United Rentals Inc

NYSE:URI

Earnings Call Analysis

Company Delivers Record Q3, Upbeat About 2023

The company's Q3 performance sparkled with a 23% surge in revenue to $3.8 billion, driven by an 18% hike in rental revenue, an increase in fleet productivity by 1.5%, and a leap in adjusted EPS by over 26%, setting a new record. Operating with efficiency resulted in an EBITDA margin exceeding 49% and an expanded return on invested capital reaching 13.7%. Shareholders were rewarded with $350 million through buybacks and dividends. The future looks bright as the company reaffirms its commitment to a record-breaking year with revenue projections raised to between $14.1 and $14.3 billion and anticipated free cash flow that will continue to benefit investors, with expected returns of over $1.4 billion in repurchases and dividends.

Robust Growth Amidst Economic Headwinds

The company reported a strong third-quarter performance with a 27% increase in revenue, achieving a new record of $11.73 billion. Capital expenditure (CapEx) was significant, amounting to almost $3.1 billion by the end of the third quarter, indicating robust growth and a focus on maintaining a fresh fleet. The supply chains, which were previously disrupted, have largely normalized, allowing for a more predictable and routine business cadence going forward. Free cash flow remained impressive at $339 million, with a trailing twelve-month free cash margin of 12.8%.

Consistent Shareholder Returns and Financial Stability

The company continues to prioritize shareholder value, having returned $1.5 billion to investors through share repurchases and dividends by the year's end. The net leverage ratio remained stable while liquidity stood at a healthy $2.7 billion, with no significant debt maturing until 2027. Guidance for the year's end forecasts a net leverage ratio reducing to approximately 1.6, hinting at a strong balance sheet and prudent financial management.

Fine-tuning the Future Outlook

Looking ahead, the company projects a positive trajectory for fleet productivity in 2024, which should surpass the hurdles of inflation. While CapEx spending on new fleet additions will continue, the company plans to focus more on replacement expenditures which could sum up to $2.3 to $2.5 billion, given the strategy to sell and revitalize 11-12% of their fleet annually. Although exact figures for growth CapEx haven't been disclosed, the anticipation is set for a significant investment to support expected growth in the upcoming year.

Strategic Mergers and Acquisitions

The company has strategically leveraged mergers and acquisitions to drive growth, albeit with a mild dilutive effect on margins. However, the returns from such deals have been lucrative. When it comes to newly acquired fleets from M&A activities, such as Ahern, the primary focus currently rests on optimization and integration to achieve synergies and align business operations.

Adjustments to Used Equipment Sales Approach

In response to external factors and the integration of acquired fleets, the company altered its channel mix for used equipment sales, temporarily elevating auction activity. As the market stabilizes, it envisions a return to a more traditional channel mix, mirroring the pre-pandemic strategy that emphasized retail over auctions. This adjustment reflects the company's agility in navigating fluctuating market conditions.

Capitalizing on Megaprojects and Market Fluidity

The company is set to capitalize on megaprojects, which tend to tighten the rental market in relevant geographies, leading to increased utilization and rates. Moreover, the business model is robust enough to reposition fleet profiles as needed, offering flexibility across various construction types. Verticals such as manufacturing, power, infrastructure, transportation, and healthcare present significant growth opportunities compared to softer segments like office and commercial real estate.

Earnings Call Transcript 2023-Q3

[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 more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31, 2022, 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.

[Matthew Flannery, executive]

Thank you, operator, and good morning, everyone, and thanks for joining our call this morning. As you saw in our third quarter results, the team continues to raise the bar as evidenced by the new high watermarks we set across this quarter's revenue, adjusted EBITDA and returns. As you've heard me say many times, our employees are the key to our results. Their focus on safely supporting our customers is paramount to generating value for our shareholders. And I'm most thankful that our team again delivered a company-wide recordable rate below 1. And this goes without saying but safety is not only a differentiator in the eyes of the customer, but it's also critical that we take care of our most valuable assets, our team.

Looking towards the rest of the year, our reaffirmed guidance for 2023 reflects our confidence in the outlook of our business. And as I'll touch more on later, this is driven by both what we hear from the field and the tailwinds we see on the horizon. More generally, we're confident in the strategy that we've developed. The competitive advantages we've created over the last decade position us well to continue to outpace the industry as we drive towards our long-term goals.

Now let's dig into the third quarter results. Total revenue rose by 23% year-over-year to $3.8 billion, a third quarter record. Within this, rental revenue was up 18% with broad-based growth across verticals, regions, and customer segments. Fleet productivity increased 1.5% on a pro forma basis. Adjusted EBITDA increased 22% to a third quarter record of $1.85 billion translating to a margin of over 49%, while adjusted EPS grew by over 26% to a third quarter record. And finally, our return on invested capital expanded to a new record of 13.7%.

So let's dive into a bit more of the details behind these results. Used equipment sales more than doubled year-over-year to $366 million as we normalized volumes and rotated out older fleet after holding back in 2022. Rental CapEx was in line with expectations at just over $1 billion, reflecting a more normal quarterly cadence. And as the supply chain is recovered, our need to pull spend forward should be behind us.

And now to Ahern. As we approach the first anniversary of the deal, the integration remains on track and highlight continues to be the quality of the team. And as you know, People are one of the key components we add when we bring companies on board and integrate them into United Rentals. And looking forward, this added capacity, combined with my comments on CapEx and supply chains, should position us well to serve our customers as we enter 2024. Ahern is another great example of the strength we have in leveraging our balance sheet as a way to benefit both our customers and our shareholders.

Now let's turn to customer activity and demand. Key verticals saw broad-based growth led by industrial manufacturing, metal and mining, and power. Non-res construction grew 9% year-over-year. And within this, our customers kicked off new projects across the board, including numerous EV and semiconductor-related jobs, solar power facilities, infrastructure projects, data centers, and health care.

Geographically, we continue to see growth across all gen rent regions. And our specialty business delivered another excellent quarter with organic rental revenue up 16% year-on-year and double-digit gains in most regions. Within Specialty, we opened 14 cold starts during the quarter, resulting in 39 new specialty location openings this year. Turning to capital allocation. In addition to the investments we've made in growth, we returned $350 million to shareholders through share buybacks and dividends this quarter and remain on track to return over $1.4 billion of cash to shareholders this year.

As we look ahead, we feel confident in our outlook. And this is supported by ABC's Contractor Confidence Index, which remains strong across the third quarter as did its backlog indicator. The Dodge Momentum Index, which advanced sequentially in September. Furthermore, nonres construction spending and nonres construction employment both remain solid. And most importantly, our own customer confidence index continues to reflect optimism. While early indications from our field team on their expectations for '24 are also encouraging.

Finally, I'd like to acknowledge our team for their efforts in earning our company's recent selection to the 2023 TIME Magazine's World Best Companies, and the U.S. News and World Report's Best Companies to Work For list. Recognition like this comes as no surprise when you see our employees' dedication and hard work in the field day in and day out. So to wrap up my comments today, Q3 was a strong quarter. We remain very pleased with how the year is playing out. Looking forward, the opportunity ahead of us around large projects is unlike anything in my career, and we're uniquely positioned in the rental industry to win more than our fair share of the $2 trillion plus of investment we see on the horizon.

Not only do we have the scale, technology and one-stop shop solutions to make us a preferred partner, but we have a history of execution our customers can rely on. We set high expectations for 2023, and I'm proud of the results we're delivering. We feel good about the rest of the year and what's ahead for United Rentals and our investors. And with that, I'll hand the call over to Ted before we open the line to Q&A. Ted, over to you.

[William Grace, executive]

Thanks, Matt, and good morning, everyone. As you saw in our third quarter release, our team again delivered strong results that were consistent with our expectations and importantly, keep us on track for another record year. I'll add that we continue to feel very good about our prospects beyond 2023 based on our strategy and the tailwinds we've discussed extensively. While it remains a little premature to say too much about next year, given where we sit in our planning cycle, I will say that 2024 is shaping up to be another year of growth.

Certainly, more to come there in January with our focus today on our third quarter performance and the balance of the year. Now one quick reminder before I jump into the numbers. As usual, the figures I'll be discussing are as reported, except where I call them out as pro forma, which is to say the prior period is adjusted include Ahern's stand-alone results from the third quarter of last year. So with all that said, let's get into the numbers. Third quarter rental revenue was a record at over $3.2 billion. That's a year-over-year increase of $492 million or 18%, supported by diverse strength across our end markets, as you heard Matt say.

Within rental revenue, OER increased by $413 million or 18.5%. An increase in our average fleet size contributed 22.2% to that growth, partially offset by a 2.2% decline in as-reported fleet productivity and assumed fleet inflation of 1.5%. Also within rental, ancillary revenues were higher by $83 million or 19.7%, while re-rent declined $4 million. On a pro forma basis, which as you know is how we look at our results, rental revenue increased by a robust 10.2% with fleet productivity up 1.5%, reflecting a healthy rate environment that continues to be supported by good industry discipline.

Turning to used results. Third quarter proceeds roughly doubled to $366 million, reflecting more normalized volumes as we continue to refresh our fleet. The decline in our third quarter adjusted used margin to 55.2% was largely due to expanded channel mix required to drive higher volumes, the impact of some cleanup actions we took on Ahern fleet and the normalization of supply-demand dynamics. Importantly, we continue to take advantage of a robust used market by driving strong volume growth in our retail sales at attractive pricing.

I'll also note that our average fleet age was 51.6 months at the end of the quarter, which is essentially back to pre-pandemic levels. Moving to EBITDA. Adjusted EBITDA in the quarter was a record $1.85 billion, reflecting an increase of $329 million or 22%. The dollar change includes a $264 million increase from rental within which OER contributed $252 million and ancillary added $19 million, while re-rent declined $7 million year-on-year. Outside of rental, used sales added about $85 million to adjusted EBITDA, while other non-rental lines of businesses contributed another $15 million.

While SG&A in the quarter did increase $35 million year-on-year, as a percentage of sales, it declined 180 basis points to 9.9% of total revenue, reflecting another quarter of very good cost efficiency. Looking at third quarter profitability. Our adjusted EBITDA margin decreased 80 basis points on an as-reported basis but increased 20 basis points on a pro forma basis to 49.1%. This translates to as reported flow-through of 46% and pro forma flow-through of better than 50%. Notably, if we excluded the impact of used in the quarter, our core flow-through exceeded 53% and was in line with second quarter results.

And finally, adjusted EPS increased 27% to a third quarter record of $11.73. Shifting to CapEx. Gross rental CapEx was $1.03 billion versus net rental CapEx of $664 million. The $257 million decline in net rental CapEx largely reflects a return to more normalized used sales levels this year. Year-to-date, gross rental CapEx through the third quarter has totaled almost $3.1 billion representing about 90% of our full year CapEx plan, which is in line with both our expectations and historical year-to-date levels. At this point, it is our sense that the supply chains have largely normalized, which should enable us to return to more typical quarterly cadences going forward and better match the timing of deliveries with seasonal demand.

Turning to return on invested capital and free cash flow. ROIC set a new record at 13.7% on a trailing 12-month basis and remains well above our cost of capital, while free cash flow also remains a good story. The quarter came in at $339 million, translating to a trailing 12-month free cash margin of 12.8%, all while continuing to fund robust growth. Moving to the balance sheet. Our net leverage ratio at the end of the quarter was flat sequentially at 1.8x, while our liquidity totaled $2.7 billion with no long-term note maturities until 2027. Notably, all of this was after returning $1.05 billion to shareholders year-to-date, including $750 million through share repurchases, and $305 million via dividends.

So let's shift to the guidance we shared last night. We reaffirmed within our ranges for total revenue, EBITDA, and free cash flow, reflecting our continued confidence in delivering a record year. Within this, we raised the midpoint of total revenue by $50 million to a range of $14.1 billion to $14.3 billion, reflecting cleanup actions being taken to dispose of some older fleet acquired that comes with no margin benefit. Just to avoid any confusion, that is to say the fleet is being sold at the values they are recorded at on our balance sheet.

You see this in our implied sales guidance of $1.5 billion at midpoint, which is an increase of $50 million versus our prior guidance. Adjusted EBITDA guidance is $6.775 billion to $6.875 billion, which maintains the midpoint at $6.825 billion. And finally, I'll point out that we expect to generate free cash flow of $2.3 billion to $2.5 billion, of which will return a little over $1.4 billion to our investors through repurchases and dividends. This equates to more than $20 per share or around a 5% yield on return of capital at current share price levels. So with that, let me turn the call over to the operator. Operator, could you please open the line?

[Operator]

[Operator Instructions] Our first question will come from David Raso with Evercore ISI.

[David Raso, analyst]

I know you don't want to give '24 guidance, but can you help us with just 2 elements at least how you're thinking about it. The productivity measure, and let's just think of it as an as-reported basis. Ahern anniversary is in mid-December and the toughest part of the time you comps, we start to anniversary soon given peak supply chain constraints about 3 or 4 quarters ago. How should we think about productivity with those 2 items sort of anniversarying.

How are you thinking about productivity's ability to go back to flat to maybe up all in as reported and then also any help you can be at all with you noticed -- you mentioned the supply chain now is loosen up. You can go back to your normal cadence on CapEx. How are you thinking about the fleet going into next year. There's some carryover growth. But just curious how you're thinking about replacement CapEx next year? Or is there some growth CapEx just to help frame those 2 big building blocks for thinking about '24 as an up or down year. I know you're saying it up. I just want to get some of the pieces.

[Matthew Flannery, executive]

Sure, David. Without giving guidance, I'll just try to help out first. On your first part of the fleet productivity, I think you captured it well. We absolutely expect next year to have positive fleet productivity. Well, anniversaries are very tough. And even on a pro forma basis, when you think about this year, we still had tough comps from a time utilization perspective. And we've talked about that over that unusual time that just we didn't feel was healthy and put way too much hand-to-mouth orders and customer relationships at risk.

So we've run really strong time this year. As I told you guys in July, back over what we were in '19, and we think this is a more appropriate level. So we wouldn't expect time to be a headwind next year. And with that being said, the industry still needs to get rate. So if we think about the 2 largest contributors to fleet productivity. We call one flat and the other one positive, and then mix will be what mix will be. We certainly expect to have positive fleet productivity next year. And as far as fleet CapEx cadence, we certainly, I think the supply chain is not 100% back to normal, but probably close, probably about 90%.

There's still a couple of categories of high time used assets that we can't get as quickly as we want. But frankly, I don't think we're going to be able to front load them either because they're just in tough supply. So I think a more normalized cadence is the right way to think about what we'll do from a capital perspective. And we're not going to give CapEx guidance right now, but think about off of our base of $21 billion of fleet. We usually want to sell 11% or 12% of the fleet a year, right, to keep it fresh. And as Ted mentioned in his comments, we're really pleased that we got back to pre-pandemic fleet age, and we want to keep that rolling.

So roughly, if you think about those numbers, you're talking about somewhere between $2.3 billion, $2.5 billion of fleet sold to get to that 11% to 12%. And if we think about the replacement CapEx on that at this point, certainly higher than [ 15% ]. Let's just round up to [ 20% ]. And you're talking about somewhere between $2.8 billion -- $3 billion of CapEx next year depending on how much we sell. And I use that as a baseline. And anything over and above that, we'll obviously communicate in January, that will be our growth CapEx. We do expect '24 to be a growth year. And we expect there will be some growth CapEx, but we just haven't worked through the planning process yet. We'll give you better guidance in January.

[David Raso, analyst]

All right. And lastly, with all that said and how you're perceiving the world going into '24, I know I asked this last call too, but the leverage down at 1.6x the net debt to EBITDA at the end of the year. Can you just give us some framework of how you're thinking about M&A versus other uses of that balance sheet in cash flow or the leverage is expected to stay continue to go down next year? Just trying to get a sense how you're thinking about it.

[Matthew Flannery, executive]

I'll answer a little bit of it, and I'll let Ted jump in here. Certainly, we always talk about the use of our capital is going to be growth business. So first and foremost, feed the organic growth to meet the demand that our customers expect us to meet. And then secondly, M&A. If we find opportunities where we can be a better owner of a business, we certainly have shown a history of that. And frankly, we're pretty good at it. So why not utilize the balance sheet for that. That pipeline remains robust, but we have a high threshold.

So I'm not pointing to anything imminent other than the fact that we're always looking. And we'll have a specific lean to any new products we can add or specialty, but then also to add capacity like we did with a couple of deals, including Ahern's in this past year. As far as after we've used capital for growth, I'll let Ted take that.

[William Grace, executive]

Yes. Thanks for the question, David. So as everybody saw, we are leverage of about 1.8x at the end of this quarter and the implied guidance would have us at around 1.6x at year-end. So a little bit below that bottom threshold we have introduced in 2019 too. We do think the strategy overall has served us very well and it's accomplished a lot of what it was intended to accomplish, which primarily was to allocate excess free cash flow to reduce the equity volatility and improve valuation and so when we measure kind of our absolute relative beta, when we look at our absolute and relative multiples, we think that has been quite successful in delivering what we wanted. In terms of what's next, certainly, that's something we've talked about that we're still working on.

We would expect to have an update for the Street as we introduce our '24 guidance and all the related capital allocation programs that will be underpinned by that plan. So more to come there in January.

[Operator]

We'll take our next question from Rob Wertheimer with Melius Research.

[Robert Wertheimer, analyst]

So my question is on rental gross margin. And I think Ted mentioned that you still have some cleanup, I guess, activity on the Ahern fleet, which may be depressing gross margin, I think you have extra depreciation, but it seemed a little sequentially weaker than 2Q. And I'm just wondering if there's any other driver or to this incremental related to Ahern that drove that? And I guess, Ahern probably didn't have specialty. So I wonder if you could address the gross margin as well.

[William Grace, executive]

Yes. So if we look at that gen rental gross margin, I'd say, in line with our expectations, while you did see the as reported margin down 320 basis points versus 270 last quarter. Pretty minor when you convert that into dollars. You'd be talking about just the 50 basis points being equivalent to about $12 million of cost on a revenue base of about $2.3 billion.

There's always puts and takes within cost structures, as everybody knows. Depreciation was part of that. So if you think about that 50 basis points, the incremental depreciation, we recognized in the quarter as we go through final purchase accounting on Ahern, was probably 30 of those basis points would have been captured in that. And otherwise, you always have onetime costs or other cost dynamics that may be hitting you. We don't think there's really much to be made of it. The question is a very fair one to ask in the scheme of things, given the numbers I just walked through, I think it's pretty -- we would characterize that more as quarter-on-quarter noise.

Within specialty, you saw flat margins, I guess, year-on-year off a record at 52.2%. So very strong performance there. There really wasn't much to call out. We did have some mix shifts within the different pieces of specialty that would have been relative headwinds. But again, if we can grow a business at 16% and generate 52% margins, we feel really good about that.

[Robert Wertheimer, analyst]

If I'm allowed, you guys have some experience with mega projects by now. And I know there's a lot of different kinds of mega projects running from LNG to airport to semiconductors to whatever. But there's a lot of just questions if commercial or office or whatever construction declines and mega rise. Do you have a sense of on a dollar-for-dollar basis, you lose a dollar in one, and you gain a dollar in the other, if that's materially different on mix? And I'll stop there.

[William Grace, executive]

Materially different on what?

[Robert Wertheimer, analyst]

On mix. So if you lose a mix, so you lose a dollar of construction, you lose a certain amount of revenue, you gain a dollar of mega construction you gain a certain amount of revenue. How does that shift out for you?

[Matthew Flannery, executive]

Thanks, Rob I'll take that. So we're probably thinking more about if you're thinking about what that larger customer, larger project, longer duration rental does from a mix perspective, there's a bigger variance if you're thinking about just transactional business. So certainly, our largest customers get a little bit of leverage out of their spend with us, then Joe the Plumber walking in the store.

So that's where the biggest gap is. But one of the reasons why we built a go-to-market to make sure we specifically cater to these large customers, large projects and large plants is because when you could put those big block of revenues to work at one site, you could serve them much more efficiently. So on the top line, there may be some variance, certainly between your transactional business in the top line rate that you charge. But margin-wise, we historically don't see much of a difference because of that lower cost to serve, and that's why we've built this go-to-market to cater to those projects. Thanks.

[Operator]

Our next question comes from Steven Fisher with UBS.

[Steven Fisher, analyst]

Just a follow up on the mega project discussion. I'm curious if you could talk a little bit about what's happening beneath the surface there on the mega projects within your pipeline. Obviously, there's some headlines about some projects experiencing some delays. But I guess, to what extent are any new ones coming on to the radar screen as well? Or is it more like just a known population at this point. Curious about just the flow of what you're seeing in the market opportunities there.

[Matthew Flannery, executive]

Sure, Steve. I would call the handful I think it's less than a handful, somewhere 4 or 5 projects that have hit the headlines are really not relevant to the whole pipeline that we're tracking. And I could be fair, I'd say the same about new ones coming on. We do find out about new things coming on all the time. But the basis is pretty robust and pretty well-known quantity. And we've been tracking that net number, net number remains strong at a steady level. When we think about these handful of projects, none of them are macroeconomic related, right?

There are some delays that you'd call political, right? Maybe that there was a Chinese partner that one of the plants was dealing with that got some noise about. Others are permitting. There was a job in South Carolina that got delayed because some environmental potential issues that they have to work through. So we're not seeing things that are slowed down because there's economic issues. It's really more just individual issues that are coming up for each of these projects. So not anything that we're concerned about. There's still a robust pipeline of jobs, many of which we have fleet on today and many of which we know are coming out of the ground in 2024.

[Steven Fisher, analyst]

Great. And then just a bigger picture question about Ahern. When we think about next year, are there actual tailwinds in '24 from Ahern? Or is it more just kind of like a neutral, you said kind of just lapping the utilization? And what about the synergies? I know there have been some plans about synergies. I'm curious if it's actually going to be adding from Ahern next year just sort of like a neutral.

[Matthew Flannery, executive]

I would call it more neutral. The egg is pretty well scrambled at this point other than some of the cleanup we're doing and certainly will be by year-end when we lap the anniversary. As far as the synergies, we did a good job. We'll meet the synergies that we had guided towards and that we had targeted by year-end. We're pretty close to done with them now. So we're in good shape there. And it will be nice to have a little bit cleaner view to share with you all, no more pro forma as reported.

I know it's been confusing on some of the metrics specifically and all that will be cleaned up by year-end.

[Operator]

Our next question comes from Jerry Revich with Goldman Sachs.

[Clay Williams, analyst]

This is Clay Williams on for Jerry Revich. A quick question. one of the hallmarks of your acquisition strategy has been the ability to get acquired businesses to post utilization and margins that are typically with the base -- in line with the base business as we approach the 1-year anniversary on Ahern. When do you -- does this asset going to have comparable fleet productivity and margins as the base business or still work to do there?

[Matthew Flannery, executive]

So usually, we say as far as the differentiation, right? So the asset attributes, which would be more the fleet productivity, we'll get there next year, right, somewhere around. But you have to remember, it would be a like-for-like asset they didn't have specialty. They didn't have some of the higher dollar ute items. But when you think about the assets that we bought from them, by next year, we expect them to look -- the performance to look like the assets that we own in that category.

Now when you think about margin, to get all of our processes implemented in their stores, it usually takes a little longer. Now you're talking somewhere between 18 months, 2 years depending on how fast we move. So there'll be a little bit of drag still on the operations of those stores as they implement all the new activity, the new tools but from the fleet productivity, it should be mostly realized by next year.

[William Grace, executive]

The one thing I might add, and just for everybody's benefit, each deal certainly has its unique profile from a margin standpoint. Just for clarity's sake, we've talked about this pretty extensively. But the deals we do tend to be margin dilutive structurally. That's not to say they're not very good deals economically. The returns have clearly been very attractive. But if you think about Ahern, they were doing 35% EBITDA margins LTM, fully synergized, they were going to be sub 40. That was the same thing for BlueLine.

I think NES fully synergized, they would have been 42%. And Net was closer. But certainly, if you look at GFN, they were doing LTM EBITDA margins of 27%, they're in the low 30 synergies, and the same thing is true with Baker. So we do a great job. We take pride in the fact that we're able to integrate these companies and extract a lot of value, including through cost synergies, but there has been that dynamic. So I just -- Craig, I'm sure you appreciate that, but for other people's benefit, I just want to make sure we added that.

[Clay Williams, analyst]

Appreciate it. And on guidance, midpoint of guidance implies margins are slightly up sequentially in Q4 versus 3Q this is better than a normal seasonality, what's improving versus normal seasonality? Or should we not be looking at it from a midpoint to midpoint?

[William Grace, executive]

Yes. Just we have always been consistent in telling people don't anchor the midpoint, and it's not kind of a linker or not, which direction you should be thinking. But we've given that range that's kind of where we feel comfortable indicating fourth quarter, but beyond that, we don't give quarterly guidance, as you know.

[Operator]

We'll take our next question from Tim Thein with Citigroup.

[Timothy Thein, analyst]

Matt, back to your earlier comments that you expect fleet productivity to be positive in '24. Do you think that you still believe that you're confident in terms of the ability to exceed inflation? I know you mentioned positive, but is your expectation that can be positive in excess of inflation. And to that point, you mentioned the replacement, the dollars you'll be replacing upward of 20%.

Is that just as you think about bringing in more fleet today that you're dropping out from 7, 8 years ago, is that 1.5% number close to what you think actual inflation rate should be in this environment.

[Matthew Flannery, executive]

Sure, Tim. So first off, that will always be our goal to outpace inflation, and we think we will. We feel confident we'll have positive fleet productivity. And frankly, we need to outpace that inflation, right? The whole point of fleet productivity was to make sure that we generate revenue growth higher than the fleet growth. And that fleet growth, some of it's inflation. So you got to exceed it. As far as the 1.5 points bogey that we put out there a couple of years ago, in reality, it's a little bit higher today.

Where that extra inflation gets captured in mix, which gets captured in the fleet productivity report. So whether we change that bogey to hire, if we make that 2%, 2.5% and then we add it back in and the fleet productivity looks better. It's really just right pocket, left pocket. We're keeping it at 1.5 for now just for simplicity's sake, keeping it consistent. But we still absorb that extra inflation and that comes in as a negative mix. So you guys still see the whole picture. And we'll probably continue to do that going forward, and we talked about a little bit internally, and we think it's easier to keep the metric consistent, and we do expect to exceed that inflation even with the extra mix headwind.

[Timothy Thein, analyst]

Okay. Understood. And then you guys have a good lens into the kind of the supply-demand balance in the industry from a number of sources, but including the Rouse data. And it seems to us anyway that, Matt, you mentioned earlier, supply chains are loosening up. And some of the OEM dealers seem to be getting more active in rental also seem to be catching up in terms of product availability. I'm curious if that's coming through in terms of that supply-demand data that you guys see and just how, if at all, it's influencing or informing you about your CapEx plans for '24.

[Matthew Flannery, executive]

Sure, Tim. We certainly gotten better, right? So supply chain certainly gotten better, and I think you're seeing -- I think you'll see most of the industry run more normalized time utilization. You've seen that this year. And that's a good thing, right? Because it was -- you can run the business more efficiently and frankly, be more reliable partner to your customers. But I think the next big leg of growth from the OEM is still going to be replaced.

I don't think that as OEMs grow their volume, this is going to be all this extra fleet in the system. There's still a lot of replacement CapEx that needs to be served and especially in some of the areas that's been dragging. So I think that will be more the characteristic in the next year or two. We're getting ahead of the curve. You see how much we're trying to focus on the used sales to get that fleet age right. So we feel good about where we are but we're still going to have a lot of replacement CapEx next year, just like the rest of the industry.

[Operator]

[Operator Instructions] Our next question comes from Neil Tyler with Redburn Atlantic.

[Neil Tyler, analyst]

A couple of small questions there, please. Firstly, just going back to your comments, Matt, thought about the Ahern synergies. I thought you've made comments at the previous couple of quarters that the revenue synergies might take a bit more time to crystallize and probably wouldn't be expected to come through in the first 12 months. So I just wanted to just check where you stand on that and the thoughts. And I understand that and to use your words, the egg is fairly well scrambled at the moment. But if you can just sort of help us understand how the cross-selling has been going there?

And then the second one, just a bit more specific on the used proceeds as you move into next year. First of all, it sounds as if you've broadly sort of caught up in terms of exited or shedding the fleet of the older assets. So presumably, the used fleet will be slightly younger, but I guess we're all expecting used prices to normalize downwards a bit. So if you can help us sort of think about the percentage of OEC perhaps of those proceeds will track through the next 12 months or so?

[Matthew Flannery, executive]

Sure, Neil. Thanks for giving me a chance to clarify. Our cost synergies will be realized. You are absolutely right. Our revenue synergies will take longer. So I'm so knowledgeable that I heard it as cost, even if it wasn't asked that way. So thanks for that clarity. But the cross-selling is going well. And we're on schedule, and that usually takes a couple of years to fully bake and we're on track for that. I think the customer base and the sales teams that come with that are very pleased to have a full portfolio to sell. So that's working well. And then as far as the used proceeds....

[William Grace, executive]

Yes. I mean, certainly, we've talked about these dynamics for a while now. And as the supply chain normalizes, the expectation would be that, that incremental buyer who couldn't buy new and was left to only buy used, fades. It's on a relative basis, you see not as much demand versus supply. Now that's something we've talked about and expected and [ '24 ] of that likely is going to be a dynamic that people should be looking for. On the other hand, you're still going to have fleet inflation and Matt alluded to kind of the cumulative 20%.

That's for us in a very good position. I would say fleet inflation more broadly, is higher. And ultimately, that provides an umbrella for used pricing. So these are those kind of cross-car that we'll be balancing next year. We certainly would expect to have recovery rates well above historical levels. '22 set an unsustainable bar. I think everybody understood that there was some temporary benefit there that led to us getting $0.74 on $1. I'm not mistaken, selling 8-year-old equipment. That's not normal and that's not something anybody ever expected to be sustained. You're seeing normalization this year with that channel mix.

Next year, I think you'll see us kind of normalize again. So ultimately, those recovery rates, they won't be at '22 levels, but they won't be back to those kind of pre-'20 levels either. And then the other part about fleet ages, Neil, it won't be tremendously different. I mean we've still got -- we just got back to more normalized fleet age. We've always had plenty of 8-year old equipment to sell. So we don't think that, that 7- to 8-year old average range that we've been hitting will be changing that much. Neil, you have the third question? I thought you said you had 3. I don't know if 2 or....

[Neil Tyler, analyst]

No. Just the 2 at the moment.

[Operator]

Our next question will come from Steven Ramsey with Thompson Research Group.

[Steven Ramsey, analyst]

I know it's early days on mega projects getting ramped up. I'm curious on the secondary effects that you're seeing there if the rental market in those geographies is tighter and helping utilization and rates more broadly besides just the project itself?

[Matthew Flannery, executive]

Yes, generally, yes, but I think you're talking about mostly the larger companies that are going to be supplying these jobs, and we'll all mobilize the fleet to get there to take care of the customers. But generally, it will tighten up in the surrounding areas. And then the other part of a lot of these plants, especially the ones that are built in more rural markets is you'll have infrastructure built around and whether that be feeder plants, whether that be residential and then the retail and the schools that go with it.

So these are big booms for these markets overall that we think the whole -- we certainly expect to get our fair share plus but that the whole area will benefit from.

[Operator]

Our next question will come from Jeff Weber with Wells Fargo.

[Seth Weber, analyst]

It's Seth. I just wanted to go back to the used equipment discussion again for a second, just to clarify. It sounds like you kind of tweaked your channel mix here to help get rid of some of the older fleet, the acquired fleet. Can you just talk to what you think your channel mix will be going forward whether it's more wholesale, less auction, what have you? Just how should we think about the channel mix to sell used equipment going forward relative to where it's been for the last couple of quarters?

[Matthew Flannery, executive]

Sure, Seth. So if you go back to pre-COVID levels, we're usually about 2/3 of our volume on retail and less than 5% auction. And whatever fell in the middle there between trades and brokers varied a little bit on years just based on what kind of negotiations we did with vendors, what were the assets we needed to replace and so on. I think we expect it will get more normalized to that type of atmosphere. Obviously, you saw 17% auction this past quarter. That might be the highest we've ever done. But that's certainly a large number for us, and that was just blowing out some of the older assets from the $2.2 billion of acquired fleet that we had through M&A, right?

Everybody had their 5% to 10% in the back of a lot that you had to either decide to work through or get rid of. So we just decided to clean that up. But we'll get back to more normalized channel mix than what you saw pre-pandemic.

[Operator]

Our next question comes from Michael Feniger with Bank of America.

[Michael Feniger, analyst]

Matt, we haven't really seen how rental holds up in a higher for longer interest rate environment. How does that kind of typically weigh on project activity but also impact that rent versus own trade-off, how does this kind of higher for longer rate environment differ from other periods and we think of the impact to the rental equipment space?

[Matthew Flannery, executive]

So for my 30-plus years of doing this, any time capital becomes more expensive, it's logical to think that people pay more attention to what they spend their capital on. So when you think about customers that we're owning or wanted to own, it adds another barrier thought to them to then think about the opportunity to try rental.

And once they do, the math just works, when you think about the lack of -- even in a flat interest environment, when you think about -- once they get over the fact that can I get what I want when I need it, our industry has come such a long way that we don't lose customers. They don't go the other way after that because the rental experience is much better. They have flexibility to turn the assets in when they don't need them. They don't have to deal with all those soft costs of storage, maintaining, transportation, and the reliability, right?

So our mechanics are usually going to do a heck of a lot better job than somebody who's working on equipment once in a blue moon. So all those variables mean greater rental penetration, and I think a higher interest environment just adds another layer of that higher penetration. So that's what would be our expectation. That's what history tell us.

[Michael Feniger, analyst]

And my follow-up is just, clearly, there's some moving pieces for the construction cycle next year, offices, commercial versus infrastructure, industrial upstream energy versus downstream. Just help us in the context of fleet intensity. We saw this in 2015, '16 with few years of oil downturn. Just how much would come out of some of these weaker pockets compared to the fleet necessary to service some of these other markets that are seeing tailwinds. If you could just kind of help us conceptualize some of those moving pieces.

[Matthew Flannery, executive]

And Michael, the pockets you're talking about, are you referring to what areas? Because we -- I think you heard in my opening comments, we're seeing pretty broad-based demand. All the verticals that we serve, ironically other than oil and gas, I think we've all seen the rig count come down, have been -- were positive in Q3. So we're not seeing a lot of the soft pockets, tell a little more what you're thinking about.

[Michael Feniger, analyst]

Well, I guess if those pockets do soften next year, Matt, how should we think about the business model reacting and the fleet that services, maybe some of these pockets that the market is worried about commercial real estate, private office relative to the fleet that's required for some of these other end markets that are seeing really strong verticals or strength on a multiyear basis.

[Matthew Flannery, executive]

Okay. Great. So we have always somewhere between $3 billion and $3.5 billion, right, at our disposal to reposition fleet profile, if that's what necessary. But one of the great things of the model is we have very fungible assets, right? The fleet we use may vary a little bit depending on what type of construction is going on, maybe in some of these stadiums you're going to need bigger booms.

And maybe on some of these mega projects, you're going to have a higher propensity for a full breadth of fleet from more dirt moving because they're bigger footprints. But our fleet breadth can really account for that. And it's one of the great parts of the rental model is as long as you don't get overly specialized, which we don't you don't -- that fungibility allows you to move it from different types of work to the other. And that's something that -- on the margin, if there's some changes, we certainly have just within our replacement CapEx, the opportunity to re-profile and send that fleet to the right place.

[William Grace, executive]

Mike, what I might add, and it's really difficult to get into demand intensity by sub vertical, if you will. But the way we've kind of talked about this publicly, and we look at it internally is just more from a top-down perspective. And if you think about the verticals where certainly, we feel very good, things like manufacturing, power, infrastructure, transportation, health care, et cetera. If you look at the dollar value of those projects in those markets versus the areas you're alluding to, which maybe it's aspects of office, it's aspects of commercial. Just the absolute dollars are much greater in the areas that seem to be opportunistic. And so from a weighted basis, that's where we see our opportunity growing next year.

[Operator]

Thank you. At this time, we have no further questions in queue. I will turn the call back to Matt Flannery for closing remarks.

[Matthew Flannery, executive]

Great. Thank you, operator. And that wraps it up for today. And I want to thank everyone for joining us and remind you all that if you have any questions, please feel free to reach out to Elizabeth any time. Operator, you can now end the call.

[Operator]

This does conclude today's call. We thank you for your participation. You may disconnect at any time.