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

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[Audio Gap] It's trading on a cash flow yield that's starting to feel maybe a little punchy or you look at Cintas is an extreme example of a Quanta. So they're converting their EBITDA to cash at 45%, 50%, you are at 30%.

I'm just curious that the structure of the business. Now, I'm not saying that's the only way to value the company. Do you see the ability to create better conversion from EBITDA to cash flow as we sit here today? Or is it -- well, it's in nature of the business, to some degree, those aren't apples-to-apples comps but watches outgrow or whatever it may be. I'm just curious your answer to the conversion of EBITDA to cash flow.

So I'll just say no one's ever said they're disappointed in the conversion ratio we achieved 30% to 35%.

Well, it was 5% EBITDA multiple, 6% EBITDA. But the higher guess, we'll like to hear a little more about it, but okay.

But I mean, I definitely think those levels are sustainable. And frankly, we think we can kind of potentially redefine the high end of that for sure, even as we grow aggressively. And that's the combination Matt talked about that we can both grow aggressively and still produce so much excess free cash flow that we can have that profile. I would say if you synthesize it down to the way we tend to hear more about it, free cash yield, free cash margin, both very rich versus pretty much the entirety of the S&P 500 industrial sleeve, would be top decile, maybe top quartile in those metrics. And really, I think all top decile, we talked about this at the Investor Day. And we've done it consistently. And I think that's kind of what has been really gaining credit in the markets as people saying, look, this is sustainable. The company didn't get credit as much credit as they probably deserve. And when they think about it on a relative basis, they'd say, versus other cyclicals I can buy, how is -- here I've grown, have their margins performed, how they generated cash? And what do the returns look like. And that was really the point we're trying to make at the Investor Day is we've been consistently top decile, top quintile for all these metrics and yet the valuation has more recently started to move towards like peers when the financial performance, frankly, on a sustained period has been better.

Yes. And the value of the cash flow is also what do you do with it? In your industry, I'm even gen rent to some degree if you want to talk international, but it's still fairly embryonic. I mean, you're the big guys sitting here at 17% market share of one geography. And especially, you go into markets where even, hey, now we're #1 in that, but you're still peanuts, right? So can you help us maybe go back to yesterday.

Yesterday, of course. Yes.

When you bought Yak way back yesterday. Can you take us through the restructuring that business went through. Platinum did whatever a year or 2 ago. What was going on with the business that, that now we can look at the recent EBITDA and be comfortable with the business? Now obviously, like new parts we looked at that Industrial Solutions segment seems to have margins in the ballpark at least, so what Yak has done recently. But can you take us through what was going with Yak 2 years ago to the best of our knowledge. I know you did own it. And what got you comfortable with this business can have this kind of margin profile going forward? Clearly, this revenue synergy makes sense. So you just bring scale to new customers, you can bring them more to be a real national player. I'm curious on the margin profile, what happened with the business a couple of years ago.

Yes. Without getting to too much detail about how they capitalize it, what they capitalized, they were undercapitalized and they would tell you that. I think everybody involved will tell you they were on to capitalize. They didn't really come out of COVID and repair as quickly as a lot of other businesses. I don't know why. But they did see that repair afterwards. More importantly, the profile that we see now is consistent with what we've seen. So we've been doing a little bit of the matting business, piloting it, and it's no different than what we did with mobile storage. We had maybe 5,000, 6,000 units in mobile storage before we bought GFN, call it -- pilots, call it, testing, to make sure the cross-sell theory and thesis that we have actually plays out before we go and spend all that money. We did the same thing with matting. As a matter of fact, we've got about $30 million of matting on our own right now before we even close Yak. So we -- at a margin profile, it's similar to what we see. So we think this scale, there's even opportunity to have a better margin profile than we're doing for the $30 million of matting we have. And we think there's a lot of opportunity to grow this business. So we're not at all concerned that this business can't throw the kind of EBITDA that we see it right now and at a higher level. We think we can grow this business significantly. We see this very much like a general finance play. We're getting a new product with a big enough platform to matter that we could cross-sell and sell it to a broad enough customer base but still enough white space, whether by geography or vertical to bring significant growth to the business.

And just given what the financial leverage is now, I think generally green, not much reason to bring it lower, is kind of found the -- for whatever found its level. Obviously, deal like this is barely budged leverage up from 163 to 174, basically nothing. Should we still expect to be pretty active as the year goes on with M&A? So do your repo? You've got the dividend, not that big. A deal like this again, barely budged. Are there many things like this that we should -- it's easy to talk about them than actually close them.

Yes. Exactly.

Would we be surprised to see a couple of more leases this year or at least somewhat near the size?

I would say the pipeline continues to be robust. We would hope we bring more -- we're open for business. We've been open for business other than maybe 6 months in '20 -- during COVID. And the pipeline has been robust. But we don't try to predict nor do we plan or budget for M&A because we're never going to put ourselves in a situation where we're chasing. But we are looking at everything and we get a lot of credit for being good integrators. I'd argue we're better buyers. I think that's why we integrate well because we're really smart buyers, and we buy things that fit and we buy things that we knew -- we know we can be a better owner. And if we find the right asset, we certainly would have a lean towards -- this is a home run for us, new product line and specialty, that's a sweet spot. Those are harder to find and harder to get. But if we find those, those would be ones we'd action right away. But the 3-legged stool of strategic cultural and last, but certainly not least, financial is still going to be our barometer. I won't predict what will happen, but we're open for business and work in the pipeline.

And that pipeline feels pretty...

It's been pretty similar rather than maybe a few months during COVID, where it slowed down, and that's both general and specialty opportunities.

Okay. I'll go one more big picture, then we'll start to hone in a little bit on the meat on the bone for this year. 2028 aspirational targets, $20 billion revenue, I'm going to ask you to force right these of that's a layup to -- keeps me up at night a little bit. $20 billion of revenue within that $7 billion specialty, $10 billion of EBITDA. And while you're doing that return on capital goes up to over 15%. Force -- what's the one that you got -- I got that, that was the one -- go 1, 2, 3, 4?

They're very much intertwined. And we built them that way, and that's the way our 5-year plan looks, and that's the model for it. If you wanted to say force rank them for probability or force rank them for importance, I would say...

That's the probability. Go ahead.

I would say for importance. Listen, by definition, we want to drive profitable growth. So you could say, oh, then it's got to be the ROIC. Well, if we could get to $22 billion at 14 or $20 billion at 15, that's a fair debate to have. I think as long as we're over our hurdle rate. As long as we're deploying our capital in an accretive manner, we're in for the growth. But it's got to meet those thresholds. That's how it looks very intertwined.

Okay. That's fair. Obviously, this morning, Ashtead, different level of expectation out there just they've got -- The Street looking for even stronger growth that's in your numbers and now the stronger tap down some of the growth numbers. But looking more at -- we've been talking about their comments about , a little more confidence in rate than the , it seems like from them at least in the near term. Tapping down to the low end of the rev range, it was more of a utilization comment. But more looking at their CapEx thoughts for the year starting in May, what Larry Hurst did a couple of weeks ago, H&E a week before. No, into our net, into our gross CapEx, they're sort of in that down -- that's what -- on average, 30%. And you -- we can adjust that fourth quarter extra number, but call it flattish kind of CapEx, we guess. What do you think is different about their CapEx guide. Now we can say, well, the starting point, they were overbuying. But anything that is -- we should be thoughtful about with those CapEx, you're a lot bigger, but you add those 3 players out there, they are bigger than you are. What are they seeing in their market, you think that makes that CapEx decision right. I know you don't know everything about their business, but that makes you comfortable with your CapEx for this year. How much of your CapEx is dedicated to projects. We know, whatever it may be. It's just that's now 3 companies after your CapEx guide that those -- they're seeing things a little bit differently, maybe.

So first of all, I'd just totally separate what we do and how we decide on our CapEx versus anything anybody else does. It's not the way we build our plan. It's not the way we talk to our customers, it's not the way we think about it. We've been pretty good at targeting our appropriate CapEx. We haven't been high in a very long time, if anything, we've been low and maybe we at. So I believe that our range, appropriate range. When I think about -- what I've heard about their guidance, and I don't know all the numbers. And I didn't even get to listen to any of Ashtead on a replay or anything yet because I was working this morning. But I think that I look at their growth. And to me, that's a story. And the same thing with that, which I did listen to, ended up listen to because we got some questions I think it's about their growth. So I don't know if they're selling less used. I don't know if they had some underperforming assets in their portfolio that they can now get more productivity at it, I really don't know, but I am encouraged that I think all 3 think rates are going to be fine. We see the same thing. We see the discipline in the industry and I look at their growth numbers. And I would agree, without putting the other piece together, maybe the CapEx change or difference doesn't net to those growth numbers. But I think their growth numbers are aligned with how we see the business going forward for this year.

I think the other thing is it's a funny conundrum, right? On the one hand, you want these companies to grow as much as they reasonably can. And it takes fleet, but you want them to be capitally efficient. And so it's almost like when they tell you they can grow at this level, people suddenly look at the CapEx, trying to make heads or tails a bit. But when they're telling you they're going to be disciplined. They're going to be capitally efficient which theoretically, they should be rewarded for people suddenly panic. And it's like, no, what you want a management team to do is maximize growth as little capital as possible and be as efficient in the process. And for all the concerns some people have about too much capacity, it's just really kind of an interesting dynamic where you can't have it both ways. We would argue, they're being very disciplined. They're seeing healthy growth, which is a great indication for everybody, and they're helping theoretically reduce the risk of overcapacity, which weak here, that's part of the thing that concerns some people.

Yes, I would say 3, 4 months with conversations, there was much worry about supply swamping, whatever demand profile you're thinking of. Now the conversation feels a lot more, just what's the demand profile. So that was my segue.

Yes. No, we take this around the horn. So we're not going to get -- he's not far enough away not to kick me. So he would not let me give you in a quarter guidance. But all kidding aside, we talked about this in January. And we -- and I think what other people have reported publicly supports what we talked about, other than the CapEx number. So we beat that force. But I think we see this as a nice mid-single-digit growth environment in what is a transitionary year for some of the local markets. And if that comes back as interest rates relax, which we think will happen in the back half of this year. And then the pipeline for some of the local smaller midsized projects gets even stronger going into '25, we feel very comfortable leaning and we feel very comfortable of the goals that we set out in January.

And I think given the comments this morning from your competitor, mega projects starting a little bit slowly, caused some underutilization. I'm just curious, you have so many projects at once. So I'm making this sound too simple. Have you seen any staging issues with some of these mega projects where you do get, call it, okay, we're at the stage of equipment there, the project get pushed to the right, but you really can't move the equipment to another location. I'm just curious how this is playing out for utilization. But the way like even today sounded more like a utilization trip up than a fundamental up rates are starting to roll over. If anything, it's a robust rate and just trying to figure out proper utilization. Is that the same dynamic for you or if I told you within your productivity measures, which I'll let you state again, do you think it will be positive for the year and every quarter this year.

Correct. Correct.

But the idea of -- is the utilization of the trickier part right now, just give a size of some of these projects where if you're putting $50 million of OEC on a project, $60 million that, that sort of could be a little trip up here and there. Or is no, it's so just normal rate and time you broadly.

So not to give inter quarter guidance that's why I said that -- I think that the way we characterize the year is the right way we're thinking about it. We think if we could get time to flat this year, we think there are opportunity between still a solid demand and therefore, rate environment offset by some mix headwinds potentially and that extra inflation we talked about. That's not that 1/2 hurdle. We expect to have fleet productivity to be positive every quarter for the year. That's the way we feel. As far as the mega projects and some of, I'll say, adjustments maybe that some other companies that haven't had this level of large project work in the past, it's natural. It's natural to have changes in your view as you're getting deeper in. We've been doing major projects in my entire career, really. So coming as an original aerial player, and I chased major projects for 10 years myself individually as an RVP in the field. So this is something we feel very comfortable about what we stated and where we are. And we think that we expect the year play out exactly as we talked about in January.

From the supply side, how are the suppliers so far now that you're back to a more traditional seasonal cadence. I assume March are starting to hit the ground a little bit more than what we've seen in the last couple of months. How are the suppliers doing with hitting their delivery dates?

We said in January, we think we're about 90% there. We think there's still some product lines that are dragging. Those folks are probably -- those OEMs will probably tell you their selves, right? Love to get booms a little faster, but I think they're getting there, they're really close and they're working their tails off. So we're pleased with our partners. We did enough planning, staging that we feel like we're in good shape. And if they get all -- I think by the end of the year that they could get all the way there to where they need to be. But we're not at all worried about the supply side of this. We think our partners have done a good job getting back to a more normalized cadence. The only thing I'd say is as we get larger, one of the things we have talked about is do we have to let the years grow a little bit more than what we'd like to, right? So we may not be able to bring in $2.5 billion, $2.7 billion of fleet in 4 months, right? That would be the historical. You bring it all there April through July and make sure that you get it all at the single point of need. It's probably not reality. So we'll probably creep a little more into early spring and a little more into fall than we have historically, but not anything significant.

Got it. And I think it's a minutia, but the weather was really cold in January and a lot of parts of the country. January is not exactly the biggest of the year for you seasonally. But when we think of March and what March usually represents as a percent of the quarter, would that relationship be the same this year? Or did the January weather put a little more pressure on March?

I guess what I'd say is, I don't know what it is year-on-year, but certainly, if you think about kind of long-term, this isn't kind of a 3 standard deviation year, right? I'd say the portion of the quarter, that March will represent should be within kind of the boundaries that we would typically expect. I don't think there's been any big shift. When you have as large and diverse business as ours, and even if you have atmospheric rivers in California or whatever these environmental conditions are like, we've generally been able to manage through those within some reasonable boundaries. And I don't think this year will be any different.

Okay. Can you help us a little bit, this is to your own advantage as the biggest wallet in the industry. But when we think of some of the Chinese players trying to make some inroads supplying, obviously, a customer of yours would be the home run. JCB has become maybe as trusted as any supplier you have. They're adding a sizable facility in San Antonio. When you see the capacity coming on in the industry, I don't know if you've kind of gone through how you can play that to your advantage. But can you give us some sense of your appetite to diversify your supply base or even the opposite, hey, we never bought more teles from anybody than JLG, but now JCB's maybe our #1 supplier. There are subtle shifts. Can you just give us some sense of this extra supply that appears to be coming on and what is 40-plus percent of your fleet teles and aerials. How we should think about that with your desire, who to buy from and anything that impacts your buying at it?

I think the long-term partners we've always had in those spaces are the long-term partners. So there they have been some shift in market share amongst them between them, but that was by definition 25 years ago. And we said we're going to have 2 to 3 major suppliers in every single category. So that you're not beholden to anyone. But I don't see a major shakeup in the who. There might be some mix by different product lines of what percentage each one of them are getting. And outside of what we went through the last 2 years where maybe #3 or even went to a #4 and the stack rank of suppliers got a little bit of business versus none, is the way we filled some of the supply chain buckets. I don't expect that to have long-term ramifications or changes because I think our partners should get it and they're smart and they're going to keep working towards maintaining the relationship that's been here for 20-plus years with just about every one of our top 10.

I mean, I'm just saying in my own career moments where things get tight, we're going to get mining tires, about 20 or 15 years ago. There's those opportunities for the player to raise their hand and become a player, but then market loosens back up.

Yes. Within categories there's certainly been some shift, right? So somebody went from #2 to #1 because they got a spot we needed.

But specifically, would you see or have you tested out enough of -- we can -- yes, lease product there may be -- should we be a little more thoughtful about their ability to penetrate your fleet than in other years we've seen here from the Chinese suppliers. Obviously, they're trying to make an investment in Mexico. It doesn't mean we have some regulatory issues that might even stop, Mexico product coming in if the current leaders have their way the supply chain. I'm just curious, have you seen any shift from your people on willing to take more Chinese product in the fleet?

I think the tariffs #1, prevented it from being any kind of meaningful thing in the U.S. More importantly, though for us, and it's always been this. And you mentioned JCB earlier. It's the support, right? So until we can get to support the product doesn't matter. We need to support.

Okay.

Maybe one other thing to add there is you need to have a very, fairly high confidence in the recovery value because when you think about the way we manage investment in fleet, that total cost of ownership at life cycle economics matters a lot. And whether you get back $0.40 on the dollar, $0.50 on the dollar or $0.60 on the dollar will matter terribly. And so when you think about selling that equipment, you've got to have a high degree of confidence that you'll get back a reasonable fraction to underwrite the kind of returns we expect to get. And so new entrants are challenged because there's no history of which to make those assumptions.

Some of your suppliers are talking about conversations already are taking place for 2025. nobody has a crystal ball, but I'm not asking for '25 guidance, but when you think about growth CapEx as a base case, everything that you know and believe best educated guess you can on what contractors are telling you about projects lined up and obviously, the election could tweak a few things, but just like the big projects aren't going away imminently. How should we think about your desire or need for growth CapEx beyond '24 as we know the world right now?

As we know the world right now, not forecasting any numbers, but we certainly -- we laid out our aspirational goal for '28 and we told you that a good portion of that was organic. So by definition, we already showed our hand here. We are -- we believe this is a couple of years visibility into some good growth, driven by the 5 tailwinds that we've talked about quite a bit over the last year, and there's nothing that's changed our mind on them.

Yes. Sort of a big picture question here at the end. Anybody wants to jump in with a question for you, I'd be happy to. I won't lead the way that's with my thoughts here, but United, a small operations in Australia, Baker in Europe. Where is the Board and your head on going beyond -- geographically beyond U.S., Canada in size, like truly going international?

I answered this question before. I think I said 15 years ago, I started to say we'll be international in the next 5 years. And then for like 10 years, I just kept lying unintentionally. The truth is we got there through M&A of companies that we're buying for their U.S. business and got through it. But we're very pleased with the niche offering that we have in Europe and what that team's doing. And then we've looked at other opportunities. There's some structural differences there that make run in our play a little different. Australia, we're a little bit -- actually, we're the largest mobile storage supplier in Australia and New Zealand, and that came through the GFN deals under the brand of Royal Wolf. We're still very interested in that market. Whether we're going to run the full United play, it would have to be through acquisition, it would have to be -- we'd have to feel comfortable with that risk profile and there's still so much opportunity here. So I would say, it's a strategic opportunity, not a strategic imperative as how I've said it before. And that's how I feel that. It doesn't mean we won't do it, but we don't have to do it to reach our goals. So if we find the right deal, we consider it, but it's not necessary for us to reach our goals.

So Those '28 goals and not that jump into the grade beyond of truly trying to go above.

Yes. It's not necessarily.

Okay. So if there's no questions, I say thank you. Appreciate you taking the time.

Great. Thank you. Appreciate it.