Sunbelt Rentals Holdings, Inc. (SUNB) Earnings Call Transcript & Summary

Perfect. Good afternoon, everyone, and thank you for joining us. For those who don't know me, my name is Angel Castillo and I'm the U.S. Machinery and Construction analyst here at Morgan Stanley. And it's my pleasure today to have Brendan Horgan, CEO of Sunbelt. So thank you for joining us.

Great. Thank you. My pleasure. Good afternoon.

Well, before we get started, I just want to read a quick disclaimer. So just for important disclosures, please see the Morgan Stanley research disclosures website at www.morganstanley.com/researchdisclosures. If you have any questions, just please reach out to your Morgan Stanley representative. So with that, Brendan, we'll just dive right into some of these questions. I guess -- maybe a good place to start. At CMD earlier this year, you kind of laid out the next phase of Sunbelt 4.0 in the fiscal year '29 framework. Just following the strong performance, particularly that we've seen in this past quarter very recently last week, just which elements of that framework would you say now look a little bit more conservative? Or where do you still see perhaps execution risk around that?

Sure. So maybe just to level set, we had our March CMD, which was just a 2-year update on our Sunbelt 4.0, which is a 5-year strategic growth plan. And what we did was we sort of gave illustrative targets for years 3 through 5 in particular, really, let's face it, we're one quarter now through what we would have updated on and you're asking were we conservative. But look, we had a great quarter in the business. We had record revenue, record adjusted EBITDA, record operating profit, record EPS. So it was a great start to the year. And what's important to understand about that was the momentum was really broad. We saw strength in our gen rents business growing 7.5%. That's compared to last year Q1 of 1%. Specialty business growing 25%, which has just been a real growth machine for years and years now. And we saw it, frankly, across multiple segments construction, nonconstruction megaproject, local nonres stability, which I'm sure that we'll talk about. In terms of what to be on the lookout for, so to speak, I would just really say that local nonres market. We've taken into account the momentum in our guide. We increased our guide by 2% in rental revenue and sort of the rest all the way through. And local nonres now we're 16 months of stability there. And I would characterize that local nonres market as good demand with stability and good supply and demand. So if we were to see -- we're not calling it in any way, shape or form, but if we were to see an inflection point in that throughout the year, I think you'd see even more growth.

That's very interesting. And maybe just digging a little bit first with the kind of longer-term targets, right? To your point, it's super early on. So definitely, I appreciate that there's a lot that is still to come. But maybe to that point, the 200 basis point margin improvement for fiscal year '27, the margin side is expected to be a little bit more flattish. So could we just talk about the bridge in terms of how much as we think about that 200 basis points through your outlook? How much comes from perhaps rate versus SG&A leverage, fleet productivity, branch maturation. Just when should we kind of expect in the cadence of that margin improvement?

Sure. Well, let's look at the Q again. And remember, we're talking about EBITDA margin because we did say and we have not only conviction but a path to improving EBITDA margin by plus 200 basis points over the course of Sunbelt 4.0. We expect that to be year 4 to year 5 rich make the turn this year. But I want to remind you that the growth that we saw in Q1 actually was accretive to operating profit margin so we saw a 60 bp improvement to operating profit margin in the quarter. What are we doing from an EBITDA standpoint? Most of them you answered in your question. But we're doing the things that we've been doing, leveraging SG&A, driving time utilization, efficiency, leveraging rental rate and the progression around rental rate, focus on areas like delivery cost recovery. These are all core to actionable component #3, which we called performance in Sunbelt 4.0 and all that we're doing, notwithstanding the fact that we're seeing ancillary growth 2x that of pure rental revenue growth in the business. But you again see that, that's accretive to ROI and EPS.

Yes. No, that's very helpful. And I think another area as part of this is ultimately just how much further you can kind of push utilization structurally to improve as the network gets denser and just how material that can be as part of the 200 basis point margin ambition. And as an overlay to that, I feel like there's been a lot of discussions about how time utilization has been very robust or very strong so far in 2026. So just could you talk about kind of that ultimately?

Sure, time utilization and perhaps touch a bit on the margin again. When you see one way, one of those paths is rental revenue growth outpacing depreciation growth. In the quarter, we had 2.5% depreciation growth, 12.5% rent revenue growth. So that is a contributor to time utilization, it's important that we look at it in the business now really on a segment level because over time, speciality is so much larger proportionately higher dollar utilization business, generally speaking, lower time utilization business, higher ROI business. But when you think about time utilization in any core product, whether it be telehandler booms or even generator in a certain SKU for that matter, growth, scale and density really help to put it in perspective if I own 10 of any one asset in the market, I can't be 85% time utilization at any one point in time. If I own 20, I can. If I own 200, I certainly can. So we expect on the business to actually see, it's not big, big step change in time utilization unless you come off of some period of decline just little bits and pieces of time utilization improvement, not just because of scale and density, but also because of efficiency, AI-supported routing, predictive routing, et cetera.

Okay. No, that's very helpful. And I guess one of the strategic advantages you emphasized at CMD was just the breadth of the platform, ultimately. And just general tools, specialty, like you're saying just cross-selling and just a denser cluster of the model. So where are you currently seeing the highest incremental return in terms of putting additional capital to work in the network? And how has that changed versus maybe 3 years ago in terms of the opportunity set?

Yes. I mean if you look at where -- again, the growth is with specialty and our overall investment and as specialty for every point, specialty grows more than gen rent or every proportionate point specialty makes up of our overall volumes, we get higher ROI. Inherently, specialty is a higher ROI business. It's less capital intensive, higher dollar utilization, as I've said, where is the investment going? It's an important question for a few reasons not just from a return standpoint, but also just the discipline and investment in the industry. And if you look at the growth that we've deployed over the course of the year. So if we look at the end of Q1, July, this fiscal year compared to July last fiscal year, our fleet size is $1.425 billion larger than it was a year ago. And where is that growth gone? $115 million of that growth is in general tool same-store. So general tool same store is about $12.25 billion OEC. So that fleet's grown 1%. When you take into account inflation, probably hasn't really grown. When you look at the same-store growth in general tool, it's growing 3, 4x the pace of its largest single end market being local nonres. That means that, that growth is going into 3 areas: specialty same-stores equally in essence, greenfields, which have been biased specialty over the last few years and mega projects. So think of this as opportunity CapEx that is immediately being absorbed on rent, hence, driving return.

Got it. No, that's very helpful. We'll touch on mega projects a little bit more and some of the specialty as well. But maybe just quickly around the rental rate momentum, you continue to see improved through August so as you move through September, are you seeing any improvement in the kind of the -- any broadening in terms of across customers, geography, size, and is it being driven by just market discipline, fleet availability or just better demand backdrop? Just how are the dynamics around pricing ultimately contributing?

Yes, August felt like Q1, September felt like August. So we're seeing momentum in pricing as we should. The why really is, it's a myriad of factors. First things first, aside from present moment dynamics, it's the output of the structural progression of this business and industry, right? We see customers who are seeking far more than just a transactional rental solution. They're looking for breadth of solution, breadth of expertise. And when you -- whether you're doing a complex live event, a complex mega project, a complex energy solution, 2%, 3%, 4%, 5% rate has nothing to do with their success factor. Think about a mega project, when there are very few services that would be on that site, where it's a single point of failure. All subcontractors, whether it's electrical, mechanical, concrete, steel, site, if rental goes wrong, you're disrupting the entire project. So that means that you should be poised for pricing. We've tested that through the cycle now. We talked a bit about it before this. But where we get it, we get it across all customer types, not to be confused by this new dynamic pricing system we have, we call intelligent customer pricing. Intelligent customer pricing is only piloted in 17 of our markets and just think about that as final mile of mechanized pricing in our industry, the rest of it is really being driven organically with our incumbent dynamic pricing systems and the strength of our offering and the value proposition that we're giving our customers.

Got it. No, that's super helpful. I just do want to remind the audience, if you have any questions, just raise your hand and we can get a microphone too. But in the meantime, just I do want to continue down that line of the rental rate. And I think to your point, one of the things that's been particularly surprising to me has just been perhaps how disciplined the broader industry has been, right? It makes sense a lot of sense with your technology to how you can be very disciplined as to how you implement pricing. But the broader industry, despite local nonres or just the pressure around construction has remained fairly disciplined. And you talked a little bit about on the value that perhaps you bring to the table. Could you just talk a little bit more about that other 70% mom-and-pop kind of rental houses or just the degree of discipline you're seeing across the broader industry. Because oftentimes, there is a lot of focus around how much supply perhaps and how fast others might be trying to grow and whether that's going to destroy some of that discipline. And yes, we haven't seen it. It seems to be remaining pretty good.

I mean for so many years, I can remember in my 30 years in this business and 15 years as CEO. I can think we just need the test to prove how much this industry, this business has structurally progressed. And therefore, one of the outputs of that is great discipline, not just in terms of a smart investment but also in terms of pricing. I think we proved that during COVID. Capital Markets forgot quite quickly about that. Now more importantly, we have 28 months of evidence. And by that, I mean, from about January of 2023, through about April of 2025, we had 28 months of decline in local nonres construction. So this is being defined as nonres construction below $0.5 billion without manufacturing and it declined at a rate of 21 million square feet of completions outpacing starts per month for 28 months which also coincided with a relatively brief period of the industry being overfleeted. Over that 28 months, we increased rates by over 4%. At the very end of it, we held rates flat, the industry progressed rates. So what better testing ground than for the industry, especially the tail, the 75% that you're talking about, when their primary market completely dried up, 22% decline from what the period before growth was versus that period of decline and look at the stability of rates. So that really tells you again a bit about the customer psyche but also that is just an output of structural change, where you really kind of have a couple to a few leaders out front all those littles follow. Rest assured, they've experienced inflation and wages, they've experienced life cycle inflation in assets. And if we've experienced it, they've experienced it significantly more.

It is very impressive, certainly, like you said, they've proven that out. And I guess maybe to that point, ultimately, going back to your initial point on the 7.4%, I think 1Q growth on general rental, I wanted to unpack that a little bit more because I think there is that discipline in the market, but more broadly, you're still doing a little bit better than what we're seeing in terms of general spending for construction. So can you just help us understand, I guess, how much of that is perhaps winning with strategic accounts, share gains, perhaps it doesn't sound like there's necessarily a recovery happening in local commercial, but ultimately, was there anything around the local side that you saw any benefits to that growth?

Well, look, certainly share gains, and we know this. We look across all of our deciles. So in other words, large, medium and small we're winning. If we look at the primary end market that the industry serves there, obviously, our business is much more diversified. We have construction, nonconstruction. So we get a bit of a live events there. So we have a broader TAM even for our GT same-store. But the other thing that's really driving that is there's a bit of rental penetration going on. And if you think about sparks for that, let's face it, rental penetration, even pricing. We faced all tests. We've gone through periods of ultra low borrowing, some thought rental penetration would regress instead rental penetration progressed, went through -- we went through periods of higher cost of borrowing, same thing happened. There's something about inflation. Inflation when we see that or goes higher for longer, there's really certain pockets that encourages deepening of rental penetration. One area that's of interest is municipalities. So municipal spend, municipal spend will be looking for opportunities to shift from ownership to rental, sort of the #1 thing, the shift from ownership to rental in general and we see municipalities doing that. So the growth is coming from multiple facets.

And maybe just to unpack that a little bit more because I think you have a very helpful slide about all the different specialty markets and how much more potential penetration there can ultimately be. Can you just -- for those who may be not as familiar with it, can you just remind us of which ones are perhaps the greatest opportunity in your eyes in terms of continued kind of penetration over the near term.

Yes. And, you're talking about Slide 55 from our investor deck. And what that does is that shows at the time, there were 12, today, there's 13 specialty business lines. And there, we've assessed current rental penetration plus rental penetration that we think is a natural resting space, so to speak, for each of those lines. When you compare specialty to gen rents, one of the inherent differences is, they're just far earlier in their journey of rental penetration, take climate control, power generation, et cetera. So overall, you're about 10%. And we see one of the big drivers there is this customer demand that's looking for breadth in solutions and breadth and expertise and we're seeing that move. So we're excited overall about the specialty space. We reiterate our confidence of achieving $5 billion in specialty revenue by FY '29.

Maybe just perhaps unpack that a little bit more penetration is clearly a big aspect of that continued growth. But just help us understand like what is the kind of the sustainable growth maybe at a base level for specialty because there are so many different businesses. I think sometimes it's hard to kind of underwrite and model what is kind of the steady cadence of that. So how do we get comfortable and how do you get comfortable beyond that penetration?

Yes. I mean, look, it's been a long time that we've seen specialty compound year after year after year, 25% in Q1. Again, I'd say reiterate $5 billion. So do the CAGR from here until 2029, and you'll get that at least. And it's going to be richly spread throughout those specialty segments. If there are 1 or 2 that we're most excited about, certainly, energy is one. There's significant demand there. We all understand that. It's more than just data centers. And we are as poised as any one company can be to get more and more of those gains.

Maybe since you brought up data centers, and I think the mega project ties in, I wanted to touch on that a little bit more. But just you said that around 80% of megaproject opportunity are still upcoming. And I think we've heard a lot about kind of the pipeline, but maybe you could just kind of go back into that and help us understand like what degree of visibility you have? What is your pipeline telling you about the composition of the product or the projects that are coming to market and the timing around that? And just any shifts or moves in that pipeline that you've seen based on all of the geopolitics, interest rate moves or other kind of macro factors.

Sure. The pipeline you're referring to is really more -- those are Sunbelt project awards. So that's not the overall pipeline, which I'll come on to. But the overall Sunbelt project awards, where we're either primary exclusive on-site or a very material supplier to when we look at the distribution between -- about to start to complete that's where we are. We're 30% either right on the cusp of starting or in the ramp-up phase. We're 50% in the crest. That's the richest part. So if this is a 3-year project, you kind of have 6 months at the front, 6 months at the back and 2 years at least in the crest. So 50% in the crest and therefore, 20% in the ramp down. What's important to understand about that is, again, that's just the wins. For every project that starts, we're getting at least 1 project in the funnel that's being added to planning. So we look at the distribution of mega projects, we actually -- in our investor deck, would have been -- you would have seen we would have -- we would have telegraphed that from May of 2023 through April 2029. So the numbers I'm about to quote add 2030, FY 2030 for us so April of 2030. And that's about almost $2 trillion landscape of mega projects value. And within that, it's remarkably diverse. Data centers are 13% of that. Energy is 21%, 22% of that. We call it transportation. So I think infrastructure is 25% of that. Semiconductors only 3%, then you have health care, renewable, entertainment. So it's really very broad. I mean, look, data centers are a rich environment for us. They're a project that we do remarkably well on that's looking for that full breadth of service. But the key point of that is we consider this mega project megaproject era, not a flash in the pan. They're all the driving factors that we know about that. And what's more, we've seen them tested in low interest rate environments, higher interest rate environments, low inflation, high inflation, just like ground penetration.

Yes. That's good to hear, especially the diversity of that pipeline that you're seeing, especially thinking longer term, maybe to that point of mega projects and ultimately, the impact on your economics, I think you think in the past, you've talked about perhaps initially margin dilutive as you have kind of that load-in phase utilization ramps up, then perhaps 30%, 40% towards kind of 70% to 80% with the mature pace potentially lasting several years. So just given the unusually large number of kind of recent wins that you've had, the importance of these mega projects and just that current life cycle, can you just talk about ultimately that wave of investment? Where are we in terms of that? And then just how meaningful could that become in terms of margins or ROIC, help us understand that cadence?