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

Thank you, everybody. Very excited to have United Rentals here. I don't want to tell how long I've covered that, but I was a little younger when we first started to talk about United Rentals last century. Look, obviously, we will know Matt Flannery done a great job, United Rentals now for -- been there many years, but as the lead man for...

4 years now and...

We felt longer to the...

32 all in, if you can acquire acquisition years.

So Matt Flannery, United Rentals CEO; and Ted Grace, all know and love many years Investor Relations. Congratulations on the CFO spot.

Thank you.

So congratulations, and you can bring a great understanding of what investors are looking to learn as the CFO. So -- it's great to have you here.

I guess with that, those slides, just open Q&A here. I'll kick it off with -- obviously, there's 2 things that people get anxious about, right? Housing leading non-resi, public and private. And then just, oh, we could not have had a better situation than a couple of years. So if you have the biggest fleet in the industry and people who can't get equipment. First, on the end demand, we can debate what housing usually means to private non-resi, look at the historical data. Obviously, what's at least a little unique right now are some of these significant public spends at a minimum. So can we start on the public side and how you quantify what do you think the annual impact is for the industry, for your business from the Inflation Reduction Act, the infrastructure bill? Just to put some meet around what is maybe unique to cycle versus trying to analyze traditional thing hurting private non-resi?

Yes. We'll just start with the housing and then Ted has done lot of work in quantifying some of these tailwinds that we have. When you look at multifamily for a single family, there's even a divergence within residential significant. And as you all probably know, we don't really participate in the single-family housing market. You drive by a home being built. You don't see a lot of rental equipment there -- a lot of equipment there, period. So even the residential side, it's a very small piece of our business has actually held up for us because the multi-families actually grown. And as far as the other opportunities and tailwinds, we spoke at length about the infrastructure bill, IRA, the mega projects led by things like chip plants and EVs, things that we don't feel are macro reliant, right? Some are even geopolitical, you could argue. So real good opportunities. And when you think about whatever your peg would be about what sectors could shrink in non-res, how much exposure there versus how much exposure we have to some of the unique nonmacro-related opportunities. We get a lot of comfort in saying that '23 is a growth year regardless of the macro environment. Ted, share some of the work you've done.

Yes. So just quantifying the public pieces, you'd start with the infrastructure. That piece of the legislation allocated $550 billion to infrastructure. Within that, there's about $510 billion of addressable market. There's $40 billion for electric buses and trains and sort of building a factory. We're not going to participate in that piece. So you'd say $510 billion. It's intended to be spent over 5 years. So just rough numbers, $100 billion a year at run rate. We just started to see projects break ground late 4Q into 1Q of this year. So a little over a year after it was signed by the President. That was very consistent with the timetable we had outlined based on kind of the research we've done there. So when you think about that, that's -- our assets are used on both sides of the aisle. So we're pretty agnostic to whether it's public or private dollars. So that's the first piece. We think we're incredibly well positioned. When you think about these projects, they're going to be executed by the large E&C companies, where we have a unique value proposition that we've been developing really since 2008, but certainly since 2016, particularly. So you think about our go-to-market approach, you think about our fleet architecture, the combination of GenRent and Specialty, you think about the technology, total control, telematics. These are all things we've done that, frankly, are different than virtually all our peers and certainly the one-stop shopping, right? That solution orientation of what we bring to the table is, we think, positions us really well for those kinds of opportunities specifically. So that's the first piece of public. The second piece of public is the IRA. This one is -- doesn't quite have the same definition of infrastructure. But the work we've seen from BCG would tell us that when you lever the tax credits, it's $369 billion, you're looking at well over $1 trillion of investment in clean energy, climate change-related stuff, a lot of which is grid related, where we're also very well positioned to spend that kind of money. I don't know if you're talking 10 years or 20 years. But if it's 20 years, that's $50 billion a year at run rate, again, in the context of a $900 billion market. That 6 points a tailwind. I'll remind people, utilities to the power side, meaning generation, transmission distribution is already 10% of our business. In 2016, we introduced that power vertical strategy, not to be conversed with the Gen side of the business. This is actually adding value to utilities and it's grown from probably our mix then to now north of 10%. So here again, we think we've got a unique kind of competitive advantages to be really well positioned for that piece. Those are the public pieces you asked about. We can talk about the private pieces as well.

Yes -- like. You go through is -- this idea of your housing exposure direct isn't the concern. The concern is, hey, Amazon is not building that second headquarters. CBRE, yesterday said we're not doing an office tower in Dallas. Those sort of knockdowns, which say that they play out traditional housing leads to that 1.5 years later. But at the same time, some of the pieces like manufacturing, which is $100 billion of $530 billion private non-res appear to have some of those mega project benefits on the private side. So if you have a similar to math would be interesting.

We do. So we've looked at autos and we've tried to find kind of like a neatly packaged report. We haven't found anything, but certainly, we've looked at some of the OEMs that have announced specific initiatives, one in particular. It's talked about spending $50 billion in North America by '26. Without naming names, they have about 12.5% market share. So if you gross that up, that would imply you're looking at $400 billion north. That will take years to spend. That's -- they are talking about their own objectives and I think they're ahead of the curve by '26. If it takes 10 years and it's $400 billion just play through our numbers, $40 billion a year. That's 4 or 5 points of tailwind to the market, all else equal. Here, again, this is going to be the largest E&C companies doing this. I would love to say it's David and Ted's E&C company from Greenwich doing this, but it's unlikely to be that. It's going to be the household names where we get are very uniquely positioned to lead those projects. If you look at SEMIs, to date, they're certainly north of $250 billion of projects. That's an area where, again, these are being executed by the biggest E&C companies, that was alluding to geopolitical hedges. These things aren't being built because iPhone demand is driving it. It's really kind of the fear of what could happen geopolitically in Asia and the potential loss of capacity in Taiwan specifically. So we think that's pretty well insulated, as is autos, right? I mean, unless people think we're going to pivot back to internal combustion. Electrification is the future. And so those ones I think are pretty agnostic to the macro in the broader sense. And then the last one we've talked about is energy. So again, with geopolitics in Europe, call it, Eastern Europe specifically, even if you see withdraw from Ukraine and reparations and begging for forgiveness. It's hard to see Western Europe go back to buying Russian gas. And these commodity markets will rebalance globally, but the U.S. will be a big participant in that, specifically in LNG. We do exceptionally well with LNG terminals, both in the U.S. and Canada. So when we think about these, these are 5 very large kind of tailwinds that we think about. In isolation, largely economically independent. Again, in the context, when you all think about this in the context of a $900 billion market, that's what gives us kind of the optimistic outlook we have in a multiyear process that is whether it's 3, 5, 10 years. I mean these are the tailwinds we see that are easy to point to that are right in front of us.

Any one of them individually could replace the headwind that would come from commercial retail or if you want to say, distribution. So we -- to Ted's point, there's just a lot more opportunities to backfill anything that happens to drop.

And I'm not asking for you to opine upon a competitor's guidance, but the idea of Ashtead, this morning, if I saw the numbers correctly running around the conference, part of its price, but for the next fiscal year gross CapEx in the U.S. up 18%, 19%. When you think of the supply chain availability, the demand profile you laid out, what's your reaction to that kind of growth in CapEx? The ability to get the equipment? How much is the pricing you think? And how much is it justified on yes, we just laid out the demand that we hope we can get 20% more equipment. Just trying to get a sense of...

Yes. I think that when you think about these mega projects and some of the drivers of where we think the tailwinds are going to come from, I think outside of us, Sunbelt probably well -- as well positioned as anybody else to get some of their -- more than their fair share based on their overall market share of 13%. So I think there's plenty of opportunity there. As far as the CapEx number, you've heard us talk about this before. I wouldn't -- it's people calling our guidance of flat CapEx year-over-year. That's not fully understanding. Remember the pull forward as much as $700 million, pick the number you want somewhere between $600 million and $700 million more of Q4 of '22 than we would have. To be fair, if I really wanted to quantify it, then say in '21, we had a couple of hundred -- $300 million pull forward. So whether you want to add $300 million or $400 million to the back end and take it out of the baseline, you're going to see more about a 20% plus CapEx growth from us as well.

And how much is that 20% a decision of trying to toggle between not wanting to challenge fleet time U, rate versus well, there's only so much we can get from the supply base as well. I'm just curious, the gating factor on why not more or less, just went into that thought process?

So first and foremost, the majority of it will be replacement, as you know, as it will be for Sunbelt as well. We've all been sweating the assets a little bit more because of the lack of supply and the amount of demand we had. So we'll get to more normal used sales volumes.

And sorry to interrupt, your replacement today, I would say, is [ 2.6 ]?

[ 2.4 ] to [ 2.5 ].

We'll sell about $2 billion of OEC if you assume cumulative inflation of 20% over 7 years.

So [ 2.4 ] replacement. Your growth CapEx $600 million, $700 million, something like that.

Correct. And if we're also going to be pulling the same levers we did last year, for supply demand, right? So if we have to hold off on opening up some of the used sales channels that we haven't been enjoying for the last 2 years because we needed the assets, we still have that opportunity. We are pulling forward capital. We're going to make sure we're ready. So between the fourth quarter pull forward, we told everybody in January, we're going to have a heavier Q1, at least 20% of our full year CapEx we expect to bring it in Q1. We're not going to get caught shorthanded here in April. And if the supply chain keeps pace with what the slots have been promised, we'll be in really good shape. The Ahern assets was another unique opportunity for us. When you think about the composition of their assets being 75% aerial and reach forks, and what's primarily been where the holdup has been on the supply chain, it really gives us even more confidence of handling some of this large work that we feel will more than out punch our share on.

The confidence to do the pull forward in the fourth quarter and then first quarter spoke to confidence for a bull -- spoke to for a bear, right? The demand profile does feel like it's been at the minimum right now, you're justified for taking the iron. What are your suppliers saying to you about lead times? Are you getting any, "Hey, I think I can get to that extra $50 million in the fourth quarter. I can even get it to you now late third quarter." Like where are the lead times? Are they shortening notably? And if they are, are you taking that iron?

In aggregate, we're getting the slots we needed to fill. Individually, we had to mix the share amongst our 3 vendors. We have pretty much 3 qualified -- really qualified vendors in each category. That share has been split a little bit more than maybe historically. And I think that's because some of the folks that had a higher share, they are limited. They're going to be supply chain issues for them this year. I think the public ones guided to that. I think you see in their growth anywhere from 5% to 7%. So we feel good about the opportunity we're going to have. If there is any pull forward opportunities, I don't do not expect it to be in the first half of the year at all. And that's why we're front-loading because we want to be ready. A lot of the jobs peak out and come out of the ground in April and peak out sometime in the fourth quarter, and that build of Q2, Q3 is really important for us.

So let's assume the mega project drives the business while the commercial office tower goes away. The way you're structuring these contracts for these mega projects, you're better positioned than maybe anybody else to serve it, but they're probably also saying, "Hey, look, we're getting a ton of equipment from you multiple years. We want some good economics on it." What are those conversations like? And how would you compare the traditional office tower versus a mega project for...

So it's really about sales national accounts, right, versus local accounts. So they certainly just as we do with our vendors, they'll leverage their scale. There's also a lower cost to serve on these mega projects. So it's actually valid. It wouldn't matter what type of large project, but we -- our national accounts have a price expectation that we'll meet, and we feel very comfortable. The conversations are more about surety of supply, quite frankly. This has been a couple of years of tight supply and the total cost of equipment rental on a project is 2%, 3% but it can have a really large impact on the speed of which that project can get done, which is how they're really paid. So when you think about that, the conversations with our key customers is more about, here's what I'm going to need, are you sure you're going to have it in time? Are you going to be ready than price?

The pendulum power, you would say, is still with -- key to us as a...

I would say, our value is well appreciated for these mega projects.

Okay. These mega projects, are they bringing to light some Specialty product tell you like, oh, that might be the next acquisition?

Not anything unique that we haven't thought of before.

But something you don't currently own.

Correct. So -- but yes, I wouldn't say unique, but I would say that the larger the project, the broader the breadth of need. So certainly, it's a competitive advantage. I mean outside of cranes, there's not really anything on a mega project that we won't be supplying at a pretty large scale.

So when it comes to thinking about M&A going forward, would we expect there's enough just good old U.S. infrastructure type work that GenRent there -- are still some opportunities to go, hey, we -- especially if the equipment stays tight that GenRent is not the preferred when you think of returns on capital and so forth. But as we sit here today, like competitive advantage of having equipment or maybe getting some geographies were a little lighter, is GenRent right there with Specialty if we think of whatever the next deal we're going to hear about?

No, I would still say we have a lean towards building out that Specialty footprint, deepening penetration in all of those products. I'd say Specialty overall is much less penetrated than GenRent product lines for the industry and the same is for us. So I think we still have a lot more head space in Specialty. They do -- most of our cold starts are with our Specialty teams. And they'll -- we'll usually spend an outweighed amount of our growth CapEx compared to their 30% approximately share of growth CapEx on Specialty growth.

And when we think about your productivity number, the amount of equipment you're bringing on doesn't sound like it's stressing your time U, but at the same time, H&E rates up 10%, time U down 100 bps. When we think of time you the way you'd run the business this year, ideally, would it be, I want to take the iron, win that business. It's a multiyear business. And I would take time U within 100 bps of a year ago, all night and day. And then play the rate game what I can get on that, right?

Yes. I said it...

The idea of rate -- time U to going to be flat. I mean it's just a too high at comp level.

Other than the fact that I said this last year and I was wrong with team outperformed my expectations. So I may not be the most credible person. I would take within 1% of 2022 time U 100%. And at some point, there's some products that you got to lighten up a little bit so we can be as responsive as we need to be for these key customers.

Okay. The decision to institute a dividend. I'm just curious how you went about thinking of sizing it. And then thinking of the repo, and then obviously, there's some cash left over. So I'm just curious, was there a thought. I mean, Caterpillar has done free cash flow, it's that's all repo and dividend, not saying you want to give away on free cash flow every year. I'm just curious the thought process for '23. How do we even want to commit to the $1 billion of repo and why not more, why not less? I'm just curious the thought process because it sounds like there's still enough M&A opportunities. The dividend had a significant statement by it, saying, hey, we believe in our cash flow. But the repo, I'm just curious how that also factor in the full $1 billion. But I'll let you answer?

Do you want me to start or?

So I would just say when you think about -- first of all, we already had the repo out there, right? So we didn't -- that would have been a bad message to pull it back. But most importantly, we didn't need to. So when we think about the opportunity to now add a dividend, it's really about the resiliency of the free cash flow that we've talked about through the cycle. And I view the -- when we've made that commitment and promise and been talking about it for years. And now that we've shown it, I would call the dividend as to the whoa on that resiliency package basically. And there's really no reason not to do it. I think it adds a lot of value. And I think it's been received very well. And we were hearing from shareholders, it was more relevant than it had been in the past. It is not at all an inhibitor of growth. But when you look at 2022, really strong organic growth, large M&A, share buyback and we still had excess free cash flow, it was time.

In terms of scoping it, certainly, we looked at the market and looked that comparable equities were paying. So it could be direct peers, it could be indirect peers, kind of the XLI, the S&P. We felt like it should be more than a token dividend. So when we came out with an initial yield at roughly 1.5%, we felt that was kind of appropriate for where the market is and kind of where we wanted to start. Obviously, our intent over time is to grow the dividend. We then thought about how much of that free cash does that consume. So this year, we've talked about -- a little over $2.2 billion of free cash flow, to be about 18%. So it leaves us with a lot of kind of latitude to do other things, spend $1 billion on the buyback and then leave $825 million at the midpoint of guidance for prospective M&A or other opportunistic things we see. So there are a lot of factors that went into scoping it, but that's at a high level. We've been pretty consistent in the not just the strategy to execute the buyback, but the dollar value. And so these are all things you take into account when you think about scoping the size of any commitment you're going to make publicly.

When you see changes like this sometimes at a company, more perception, you've had the cash flow to do this for years, but you did it. Are there any changes to the metrics and compensation that you think will come out of crossing this divide, so to speak, of like we're now a dividend payer, and we've cemented our belief in cash flow. Is there any thought from the comp committee on dividend growth, EPS, I'm just curious any simply you just want to...

These are the same metrics we've got revenue, EBITDA and 2 return metrics that drive short-term and long-term comp. No change to that.

I think those actually think about it -- immediately, I wouldn't thinking about it as an operator but when I think about why we didn't do it a couple of years ago, even though we had was we wanted to make 100% certain that it wasn't going to impact the way we run the business, right? This is about distributing excess capital, not running your business to hit a number for -- to distribute. So that's why we did wait because it won't have an impact on the way we manage the business. It's an output that we're more than happy to be able to share with our shareholders.

When you think of that productivity measure, right, and we know a time you said a very healthy level. These conversations you're having with customers at the pendulum power, you feel is still -- availability is still a weapon. And our scope to do these mega projects is probably not as unique as nobody else can get equipment near of the biggest fleet, but still, it's a competitive advantage dynamic. When people think about, oh, here goes rates, and they're going to really, really dissipate quickly. What's your response to that?

Number one, I think we value partnerships. So I think we're more thoughtful about with our big customers, how we manage that. You could call it power, I'd call it opportunity, right? And I don't even think about this power. You can commoditize yourselves on the way up just as much as you could in a way down. And I've always thought that. And I think that's something that is really -- you have to think about what's a reasonable way to go to market for your key customers and get the opportunistic stuff off of your non-core business. And I think that's why we believe we'll show resiliency in any end market with not just the stickiness of those customer relations, but the economics of those customers. I think it's smart business to be steady as she goes as opposed to up and down.

And educate me on if it is a multiyear project. What kind of pricing are you establishing in year 1? And are they signing up you're our 3-year supplier?

So one of the reasons why these -- why rental is so important to these projects. There's not many assets. If it's a 2.5, 3-year project. There's not many assets that are there for 3 years or 2.5 years. It goes through stages, it's why rental is a better option because if you own the asset, you only might need it for a 1/4 of the time of the project. So they won't be set pricing for multiple years. But there'll also be different equipment needs, and there will be different phases and different contractors who are really our customers, right? The construction manager runs it. But it's all the subs that are coming in, and they'll be coming in at different phases. So to the point of the question, do we get locked in at a number that inflation may run away from or it's not necessarily fixed pricing, there's a reasonable expectation. But as dynamics change, we can flex with the market.

But when it comes to winning the business, not say they can't switch you out. But most of these conversations like you've got this for 3 years. It's not up for renewal necessarily a year later.

The switching costs are more painful than the dollar of savings are or anything else. It's really about you do your job, you meet the demand and you do the service you need, you're going to be there. It's about the incremental trades that are coming in. Who's going to win that bid because it will come in phases throughout the project. The earlier on, you're there, the better you do early on, which is why we like to support the whole project, the better your chances are because you can already put a shop inside the gate, right? You can already have remote access to the site. You can have mechanics on site, you can have product on site, and that's something that we've been doing for years on major projects.

Any questions from the audience? Yes, they you go, come on, Omar. Yes. Actually, this -- Diane, can you get the mic over to Omar.

I'll let David rest a little bit. Two quick ones. One, you talked about the fact that any one of these new verticals stimulus can replace any drop of whatever economically sensitive sector one might think of. The fact that all of these are coming in at the same time, concern do you see on crowding out private sector [indiscernible] activities, number one. The number two [indiscernible] versus CapEx, right? And there's quite a bit of OpEx related equipment that you provide historical share sense as to how much was one side of the financial?

Sure. I'll take the first part, and I'll let Ted answer the MRO section. So as far as the mega getting crowded out, that would just be a better supply-demand environment. What we're not going to do is we're not going to trade off one for the other. The one -- the customers are going to be doing mega projects are the ones we're going to be focused on because that's the long-term play that we decided many, many years ago, coming out of the Great Recession. So one of the significant changes we made in our go-to-market is we can't be the largest rental company in the world with the largest footprint without owning these national accounts. So that -- it was for a different reason, by the way. It was more for resiliency. And the irony is it really sets us up well for the opposite. It was really more built for in a recessionary period to have those customers that we're going to get more than their fair share of the work, and it's playing out in a better way in this instance. So I don't see any change there. It may create some opportunity where the big guys are focusing the big jobs and maybe the lower half of the industry, the mom-and-pops, can focus on more of the local stuff, quite frankly. That's the only delineation, I would say, in a normal -- versus a normal operating environment. And on the power sector, I don't know how much if you have the math on the MRO, which is how I heard it, the run and maintain work versus new ground-up projects or capital.

So Omar, I don't have those numbers. I can come back to you. But certainly, the base of the business is going to be MRO. That was the intent when we started the strategy in '16. The last couple of years, as you've seen renewables really kind of see a strong tailwind. We've certainly done exceptionally well with wind and solar. And we certainly expect to continue benefiting from those tailwinds as part of IRA as an example. But certainly, you don't see a lot of conventional power plants being built these days, right? So that's less of the opportunity on the construction side. We've seen a decent amount in transmission and distribution, especially some very big projects. So certainly, I think it's -- I'm comfortable saying the large majority is going to be MRO but I can come back to you with those numbers.

And similar in downstream, right, where we're inside the gate. So shutdowns, turnarounds, run and maintain type business is a bigger part of our petrochem business, specifically downstream.

That made me think of the large Ritchie auction in Orlando. Sort of sets the tempo, your blue Thursdays, what kind of pricing we think we could get in the channel, what was your folks internally through interpretation? How rich you went in Orlando? And does that measure up with what you're thinking you might be able to get on proceeds as a percent of OEC?

Yes. I think it came out strong, specifically since -- I don't think there's a great need for companies that have other channels to go to auction in a tight market. So then when you think about the assets that did go to auction, came out of it strong was I would think you'd have a lower quality of asset at the auction today than maybe 5 years ago where people might get rid of floor plans or stuff like that. So I actually think it bodes very well for the pricing strength of the end market -- the used end market.

You were there, David.

Yes, I was.

Hopefully, you see a lot of new product going across the ramp. I wouldn't have...

No, I remember those days where its dealer just blowing out new equipment and it was the opposite of that.

So when we look at the numbers, I mean the only thing that looked weak it doesn't affect us is the truck sales were obviously a little below FNB, but otherwise, the construction equipment did very well across pretty much every segment.

Yes. We're about out of time. We like 30 seconds left if anybody has one last acquisition question or something I'll see if Matt will stay on the way out the door.

See if I trip up?

Yes.

The pipeline remains robust. I can even save you the question.

Yes. We like, obviously, appreciate you wrapping up a great first day. So, thank you.

Great. Thank you.

Thanks, Dave. Appreciate it.