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

Thank you. Absolutely one of those last-but-not-least situations. Our last presenters today, United Rentals. Obviously, go back to when you guys were going public. So not to date myself, but obviously, it's been an interesting ride. Obviously, you guys have done a tremendous job. Particularly, the last 10-, 12-year run, I'd say, have been pretty impressive. For those who want to ask a question -- for those who don't know me, David Raso, I head up Industrial Research for Evercore ISI. But for questions, feel free just to put them in the chat room as you think of them. We won't have a formal Q&A at the end. Just as the questions come in, happy to ask them on your behalf. And also, I understand no slides, just kind of an open Q&A. For those who don't know -- everybody knows, Ted, right, Ted Grace, VP of Investor Relations; Jessica Graziano, CFO for United Rentals; Mr. Flannery, Matt Flannery, CEO of United Rentals. Obviously, happy to have all of you here. So thank you. Unless anybody wants to have any opening remarks, I know I'd start with where the leverage will be toward the end of the year. Feels kind of about that time. So I'm just curious, when you think of GenRent versus specialty, I don't know how you all you think about -- maybe I assume not GenRent internationally but maybe specialty internationally, can you give us a sense of -- do you also feel you need to know what the infrastructure bill looks like a little bit first that might influence your appetite? I know it would be for me, I mean, if you knew that's where the guts of the infrastructure-built growth could come. Hey, we are a little light there. We need a little more X, Y, Z. And we won't name names, but, at the same time, the economy reopening makes some assets more attractive than, say, other parts of the cycle. So I'll just kind of leave it open ended there. How should we think about how you're thinking about the M&A backdrop and weaving in the knowledge hopefully coming of what the infrastructure bill will look like?

Well, David, thanks for noting the hard work that Jess and team has done to get the leverage down to the level that it has, and that we'll continue to do. But we are definitely thinking about our #1 priority for capital allocation is growth. How much of that is organic growth versus acquired growth frankly will depend on the robust pipeline of M&A that we always have and what gets to the top of the list and gets over the very high bar we have. With that being said, the fact that we're just about through COVID, the fact that we think we're going to lap all of our tough comps here in March and we think get returned to growth is going to be an impact in the models as we model potential acquisitions. We do have a lean towards specialty and any new products, but we're only 13%, 14% market share here in North America. There's still ample opportunity for tuck-ins. It's really about what's going to pass our 3-legged stool when we talk about the strategic, the cultural and, most importantly, the financial hurdles that we have before we would close a deal. And can we be a better owner of it? We think there are some opportunities out there that we could accelerate with M&A, but we are very focused on growth. And we're going to control the organic path aggressively because we do think that's a good opportunity for us as we enter a new growth cycle. And if we find specialty targets, you could expect -- that are reasonable, you can expect us to move on that aggressively.

And on the GenRent, over the last 10 years, a lot of the old number 4, 5 through 10. There's obviously still one left. But in general, GenRent of some size. There's less opportunities, but there's still some, and it's all relative.

Yes.

Would those acquisitions not be as attractive because we maybe hit a threshold of synergy opportunity on consolidating branches the way RSC and URI make sense? But RSC, URI and a third player of size, the synergies aren't the same? Or am I over...

Yes. I would say at this point, our acquisition strategy will be more about capacity. Certainly, there'll be synergies on the back end of any of these deals from a corporate structural cost perspective. But we certainly wouldn't buy -- whether it's a local business, a regional business or a national business, we're not at the point where we need to consolidate into the network from store closures. Our acquisitions would be about a faster way to grow, and it would be about capacity, which means more than likely we're going to need the branches, we certainly are going to need the fleet. And most importantly, we're going to need the people. That's the toughest capacity to get, is continuing to grow employee base that want to work hard and serve the customers, and that's one of the big levers we use M&A for versus organic if we found the right opportunity.

That's how I thought about knowing what the infrastructure bill provides changes the appetite of -- end of the day, more people and more fleet that you can get in one shot. At the same time, depending on the price you're paying for the acquisition, it's not bad to buy a fleet that's also a little bit younger as well. Should we think of timing of a deal just given the seasonal aspect of the cash flow? Anyway, this -- we'll probably get an infrastructure bill, we hope, before we're making any bigger decisions on M&A?

That sounds like, David, you might have an idea when will we get an infrastructure bill. I've been waiting for that one for a couple of years.

That's easy. No, I didn't say -- it's a phase...

If you know something, could you tell us?

We just want to...

All kidding aside, assuming -- I think we all understand that at this point, an infrastructure bill has bipartisan support. The demand has been there for quite some time. And you're starting to feel that we're a little closer to it than further, as we have been for a couple of years. We view that as a '22-and-beyond event. And we think it would add significant growth opportunity that would model into any deal. It doesn't necessarily mean I would need to hear an announcement of an infrastructure bill before I felt comfortable closing a deal. We have growth opportunities beyond infrastructure. Infrastructure is probably the largest single impact we could have. And the sooner it comes, the better from a '22-and-beyond perspective. But we think there's growth opportunity right in front of us in many of the sectors that haven't been as negatively impacted from COVID. And then in the industrial side, specifically petrochem, as the world starts opening up again, I believe there's opportunity in the back half of this year and beyond for some of the spaces that have been challenged by COVID. So we see a lot of growth opportunity.

And some of the opportunities where they're fairly small businesses for you today, they lend themselves to an economy opening and people gathering at live events or whatever it may be. When I think of the waste business, the United Waste, for example, how do we think about that business as something we want to scale up? Or is it -- look, it's having a nice run because people are cleaning those porta potties more than they ever have in the past. But structurally, it doesn't offer enough differentiation on the product, that it's not really needed in the portfolio. Would we want to scale that business up?

I wish -- we have an organic growth plan for that business that we're working. I think you have to think about our goal is to continue to supply our existing customers with products they don't use. I think when you're talking about getting into portable sanitation business in a big way, you're dealing in a much broader audience, so I don't feel that's necessary for our success in that product line. But certainly, not diminishing some of the opportunities that are out there. But I think for us specifically, we're very targeted on what we want to do with additional products. Not only does it add growth, but if we're focused on deeper penetration in existing plants and projects that we're on, we're talking about building value and a competitive moat around the overall value proposition.

And when you think of specialty -- and, again, half a turn of EBITDA is nowadays $2 billion for you, so it's a material amount of money. When I think of specialty, when I also think of that kind of wallet, not saying you have to spend it in one shop, but is it another leg of specialty? Or do you already have the core 4 or 5 verticals that would just be stacking on top of those?

I would say that's an end strategy. I think there are some products that we don't carry today that could have opportunity. You -- we usually would introduce a new product by M&A like we did with National Pump, if you recall. And then adding Baker Tank to that, we made it a much bigger business than it was. But I also think we have headroom and penetration opportunity in our existing specialty businesses that we have today. So I wouldn't say that we're locked in on it, it being an either/or. We're going to continue to grow our existing specialty business organically and with tuck-ins that are appropriate. And if we see new product lines that meet the threshold, we're not afraid to add more to the portfolio and help serve the customer.

And given that Baker gave you a little bit of a footprint in Europe, how comfortable are you internationally with specialty?

I think we'll continue to grow incrementally on that business. Actually reviewed a plan recently from those -- from the team out there, and we feel good about that. We're more educated today on international than we've ever been, having had a dozen branches in Europe and learning more and more about it. And I would say that we'll continue to grow that existing business and learn more. I wouldn't project that we're ready to go all in and trying to duplicate what we've done in the U.S. quite yet.

I know the answer is always more than you're willing to give them. But to gauge the appetite of your branches, we know the CapEx guide, what -- how much do they ask for?

Yes. Well, I would say that we are -- the field's growth goals organically are aligned with our growth goals organically, right? They realize that we can't wait for a deal to come. We've had -- we've been blessed with a lot of great targets, a lot of good deals that we've done over the past few years. Now we have to make sure that we're driving the organic growth engine, and the field's desires are very much aligned with that. I think they're actually excited for that opportunity. And if we accelerate it with smart M&A, we'll certainly go from there.

But when it comes to CapEx for the year, Jess, if -- there's always that dance of they ask for more than you're willing to give. I'm just trying to get a sense of the -- not saying it's prudent to throw more fleet at it. The industry is making that turn. You have to always be careful with too much fleet coming in too quickly across the industry. But I'm curious, from kind of man or woman on the ground right now, how much CapEx they would like to see versus what you're giving them. Where is their appetite for fleet expansion?

So like Matt mentioned, we're aligned with the field in terms of the guidance that we've given and the CapEx that we expect to deploy. However, we made it very clear to them actually during our annual management meeting in January that for those markets where they know that they can do more and we have even more growth opportunity and there's the opportunity to land more than what we've planned, right, we have an appetite to want to grow and the flexibility, right, the beauty of being able to flex that CapEx up if and when we need to, right? So we're definitely not going to take that off the table. And every branch manager will tell you they have to earn the fleet they get, but we're definitely supporting growth across the network in -- wherever we see it.

Yes, there is a growth to your tone in the channel from your organization than maybe in the last couple of years.

A bit.

Obviously, hopefully, they're just aligned inherently. But was there any tweaking to incentives this year or something that makes it a little clearer on growth is the focus?

No. I would say that all the way from a branch manager, well, even from the sales rep to Jessica and myself, it's all about profitable growth, right? So we wouldn't change that comp program. If you got too out of balance with that, I worry we had sent an unattended message. And the industry has done such a great job coming through COVID responsibly. We certainly, as a leader in the industry, wouldn't want to do anything that pivots too hard on the growth lever as if that's all that matters. The reason that we've all gotten through it is because we've been smart about the business, smart about the growth. And we wouldn't do anything to track from that. So no changes.

So that's what I was trying to gauge. So this is more of a -- it's an initiative, but there's no comp changes or the account merging that we went through there for 1 year or 2, that's behind us. So in a way, hopefully, they're in better position because now there's no -- you took this large account away from me to give you a small account and the -- we had consolidated those account debates and fleet, so that's great. The used equipment prices starting the year pretty strongly, how is that influencing your fleet decisions? And just in general, when I hear strong used prices, I think a greater and greater percentage can be sold retail, not having to obviously go through auctions or brokers. Is that a fair assessment? Is that how the year is starting?

It is. Yes, it is. We were very pleased with the strength of that retail market that we saw through 2020 and frankly the ingenuity of our sales team to pivot to selling that fleet through to our customers largely using technology and Zoom calls and Facetime and all that kind of stuff. And so that as an initiative and the opportunity that we see, that you actually see within our guide of the proceeds we do expect to generate this year is to have another similar year in used sales, and we're encouraged by that.

But no changes from the dynamic of we have a better used market than we thought, hey maybe it's a chance to reduce the fleet age a little bit? Or just the incentive to buy new is greater when you can sell higher for used?

There was no real shift that caused us to make any kind of change in action or change in structure as a result. It's just the continuing strength that we see, which we talked about before is a great indicator with our customers buying that used fleet that they're going to put it to work, right? So a great indicator of the work that's out there.

The costs that are returning this year, some of it is just natural, right, to assume that the salespeople are out more running around, T&E is going up, medical premiums or going to visit and get reimbursed. Has anything surprised you? I mean you feel like maybe the fuel costs or some of the logistic costs, are those the key areas where maybe there's some negative upside from the cost front? And is there anything offsetting that?

There haven't really been any surprises. Frankly, it's too early, right, just in terms of kicking off the year. And where we would see that in any material way would be when the season starts, right? And the activity -- the costs will then follow the activity. But right now, we've taken a position on how we think those costs are going to start to normalize. And T&E is a great example, where, in our plans, we assume that the teams are going to be back in the field in front of our customers, which, frankly, we want at a particular pace. Right now, depending on how things continue to open up and vaccine distribution and making sure that folks can get in front of customers in a real safe way, we'll see again how that shakes out against the way that we've planned. But there's -- right now, there's nothing that's surprising us that we don't still feel comfortable with what we've underwritten.

Something unexpected that hopefully would be a net positive for your business, the situation with the storms in Texas up through Oklahoma, how has that played out? And also, the oil price is up. Texas still had their sporadic -- the Tesla factory to the Microsoft data center. But it's been generally a little slower market for you because of the oil patch. Now with oil improved, the rig count is starting to turn a little bit and then you throw in the storms, can you help me quantify a little bit? I mean Texas is obviously a very important state for your business. Can you take us through the impact and how to think about it?

Sure, David. I mean, first off, thank goodness all of our employees are safe there. But we understand the communities we serve there were deeply impacted by the very nontraditional weather, the events they've had. And I think they're still struggling with it. From our business perspective overall, early on like with any storm or disaster, hurricane or anything, you'll see a short-term dip, and then our emergency response teams come in and do a great job in offsetting that. Net-net, I think we have to see if there are some infrastructure challenges that are a longer-term positive from it. We don't have visibility to that right now. I do know some of the plants probably had some damage because we've done some emergency response in some of those issues, specifically in our specialty business. I would say net-net, not a large enough impact to call out but certainly a positive and not a drag.

Got it. Okay, not a drag. When I think of the opportunities around an infrastructure bill, just so we can digest when we read it for the first time, hopefully it does come to fruition, to think how, Matt, you might sit home and read it and kind of understand your reaction, and also you guys have been pretty involved with obviously the different organizations in D.C. that have petitioned for infrastructure for God knows how many years, what are you hearing from your D.C. contingent? And again, how would you think of what is most advantageous for United Rentals in an infrastructure bill?

It depends on how broadly you define it. But let's just talk about infrastructure. In general, road, bridge, airports, cabling, I think that...

But it could be broader, right? I'm not saying -- what if it's broadband rolled out in rural areas? You really have -- the bucket truck demand for 5G is booming right now.

Exactly.

Keep it open. What would be ideal?

So we think that the infrastructure spend more broadly is going to be a huge growth component for the next 3, 4, 5 years, not starting probably until about 6 to 12 months after finally a bill passes. We are still not comfortable with what the timing of passing and funding of that bill would be nor have we been for the past few years. But we're not waiting for a bill for us to make sure that we're well positioned in that space. We have the people, the customer relationships and the assets, very fungible assets, to go in there. And if we need to add some more product for growth there, we think we can do that organically very effectively. It really would depend on just how broad it is, David. But we serve these end markets with very fungible assets. 90%, 95% of what we're going to put on any of these infrastructure projects are core rental assets. If it's a road and bridge, are we maybe going to buy some more message boards? Maybe some more light tower specifically for it? Absolutely. But we're not getting into big, big yellow. We're not getting into motor graders. We're not getting into assets outside of our core to serve it. So where it ends up in infrastructure, it doesn't really vary too much of how we're going to respond, it's more about how much and how fast are we going to deploy the money to get shovel-ready work in the ground so that we could serve those end markets.

I was just thinking maybe some grid-related items, 5G or things that are, let's face it, up in the air more so.

Maybe they are.

I mean they're up more -- yes, that's how I was thinking of it, maybe more up in the air is better than not.

Yes. Certainly anything elevated, certainly anything that -- where they're going to have to move men and material, it would play more into our wheelhouse versus if we're just handing out paving contracts, right? But I don't think -- I think everybody understands -- at least it's my assumption. We all understand the need in infrastructure is much greater than just paving and potholes. So there's a lot of work to be done there on elevated roadways, on bridges, on overall cable infrastructure, 5G that you mentioned. Those are all great opportunities for us.

When I think about the productivity of the fleet moving forward, I'd assume it's safe to say the second quarter will be positive. The idea that the -- the way the year is starting off and so forth, is there a chance the fleet productivity -- I mean, the market feels, broadly speaking, a little stronger than people would have thought. The fleet that you're putting in, when I think about the chance for fleet productivity to be closer to flat than otherwise, what are the key metrics we should be thinking about, especially, as you said, Jess, so January, February aren't big months. March, right, the next 4, 5 weeks just doing work in the channel, what are the things I should be listening for that could have turned that fleet productivity closer to flat than I would have thought? What are you...

I mean without getting into the specific pieces, right, which, as you know, we don't do, it's really going to be the relationship between them, right? So the biggest opportunity we've talked about pretty consistently is in absorption, in utilization and how the rest of the quarter and even into the second quarter and the start of the busy season, the impact that, that'll have through fleet productivity is, of course, going to have some impact on what happens with pricing, what happens within mix. But the biggest opportunity we're going to have is to get the fleet on rent and some of the capacity that we have to get that fleet on rent.

So I was thinking about if there are some supply constraints from your suppliers, it could -- I'm not saying artificially but kind of boost the fleet utilization, right? Are you getting deliveries on time for the equipment? I know, well, the first quarter is not the big CapEx quarter. But still, are the deliveries hitting the dates they were expected to?

So as you know, David, we do a significant amount of our capital spend for the year in a prebuy, and we haven't had anybody turn away any of the requests to date. We'd be very disappointed if anybody did. But we think we're in good shape. Maybe incrementally, if people, supply chains don't keep up and the market turns faster, maybe on the tail end of the year, could there be some constraints? Maybe. At that point in time, I think we'll be in good shape. I think the ability in forecasting that we have and the prebuys that we give put us in real good shape for supporting the demand that's going to be there for us.

And your needs, especially prebuying and obviously with one of the biggest wallets in the industry, how would you characterize the inflationary pressures that you felt purchasing equipment this year?

We've guided everyone to think about this in a normal perspective. I certainly don't want to talk on open mic about negotiations with our vendors. But there's a reason why we get things done early. There is a certain surety of support that we give our partners and in turn get the appropriate support from them. And we view pricing as one of the mechanisms for our vendors to give us value, just as we do to our customers. So there's many things tied into that, product support, and we were very pleased with our vendors' participation in our product this year.

I know you've never been as wedded to some of the lead indicators for private non-resi, from ABI to contractor backlog, whatever it may be. But there's definitely enough investors that call me like, I don't understand how they're not seeing their customers' project backlogs fade. We see some of these indicators from the back half of '20. Why are they not seeing it? I'll leave that question for you to answer because I have to answer it too often. So you -- how would you answer that?

Yes. I think that no different than the fungible asset base that we have, we have many of our customers -- take out the petrochem business. Take out the specialized contractors that are down in the Gulf states, who are working in refineries around North America, and think more about whether they're mechanical contractors, steel erectors. They're going to go to where the work is, just like we are. And it's one of the reasons why we believe in our strategy of having relationships with the larger contractors, because as work contracts, they're going to sell deeper into the pipeline. So yes, retail is down. We're not expecting anybody to be building hotels anytime soon. But those very same contractors could be working on distribution warehouses, data centers, health care facilities. There's other opportunities. And if you're positioned with the right customers, and we feel that we are, you're going to be able to use your fungible assets to support those people as they find the work they need to make sure they're running a good business. And that's probably a little bit of a disconnect when you just look at the macro data versus engaging with these folks day in and day out through our managers and our sales teams.

So for all those indicators that were suggesting late spring '21, second half of '21, your customer base is not seeing that?

No, I think it depends on what sector you're talking about and what customers you're talking about. But overall, we have had probably a little more confidence. We've probably been a little bit ahead of the macro data. And I think the industry overall has proven that out, that not only is the rental business resilient, but our customers are finding work and therefore need our products to support that work. It's still going to be down in Q1. We've talked about that. We forecasted that. But once we lap the comps of March, we're looking at back half of this year being a growth story for the industry and certainly for United Rentals.

Well, that's a good spot to leave it off, I think. I appreciate all the time you've given us throughout the day today with meetings and obviously doing this large group presentation. So thank you. You're done for the day. Thanks for being with us.

Thank you, David.

Thank you.

I know you have other things you have to do, but I really do appreciate you taking all the time. Thank you so much. And thanks, everybody, for dialing in. I appreciate your participation as well. So thank you. Have a great rest of the day.

[indiscernible], everybody.

Stay safe, everyone.

You too.