United Rentals, Inc. (URI) Earnings Call Transcript & Summary

If I can add one thing. One of the other opportunities we have is to be able to manage moving the fleet across the metro. So technologies that we use don't necessarily limit branch-to-branch, but within a specific metro within a specific geography. The branch itself is agnostic, and it's more a function of having that pool of fleet that we're able to deploy appropriately to a customer within that area.

That's -- and we'll switch to the fleet productivity, Matt. And as you think about the outlook for this year, I think you talked about getting in excess of inflation. So being positive for the full year, coming off of what was a pretty tough fourth quarter. So how do you, I guess, one, that your confidence that you, obviously, wouldn't have said it, if you didn't believe it. But your confidence level in that coming off the fourth quarter? And then, maybe within that, what within the components that make up fleet productivity, where do you think the greatest upside was?

As we talked about in the Q4 call, I mean we had extra capacity throughout the year. Part of it structural and expected with the deals that we've done. We didn't expect time to run high. And even though we're not giving the individual components because it's very focused on how these 3 interplay with each other, it's obvious that the capacity was the greatest opportunity, and that will be our -- one of the reasons why we'll get to positive fleet productivity this year. And it's inherent within our guidance. It'll -- it will be less than the first half of the year than in the back half of the year. But certainly, as we get towards seasonal build, to the end of Q2 and Q3, we expect that absorption of that capacity to certainly drive our fleet productivity positive. Frankly, we wouldn't -- couldn't -- can't reach our guidance if we didn't believe that we can do that. So it's -- although not called out explicitly, it's inherent to our guidance. At the back half of the year, we'll have positive fleet productivity and should have fleet productivity positive for the full year.

Got it. And just in terms of that tension that always exists in terms of balancing time and rate. Do you -- just talk to how you manage that across the branch level, where parts of the market where utilization was hit a little bit off, a little harder, and then, relative to other areas. So is it managed again, at the branch level? Or just talk about how you kind of toggle between the 2.

Well, actually, first of all, let's talk about -- first of all, the -- and I've said this, I'll take this for the opportunity to say it again. Fleet productivity is not at all a change in the field, it's a change in the way we communicate. The tenets of strong rigorous rate management and utilizing your assets have not changed the branch. And it's still a very, very strong focus. It's at the outputs, and the interplay of mix is what we've changed from a communication perspective. What I would say is that it happens at the rep level, we're talking about rate management. So we have a proprietary pricing algorithm that even at the rep level, as I'm quoting you an asset, I can get on my phone with the suggested rates. So this is a very rigorous process to continue to make sure that we're getting the fair rate for the services that we provide. And that is rep-to-rep, branch-to-branch and rolls up to the overall company. The fleet management part of it from the asset allocation perspective and the asset absorption perspective is done more on a asset class, right? So category of assets have different attributes and different goals for them to achieve. And the branches have to earn their way, not just to new capital, but to keep capital. So this is where we get to use this fungible fleet throughout a network that we talked about. We'll aggressively move assets as we have to. 2019 was a bit of anomaly, getting through the absorption of the BlueLine integration. We kind of let things sit a little bit longer than we normally would. There was obviously a disruption to the external focus of the branch, as they were worried about pollinating, cross-pollinating employees into 1 cohesive branch, the -- getting the cost synergies out. And we're probably a little more internal-focused than external-focused. That will not repeat in 2020. We'll be much more aggressive on moving fleet, if it's not absorbed at the local branch network. And that's the way we see how we'll drive this positive fleet productivity. The combination of managing both those important metrics.

And what role does mix play in a backdrop where it should especially continue to grow on one hand, everything positive for mix, but then you've got, as you mentioned earlier, some challenges within industrial? So do those balance out? Or what -- how should we think about mix in that outlook -- kind of in the outlook that you've provided?

So it's definitely a factor, in terms of how it plays into what ultimately, the fleet productivity will be for any one period. And that it's not just about trying to drive for time or drive for rate, but really to look at the overall fleet mix, growing specialty, but also as we think about the mix of gen rent fleet that we're renting to customers as well, right? To the extent that we continue to move towards more profitable fleet mix, you're going to see that show up in the mix calc, which is why the move to fleet productivity for us makes complete sense in being able to provide an output across the interplay of those 3 factors. Because decisions aren't being made for -- to drive just one factor, it's actually across the board.

Got it. Okay. Yes. Maybe I'll switch to specialty. And Ted was -- it is great, helped to set up just a great day with all the team there in New Jersey, just to highlight the various components and parts of that story. Maybe talk to -- and Paul had outlined there that a target of getting that business to like $3 billion-ish in revenues in 4 to 5 years, which come a long way in a pretty short time. So maybe just talk about some of the key growth drivers that you foresee there, which I presume was going to be a little bit balanced between organic and inorganic?

Even if we don't have any M&A, so we did achieve -- I remember when we set that $1 billion goal many years ago, but then the $2 billion goal, which we achieved faster was because of M&A. But that goal can't be reliant upon M&A. Now we get there faster if there's some M&A opportunities that meet the threshold, the high threshold, that Jess inferred to earlier. But you're not talking about whether it's in '20 -- whether it's a 4-year or 5-year CAGR. It's going to be somewhere in that 6.5% to 8.5% organic growth, without any M&A to get there. So we think -- we certainly see a path. We will continue to invest in specialty growth. Part of it's going to be penetration, part of it's depending on product line, building out their network, right? So we still have different levels of maturity in the different specialty businesses, but we think there's ample organic opportunity to reach that goal in the next 4 to 5 years.

I'm sure it varies widely within that. But is there a way to -- as you think about what rental penetration in gen rent in the whatever, 50-ish zone. What -- if you summed up specialty, any way to size that in terms of rental penetration?

It would be a mixed bag depending on the asset class. So trench would be the lowest, right? So you've heard the trench guys talk about it, you've been to Specialty Day. Noncompliance is the single largest opportunity that the whole industry has including United Rentals. Even though we're the largest trench player in the space -- in the world, we can get plenty of growth out of North America to the U.S. and Canada, just strictly by continuing to eat away of noncompliance and drive penetration of the problem. We don't have to take an ounce of market share to get growth in the trench business. Power. A little bit more mature, right, depending on what level of power you're playing, and that's why we'll continue to add products to our Power & HVAC group. So it depends on each asset class. I wouldn't guess what the overall penetration is, but I would say it probably lags gen rent overall in specialty. It's a little bit more of a solution-based product, more reliance upon having the talent to do it as opposed to, if I'm just dropping off a boom lift or a skid steer, and you've got a little bit of engineered solutions in a lot of these products. And so I would think people and talent is probably more of an inhibitor than fleet to penetration. And I think as we continue to invest in the people, we'll continue to get some secular penetration in the space.

But from a profit standpoint that presumably, the discussion to drop off that, in your example, drop off the boom lift that rates probably first, second and third part of the discussion, where it's especially, I'm assuming price or rate is a lot further down in terms of...

It's an engineered solution, right? So it also depends on the end market you're going to, but I would agree. I mean it's more about more solution-based. A lot of these products, even the drop of stock products, you're there to drive productivity and safety for the customer. So how you -- the broader your usage of the asset and the problem you're trying to solve, gives us more opportunity to help the productivity save the customer money, and that will dictate the price.

Got it. Maybe let's start with the used market. It's always a little difficult in just looking at the results from a margin perspective. Is there so much noise that can kind of filter into that? But just -- and I don't know if you read Ritchie this week, but -- the big Ritchie auction. Just update us in terms of what you're seeing from a used standpoint, and what you're assuming or what's baked in for 2020.

Jess, do you want to...

Sure. So market continues to be healthy for us because, as you know, Tim, we sell the majority of our used fleet through our retail channel, which, in the fourth quarter, was strong, especially considering we sold about 40% more fleet through retail fourth quarter '19 than we did fourth quarter '18. So as we think about 2020, the look back to 2019 and using the auction markets, more than we had in the past, was really more a function of working through the beat up fleet that came off of the oil patch, right? We think we'll still continue to see a little bit of that bleed in through, call it, the first half of the year, first quarter. But as far as used still continuing to leverage a strong retail market, that's really how we're thinking about 2020.

You mentioned oil and gas. When you think about, like from a full cycle perspective, the profitability of oil and gas, is it -- I mean is some of the costs may be a little understated when you think about, I'm running this asset at this price, which is great. But then, am I flowing out through in terms of what I'm ultimately going to realize?

It lags, right? So full cycle, it's still profitable business. But it's a great point that it lags. So when that fleet is out there, earning its money, it's worked a little bit harder. You get a little bit higher rate, by the way. So you get a higher rate on the product when it's on rent, you're probably doing a little less R&M to it because it's not turning as much. It's out there on the rig and it's staying out there. Then when you bring it back, you got a lot of catch-up to do, quite frankly. So there's just a timing difference in all that R&M, and that's why you see it as the rig count dropped 25%, our volume dropped 31% in Q4. You see all that coming back. Now you're playing catch up with those assets, and that's probably more of the attribute that's unique to oil and gas because the assets just stay parked out there. Really worked hard, which is why we charge a higher rate from when they're out there.

And that catch-up is the $12 million that we talked about in the third quarter and the $8-ish million that we talked about in the fourth quarter. That lagged R&M that hit us all at one-time as that fleet's coming back, and we're making the decision of, do we put the repair into it? Or do we send it off to auction? You get that timing blip of all of that R&M hitting you at one time.

The important thing is we'd only serve the oil and gas market, other than maybe a handful of pumps that are specialized with fungible assets. So we're not going to either have oil and gas specific assets that we're trying to rent in there that we can't move to other markets. And I think that's important as we flex at one point in time, pre-'14, this was almost 12% of our business. Now it's under 4% of our business, and we'll continue to manage that appropriately. But full cycle to the original question because we did the work, because we had to answer this question for ourselves, even with all the lagging pain that we've absorbed for the last 2 quarters, it's still profitable business.

Yes. 4%, but it doesn't take up 4% of the discussion...

No, no, no. Never has. No.

All right.

What, maybe just in terms of -- you mentioned R&M, and balancing R&M versus fleet age. And again, this goes back to the point of how the mix is changed, and especially as you've grown via M&A, that's presumably playing a role as well. But a fleet aged at 50, 50-odd months or close to it, did you get them to the point where that limits your ability in a potential softer environment to age the fleet further? Or I mean, are you starting to get to the point where there's a little bit more of a trade-off between R&M expenses and extending that fleet age?

So some of it, to your point, is the attributes of the assets we bought, right? So you could see it within the data. When we bought Baker, right? So we bought tanks that has 25-, 30-year life assets, significantly different profile than our standard base. But when we look overall at the fleet age, we are -- and that's why we're saying we're going to spend $1.9 billion of maintenance Capex, inflation-adjusted for the 165, whatever, a net ballpark that we're going to sell, it's because we want to keep that fleet age in the high-40s to 50 range so that we continue to have that headroom for a day, when there is a downturn, and we have to turn off the inflow. So we are very deliberate about managing this fleet age so that we do have a minimum of 12 months headroom. So we still feel we have the headroom, the difference between 47 months and 50 months is not the difference. It's can you get it to the mid-60s, without too much R&M, extra increase in dilution of services to your customers? And when we look at that, you guys could see the whole number. We look at that asset-by-asset class, within our rail useful life, or you'll hear us refer to RUL rules that will make those decisions on.

And that...

Is there anything -- sorry. Go ahead.

Sorry, Tim. And that RUL will actually include cat class-by-cat class, the anticipated R&M, and where that breaking point is for us to invest in the repair as opposed to putting up for sale.

Is there anything inherent within the equipment today that compared to say, 5 years ago, that makes it more or less of a -- that puts tension on that, or one way or the other? And I'm -- what I'm getting at is Tier 4 engines being a bigger part of -- as that becomes a bigger part of the pie or it's just more technology and sensors on the machine? Does that put any -- is that factoring at all?

We haven't had it long enough, right? So Tier 4, specifically, I don't think it's been around long enough and broadly enough to really have that answer yet. We're not anticipating for that, but we'll keep an eye on it. We -- obviously, we aggregate as much data as anyone, as far as what we're seeing in these changes that have evolved in the system's overall of this equipment. Whether it's Tier 4, or whether it's computer boards running the circuitry on the sensors versus the old hard wire. There's a lot of changes that we track, along with our OEMs. We're not anticipating that there's a huge issue going forward, or any kind of wall of change that we're expecting.

Got it. Maybe talk about digital and just as total control has become -- as adoption rates have gone up, and that's become a bigger deal. Just what benefits that accrued well to the customers and then, ultimately to URI? And I'm just curious, if you're able to get -- actually able to get customers to pay for it? Or is this just going to be increasingly become kind of a cost of doing business?

So total control has been around for -- at different levels for about 18, 19 years by now. But obviously, much different today as you can embed the investments we've made in telematics into the platform and into the system. So that's a subset of our national accounts. We're using total control, working tremendously. Our real goal is how do we take that platform to a broader piece of our customer base. How do we get contractors on job sites to value the data that they can be exposed to or that they can utilize to drive safety and productivity? I would say we're 80% there in the use of technology internally. It's embedded in systems, even with us being the leader in usage of technology in our space and in our industry. I'd call our industry overall as a lagger. And I would say that we're only 15% there at the customer-facing opportunities, with total control being a great proxy for what could be out there. But we spent the energy and the resources to have over 300,000 telematics devices on our rolling stock, on our assets that we designated where there can be value, and where you're getting that use internally. I think now, the next opportunity is to show a broader customer base, how they can get value out of the information we can draw from that investment. And we're still building that. We continue to make improvements to our platform. But I think adoption is still lagging. It's something -- it's a great opportunity for our customers and for the industry.

Interesting. Any questions here? No. Okay. The -- just going back to the CapEx and that -- the range you've outlined for this year. What are the milestones where you say, those decisions aren't obviously going to remain in February. But at what point is it April, May? Do you have to, in terms of your commitments to the OEMs, just how you can kind of flex that as you go through the year? And what will be the -- obviously, the demand environment will impact it. But what will you be watching in terms of indicators that will signal where you want to fall within that range?

You -- we won't. So Q1 is such a small sample. So you won't see much change after Q1. It's when we get to that seasonal build of April, May and going through to August, where if we see better than anticipated absorption of the fleet or -- and demand, we may pull forward Q3 capital, pull it flight. So we have slots that were pretty much the largest customer for just about every 1 of our top 10 suppliers. It's important that we work together so that they can plan their production. We'll have the ability to pull forward before we increase. So you wouldn't see an increase or a decrease, for that matter, in our capital spend, until we get to the midpoint of the year, where we'd see how that seasonal build work, and how we absorb the extra capacity we had, and what have our spend been on specialty with cold starts, which you could almost call it given, that we're going to spend $150 million to $200 million on specialty, regardless of where we end up in that range, to fund cold starts in the organic growth that we have planned for specialty. So the flex in that $300 million range, really, we wouldn't really see what that would be until we got to our Q2 call.

Okay. And last one for me. Just on the oil and gas [ weakness ] is well discussed. It -- was the kind of the measures, the austerity measures and the pullback and freeze in CapEx, in the -- directly in the oil patch, has it been enough to kind of trickle into having a broader secondary impact in those -- in the more energy-intensive regions?

I wouldn't say we're seeing a knock-on effect in the other businesses surrounding that area. As I've said before, that impact that we had in '15, '16, which really had that knock-on effect because people were building the infrastructure around it, whether it's a school or shopping centers, the housing, the multifamily dwellings. Everything that was going on in that area is pretty much built out, because the oil and gas business didn't get even back to that peak. There was no extra infrastructure to have to build out this time. And therefore, you didn't have that double-down knock-on effect within the areas that were serving the oil and gas.

Perfect. Right on queue. Thank you.

Great.

Thanks, guys.

Thanks, Matt.

Yes, yes.