United Rentals, Inc. (NYSE:URI) Q4 2022 Earnings Conference Call January 26, 2023 11:00 AM ET
Company Participants
Matt Flannery – President and Chief Executive Officer
Ted Grace – Chief Financial Officer
Conference Call Participants
David Raso – Evercore ISI
Steven Fisher – UBS
Rob Wertheimer – Melius Research
Seth Weber – Wells Fargo
Timothy Thein – Citigroup
Jerry Revich – Goldman Sachs
Michael Feniger – Bank of America
Ken Newman – KeyBanc Capital Markets
Stanley Elliott – Stifel
Scott Schneeberger – Oppenheimer
Operator
Good morning, and welcome to the United Rentals Investor Conference Call. Please be advised that 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 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, 2022, and as well as to subsequent filings with the SEC. You can access these filings on the company’s website at www.unitedrentals.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations.
You should also note that the company’s press release and today’s call include references to non-GAAP terms, such as free cash flow, adjusted EPS, EBITDA and adjusted EBITDA. Please refer to the back of the company’s recent investor presentations to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure.
Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer; and Ted Grace, Chief Financial Officer.
I will now turn the call over to Mr. Flannery. Mr. Flannery, you may begin.
Matt Flannery
Thank you, operator, and good morning everyone. Thanks for joining our call. Yesterday we reported record fourth quarter results to cap the best full-year financial performance in our history. And we definitely raised the bar in 2022 and we intend to raise it again in 2023. We’re moving forward with a larger sales and service team, a more expansive footprint and a fleet that’s significantly larger than a year ago, and that’s a lot of tailwind at our back in another year of high demand.
And I’ll start with a recap of fourth quarter results, which kept us on a strong trajectory. We grew both rental revenue and total revenue by a solid 19% compared with fourth quarter last year. And we grew adjusted EBITDA by 26% with a 280 basis point improvement in margin, and that brought our margin to 50% in the quarter, and that came in at a very strong flow through of 65%. We also continued to generate significant cash.
For the full year, we delivered $1.76 billion of free cash flow, and that’s after investing over $3.4 billion in fleet. And none of this would have been possible without our people. First off, as you know, our top priority is always safety. And our team delivered another first-class recordable rate in 2022 in a year when we onboarded over 6,000 new employees. On the financial side, you can look at every metric I just mentioned and see the quality of Team United behind the result.
For example, our revenue growth comes from keeping our customers front and center in the field. Our people are laser-focused on helping our customers succeed. And our flow-through comes from the team’s ability to leverage our growth and maintain good cost discipline. Inflation was a factor, but that didn’t stop us from delivering very good margins. We also reported a record return on invested capital of 12.7% at year-end. And on the ESG front, we made good progress with sustainability, including new investments in zero-emission vehicles and fleet. And the customer adoption of our new emissions tracking tool has been excellent. This is the technology we launched on our total control platform, and it’s an industry first.
Another highlight of the quarter was the Ahern acquisition, and I’m pleased to say the integration is going very well. We closed the deal on December 7. And then by the 16th, our new team members were already operating with the rest of the company on the same technology system. And this means our branches are sharing fleet and customer information seamlessly. One of the main reasons we like M&A is the capacity we gain. And that comes in three forms: people, fleet and facilities. And we always focus on the people first, because it’s critical to get that right. And we’re really bullish about the talent we onboarded in this acquisition.
We had over 100 of the Ahern managers at our Annual Meeting earlier this month, and they fit like a hand in glove. And they’re excited to be part of United and they’re raring to go. Now we’re focused on optimizing the fleet and facilities. We’re running on schedule, and it’s boosting our resources at an ideal time to capture share.
The diversity of demand that we pointed to a year ago turned out to be a major tailwind in our operating environment, and that continues to be true. And I’ll share some fourth quarter data to underscore how we translated this opportunity into top-line growth. Demand in our key verticals was broad-based, with total construction up 19% year-over-year and non-res up 22%; and industrial, up 11%. We leaned into that opportunity across the board and grew rental revenue by solid double digits in all of our gen rent regions as well as all of our specialty businesses.
Our specialty segment delivered another strong performance with an 18% increase in rental revenue year-over-year. And it’s notable that every line of business in that segment reported solid gain led by our mobile storage business.
Our greenfield investments in specialty are highly strategic and they’re targeted by geography and line of business to generate attractive returns. And we opened 35 of these locations in the past 12 months, and our plan calls for at least another 40 cold starts in 2023. So that brings us to 2023. So there are plenty of reasons to feel confident about our operating environment.
We have terrific internal and external momentum with good visibility into revenue. And the team’s done a great job of driving strong fleet productivity to help offset the cost inflation we’ve experienced.
Contractor backlogs are growing, and not surprisingly, the employment reports indicate that U.S. contractors continue to be in expansion mode. Industry indicators like Dodge Momentum Index show healthy growth trends in commercial construction, and this includes the planning trends for future projects. There’s also a strong institutional component to the trends which we see in our business. And a number of our multi-year projects are in sectors like healthcare and education.
And the industrial indicators like the PMI still have room for improvement. But the construction activity and manufacturing’s going strong. We’re winning business on a wide range of new plant construction including automotive and batteries, semiconductors and petrochem. And importantly, our own survey shows that customer sentiment remains strong with the majority of our customers point to growth over the next 12 months.
One final indicator of market strength and an important one was at our annual management meeting. We had over 2,000 field leaders with us in Houston two weeks ago, and their take was extremely positive. And I’m throwing that into the mix because this is coming directly from people on the front lines. We took all this into consideration when we developed our 2023 guidance.
And as you saw yesterday, we expect our revenue and adjusted EBITDA to hit new high water marks, including free cash flow of more than $2.1 billion, while our return on invested capital should be another milestone for us. In addition to the capacity we carried into January, we plan to invest more than $3.4 billion in gross CapEx this year. And at the same time, we’ll continue to take advantage of a strong used equipment market to optimize our fleet.
Longer-term outlook for our industry continues to be very favorable driven by several tailwinds that we believe are largely independent of macro conditions. And we’ve talked about these before, things like infrastructure spending, the Inflation Reduction Act and the return of manufacturing to North America as well as investments in both energy and power.
Now, before I wrap up, I want to mention two important announcements we made yesterday regarding capital allocation. First off, we’re reactivating the $1.25 billion share repurchase program that we pause when we announce the Ahern deal. We plan to buy back $1 billion of stock this year. And we’ll also be instituting quarterly dividends for our shareholders, totaling $5.92 per share this year. These two decisions underscore our confidence in the durability of our cash generation and the strength of our balance sheet. And together, they’ll return $1.4 billion of capital to our shareholders in 2023.
So to come full circle, 2022 was a demand environment that through the door wide open for a record year and we ran with it. But to quote Babe Ruth, we also know that yesterday’s home runs don’t win tomorrow’s games. So now it’s onwards and upwards. 2023 is officially the start of the next quarter century in business for United Rentals, and by all accounts, this will be another memorable year.
So with that, I’ll ask Ted to cover the results and then we’ll go to Q&A. Ted, over to you.
Ted Grace
Thanks, Matt, and good morning, everyone. As you saw in the results we reported last night, the team did a great job delivering across the board, both in the quarter and for the full year. And importantly, as you can see in our guidance, we expect these trends to continue in 2023. Combined with the enhancements to our capital allocation strategy that we’ve announced this quarter, we are confident that we will continue to drive meaningful long-term value creation for our shareholders.
I’ll dig into this more in a bit, but first, let’s dive into the quarter. Fourth quarter rental revenue was a record $2.74 billion. That’s an increase of $435 million or nearly 19% year-over-year. Within rental revenue, OER increased by $354 million or 18.6%. Our fleet average – our average fleet size increased by 14.2%, which provided a $270 million benefit to revenue and fleet productivity increased by healthy 5.9%, which added another $113 million. This was partially offset by our usual fleet inflation of 1.5% or roughly $29 million.
Also within rental, ancillary revenues were higher by $81 million or 23.1% year-over-year. While re-rent was essentially flat.
Outside of rental, fourth quarter used sales increased by roughly 26% to $409 million as we sold some fleet we’ve held back on selling earlier in the year. To help accomplish this, we brought in our channel mix for used sales in Q4 to something closer to normalized levels. The net of this was our adjusted use margins increased by 940 basis points year-over-year to 61.6% supported by strong pricing.
Let’s move to EBITDA. Adjusted EBITDA for the quarter was $1.65 billion, another record and an increase of $338 million or 25.8% year-on-year. The dollar change included a $291 million increase from rental within, which OER contributed $256 million. Ancillary added $34 million and re-rent was up $1 million.
Outside of rental, used sales added about $83 million to adjusted EBITDA, while other non-rental lines of businesses contributed another $18 million. SG&A was a $54 million headwind to adjusted EBITDA due primarily to higher commissions and the continued normalization of certain discretionary costs. As a percentage of sales, however, SG&A was down slightly year-over-year.
Looking at fourth quarter profitability, our adjusted EBITDA margin increased 280 basis points to 50.0%. Excluding the benefit of used sales, flow-through was in line with recent quarters at a healthy 59%. I’ll add that within the fourth quarter results, in the roughly three weeks we owned Ahern, the business contributed about $54 million of total revenue, the vast majority of which was rental and roughly $20 million of EBITDA. And finally, fourth quarter adjusted EPS was $9.74 per share. That’s an increase of $2.35 per share or almost 32% year-on-year.
Turning to CapEx. Fourth quarter gross rental CapEx was $980 million, and net rental CapEx was $571 million. This represents an increase of $205 million in net CapEx year-over-year, which positions us well for the growth we see in 2023.
Now, let’s look at return on invested capital and free cash flow. ROIC was another highlight at a record 12.7% on a trailing 12-month basis. That’s up 50 basis points sequentially and an increase of 240 basis points year-on-year. Free cash flow also continues to be very strong, with the year coming in at $1.76 billion or a free cash margin of better than 15%, all while continuing to fund growth.
Turning to the balance sheet. Our leverage ratio at the end of the quarter was 2.0 times on an as-reported basis, including the impact of the Ahern acquisition. More importantly, on a pro forma basis, our year-end leverage ratio was flat sequentially at 1.9 times. And finally, our liquidity at the end of the quarter was a very robust $2.9 billion with no long-term note maturities until 2027.
Now, let’s look forward and talk about our 2023 guidance. Total revenue is expected in the range of $13.7 billion to $14.2 billion, implying full year growth of about 20% at midpoint and pro forma growth of roughly 12%. This increase is supported by the momentum we’ve carried into the New Year, particularly within rental revenue and the contribution from Ahern. Within total revenue, I’ll note that our used sales guidance is implied at $1.3 billion, with the expectation that we’ll sell roughly $2 billion of OEC. This 35% increase in used sales year-over-year primarily reflects two things. First, is the normalization of our used sales as the supply chain continues to improve. And second, a substantially larger fleet, including the addition of Ahern to our business.
We remain focused on efficiently converting this growth to our bottom line. Our adjusted EBITDA range is $6.6 billion to $6.85 billion. On an as-reported basis, including the impact of Ahern, at midpoint, this implies roughly flat full year adjusted EBITDA margins and flow-through of about 48%. On a pro forma basis, however, which we think is the more appropriate way to think about it, our guidance would imply at roughly 80 basis points of margin expansion and flow through in the mid-50s.
On the fleet side, our initial gross CapEx guidance is $3.3 billion to $3.55 billion, with net CapEx of $2 billion to $2.25 billion. And finally, our free cash guidance is $2.1 billion to $2.35 billion. To be clear, this is before dividends and repurchases. Assuming these two factors are a use of cash of roughly $1.4 billion that leaves $825 million of remaining free cash flow to fund additional growth or reduce net debt.
Now before we go to Q&A, I want to make some additional comments on our updated capital allocation strategy. Specifically around our plans to return excess cash to our investors. As you heard Matt say, we are very pleased to be adding a dividend program to our mix. Based on an initial yield of 1.5%, we expect to pay $5.92 in dividends per share in 2023. This will translate to approximately $400 million this year or roughly 18% of free cash flow. We expect that our first quarterly dividend payment of $1.48 will be made on February 22, with all four payments expected within the calendar year.
Following the transformation of the company over the last decade or so, we feel that it’s the appropriate time to add this last element to our capital return strategy to help drive greater shareholder value. Not only will this help expand the universe of potential investors, we expect that it will also provide another means of enhancing total returns for our investors over time. It also reflects the confidence we have in our operating model to consistently generate considerable excess free cash flow after investing in growth. We’re also very pleased to announce the restart of our share repurchase program, which we paused in November with the announcement of Ahern.
The restart is probably a bit ahead of schedule, but the integration is off to a great start and the decision is well supported by the financial performance we expect this year. It’s our intention to repurchase $1 billion of the $1.25 billion authorization in calendar 2023. As Matt said, these two programs combined, should return approximately $1.4 billion to our shareholders this year or about $20 per share at the same time that we continue to see substantial growth in our earnings.
Finally, I want to be clear that these announcements are being made in the context of our continued commitment to a disciplined balance sheet strategy. Our financial strength has served the company and its shareholders very well, and we’re not planning any changes there.
So with that, we’ll turn to Q&A. Operator, could you please open the line?
Question-and-Answer Session
Operator
[Operator Instructions] We’ll take our first question from David Raso with Evercore ISI.
David Raso
Hi, thank you for the time. Two questions. One, where there’s some worry by investors and another where there’s a clear cementing of a structural improvement on people’s minds about the business model. First, in the area of [indiscernible], equipment availability, I think, Matt, you had mentioned earlier about maybe taking some market share this year. Can you let us know what you’re seeing and hearing regarding competitors and even include OEM dealers, rental fleets in this comment? What are you hearing about their incremental ability to get equipment? What are you hearing about their adding fleet for the year? Just the overall availability from that side? And what are your equipment suppliers suggesting about increased availability versus last year? And I’ll follow up the other question.
Matt Flannery
Yes, sure. So we – it’s still a tight market. I’m hoping it will be a little better as far as delivery slots than we got last year. But we don’t expect the supply chain to be fully back to normal this year, maybe to the back half, but to be fair, I thought maybe the back half of last year would have and we still saw slippage. There are some niche products that are being quoted out to 2024. Now that’s the exception, not the rule. But I think that that kind of underlies another year of some supply chain challenges. And we’re mitigating that by, as you saw, we brought in some fleet in Q4, and you’ll probably see us do a little bit more in Q1 than usual to make sure we’re ready for the build season.
And then from there, we’ll adjust according to demand appropriately. So, I think there will still be a little bit of a challenge. I think our vendors work hard, David, to get us a fleet they did in 2022, and we think they’ll work hard to get this number. I’m not seeing a remedy to the supply chain challenges.
David Raso
Yes. Can I asked one question related to what you just said the first quarter, a little larger than normal. I’m just curious, just the cadence for the CapEx for the year, I’m talking gross, the 3.425 [ph] midpoint. Can you give us some sense of cadence is – I know you pulled forward, but on the idea of roughly flat gross for the year. Is the down quarter more the fourth quarter because of the pull forward in the fourth quarter?
Matt Flannery
That’s our expectation as we sit here today, David. What I really wanted to refer to is you’ll prop because it’s the one that we feel pretty sure of is that you’ll probably see us do more about 20% of our capital spend here in Q1 as opposed to maybe in a standard year, it would be 12% to 15%. And that pull forward is really just to get ready for the spring season, and making sure specifically in these high time categories that have been the most challenged in the supply chain that we’re ready to respond to the customers. Is that really what I was referring to as far as the cadence for the rest of the year, Q2 and Q3 really will depend on how fast we’re absorbing the fleet that we brought in as well as how well we’re doing with the Ahern’s fleet. So, we’ll adjust as we had the past three years accordingly.
David Raso
It’s pretty interesting. That’s taking about $1.6 billion of fleet in the fourth quarter and the first quarter when you combine the two. I assume you’re seeing project backlogs that are really focused on we need this equipment for certain projects. This is not a presumption of demand? I mean, is that just a pretty big first quarter number to follow the fourth quarter, is that…
Matt Flannery
Yes, it absolutely David. And that is because we see the underlying demand, and we’ve talked a lot, right, in the last quarter as well about the mega projects. So they’ll require a lot of this high time utilization assets. Additionally, we’ll also get more to a more normal cadence of used sales than we have. We held back, and we hope we don’t have through this year. We’re planning on selling about 35% more use sales to get back to a normal fleet rotation. So that some of that capital will be to make sure that we have the ability to sell, and we don’t have the team losing confidence in their ability to rotate fleet out so that we can still meet demand.
David Raso
Just a strong – obviously, you’re seeing very strong demand in the year is going to start very strongly with that much fleet over the six months even with the used sales as well. Second question. So if we do the dividend, we do the repo if you look at the guide, it implies net debt-to-EBITDA at the end of the year at 1.55 [ph], which is almost a half turn below the low end of your range. Can you give us a sense of the capital allocation, how we should think about that? Where would you be comfortable with the leverage? Or should we think of it as you want to get the leverage back to the low end of the range and thus, M&A?
Ted Grace
David, this is Ted. I’ll take that one. There’s no change to that longer-term framework we’ve provided of two times to three times being that optimal level. We’d always said there was nothing religious about the low end. And so living there for some amount of time to us is something that is consistent with what we’ve articulated. The idea really would be the kind of stockpile dry powder for potential growth opportunities. If we were to kind of decide to live in a different ZIP code entirely, we would certainly update – the Street. But certainly for the immediate future, we’re comfortable at these levels.
David Raso
I appreciate it guys. Thanks for the time.
Ted Grace
Thanks, David.
Operator
Thank you. Our next question comes from Steven Fisher of UBS.
Steven Fisher
Thanks. Good morning. So just, I’m curious how the fleet productivity you reported in Q4? How did that compare to what you thought you could do going in some of the investors we chat with kind of seem to note the moderation in fleet productivity as the year progressed. I guess, what’s the message you want to give to them about how they should think about sort of lower level of fleet productivity in 2023? Is it just more that it’s settling into a more normalized level, still above your hurdle rate, but just kind of moving beyond these unusual dynamics of utilization and inflation in 2021 and 2022 and it’s just sort of steadily into a more normalized path. Is that what message you would give? Or how would you frame that?
Matt Flannery
I think that’s – first of all, this is an output, right? So, we’re going to manage the heck out of rate and time even though we don’t report it out individually. And I’m very pleased that the whole industry is doing that, and we see the discipline shown in the industry from that perspective. But I think the way you characterize it is fair, we were pleased with our Q4 fleet productivity. It was what we expected. And just for clarity for those that may not have picked it up, the 5.9% as reported when you take out Ahern, that would be 6.5%. So that’s about three weeks of Ahern built into the fourth quarter.
So, we will report next year fleet productivity on as reported and on a pro forma basis, so you could see that impact. And what we’ll really be focused on is making sure we take the entirety of the fleet and drive more value out of it. And any time this number exceeds our threshold we expect to comfortably do next year will – that’s a net gain. And we’ll be measuring that on a pro forma basis for you see what we’re doing with the Ahern fleet against their baseline as well.
Steven Fisher
Okay. And then I’m wondering about the general cadence of project activity that you expect during the year and where you are with these large projects. Obviously, you talked about taking all the extra CapEx more front-end loaded. I guess I’m wondering how you compare what’s in the – still in the planning stages on these large projects compared to what you have on rent at the moment because there are some investors that, I think your business is slowing down, but I’m wondering if there’s actually – if you’re seeing more large projects in the planning stages than what’s on rent, I’m wondering if that could actually lead to some type of acceleration as the next year or two plays out?
Matt Flannery
Yes. We’ll stay away from quarterly cadence, but obviously, it gets held by our pulp that we expect to need more fleet come the spring build up. We’re not – Q1 is always going to be the slowest quarter seasonally, but we see strong demand here today, and we expect that to continue to ramp up from big projects. And then once you really get to the peak season, once you get past May, June and even all the local market stuff starts popping. So when you hear about this pull forward, we don’t feel the fleet that we would normally have had ready is going to be enough when we get to the real build season in April. And that’s really more what that pretends to be in Q1, isn’t really the focus, the focus in is, are we going to be ready for the build, all these projects that are scratching dirt or coming out of the ground that we’re going to need, we’re going to need to mobilize fleet for in the spring.
Steven Fisher
Okay. Just a quick clarification, if I could. What’s the embedded flow-through that you have on the Ahern business in 2023? And compared to 2022, you got a 55% pro forma for legacy or? What’s the Ahern flow through?
Matt Flannery
Yes. Steve, that one is harder to speak to just because of the way we integrate acquisitions, especially in gen rent, and that’s why it’s easier to frame as a function of pro forma. So I think you hit the nail on the head, certainly as reported, flow-through would look like 48 – or excuse me, as reported looks like 48% pro forma 55%, but it’s hard to kind of discretely break apart the businesses. The one thing I would note, just to remind people of, we do think we’ll achieve about $30 million of the cost savings out of the $40 million we talked about. So we can certainly share that. Yes, in 2023, we’ll hold $40 million, but we only get about $30 million of it in 2023 as to our expectations.
Operator
Thank you. Our next question comes from Rob Wertheimer with Melius Research.
Rob Wertheimer
Hi, thanks. Good morning everybody. I wanted to kind of circle back to the demand side or at least the end market support that’s out there in the short and the long-term. And so if you look at the dynamics, I guess, we have the mega projects that people talk about you have the fear or the risk that rising interest rates and the potential recession will cause project delays or
cancellations? And then you have the infrastructure bill, which is kind of different from some of the chips and semiconductors and stuff that will flow in.
So, I wonder if you could level set us on those. Are you seeing any delays, cancellations, et cetera? The mega projects I assume are flowing in? And are you seeing any of the infrastructure bill starting to flow? And I assume there’s pretty good duration on some of the stuff. So, I wonder if you have any comments on what your visibility is now versus past errors in the history.
Matt Flannery
Yes. Sure, Rob. So broadly, we’re – we believe that these – many of these projects are not macro relining. You heard me say that in our opening comments, and we’re talking about the type of mega projects we’re talking about. We feel really good about that. As far as infrastructure, we’ve been saying all along, we expected this to be a 2023 event, and I’m pleased to say that we are seeing projects coming out of the ground and projects that are taking fleet as we speak.
Mostly, you’re think looking at bridges, airports, whether it be expansions or remodels. So we’re pleased, and we think that will carry out and accelerate through this year and beyond, right, be a multiyear event. So, we’re very pleased with that. Ted, I don’t know if you had anything to add?
Ted Grace
Yes. No. I mean we really have not seen anything along those lines, Rob. Probably the one area where maybe we’ve seen some delays just as we’ve talked about it, has been more in the alternative power side, and I think there’s been some stuff written about this publicly. Solar has had some supply chain issues. And within wind, we’ve seen a couple of permitting issues. All that said, our Power business in the quarter was up about 9%. And for the year, we’re up about 10%.
So while we’re seeing kind of reports that you’re seeing delays on project starts. That business for us has continued to be very robust. And just for clarity on the broadness that we’ve been talking about, right, in just the mega projects, the mega projects are really the kicker, while you hear us this strong tone and guidance that we’re coming out with, but we have seen this breadth growth throughout all geographies. So it’s not mega project reliant, but they’re kind of a kicker that maybe could offset if the commercial retail is going to drop or you think office space is going to drop. So we really feel that the balance is appropriate for this type of guide and the bullishness – you here in October.
Rob Wertheimer
And just to clarify on that, I was going to ask anyway, but we all talk construction, you have a lot of non-construction verticals you’re seeing strength kind of throughout the industrial side?
Matt Flannery
We are, yes. I mean if you really go through all the verticals with the exception of midstream, which throughout the years, you’ve been the only vertical down for us, everything is up and even though the rate of change across those verticals has been negligible. I mean, it’s really been very consistent across the year.
Rob Wertheimer
Perfect. Thank you.
Matt Flannery
Thanks, Rob.
Operator
Thank you. Our next question comes from Seth Weber with Wells Fargo.
Seth Weber
Hey guys. Good morning. You guys are obviously planning to sell a lot more fleet used fleet this year. And Matt, I think I heard you reference something about a broad mix or something different channel mix or whatnot. Can you just give us some more details on what your – kind of how you’re selling this used fleet? I mean there’s obviously some concerns about used pricing starting kind of rolling over. And what your expectations are? What’s embedded in your expectations for used equipment pricing for 2023? Thanks.
Matt Flannery
Sure. So, we feel good about the end market including pricing. We’ll fall off the historic eyes that we’ve set over the last two years, maybe a little bit, but we’ll find out. And I think one of the things we’re going see is that the increase of replacement capital costs could definitely have a halo effect on used pricing. But when we think about what channels we’re going to open up is what we were talking about, we’ve been strictly or 90% retail all the way in the first three quarters of 2022. And then you saw we lose it up a little bit to get – to do some more volume in Q4. And that wasn’t because there weren’t options; it was to retain fleet to rent. Because we – the supply chain just wasn’t getting fleet to us fast enough for our customers.
We’re hoping our expectation is that we can go back to a more normalized channel mix in 2023, and that’s what’s embedded in our guidance. So, we’ll open up the broker chain. We’ll do some trades. We probably won’t do much auction unless you have something that’s really in this repair. We’re not really a big auction player. But just opening up that channel mix over and above the retail, and that will allow us to rotate out about $2 billion worth of hopefully.
Seth Weber
Got it. Okay. That’s helpful. Thanks. And then just on the strength in the specialty margin in particular was pretty notable is – I think it was 400 basis points year-to-year. Is there something – is there some step changes happened there? Is it the general finance business, it’s clicking or anything you’d call out that is supporting that big jump year-over-year? Thanks.
Matt Flannery
Yes. I think there are a couple of things there, Seth. I mean certainly, growth has been good, so that’s helped drive fixed cost absorption. But beyond that, you had really good cost control in the quarter. And you also had some beneficial mix both within the specialty segments and on a project basis that benefited that flow through.
Seth Weber
Okay. All right guys. Thank you very much.
Matt Flannery
Thanks, Seth.
Operator
Thank you. Our next question comes from Timothy Thein with Citigroup.
Timothy Thein
Thanks. Good morning. Just maybe group two together here. Matt, maybe the first is just on fleet productivity and just how you think about the components within that in 2023, just thinking of maybe time and rate given that you held on the fleet longer in this year to make sure you met the demand presuming you’re running pretty hot on time. So potentially, that starts to run against you, but maybe I’m wrong on that. And then just kind of the interplay on rate.
And then the second question, maybe for Ted, is just any help in terms of EBITDA to operating cash flows, how should we think about, say, cash interest and cash taxes. Any help you have on that? Thank you.
Matt Flannery
Sure, Tim. On the fleet productivity, we still feel that the environment is going to be very constructive to drive positive fleet productivity. But you pointed out, the reality of our time may have been running so hot, but at some point, you have to look at it, are we running the appropriate level of time? Can we continue to raise it? Or does it become a bit of a headwind. With that being said, even if time becomes a headwind just because we’re running so hot in some key categories, and we need to make sure we have availability for our customers. We still have ample opportunity to drive positive fleet productivity. And we think the end market is constructive for that. We’ll feel comfortable that both in as reported and pro forma basis will exceed our hurdle rate that we talk about that 1.5% even if that goes up to 2%. So, we feel good about it. And Ted, you can take the EBITDA question.
Ted Grace
Yes. So Tim, just in the absolute, we would look for cash taxes in 2023 to be about $565 million. That’s an increase roughly of about $240 million. Cash interest at about $600 million, which would be an increase of $195 million or so. And so when you bridge kind of that $1.1 billion increase in EBITDA against a roughly $460 million increase in free cash flow, really that the delta is going to be the change in working capital.
Timothy Thein
Got it. Thanks, Ted. And did you – usually you speak to a merit increase as we think about an SG&A kind of bridge year-over-year. Any – have you quantified that as to how we should think about that for this year?
Matt Flannery
Yes. I don’t know if we’re ready to quantify it. But certainly, we’ve got that built into our guidance and built into our operating plan. We always talked about the importance of supporting our employees and taking care of them, and that’s an important aspect of doing just that. So there is absolutely a merit increase built into this guidance. But in terms of quantifying it, it’s not something I think we’re prepared to do.
Timothy Thein
All right. Fair enough. Thank you.
Matt Flannery
Thanks, Tim.
Operator
Thank you. Our next question comes from Jerry Revich with Goldman Sachs.
Jerry Revich
Yes. Hi. Good morning, everyone. I’m wondering if you could, just talk about the impact of the new higher pricing on new equipment on the marketplace. When we saw a Tier 4 higher pricing roll through that had a nice pricing umbrella on the rental industry for the entire fleet. And I’m wondering, I know it’s early post the January price increases by the OEMs. But to what extent is that a pricing opportunity for the industry as you folks see it? How would you compare and contrast this transition versus the Tier 4 transition in terms of driving pricing upside? Thanks.
Matt Flannery
Sure. Well, number one, this would be more across the board, and we feel comfortable, I talk about it in used pricing as replacement CapEx gets increased. That’s kind of an umbrella on the used pricing, residuals, which is a positive. And I think to your point about the whole industry having absorbed some inflation has been – has bolstered the discipline that we’ve been seeing. But to be fair, we saw it even before the price increases, and I think this is just the maturity of the industry. You’ve heard us talking about the bigs – getting bigger and just more sophistication and information in the industry. I think all those are helping and certainly increased OEM pricing makes that even more important. And so I think your point is well taken. It will probably bolster some of the behavior in the industry.
Jerry Revich
Super. And just curious, a lots of cross currency in the cycle, as we’ve discussed, I’m wondering if you look at the 2011 through 2015 environment, any analog that you would draw in terms of the industry’s ability to match supply and demand today versus that cycle where early on supply demand matched pretty well, but obviously 2015 touch of oversupply. Can you just talk about how you view the industry’s position today between availability and data, et cetera, and how you’re managing the supply/demand balance?
Matt Flannery
Yes. So one of the biggest differences is the information that access – everybody has access to, right, whether it’s the route data, whether it’s now that over a third of the industry is covered by top three public companies, right? These type information gives everybody more understanding and visibility of the important metrics to focus on and the opportunities that exist in the industry. So – and the scale – so specifically for us, and let’s say, our next largest competitor, scale allows us to get through things in a different way. And so I don’t really wouldn’t draw a comparison. I think the industry changed significantly in my 32 years, but even in the last 10, we do things differently, and I’m sure some of our peers do. And I think you’re seeing that manifest in better performance overall for the customer and for the shareholder.
Jerry Revich
Super. And lastly, if I could just sneak one more in there. Ted, I’m wondering if you could just talk about what level of inflation is embedded in guidance overall? And if you can just touch on transportation, specifically where it feels like there might be some tailwinds for you folks on third party? Thanks.
Ted Grace
Yes. In terms of the inflation that’s built into our expectations, certainly probably elevated versus historical levels, probably not as significant as what we saw in 2022. And yet, we’ve been able to manage it very effectively, right? So if you look at that flow through last year, as an example, when you back out use across the full year, flow-through would have been 56%, 57%. So clearly indicative of our ability to manage that inflation very effectively.
And when you think about what we’re pointing towards in 2023, a similar level of flow-through on that pro forma basis. So – it’s not to say that we’re in a benign cost environment. There’s still elements of inflation that we’re managing and all companies are managing, but we feel very comfortable in our ability to manage it effectively.
In terms of pickup and delivery, that’s an area where, frankly, we’re not trying to make money. So as you see, the price of diesel, as an example, ebb and flow, the impact on our margins is relatively de minimis. So it’s something the team has done a great job managing through in 2022 when obviously, diesel prices were a substantial headwind to companies. But if you think about that dynamic in 2023, I don’t think it will be very appreciable.
Jerry Revich
Super. Thanks.
Operator
Thank you. Our next question comes from Michael Feniger with Bank of America.
Michael Feniger
Hey guys. Thanks for taking my question. Just we – I know there’s been a lot of talk of mega projects. We see Tesla announcing a $3.6 billion of new investments in two battery plants in Nevada. Just – we think about the economically sensitive areas of non-res like office and retail. Can you just help us understand when we think of these mega projects, how much more fleet on rent for these projects versus your typical office or retail? Are the terms and structures different? Is it different in terms of the multiyear visibility there, the different type of fleet required. Just curious if we see that trade-off over the next 12 months, 18 months, how we should kind of view that?
Matt Flannery
Yes. Michael, the type of projects vary so much that would be pretty hard to do. I mean outside if you’re thinking about towers, right, large towers, office building, which may be more limited in what type of fleet you would rent on it. All these projects have different needs. And the great thing about our product line is whether it’s early when they’re scratching dirt, whether he needs trench places from creating the infrastructure to then creating the structure to then finishing off the building. We’ve got the opportunity to cross-sell into all those needs. But as far as the volume needs, we do attribute models, they’re really hard to be predictive. I wouldn’t really say that it’s something that you can rely on.
I think the speed and the time to do the project and the sensitivity probably drives more variation of how much men, material and fleet they’re going to put on there, right? And it seems like nowadays everything is a fast-track project. That used to be a term 10 years ago, that meant they were going to do something quicker now it’s every project is fast-track. So, I think that has implications of driving more rental than anything else.
Michael Feniger
Thanks. And you guys highlighted all year that fleet productivity number was going to decelerate. I know you kind of gave us some puts and takes for 2023. But is the view that number continues to decelerate through 2023 or finds more stability at some point? Could you guys were kind of clear through the year how we should kind of prepare for that throughout the quarter? Just curious if there’s anything we could kind of prepare as we go through 2023 there directionally?
Matt Flannery
Yes, I mean, you see what’s embedded in our guidance on as reported basis, right? And within that range would be a different number anywhere. I won’t even say the number. You could do the work. But I think really the most important thing is that the environment’s good for us to continue to drive positive fleet productivity, even if time utilization doesn’t go up. And that’s really what matters. That’s the important part of it. And we will report this on a pro forma basis. They’ll be a little bit as reported drag from the 800 – bringing in the 800 fleet, but we’ll report that out and that’ll be a couple of points differentiation there, even between as reported and pro forma is what our expectation is. So, we’ll – it’s an output that we really don’t want to try to predict. But what our expectations are for [indiscernible] are all embedded within our guidance.
Michael Feniger
Great. And just, I’ll sneak one last one. Just, I know we talked about power exposure, alternative energy, just on the traditional side, the upstream, midstream, downstream, just are you seeing more activity there? Is that actually accelerating? I’m just curious if you kind of touch on the traditional side?
Matt Flannery
Yes. It’s bit pretty consistent in terms of that progression. Hold on, I’m just turning something quickly, Mike. Give me one sec. So certainly continue to see strong momentum in upstream. I mentioned midstream has been kind of the one sector that has been a headwind for us this year. They’re – it’s relatively small, call it 2% of our total mix and downstream has been pretty steady as well. Chemical processing would be the same. So if we look at the business, it’s consistently been about 13% of our total business across the year.
Michael Feniger
Thank you.
Matt Flannery
Thank you, Mike.
Operator
Thank you. Our next question comes from Ken Newman with KeyBanc Capital Markets.
Ken Newman
Hey, good morning, guys. Thanks for squeezing me in here.
Matt Flannery
Good morning, Ken.
Ken Newman
Good morning. Matt, I wanted to go back to a couple of your comments that you made. Obviously, you gave a lot of good color on infrastructure spend opportunities earlier in the call. I think the guide implies, call it a low double-digit organic growth after you strip out Ahern. But maybe, is there any way you can help us try to size what the midpoint of guide assumes are the benefits from the trends we’re seeing in industrial restoring or your visibility on infrastructure projects?
Matt Flannery
I don’t really have it broken out that way. We really look, frankly when we’re planning, but more by region versus the verticals and then we track the verticals as we assign capital after the fact. So I actually don’t have that number for you, Ken. We can do a little work and get back to you on that. But just generally, right, without trying to get too pegged on numbers that I haven’t vetted. Generally, it’s – we view infrastructure as something that’s accelerating, right? We view that we’re seeing the beginnings of it – of the spend, and we think that’ll accelerate through 2023 and beyond into multi years.
As far as the manufacturing, someone mentioned earlier, there’s some big plants going on right now that have a lot of fleet on rent as we speak. But there’s also some projects coming out of the ground that we think are multi-year mega projects. I don’t really know how to lay those against each other. But I’d say overall the mega projects work will certainly outpace infrastructure work in totality. But the acceleration infrastructure will continue throughout the year.
Ken Newman
Understood. For the follow-up, and you touched on this a little bit, but obviously we’ve seen some cracks start to emerge for the broader industrial space, especially on the – you talked about PMI in your prepared remarks. I know that’s a little less than 50% of your customer mix, the industrial MRO part of the business. Maybe talk to us a little bit about how much conservatism is built in to the bottom end of the guide range. What’s embedded there in the assumption if we really do see a sharper turn in the industrial MRO demand environment?
Ted Grace
Yes, Ken, I’ll take that one. As Matt mentioned, when we do our forecasting, it’s really built by the branches up to districts, regions, divisions, and corporate ultimately. So it’s really kind of set by the field. We don’t look at it kind of top down looking by vertical. So as I mentioned, our industrial business has held in very well. We’re not seeing any signs of cracks, and I know people have looked at whether it’s the PMI or other metrics and it’s raise concerns. We’re not seeing signs of those.
And as Matt mentioned in his prepared remarks, we also see a lot of these industrial projects kicking off this year. We’ve talked about autos and related stuff. We’ve talked about semis, but frankly, it’s even broader than that. And so if there’s an offset from this – if there is a headwind on the MRO side, I think we’re very confident you’ll see within industrial kind of offsets on the construction side. But just to answer the question pointedly, we don’t forecast our business based on these industrial verticals.
Ken Newman
Got it. Maybe if I could just sneak one more in here. It doesn’t sound like you guys expect any constraints certainly from a capital perspective, even with the new dividend and the share repo, but I am curious if you think there’s enough management capacity to go after M&A here in the near term?
Matt Flannery
Yes, Ken. So outside of anything that has a significant overlap with Ahern, right? So in those markets where they’re integrating the teams together, right, getting the sales reps together, that’s a lot of work on the ground. So we’re going to pause for a little bit on anything that would have a large overlap. But if we have opportunities and we continue to work the pipeline as we have for the past couple years that don’t have a big overlap and we have capacity in the field. We’re absolutely if they clear that final hurdle of the finance – makes financial sense. We have the dry powder, we have the capability and we certainly would consider M&A that whether it be a tuck-in gen rent deal in a market that Ahern wasn’t in or a specialty product line where they’re not dealing with any integration issues right now. So, our integration work rather than issues.
So I would say absolutely we would. And just to touch on the capital allocation, one of the reasons why it was the right time for us to do a dividend now is because this is not at the expense of growth. When you look at the past two years and the kind of growth we drove, including significant M&A, we still have the capacity and free cash flow to give a dividend. So we had asked that question by someone earlier, are you given a dividend because of less growth prospects? No, quite contrary, it’s because even after supporting growth, we have excess cash to return and that’s push points to the resiliency of our strong free cash flow through the cycle.
Ken Newman
Very helpful. Congrats.
Matt Flannery
Thank you, Ken.
Operator
Thank you. We’ll take our next question from Stanley Elliott with Stifel.
StanleyElliott
Hey guys. Thank you guys for fitting me in. Matt, in the past you guys have talked about the big – getting bigger and in the K you mentioned 4% North American rental growth and you’re talking about 12% sort of growth right now. I mean, do you guys have consistently outgrown the broader industry? But are we seeing a step up now, an inflection point with the scale that you have, the specialty that now it’s reasonable to think that you guys might be able to put up 3x what the industry’s growing at?
Matt Flannery
Well, certainly yes, because that’s what our guidance implies. I think you’d have to think that that 4% number would be locked in as well. So, I don’t know what the coming out number for ARA was last year, but I know they raised it throughout the year. But we don’t focus on that as a barometer limiting ourself. We focus on what we see in front of us, what we do during our planning process and what we hear from our customers as well as our people in the field. But implied in this guide is 3x. And we do think we could do that. I think, I’ve talked about this before, how the top end of the business, the biggest getting bigger is a trend that we think is going to continue. And we think scale gives you some opportunities and options as well as adding additional product lines and cross selling that are – gives better service to the customers and gives you an opportunity to grow faster than the industry. And I think we’ll see that continue.
StanleyElliott
Great guys. That’s it for me. Thanks.
Matt Flannery
Thanks.
Operator
Thank you. Our next question comes from Scott Schneeberger with Oppenheimer.
Scott Schneeberger
Thanks, guys. Good morning. My first question, in gen rent specifically, I guess, probably, Ted you may be the best to speak to this, but how is rental duration performed over the last few years? Have you seen an expansion of your equipment staying out on rent and with mega projects coming and infrastructure bill feels like 2023 is going to be a lot of that should, is it likely that we may see that expand? I know we’re talking a matter of days here. But might the length of period that assets are out on rent expand and could that have a positive margin benefit for the company? Thanks.
Ted Grace
Yes, so I’ll touch the first part of the question. I’ll start there. In terms of the mix between daily, weekly, monthly, which is really the way we would look at this. We don’t kind of measure contract duration and maybe the way you’re asking Scott, but those numbers have not moved meaningfully. You’ve seen a very modest shift between daily and monthly to the point of – to the tune of about a point. So, we’d be kind of mid-single digits on a daily and we’d be about 80% on monthly. And those numbers have been remarkably consistent for a long time and it really hasn’t been an appreciable change in terms of 2022 versus 2021 or prior years.
In terms of the margin impact, certainly what we’re always trying to do is be mindful of getting more of your volume and serve you more efficiently. And so certainly, I don’t know that there’s a huge change there, but we do have that benefit as we do get larger projects that last longer and we get more fleet on this projects, we’re able to serve that customer more efficiently. And that certainly benefits margins to some degree and importantly returns.
Scott Schneeberger
Great. Thanks. Appreciate that. And then, Ted still for you, kind of your thoughts and kind of how the Board is looking at with the new dividend program, should we anticipate United Rentals to be a dividend growth story? I think you referenced about an 18% payout. If you want to quantify this, but is there a comfort going higher on payout ratio? Is that kind of a direction we’d expect to take vis-a-vis share repurchase, just high level thoughts there? Thanks.
Ted Grace
Yes, absolutely. Don’t want to get ahead of the Board, but absolutely, we have the intention of growing the dividend over time. In terms of what that relative growth looks like relative to net income because you’re asking about a payout ratio. I don’t know that we’d get locked in there just yet, but absolutely the intent is to continue to grow the dividend over time. It’s fully our expectation. We’ll continue to grow the company over time. We’ll continue to expand margins. We’ll continue to generate more cash. And so one of the things that dividend allows us to do is have another tool to return that excess cash to investors as we keep growing. So yes, I think it’s very fair to assume that we will grow the dividend over time and in terms of what that rate looks like, stay tuned.
Scott Schneeberger
Fair enough. Thanks a lot guys.
Ted Grace
Thanks.
Operator
Thank you. That concludes our question-and-answer session. I’ll now turn the call back to Matt Flannery for any additional or closing remarks.
Matt Flannery
Thanks, operator. And that wraps it up for today. And I want to say thank you to everyone for joining us as we kick off another year of growth for our shareholders. And we look forward to reporting a strong quarter for you in April. Until then, if you have any questions, please feel free to reach out to Ted. Have a great day. Operator, please go ahead and end the call.
Operator
Thank you. This concludes today’s call. Thank you for your participation. You may disconnect at any time.
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