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

All right. Thank you, everybody. I'm really excited for the next presenters as our first day of industrial conference continues. Excited to have the CEO of United Rentals, Matthew Flannery; CFO of United Rentals, Jessica Graziano; and the Vice President of Investor Relations, you all know him well, Ted Grace. So with that, maybe I'll open it up -- if you want to give a little preamble of sort of what you're seeing. And I think most people know you're the largest construction equipment rental company in the world, largely a North American-centric in your sales, a little interesting, a little Australia, a little Europe now to throw in the mix. But I'll open it to you. I have questions, I'm happy to start firing at you, but if you want to give any overarching message right now, I'll open the mic to you.

Sure, David. So similar to what we talked about in January on our earnings call, we're seeing a very strong demand in the end market. We feel really good that this has pivoted at some point in '21 from a recovery of COVID to a new growth cycle. And we're seeing that manifest itself where the macro staying intact for us. We talked a lot and continue to talk about the breadth of the demand in our space, both geographically and by verticals. So we're not relying upon any hot pockets for the growth that we're experiencing. And additionally, we feel really good about the supply-demand dynamics in the industry, continuing to foster a constructive environment for the rental industry. So we feel just as good sitting here today as we had back in January and excited about the 2022 prospects.

Okay. With that, I know with the topic of the day, obviously, with Russia and Ukraine, just curious how you're digesting that news. Are you hearing anything about demand maybe positively impacted by higher energy prices or other aspects of your cost structure being challenged due to what's going on there and the impact that's having on inflation? I'll leave it open ended, how do you want to answer that question?

Yes, I'll start and ask Jess to add in. So we haven't -- obviously, it's way early other than -- for those poor people in Ukraine, we haven't seen any business impact from this. As you know, we don't have any direct exposure there. But even thinking about from a supply chain perspective, anything that's happening due to the conflict, we're not seeing anything right now. Could there be a fuel price impact, right, which we're all seeing around North America right now? That could have some impact. A net positive of that could be the impact it has on maybe spurring some activity in what's been the one laggard we've had of oil and gas. So whether that's in Western Canada or whether that's in the Gulf states, we were already starting to see that may accelerate due to the conflict. So early days with time. And Jess, I don't know if you have anything to add.

I don't, actually. I think early days is the right way to frame it as I even think through the P&L, right, and the impacts that we could have on the financials, early days at this point and nothing that we're seeing at this point that would really cause us any kind of concern.

What percent of your costs typically are fuel?

I don't know that we've ever isolated them. Ted, I don't know if you have that number handy.

Small number, very small number.

Very small. Very small, yes.

Very small, I mean, would be very low single digits.

And you consider half of it would be recoverable through fuel charges on the [indiscernible]?

Not a big operating cost, David, just to be clear.

Repeat that, sorry?

Cash operating costs.

Yes. And then when it comes to wage inflation this year, while we're on the [indiscernible] inflation, can you help characterize that a bit between maybe just traditional wages and commissions versus any incentive comp?

Sure. So nothing out of the ordinary for us this year as we think about continuing really even through COVID, right, and through last year. And the way that we're thinking about it for this year is continuing really kind of normal merit trends that we've seen, labor costs and increases throughout the organization consistent with what we've seen and nothing that we would call out where we've had to lean in and any kind of extraordinary way to be able to either retain or procure our labor. We've been -- as you know, David, we put a lot of work behind supporting our employees. Our retention is very high. Our turnover is incredibly low. And we see that, really, that benefit play through in periods like this one, where we don't see a lot of issues on the labor side for us internally.

And on the equipment inflation, the equipment purchases, as the years move forward, we're almost into March, being the big wallet that you are in the industry, I'm not sure if this question impacts you as much, but have you seen any OEMs come back for a little bit more than originally agreed upon? And there are some thoughts of maybe the inflation number, which maybe you can offset or not with rates, but just give us an update on how the pricing is going for your equipment as the full year CapEx plays out versus what you [indiscernible]?

As you know, we prenegotiate our 2022 spend. And we're pretty sure and feel comfortable our partners -- to those agreements. We understand the challenges. And that's why we priced in a little bit more than our usual 1% to 2% increase as we told everybody in January. We feel that's sufficient, and we'll go from there.

On the demand profile. I'm just curious when you see -- and there's some positives, there's some negative. You see some of the API data a little bit weaker as a lead indicator. You see the mortgage applications reacting a bit negatively to the higher interest rates. Other indicators, contractor backlogs look pretty strong, C&I loan growth maybe starting to turn back up. So I mean there's some positives, some negatives. You've spoken very strongly about you're seeing robust demand. Just curious, is there anything on the horizon that's making you a little bit anxious about the demand profile? And I can leave it open ended at that, but I think there's some thought out there as well. I'm curious your thoughts on this for demand. The infrastructure bill is more spending. But the limitation in labor and construction, it might be just chasing the same workers and maybe just take them out of the private market to support the infrastructure spending. So just kind of curious some of those demand drivers and that labor issue.

Yes. So I'll answer the latter part first from the labor perspective. For us, David, the infrastructure work gets funded from irrelevant, right? It's basically going to be the same contractors that we do business with, and they're going to have to deal with the labor challenges. And I'd call them challenges versus shortages because we haven't had projects get delayed or canceled because of it. I do think people have to work a lot harder to fill the space that we all hear about on a daily basis, including ourselves. But we think that, that will be overcome. And I think the bigger question is if the macro stays intact and absent any geopolitical impact to that, we're just seeing the reality of a strong end market. More importantly, the forecasting from our customers and our field leaders, which is the additional information that we get over and above anybody else on the call as far as macro that you pointed to, we feel really good about it. So nothing has changed from our view. And as long as nothing escalates to a ridiculous degree on the geopolitical, we think that the end markets can remain intact. And we see infrastructure as icing on the cake, probably not manifesting until as early as 2023, but not really a 2022 event from our -- not a meaningful event for '22 from our perspective or from our guidance.

Any conversations with contractors looking out to projects maybe in '23 or later, where they're digesting the rising interest rate environment? I mean that isn't active yet, but obviously, the 10 years has already moved. Any conversations early days on the rate impact on business?

Yes. Not meaningful from a customer's perspective. I think you'd have to get into developers. And if people are starting to see some capital spend down the road, that maybe they would want to do differently. But we're not really hearing that. That's why it would start to manifest and we haven't heard that yet. Our customer confidence index, just as recently as -- I believe we just ended that at the end of January, Ted, was as high as it's been any time in post-COVID. So we're not seeing that from customers' view.

Can you remind us on how broad that survey is of your customers? What's the touch point on, say, total business?

The sample size is about 900 strategic and national accounts. And then we've got a broader set that's everybody, but the number we quote is strategic and national. And then what you see is the correlation among the entire customer set is -- I mean the correlation is like close to 1.

What are you actually asking them in that? Is that simply your project visibility, growth in your backlog of business? So what do you ask them?

Yes. So it's done during the Net Promoter Score process. And essentially, what they're asked is on a forward 12-month basis, do you expect your revenue to be flat to up 10, up 10 or more and then it's symmetrical than downside? And so it creates essentially a diffusion-based index that we can measure. I mean we get the data on a daily basis because the Net Promoter Score process is done as a form of follow-up.

So when you say highest you've seen, I assume that's an over 10% number then? It's not flat, it's not 10, it's above 10.

Look -- yes, to get your [indiscernible] data is that the percent of customers that see their revenue down is about 2%.

And that's on a 12-month look? Okay.

Over 12 months' basis, yes.

Any best laid plans can go awry, but obviously, an interesting data point to start the year. Inflation, right? You look at what the CPIs are, the PPIs are. A layperson can say, "Hey, this market is tight. Why can't you get rates at least at that high single that CPI and PPI are running." Will you answer that...

Well, I mean we would answer it more from the perspective of fleet productivity, right? And answer it really from the perspective of in an environment like this one, we do expect that we would be able to generate fleet productivity that would exceed inflation, right, an inflation as it affects our business. So not speaking to rate specifically or utilization specifically or mix specifically, but rather as we're managing the business and we're thinking about that kind of productivity that we can generate in a market as constructive as this one with the kind of demand/supply dynamic that's playing through this one. Again, we're encouraged that the opportunity for that constructive top line should be there.

And we felt that way, and that's implied in our guidance, right? We knew what this -- we saw supply/demand dynamics were going to drive the other 2 factors. Now the time utilization by the second quarter should get normalized. We said the other 2 factors would be the opportunity. So we were pretty deliberate about that back in January and, frankly, during our planning process.

Yes. I'm just trying to think about the fleet productivity numbers for the year. I mean there is an element of size of fleet in that calculation as well. But also, the rates didn't collapse as much that kind of mini mid-decade downturn or even last year versus what we saw in '09. So the comps aren't as easy to grow rate that high. But be it rate or a time you -- I would so argue. I mean you wonder why the rate growth loan can't be at the rate of CPI or PPI. And then whatever you get on time is gravy. Fleet growth is gravy. I'm just curious, do you think -- when you price, do you think of it that way at all? As this customer might be seeing higher price increases in other parts of their business, why aren't we able to get a similar rate regardless of utilization or precise [indiscernible]?

Again -- and once again, the reason we talk about fleet productivity is the asset category, where you run all those things. So it's an output -- truly is an output of the decisions you make. But when I think about how were the methodology of how we're approaching our customers, we all understand inflation. We all understand the need to outpace inflation. And we're going to get as much help from that through our relationships with our customers as we can as well as making sure we're driving efficiency. So I don't think what you're saying is any different than how we're feeling about it other than to put a number on it. We do certainly feel there's opportunity to drive fleet productivity well above our inflation that we pegged at 1.5% in a normal year, expecting that 1.5% will be a little bit higher. And we expect to get the appropriate return to offset.

Okay. I mean I was just looking at the guidance, it feels very -- fleet growth is the biggest component. And then there's some 300 basis points, something like that above and beyond that. And there's a little acquisition carryover. But basically, it's kind of whatever, 7%, 8% fleet, 2%, 3%, 4% on -- and rate. So the math doesn't -- or I should say this way, the guide doesn't seem to support that answer that we shouldn't be able to keep track with inflation via fleet productivity. You would think that would be more...

The difference would be if we're talking about our inflation versus whatever CPI number you want to throw out there. You hear people talking at the mid-single digits to high single digits. So I think that would -- to your point you made earlier, we didn't have double-digits [ drops ] in rate productivity or anything during COVID. So to compare that world where we were down 17%, up 12%, that was a totally different world back then. We're much more steady as she goes in the business right now. And that's important for our relationships with our customers and for us in the planning process. So I feel that we're in a constructive environment, but I don't think going to double-digit fleet productivity in the back half of this year is probably a proper expectation.

Sure. That's fine. When I think about when the cycle has these moments and haven't seen quite like this, but the lead times are that long on getting equipment. At the same time, you have always made that projection of where do you think the industry fleet will be as well, right? I mean you're the big 800-pound gorilla, but you got to be thoughtful. Like on my crude math, the industry fleet was shrinking from the middle of '19 through the middle of '21, but the last 2 or 3 quarters, it's starting to grow again. That demand might be there to absolutely justify it, right? But it would be nice if everybody else was shrinking their fleet and you're the only one, right, growing your fleet. When you try to look out now a little further than normal, just given lead times from your suppliers, how are you digesting -- and Jess, I don't know if you have some analytics you want to share with us on how you approach this. But thinking about the fleet size exiting '22 when you look at -- I mean you've seen the numbers, right, Ashtead, Herc, H&E. I mean they all have bigger CapEx growth, especially Herc and H&E, I mean, Ashtead. We got to be a little thoughtful of like how much do we want to add to our fleet in '23, if there's any tipping point where, hey, we want to focus a little more on rate, but there might be some markets we want some fleet to particularly grow for infrastructure. So kind of a broad question, but how are you digesting all that this early in the year, but probably having earlier conversations with your suppliers for '23 than normal?

Yes, I would say you're dead on, that's appropriate. And being '22, let's call it, pretty much known as long as everybody gets supply chain that they think they're going to have, any incremental opportunity is going to be back half of the year, if at all. So you're really talking about 2023 when we're having strategic conversations with them. But as far as how our competitors are acting, first off, we're very pleased to see our top 2 competitors participating in the consolidation of the industry. We've said for a while, the big is getting bigger is a good thing for the industry. And I think them consolidating capacity versus simply adding capacity is a healthy way to do it. So kudos for that. And as they have bigger fleets, their replacement cycle will be bigger. Their spend will be bigger just for that alone. So when we break it down from growth CapEx, I don't think it's tremendously different. And we do think the demand as well as the share that the bigs are gaining is appropriate for those levels of spend. We didn't see anything that made us scratch our head and say, "Oh, we better think about this differently." With all that being said, your point about the balance of growth and profit, we have pivoted to profitable growth, as you know, a long time. So we're not going to chase the last dollar if it's not a smart dollar.

That said -- go ahead, Jess.

No. The only thing I'd add, David, is if you think about kind of start to end at midpoint, we'll look to grow just over $1 billion, given gross and used sales. And as we think about that as a starting point going into 2023, I mean, we certainly haven't started any planning processes on 2023, but we feel good about it, right? As you just think about the kind of momentum we think could continue out of 2023, you add the opportunities that we think we're going to start to see from the infrastructure bill. And it's, again, kind of set us up for discussions going into 2023 that we think could be really sizable to the business.

The equipment availability so far this year -- and I know this is not the hot and heavy moment of when you take iron, but it's coming, right? It's March tomorrow. What are you -- obviously, you're not going to call out any individual suppliers on this call. But can you give us a sense of their ability to hit the date they promised? Has there any been a little slippage on something you expect in April, May, it's now June? Just a little color on that would be great.

Net-net, we're on target to what our plan was. Some are falling. Some are accelerating. I think that we're not expecting in the first -- as I kind of alluded to earlier, we're not expecting in the first half of the year to have any positive surprises, and I certainly hope not to have any negative surprises. If we do, we've already strategized about flexing used sales in the short term to help offset that. But I'm expecting that we'll stay pretty close to plan. And if there's any upside, I'm hoping by the back half of the year, some of the supply chain challenges that the few that are slipping have will remedy. To be fair, some of them also may have had a little bit of early January, some plant challenges with Omicron spiking up. We talked to some of our partners that had a temporary challenge in specifically the first half of January, where we may have had 30%, 40% of their staff out because of Omicron. But that's all temporary, should be behind everybody right now. And at this point, we think everybody will catch up, get on target.

The incremental margins implied for this year, I thought were -- it was nice to see back kind of about 55%. When you think of -- and again, I'm not asking for guidance for '23, but when you sit back and go, how are we going to build a model for '23 with certain targets, right? I mean obviously, if you grow the fleet a ton, you're probably going to give up on rate a little bit, the margins aren't the same. When you sort of build your framework -- and look, anything could happen, but the backdrop for '23 at the moment, you would say with the infrastructure bill and so forth, at least looks fairly solid. How are you building that model for '23 in those planning sessions? Is it a 55% EBITDA target? Is it -- and we might go lower targeting growth given the infrastructure bill, whatever may be. I'm curious your thoughts.

Premature at this point in that level of detail. But what I will tell you is we think about in the long-term planning that we do with a focus towards continuing to increase margins over time, it's really about starting with how constructive we think that top line will be. And the focus that we have on being able to generate that productivity at appropriate levels, right, to be able to outpace the inflation that we think, at least now, kind of looking forward with some of the macro estimates that are out there, looking to get ahead of the type of inflation that could continue in the short term. And then beyond that as we think about, okay, how does then the cost structure need to respond accordingly to be able to support those better margins and kind of that flow through in the 50s, if you will, similar to what we're going to generate -- we think we're going to generate this year? It's really about the discipline side and the productivity side, right, in terms of keeping the discipline focused on in-sourcing, not leaning in on third-party, high-cost variable cost, working through areas where we can continue to belt tighten and then shift towards continuing to challenge the teams on increased efficiency, increased productivity, developing out -- continuing to develop out the use of technologies that we have across the network. All of that comes into play when we then look at on-net, what do those margins look like? And what are we going to challenge ourselves to be able to provide in terms of higher margins over the period.

But dovetailing off of that, right? You're not working in isolation. There are competitors who have pretty strong organic targets for growth as well as, as you said, it's a constructive situation that they're rolling up some of the smaller players themselves. But when you think of the competitive dynamic, how should we think about your reaction to some of those targets of -- I mean we know what Herc's doing around some of the urban centers and obviously, Ashtead. Ashtead's organic growth on branches. I'm just curious how do you react to that?

I think they both have some white space that they continue to fill out. And my point about M&A before is at one point in time, you've heard people talk about they were going to do it all organically. So net-net, we see this pivot as a positive for the consolidated capacity versus only adding capacity. But we feel whether it's through end market growth, some of the tailwinds we talked about, whether it be infrastructure, we see an opportunity for some onshoring in the future. I think today's political environment would only support that. We see the industry -- and supported by ARA's numbers right now updates, we see double-digit growth for the industry. So we're -- we feel good about that opportunity. How long that plays out? We've often said, I'm very pleased that we don't have to forecast for 5 years that we have a model that we can flex pretty quickly because I'm not sure anybody is any good at it. So -- but we do see this as the beginning of a growth cycle. And there's nothing we're seeing today, David, that changes my mind on that for the next 12 and even to be fair, today, 24 months admitting we really only have 12 months' visibility.

But given how tight the market is, is it fair to say also despite some of the organic growth initiatives that people are being disciplined on rate, whether -- H&E, right, was the fourth quarter number, but it was up to 4.7% on rate, coming from a little bit of an easier base to grow rate, I get it. But I mean is it fair to say your rate growth is accelerating as we get into the year, right? I mean that's part of the game plan and what we're seeing across the industry. Is that a fair assumption? And the competitors are enabling that as well, right? They're not [indiscernible]

I think the industry has learned over the years and has been -- is responding very appropriately, and I'm proud of the industry, right? This is nothing like we've seen in the past, either on the way down during COVID or on the way up, if anybody is trading off growth for profitability. I think the industry is responding very well, very pleased.

When I think about the capital allocation decision you made, curious to be a fly in the wall and that conversation was going on about doing $1 billion of share repurchase and even put it out there as we expect to do it this year and then also the lay of the land of what you see on M&A. So first on the repo, I am curious of the cadence of that. Obviously, the market has been volatile to say the least of late. How should we be thinking about your decision to do the repo, do it this year? And then maybe have even a little more opportunistic earlier in the quarter given some of the activity in the market?

Yes. So the decision to do the repo, I'll start there, and I'll talk to the cadence in a second. But the decision to do the repo was really on the whole as we looked at the strength of the cash flow, first and foremost, right? When we looked at that, we looked at generating a midpoint, another $1.6 billion of cash -- free cash flow this year. We looked at where the balance sheet is, which I'm really proud of all the work the team has done on a balance sheet that's, from our perspective, rock star status at this point and just keeps getting stronger. We looked at the opportunity that we have, maintaining that target 2 to 3x range and basically not -- from our perspective, not having any real limitation to the type of M&A that we would want to do should it become available to further supplement growth for the organization because, for sure, the growth is priority #1. And I'm beholden, looked at it and said, okay, we can also get back into share repurchases with this program and feel comfortable that the end strategy will support M&A opportunities and still provide this $1 billion capacity to do that program within 2022. So that's really -- you talked about fly on the wall, that's the conversation we had. When you kind of lay it all out, you just say, hey, we can do this $1 billion, and it's no real huge sweat when you think about the way the opportunities could otherwise lay out for growth in the year. The cadence if you're modeling it, I would say we're going to still pretty much stay true to form in terms of a consistent buy. Could we lean in a little bit here and there if we see a dislocation? We might, but I wouldn't expect that we have half of it done in the first quarter, right? I think it's going to be something that will be a bit more steady throughout the year with perhaps a few lean-ins here and there. But I do feel very comfortable that we will finish before the end of the year.

And Gen Finance was a decent-sized deal, I think maybe near about $1 billion.

Right.

Now half an EBITDA turn for you now is $2.5 billion, so that's a lot to play with. And thus, $1.6 billion of free cash flow, doing $1 billion of repo. You've got $600 million of cash, let's say, roughly $2.5 billion to play with on the balance sheet. That's a lot of money given your historical acquisitions. But does it also signal to do the repo that there aren't going to be many Gen Finance sizes anytime soon? Or no, we've got over $3 billion to play with, with half a turn in the excess cash flow that there could be deals of that size in the next 12 to 18 months?

We are an aggregate of deals getting to that size. So I think it's more of that number was not a limiting number. We can do exactly what we did, what we put about $1.4 billion done deals in '21. We can duplicate that without even any concern in '22. And that realization really is what drove the decision. And I think Jess covered the rest of it well.

And we're running out of time. So my next question -- the last question relates to that, when I think of M&A for you, right? It's been very specially centric, except for a couple of nice number 5 through 10 size consolidation on gen rent. Should I still think specialty? And any appetite with what you've built in Europe and Australia to take the plunge and actually make a non-North American-centric acquisition?

So when we think about our prioritization, first and foremost, like we did with General Finance, it will be new product category. If we can add another product to the portfolio, especially off something that's a base that we can then grow through our network, we had told you all we expect to double the size of that category for us, that business in the next 5 years. We're well on track to do that. Then it would be specialty overall, frankly, because we have more footprint to fill out in most of our specialty businesses and more penetration to drive. But we're not afraid of doing tuck-in deals. We did a couple last year. If we think that the right opportunity there to add capacity in a given geography on the gen rent side is a smart business decision and the numbers work, we're going to do it. It's a strength of ours and not something that we should shy from because we have the capital to put the work and the capability to integrate and drive synergies. You'll see more of that continued thought process, David. And that prior...

I didn't hear international. Is it safe to say then we're still thinking very North American?

There's no targets in our mind right now, but we see that as not a strategic imperative but yet a growth opportunity. And now we have a lens at which to look at it through. But it's not necessary to do our one-stop-shop business that we are focused on in North America. That's our main strategy.

All right. We're out of time. But I really appreciate the conversation. To be continued, but great to hear the update, and have a great rest of the day. Thank you so much for taking the time. Really appreciate it.

Thanks. Take care, folks.