectations that this performance will continue through year-end in support of a record 2026. Before we get into the details of the updated guidance, let us review the third quarter's results. As you saw in our press release, rental revenue increased 17.8% to over $4.3 billion, supported once again by the team's strong execution across large projects and key verticals.

Within this, OER increased by 12.9%, driven by a 7.9% increase in our average fleet size and fleet productivity of 6.5%, partially offset by assumed fleet inflation of 1.5%. Finally, within rental revenue, ancillary and re-rent grew over 37%, again outpacing OER growth by a healthy margin. Pivoting to used, we sold $677 million of OEC in the quarter, generating $348 million of proceeds at an adjusted margin of 46.3% and a 51.4% recovery rate. As Matt mentioned, consistent with our initial guidance, we are on track to sell approximately $2.8 billion of OEC this year at a recovery rate in the low-50s in what remains a healthy used equipment market.

Next, let us turn to adjusted EBITDA, which increased $385 million to a record of over $2.3 billion. This was driven primarily by a $417 million increase in rental gross profit and an $8 million increase in used gross profits. SG&A increased by $54 million, translating to a 20 basis point improvement as a percentage of revenue, while gross profits from other lines of businesses added $14 million. Looking at profitability, our third quarter adjusted EBITDA margin increased 160 basis points to 47.6%, reflecting another quarter of strong cost discipline.

While there will always be some quarter-to-quarter variability, we are very pleased with our team's ability to efficiently leverage our third quarter growth to offset the impacts of both lower margin ancillary and re-rent revenues and other inflationary pressures. Shifting to CapEx, we've responded to robust customer demand by investing over $4.7 billion in gross rental CapEx year-to-date, which is an increase of almost $1 billion year-over-year. Moving to returns and free cash flow, our return on invested capital increased 30 basis points year-over-year to 12.3%, which remains comfortably above our weighted average cost of capital, while our free cash flow year-to-date has exceeded $1.4 billion.

Turning to our balance sheet, net leverage remains very comfortable at 1.8x at the end of September, with total liquidity of over $2.6 billion. As Matt mentioned, we are very pleased to see S&P's recognition of our commitment to maintaining a strong balance sheet by upgrading our credit rating to investment grade earlier this month. We view this as a testament to our disciplined financial policies around leverage, liquidity, and maturity management, as well as the strength and durability of our free cash flow. Turning to capital allocation, through the third quarter, we returned roughly $1.5 billion to shareholders, including $1.125 billion through repurchases and $371 million via dividends.

Now, let's move to the guidance we shared last night, which reflects our confidence in delivering another record year. Total revenue is now expected in the range of $18 billion-$18.2 billion, an increase of $450 million at midpoint versus our prior guidance. While used sales are still expected at around $1.45 billion. At midpoint, this now implies full year total revenue growth ex used of better than 13% versus our initial 2026 guidance of closer to 6%. In turn, we've also raised our adjusted EBITDA guidance by $300 million to a range of $8.3 billion-$8.4 billion, reflecting our continued expectation to bring the revenue growth to the bottom line and finish the year strong.

Notably, at midpoint, excluding the benefit of the H&E termination fee last year and the gain on sale of our scaffolding business this year, this implies a roughly 70 basis point improvement in our full year EBITDA margin compared to the goal we initially shared in January of a flat full year margin. On the fleet side, driven by strong customer demand, we've increased our gross CapEx guidance by $300 million to a range of $5.2 billion-$5.5 billion. This now implies net CapEx of $3.75 billion-$4.05 billion. Finally, we are reaffirming another year of strong free cash flow in the range of $2.15 billion-$2.45 billion, which reflects an increase in our cash flow from operations offset by higher CapEx.

I think it's important to call out that we've invested significantly in our fleet this year to drive strong organic growth, positioning the business for attractive returns over the coming years, while also generating substantial free cash flow. Finally, on the capital allocation front, we still intend to repurchase $1.5 billion of shares in 2026. Combined with our dividend, this will return roughly $2 billion to our shareholders this year, equating to approximately $32 per share, or a return of capital yield of over 3% based on our current share price. With that, let me turn the call over to the operator for Q&A. Operator, please open the line.

Operator: Certainly. Thank you, Mr. Grace. Ladies and gentlemen, at this time, if you would like to ask a question, please press star one. If you do find your question has been addressed, you may remove yourself from the queue by pressing star two. Additionally, we ask that you please limit yourself to one question and one follow-up. We'll go first this morning to David Raso with Evercore ISI.

David Raso: Hi. Thank you for the time. The margins were impressive, and the sustainability of that improvement is the spirit of the question. The pricing opportunity you see coming up as some larger projects roll off to new ones, maybe some flexibility in pricing in current multi-year projects. Just give us a sense of how you're thinking about the chance to maybe improve the pricing on those. Any change there? The same idea of structurally, there are probably some ceilings how high time utilization could go. At least versus history, it feels like we're maybe getting a bit close to that ceiling.

If that's the case, should we think of how we address that high ceiling as expect strong CapEx next year, but also maybe an increased focus on rental rate? Thank you.

Matt Flannery: Thanks, David. What you're touching on, you see we're doing all three components very strongly here in the quarter with the productivity of 6.5% that you saw. With all that being said, rate's been climbing and been a good guy for us for quite some time, and that's necessary because of the inflation that we're all experiencing in the industry. We expect that to continue next year. Certainly, the demand environment and the high time utilization, to your point, assist that. We feel really good about that opportunity. As far as the CapEx, we'll get to that when we get to January guidance.

But it's a fair point that maybe running at this level of time utilization isn't the most prudent thing to do. We're doing it out of necessity right now. But we could temper that a little bit next year, which would require a little more CapEx, but not a lot. I think we will get to that in January once we get through our planning process here throughout the fourth quarter and let you guys know in January.

David Raso: Any thoughts you maybe could provide on the rate opportunity, thinking about larger projects still as a base case driving the business next year? And obviously, any other color between rate growth for gen rent versus specialty? Thank you.

Matt Flannery: Yeah. We are seeing positive fleet productivity throughout all business units and throughout all project types and all customer sets. So this is not just unique to projects or local market or industrial. This is across the board concerted effort for all of us to make sure we recapture the cost that we are absorbing.

David Raso: All right. Thank you for the time. Appreciate it.

Operator: Thank you. We go next now to Rob Wertheimer with Melius Research.

Rob Wertheimer: Thank you. One of the concerns people had heading into the year, if we go back a few quarters, is just the fleet movement costs in a market that was bifurcated, soft on one side, strong on another. It seems like you've alleviated that. I'm sure some of that is internal management. I wonder how much of that is the overall market has tightened up. I wonder if you could just sort of comment on that dynamic and if it remains a risk or a focus.

Matt Flannery: Sure, Rob. It's really been a lot of internal management and process change more than anything. The reality is a tighter market could require more movement. So I think the team's done a great job. We obviously put more process changes and eyeballs into it. It wasn't that the team was doing anything wrong last year. We just needed to see how we could do it better. We have a team that's very responsive to customer demand, and if we could bundle some of those responses together and put a little more elbow grease into making sure cost was a big variable in these decisions, that's the result that you saw.

Rob Wertheimer: Perfect. Thank you. Just kind of more generally, and I guess maybe David just touched on this, but as you roll through the mega project era, you guys add a ton of value with fleet diversity, technology, service, uptime, all these different things you guys do well. Are conversations around the value you deliver to mega projects more constructive now than they were in the past? Do people kind of realize how much you can save through delivering all those factors?

Matt Flannery: Yeah, I certainly think that surety of supply and the one-stop-shop value proposition have definitely taken more prominence really in the last year plus. When you run a big site, not having a bunch of vendors running around is very helpful for the folks that have to control the security and the safety of that site. I think probably all the large companies are playing favorable there, but we certainly think our unique value prop advantages us there.

Rob Wertheimer: Thank you.

Matt Flannery: Thanks.

Operator: Thank you. We go next now to Jerry Revich with Wells Fargo.

Jerry Revich: Yes. Hi, good morning, everyone. I just wanted to ask on the cost performance, what really stood out is really strong labor and R&M productivity across both general and specialty rentals. Earlier this year, you folks have implemented a number of rationalization plans. Can you just update on where we stand on that? Is there more runway for further efficiency gains from here? Are we at the run rate from those efforts?

Ted Grace: Sure. Thanks for the question, Jerry. This is something we have been talking about publicly since January. Something we challenged the team to do early in the year, and they have delivered incredibly well. Certainly, we have gotten very good labor absorption, and you can see that in both sides of the businesses, and you mentioned R&M, but almost back to Rob's question, I think the team has also done an extraordinary job on the delivery side. We said that all three of those would be critical to producing better margins year-on-year. In terms of the restructuring, that is really played out in line with expectations.

The benefits have been consistent, and they really are not a big part of what has driven the year-on-year improvement. They have been helpful for sure, and we were prepared to take those actions. But at the end of the day, it is really been the team's focus on leveraging growth efficiently. You think about growth, I mean, growth itself has been very strong, stronger than we expected. The composition of growth has been very strong. You can see that in the fleet productivity. Then to your point, the team has just done a really good job driving efficiency across those big three buckets. That is something we have long talked about.

It is a challenge we have got to meet every year. We feel like the team has done a great job prior to 2026, to be honest, and we talked about that publicly. Going forward, almost coming back to something David asked about, the sustainability. This is just how we run the business. There is always going to be an ebb and flow to all these dynamics. But certainly our expectation is we will continue to deliver. Our goal is to deliver margin expansion always. We feel like we have got a good recipe to continue driving strong results.

Jerry Revich: Yeah. Thanks for that. Matt, can I ask just to expand in your prepared remarks, you spoke about delivering to manufacturing as well as power. What we are seeing in the semi fab plants is for plants to double CapEx 2027 versus 2026. Is that the magnitude of the startup deliveries that you folks are alluding to when you mentioned the prepared remarks in manufacturing? Can you expand on just the magnitude of growth in power? Because in addition to utility CapEx growth, obviously behind the meter is set to more than double as well. Are you seeing that level of growth in those verticals?

Ted Grace: We do not get too specific in verticals, but certainly we feel like we are very well positioned to be that partner of choice for the kinds of contractors that build the kind of facilities you are alluding to, the very high spec, demanding customers. We feel very good there. Not sure we would quantify what that translates to too specifically, but we are doing very well there. On the power side, we saw double-digit growth. It has been a trend we have been talking about publicly for a while.

Certainly, that is actually not going to be the behind the meter piece as much as it is working with investor-owned utilities across generation, transmission, distribution, all of which have been key elements to our power vertical strategy since really for over a decade since we introduced in 2016, Matt?

Matt Flannery: Yeah. I think the broader point is our end markets are very diverse. We cover a broad range of end markets, both in construction and in industrial as well as infrastructure, and all with the same fungible assets. I think that is really the story there. For example, even in power, we are not doing a bunch of specialty power assets, right? Or large scale to power some of these projects. We are really staying in our lane, and I think it is playing out really well for us. Gives us a lot of flexibility.

Jerry Revich: Thank you.

Operator: Thank you. We go next now to Angel Castillo with Morgan Stanley.

Angel Castillo: Thanks, and good morning, everyone. Could we just talk about price cost a little bit? As you start to do your 2027 planning, I know we're still a little bit early, but can you just talk about what kind of levels of inflation you're seeing across the major buckets of cost of goods sold? Again, you've done a great job so far here in 2026 covering that, so it would be helpful to understand how you're seeing that progression or the implications of cost inflation next year.

As it relates to the questions earlier on rental rate, how much of that has maybe already been kind of secured through recent renewals or projects or just kind of increases, and will just kind of roll through into next year, versus how much do you still need to kind of go out there and get as you do renewals of contracts?

Ted Grace: Yeah. So touching on the first piece, Angel. Look, inflation is very real. It's certainly not benign. It's certainly not deflationary. I think it depends on the bucket. On the one hand, you look at that labor absorption we talked about. I mean, frankly, that's why we're absorbing above-trend merit increase, and we think that's important. We want to take care of our people. I think we pride ourselves on being the employer of choice, and that certainly means taking care of your people in a lot of ways. So I can tell you, we proudly think about the way that we reward our team for the great job they deliver.

But honestly, the underlying increase is above trend, and yet you're still seeing the team offset that through productivity gains. Within R&M, you can imagine, that's another area where our suppliers are focused on their pricing on parts, and yet we've been able to manage that very effectively. Within delivery, what is incredible, I think people see what's happening with diesel. They can see what's happening with freight rates. And yet, here again, we've been able to offset that. So it's not at all to suggest that we're in some kind of deflationary beneficial cost environment. Going forward, we'll see how next year shapes up.

There's a lot of dynamics to consider as we get into planning internally, and then what that translates to from a forecasting perspective. But I come back to our goal is to be as efficient as possible and consistently deliver strong margin performance across the business.

Matt Flannery: Yeah, and as far as—

Ted Grace: The second part of your business.

Matt Flannery: As far as the rate component to the second part of your question about fleet productivity. First of all, we manage rate and time rigorously. It's the mix of the two that matters, which is why we talk about fleet productivity. But to be clear, we manage rate throughout the year. There's no magic date or point where we're doing renewals. We work with our customers throughout the year, making sure there's a balance of getting paid for our value and making sure they can do what they need to do on the job, both physically and economically. And we think we've found a really good balance, and we don't expect that to stop anytime soon.

Angel Castillo: It's very helpful. Thank you. Maybe could we touch on capital allocation? You now have investment grade with one credit agency, and when I look at your balance sheet, you still have quite a bit of firepower. So maybe a couple of things. Maybe touch on what the implications to perhaps your borrowing cost or cost of capital is from the shift to IG. Then as we think about your current leverage or net leverage versus your target of 2.5x at the high end, is there anything preventing, I guess, you from being able to deploy more of that, whether it's to buybacks or for M&A? I know you did, I think, a little over $100 million this quarter.

Just talk about the puts and takes there for capital deployment and perhaps timing.

Ted Grace: Sure. I think we talked a little bit about this last quarter, but when you think about our capital allocation philosophy, it always starts with the balance sheet and where we position. Certainly, over the years, you've seen us evolve that strategy, get to the point where we've got a very strong balance sheet that will allow us to do pretty much anything we think makes the most sense for the company and the shareholders. As a result of that, we changed our internal financial policy such that we felt comfortable moving to investment grade. The concern we previously had was the potential constraints that could put on inorganic growth.

But as the company has grown and the scale has gotten bigger and bigger and what that's done for our financial capacity, we realized that frankly, we had the ability to do anything we wanted with the existing constraints. As a result, we've changed that internal financial policy and communicated that externally, and that's really what's precipitated at least one of the upgrades. So it doesn't change much. It really doesn't change anything internally. So there's no "cost." The benefit is obviously those tighter spreads that we'll get as an IG issuer versus a high yield.

I wouldn't want to speak for the market, but certainly people can look at kind of BBB- credits to get a sense for kind of what their yields would look like relative to ours, and we think it'll be a very appreciable benefit that will, over time, as we refinance debt or issue debt for whatever reason, accrue benefit to the shareholders. But it doesn't change that strategy of starting with a strong balance sheet, investing in organic growth, funding smart M&A, and then returning the excess capital to our shareholders.

It's really going to be that kind of framework, I think certainly for 2027 to be a reasonable assumption that's the framework we use to figure out that capital allocation strategy. Does that answer all the questions, or was there one at the end that you also wanted us to address?

Angel Castillo: Yeah, just more, I guess, in terms of the potential for timing of either buybacks or M&A, if we should kind of be leaning one way or another, how to kind of think about that.

Matt Flannery: Well, if there was any impact on our ability to do M&A, frankly, we wouldn't be doing this. So we don't see any impact there. As far as the buybacks, stay tuned. I think we've been pretty consistent there.

Ted Grace: Yeah. We've got to go through that planning process to see what that growth opportunity is, what the investment looks like organically, get a sense for what that part of the use of cash would be. And then obviously we'll assess kind of the M&A opportunity. And then what's left over, consistent with history, I think you can expect us to return that excess capital to our shareholders. So I wouldn't anticipate any change there, to Matt's point.

Angel Castillo: Very helpful. Thank you.

Operator: Thank you. We go next now to Seth Weber with BNP Paribas.

Seth Weber: Hey, guys. Good morning. Thanks for taking the question. Appreciate all the comments about the strength in the mega projects and stuff. I just wanted to get your sense a little bit on the local markets. Would you characterize them as still being kind of stable? And just, how much of a lag do you think we should expect? How long will it take for those markets to accelerate once interest rates start to come down, in your experience? Thanks.

Matt Flannery: Sure, Seth. We would continue to call it stable. Now, to be a little more information there for you, it probably gave us a couple of points of growth here in this quarter, but the big driver here is still the mega projects, the large projects and our large customers driving this growth. We like the fact that there was a little bit of growth there. As far as is that a pivot point, we don't know. For the second part of your question, we'll stick in our lane. As I said earlier, we have no idea how to forecast what that lag would be.

What we do have is the ability to get, especially as we go through our budget process, to have boots-on-the-ground feedback, and that's what we'll learn, and we'll count more on that than any kind of thoughts about what a lag would be. But we have heard for a while now, sentiment has been more positive. We have seen a little bit of growth in a lot of these local markets, so we are feeling good about the direction of it.

Seth Weber: Okay. Thanks, Matt. I guess just on the specialty business, I think you're talking north of 40 cold starts this year. Do you think that would accelerate next year? Have you started to see any change in the competitive landscape in the specialty categories? Thanks.

Matt Flannery: Yeah. So we're slightly ahead of target this year. This is kind of a continuum of markets that our teams in each business unit have on their docket of where they want to grow into. We haven't done that work yet. That's part of the budget process. So I don't want to try to predict what we're going to come out with. But we still have white space geographically in some of these markets, and really the ability to grow some density in markets where we already exist in some product lines as we've been outgrowing the existing facilities. So I think there'll be more opportunity, and we'll update you guys in January.

As far as the competitive set, there's always competitors that want to get into what we're doing, right? Somebody always covets thy neighbor's revenue, so to speak. What I will say is the barrier to entry and the value prop that we have built is really strong. I think we have got a pretty good competitive moat there as far as what we offer the customer.

Seth Weber: Got it. Okay. Thanks, guys. Talk to you soon.

Matt Flannery: Thanks.

Operator: We will go next now to Kyle Menges with Citi.

Kyle Menges: Thank you, guys. Maybe following up on Seth's first question on the local markets, I would just love to hear a little bit more of what you think is driving some of the positive sentiment in those local markets in spite of still a choppy macro backdrop and elevated interest rate environment.

Matt Flannery: I don't really have any additional color. In aggregate, we're giving you a number in aggregate, but the puts and takes in all these different markets, the 1,800 branches that we're in almost in the U.S. and Canada, it'd be really hard to homogenize that for you as far as what's driving it. But we are seeing local markets that do have some growth, and we'll update you guys of what we think that's going to turn into in 2027. But I don't really have any additional color for you.

Kyle Menges: Got it. Ancillary, again, outgrew OER pretty significantly this quarter. How should we think about that gap between the ancillary and OER growth potentially narrowing over time and maybe into 2027? And how much of it is just a matter of mega projects maturing into maybe year two, year three, year four versus a lot more of them in year one and getting ramped up and maybe there's more ancillary revenue as those projects ramp up?

Matt Flannery: Yeah. We view ancillary as responsive to customers' needs and their requests, not really something we'll predict. I'm certain that specialty growth is one driver of it. I'm certain that projects do tend to need more of it. But as we continue to add more offerings and customers are aware of what we have to offer them, it'll be interesting to see how that spreads. I think more importantly is we're just being a better provider to our customers. So for us, we don't have a target for it to grow it or to not grow it.

It's to make sure we're in position to respond when the customer asks us to do something for them that's related to our products and our services. So really no ability to predict there because it is a responsive, non-CapEx driven type of volume.

Kyle Menges: Understandable. Thank you, guys.

Matt Flannery: Thanks, Kyle.

Operator: Thank you. We go next now to Chad Dillard with Bernstein.

Chad Dillard: Hey, good morning, guys. My question for you is on the CapEx raise in the quarter, and what drove it. Is it the demand that you're seeing right now, or are you preparing for what you're seeing ahead? If you could, just what end markets are getting better to drive that? Then maybe just secondly, what was the breakdown between what drove it, gen rent or specialty?

Matt Flannery: Sure, Chad. I'd say yes to both. It is the work that we see right in front of us right now. We had talked about how we're driving historically high time utilization. This isn't a pull forward of stuff we're going to need next year. But certainly, the fact that we think 2027 is going to be a growth year gives us the confidence to support these growth needs that we have late in the year here in Q4. So it's really a little bit of both. As far as I forgot the second part of your question.

Chad Dillard: Oh, yeah. Just gen rent versus specialty. What—

Matt Flannery: Oh, yeah. Thank you. You see the growth of specialty. Really for quite a few years now, specialty gets an overweighted amount of the growth CapEx to support the cold starts and the growth that they're having. Outside of that, then once you get beyond specialty, within our gen rent portfolio, we're really utilizing our full portfolio on these major projects because you think about it's pretty evenly spent throughout those categories that we carry in our gen rent stores.

Chad Dillard: Gotcha. Maybe just double-clicking on specialty. Saw some pretty sizable growth, +30% in the quarter. Can you break down how much is from cross-sell or scope increase versus just a dedicated specialty sale? If you can't do it quantitatively, maybe just give some qualitative color.

Ted Grace: Yeah. It's hard to break down too specifically, but certainly, when you think about the value proposition of being a one-stop shop, that is a good example of cross-selling. Certainly as we've been providing more and more products and services on these large projects that lend themselves very well to it certainly benefits, I guess what you would call cross-sell. To us, it's solving problems for customers and making their lives as easy as possible. That all kind of comes back to the strategy we've been talking about of being that partner of choice. But it's hard to peel it apart, Chad.

Chad Dillard: Okay. Thank you.

Ted Grace: Thanks.

Operator: We'll go next now to Mig Dobre with Baird.

Mig Dobre: Yeah. Thanks for taking the question. If we can go back to the discussion around ancillary and maybe double-click specifically on the re-rent revenue. We'll see how Q4 shakes out, but it looks to me like this line item is going to be up quite significantly, maybe 40%-50% on a year-over-year this year. I'm curious what the right way to interpret this or think about this is. Is this a function of you guys just re-renting equipment in categories that maybe you're not participating?

Or is this more of a CapEx signal in terms of where demand is materializing, and part of the reason why you're raising CapEx, simply not having enough equipment and having to source it from third parties?

Matt Flannery: Yeah. I would say it's the latter, Mig. This goes hand in hand with the demand environment and the time utilization that we're driving, and part of the reason why you see a CapEx raise here. It is the latter, and sometimes it's, I would say most of it. I won't say all because there's always something that we're getting to support a customer's need that we don't necessarily have in that market. Sometimes it's the more efficient play, especially for a short-term need or for something that we don't have access to handily at that moment of need. But overall, it is indicative of the combination of demand and high time utilization that we're running.

Mig Dobre: Okay. That's helpful. As you're raising CapEx, I'm sure you'll give us an update on 2027. It sounds like you're probably going to spend a little bit more. Is it fair to expect this line item re-rent to maybe flip to more towards OER? Does that kind of have a bit of a margin benefit that we need to contemplate if that's the case? Thank you.

Ted Grace: It's a good question. I would say ultimately, certainly as we pivot some of the stuff into CapEx, and we internalize those cash flows, it's going to benefit your OER line. But one of the things, again, is solving problems for customers. I think you've long seen re-rent as part of our business for a lot of different reasons, whether it's sourcing additional capacity or providing those things as a one-stop shop service provider that for one reason or another, we don't own or don't want to own. So I'm hesitant to get too specific, but I think your logic makes sense.

As we do convert some of that re-rent into OER via CapEx, that's going to benefit our core results.

Mig Dobre: Great. Thank you.

Matt Flannery: Overall, it's not that big a number in the overall scheme of things and not something that we plan for. So it's hard even for us to model what that would be. I don't know how to guide you how you would, frankly.

Operator: Thank you. We'll go next now to Jamie Cook with Truist Securities.

Jamie Cook: Hi, good morning, and congrats on a nice quarter. I guess just two questions. My first question, just with regards to conversations that you're having with OEMs as you think about CapEx for 2027. Any concerns on capacity constraints in the market? Are we having conversations earlier just because of concerns on OEM availability, and just sort of the pricing set up for 2027? Then I guess my second question, just the competitive dynamics, which I'm sure there's always new ones each cycle, but obviously you have a large OEM who's trying to get more aggressive and compact and trying to focus more on mega. We have new players in the market trying to double their OEC.

I guess, Ted, given what you're seeing in the market, do you think the improvement that we've seen in rental rates, do you think that could continue into 2027? I guess to what degree are you concerned that some of these peers could be potentially putting too much fleet into the market and that becomes an issue, you know what I mean, potentially at some point next year? Or do you just see this as sort of normal new entrants trying to do things and ultimately not making big waves in the market? Thank you.

Operator: Ladies and gentlemen, it appears we're having a technical issue. Please stay on the line and we will have it resolved as soon as possible. Again, ladies and gentlemen, please continue to stay on the line. We are resolving the technical issue as we speak. I'll let you know just as soon as Matt and Ted have rejoined us.

Jamie Cook: [inaudible]

Matt Flannery: Ted Grace is Matt Flannery.

Operator: Ladies and gentlemen, please continue to hold. We are still resolving the technical issue as we speak. We will resume momentarily. Ted and Matt, I believe we do have you back if you can hear us again.

Matt Flannery: Can you hear us?

Operator: We can. Ted, Matt, please go ahead.

Matt Flannery: Great. Sorry about that, folks. I do not know what happened. We had a little blackout here, but with all that being said, we are on a line. Another line.

Operator: Line again.

Matt Flannery: I believe what we heard at the tail end was that Jamie asking a question, if you would like to repeat it.

Operator: It was.

Jamie Cook: Sorry, I guess—

Operator: Jamie, please go ahead.

Jamie Cook: You want me to repeat both questions? I guess the first question was just on talking to OEMs about 2027 concerns, basically on any constraints in terms of you being able to get equipment and pricing. Then my second question, it was just the competitive dynamics this cycle with a major OEM trying to get more into compact and mega, obviously other public players trying to double their OEC. To what degree are you concerned, potentially we could be flooding the market and this becomes equipment could be flooding the market and this becomes an issue. Or do you think the appropriate level of equipment that's going into the market sort of meets demand?

I guess that was the spirit of the question and whether competitive dynamics are any different or more concerning versus what you've seen in other cycles. Thanks.

Matt Flannery: Yeah, sure. To the flooding supply, the industry's shown really good discipline on supply and demand, and including the OEM. We feel good about that backdrop. More importantly, we feel really good about the demand going forward. We're not overly concerned about that. As far as our ability to access, you see this year with the raised CapEx throughout the year. We've got real good relationships and flexibility with our partners where we do feel we're able to react quickly and respond quickly to opportunities. There's a lot of planning in that and a lot of forward-looking information that we're sharing with our partners to make sure we can do that effectively.

We do feel good about the supply demand and our ability to participate appropriately in that.

Jamie Cook: Thank you.

Matt Flannery: Thanks, Jamie.

Operator: Thank you. We'll go next now to Steven Fisher with UBS.

Steven Fisher: Great. Thanks. Good morning. My call dropped a little earlier, so apologize if these have been addressed. Last year in the fourth quarter, you had a couple of things that were specifically weighing on the margins in that quarter. The comps, I think, should be easier. I'm just curious how you approached setting the expectations for Q4 incremental margins or implied incremental margins in light of easier comps on that from last year versus this year. I would think they should be better than what you saw in Q3, but it seems like there might be something else you're factoring in.

Ted Grace: Yeah. Certainly, it won't react to dynamics we talked about a year ago. I'd say the biggest thing we did call out was that repositioning a year ago, and the team's done a good job. To some of my earlier points, Steve, I'm getting the gist of your question is if you're trying to see what's implied at the midpoint of guidance on the fourth quarter. We've warned caution people against anchoring at the midpoint of our guidance. On the one hand, it's inevitable and it anchors these conversations because it's an easy point to point to. It's not without risk. We've got a range.

We feel very good about the momentum we're carrying throughout the year into the fourth quarter. Fundamental performance, we would not expect to deviate. I'd just remind people the sensitivity of that calculation, right? If you think about a 1% variance in EBITDA, where you hold everything else constant, that equates to about a 50 basis point swing in the implied margin year-on-year. Without obviously decomposing all the factors that influence a quarter because it varies quarter-to-quarter, I'll just say we feel really good about the year-to-date execution. We feel really good about our expectations for the fourth quarter. Where we end up, time will tell. If you're inferring that something's changed or anything along those lines, nothing has.

Steven Fisher: Okay, that's helpful. Then in terms of cold starts, I think if not all of your cold starts have been in specialty, certainly it seems like the vast majority of them. I'm just curious, as we think about an increasing mix of large projects going forward, just curious geographically where those large projects are setting up. Is there an opportunity for you to do more gen rent branches, or are they in places where you've got adequate coverage already within your existing footprint?

Matt Flannery: Typically, we have adequate coverage where they are, but if there happens to be a large project in a really remote area, more times than not, we're able to get an onsite to service it that way. If we think it's a market that's going to continue to grow outside of the major project, then we certainly have no hesitation putting a cold start in there. Our coverage is pretty good, especially here in the U.S. and in Canada. We feel we rarely need to add a store in gen rent just for a major project.

Steven Fisher: Okay, fair enough. Thanks a lot.

Matt Flannery: Thanks, Steve.

Operator: Thank you. We'll go next now to Sabahat Khan with RBC Capital Markets.

Sabahat Khan: Great. Thanks and good morning. I think last quarter you shared some comments on sort of underlying margins, some of the moving pieces, and I guess with higher ancillary and re-rent mix. Maybe if you could just share some thoughts on how underlying margins trended this quarter as well.

Ted Grace: Yeah, thanks for the question. The dynamics we had to manage through in the third quarter were not dissimilar to what we managed through in the second quarter, whether it's that impact from the outgrowth of ancillary and re-rent. I would say the headwind, which obviously saw its offset, was similar. Even within fuel, right? We talked about the headwind we absorbed in fuel last quarter. It was pretty similar third quarter over second quarter. So not a lot of change there. Shouldn't surprise people. But obviously what you saw was our ability to, again, leverage that growth, the composition of growth, and just very good cost execution across the company.

Sabahat Khan: Great. Then, as you think about 2027, some of the costs or operational cost reductions you've been making, those likely help into next year. I guess when you outlined some of the technology initiatives earlier this year, whether it's on the AI front and some of the other programs, do those become a material contributor to margins as we head into next year? Or are some of these technology programs that you're undertaking more longer term contributors and maybe a bit less material? Should we start to think about them getting more material as we head into 2027? Thanks.

Matt Flannery: As we get through the budget process, we'll probably get a little deeper into that. I think most of them are longer term, but there's certainly some productivity improvements in there. Some of them are less easily to input into a margin conversation, but just productivity of some of our human capital. I certainly think longer term, we should get productivity in the shops from some of the technology we're using and certainly free up some time for our managers to use more of their time to drive the business. I think there's a range of opportunities, probably more towards the long term, but we'll update appropriately as we learn.

Ted Grace: This isn't at all to take away from the opportunity, but just as a reminder, we've long embraced continual improvement. While a lot of the AI tools have a lot of potential and we're really excited, we view it as a continuation of what we've been driving internally to drive productivity for several decades.

Sabahat Khan: Okay. Thanks very much.

Matt Flannery: Thank you.

Operator: We'll go next now to Scott Schneeberger with Oppenheimer.

Daniel: Good morning, guys. Hey, it's Daniel on for Scott. Could you please address the sustainability of the used sales margin expansion you've seen recently? Thank you.

Ted Grace: Sorry, which margin expansion?

Speaker 14: Used sales.

Ted Grace: Oh, used.

Speaker 14: Yeah.

Ted Grace: Yeah, look, we have been very pleased. I would say overall that market has performed as expected. You rewind a year ago when we talked about we felt like 2025 was kind of the bottom innings of that normalization process. We saw that progressively if you think about how the first half of 2025 played out versus second half. Obviously we have progressed through 2026 pretty well. So feels like the market is normalized. Certainly it is a very deep market, plenty of demand. You can see that in our results. In terms of the margins, I think we are back to kind of what we would say are normalized margins.

I would not encourage people to think there is going to be a huge amount of variability there. The likelihood is we are kind of again back in this normalized market. But good news is things have played out as we had kind of expected them to.

Speaker 14: Got it. Thank you. Just to round off on EBITDA flow-through, you've done a great job with the efficiency this year. How do you think about EBITDA flow-through longer term? Any color there will be helpful. Thank you.

Ted Grace: Yeah. We've really tried to pivot this discussion away from flow-through, because I think it almost simplifies things. Really our goal is to drive margin expansion across the cycle. We feel like that's what we've done. Certainly, as we've talked about, in some periods of time, it's easier to do and easier to show, and other times it's more difficult or it gets clouded by dynamics. Whether that's used, to kind of your earlier point, Daniel, or whether it's obviously this outgrowth of ancillary and re-rent. I would just say going forward, our focus is on driving profitable growth and then being as efficient as possible. That obviously implies driving core margin expansion.

Similar to what we talked about in 2023 and 2024 and 2025, we're going to help people see what the underlying results look like as best is possible. But as we go forward, certainly our goal again is going to be to drive strong margins and ultimately margin expansion is the goal.

Speaker 14: Got it. Thanks, guys.

Operator: Thank you. We'll go next now to Neil Tyler with Rothschild & Company.

Neil Tyler: Okay. Good morning. Thank you. Just one more from me, please. Coming back to the topic of inflation more broadly. Matt, I guess you've talked about the various aspects in which that appears across your industry. Are there specific areas or verticals that you might want to call out where you're seeing customers come to you to solve their inflation problems in ways that your model might be better able to absorb it? I mean, if you could just talk a little bit about that as a theme.

Matt Flannery: Sure. We usually think about capital cost avoidance when we're thinking about rental versus owning. To your point, those come at a cost. I think the most important part is how can we help our customers drive efficiency? We believe fleet, right, technology and part of that, and fleet is a great way for them to do that. We make sure we provide that, and we do think rental's the better way. You could own fleet and get some productivity out of the usage. But we feel strongly that rental's proven to be the better way for them to do that.

I think it's a big part of our value proposition, to continue to help customers drive efficiency, to improve their margins and competitiveness in their markets.

Neil Tyler: Great. Thank you. The second question would be, obviously you've talked confidently about how you feel good about demand and into 2027 as well. Obviously there are discussions ongoing as to sort of longevity of some of the end cycles and end markets that you serve. Can you sort of talk a little bit more sort of longer term? It feels like the market's broadening out, the demand environment's broadening out, but how you would characterize your visibility compared to, say, six, 12 months ago across the sort of indicators that you look at?

Matt Flannery: Yeah. I would say we feel better than we did 6-12 months ago, certainly. You see that not only in the raised guidance, but in the activity that's going around in the industry. The end markets we serve are very broad. Even within non-res, and I know there's been a lot of talk underlying in that commentary, people are wondering how long data center's going to continue. Well, that sits in our non-res business, and even if you take data centers out, we've got strong double-digit growth within non-res. Then we think about infrastructure, power, LNG, even upstream oil and gas is doing well right now, but growing.

So those opportunities remain, and that's with a couple of end markets not being strong, like industrial manufacturing we think is a potential future opportunity for us. Residential, which then will drive more non-res work, right? Is still down and downstream oil and gas. Petrochem overall on the downstream side, which is an area where we have a lot of run and maintain work, a lot of turnaround work that's just not getting done right now because those folks are busy as heck right now as you can imagine. So we feel really good about the long-term view here, and certainly more bullish than we did 6-12 months ago.

Ted Grace: And the one thing I might add, Neil, is I think people know we survey our customers regularly, and they continue to feel very good about their own prospects. So this is something that Matt and Elizabeth and I have gotten a lot of questions on in the last, let's just say six-plus months, given what's happened with energy pricing and inflation and what the market's discounting on rates and understandable concerns around whether it's the short end of the curve, the long end of the curve. Throughout all that volatility that markets have wrestled with, I would tell you our customers have felt consistently positive. That's certainly as of the most recent reading.

So that also helps underpin our confidence and kind of what that outlook looks like.

Neil Tyler: Great. That's super helpful. Thank you.

Operator: Thank you. Ladies and gentlemen, that is all the time we have for questions this morning. Mr. Flannery, I would like to turn things back to you, sir, for any closing comments.

Matt Flannery: Great. Thanks, operator. Once again, folks, we apologize for the tech disruption. To everyone on the call, we appreciate your time. I am glad you could join us. Our Q3 investor deck has the latest updates. As always, Elizabeth is available to answer your questions. Until we speak to you again in January, have a safe and happy holiday season, and have a great end of your year. Operator, you can now end the call.

Operator: Thank you, Mr. Flannery, and thank you, Mr. Grace. Again, ladies and gentlemen, this does conclude United Rentals' third quarter earnings conference call. We would like to thank you all so much for joining us today and wish you all a great afternoon. Goodbye.

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.