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

Perfect. All right. Thanks, and welcome for joining us, everybody. My name is Angel Castillo, and I'm the Morgan Stanley machinery analyst here. And it's my pleasure to have with me today, we have Matt Flannery, CEO of United Rentals; and Ted Grace, CFO. So before we dive right in, I want to just read a quick disclaimer. So for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. Before I dive into some of the Q&A as I was just telling Matt, I have plenty of questions. I could go for 2 hours, but I want to make this a little bit more informal. So if anybody has any questions at any point, just raise your hand. We'll get you a mic, and we'll go through that. But Matt, again, thanks for joining us.

Maybe a great place to start is just given the diversity of the end markets that you participate within and you kind of pulse on the market. Could you talk about a little bit more the demand that you're seeing, how you're seeing that evolve over the last couple of quarters? I know that small local versus mega projects has been a dynamic, but maybe start a little bit more broadly, and then we can kind of go from there.

Yes. And we've talked about this at length, if you've been following us in our industry peers as well. We've certainly seen robust demand in the large project sector, megaproject. You draw that delineation line anywhere you'd like. But there's more large projects going on. There have been quite some time. And we're enjoying and positioned very well to enjoy that demand. And then when you get to the local markets, it's a little bit more dispersed. We still have some great growth in many of our local markets and some that don't have that opportunity. But when I -- when we look at it overall, you see at the midpoint of our guidance, it's driving overall 6% growth. We started talking about the 5 tailwinds that are driving that growth for us. Probably 1.5 years, 2 years ago, Ted came up with that framework, to give him credit and started talking about it publicly because everybody was concerned what's going to happen here. You've had 2 years of robust growth. The end markets are going to -- are going to drop. And we really -- we're very deliberate about what we saw and what our team was telling us and our customers were telling us. So we're pleased to see that demand environment play through as expected. I don't know if you had anything to add?

No.

Perfect. So maybe just to the 5 pillars or the tailwinds that you're talking about. As we look to 2025, so I know you're not going to provide guidance on that, but just more kind of broadly as you think about a macro that is still a little bit uncertain, some of these kind of ebbs and flows, those 5, can you just discuss those 5 tailwinds and what maybe the benefit would be from -- as we think about 2025 kind of macro side to some degree?

Yes, I'll do my best. So the 5 we talked about initially, and it was really when we did the Ahern acquisition were in order, IIJA, which is the infrastructure bill at announcement that was $550 billion piece of legislation. Congress' intent was to spend that money over 5 years. At the time, we said the dollars seem realistic, but the timetable felt aggressive. And so that one is still in the relatively early innings. Won't shock anybody, the government doesn't provide great accounting here, but we're probably in the third or fourth inning, we'd say. And building momentum. IRA was another of the 5 tailwinds. That one is when you lever up the tax credits and you add the advanced manufacturing dollars, north of $1 trillion. That's a lot of money in the context of a construction market. So we felt that could be 10 years to spend. That one also feels early. And has a lot of runway. Then you get into the CHIPS Act. There's been north of $300 billion chip facilities announced in the U.S. A lot of those are multiphase. So where we've broken ground on large ones in Ohio and Arizona and probably a handful of other states also in the early innings. So a lot of runway there. EVs is another one we've talked about. That was the fourth of the 5. That is a long journey. You think about the nature of U.S. autos and there's something like 250 million cars and light trucks in the U.S. Arguably, you're going to have to cycle through all that installed capacity before you really fully convert to whatever that next technology is. I think we'd all agree it's likely electrification. And there's probably been north of $400 billion of announcements across the broader value chain of autos. LNG was the fift,h, so shortly after Russian invaded Ukraine. And our thesis, which is kind of consensus, was that the U.S. and Canada would be part of global gas markets rebalancing. And that seems to be the case. Since then, I'd say there have probably been -- there's another tailwind we didn't talk as discretely about, the broader onshoring team. I think that's very real. It's one that we know industrial analysts have been digging into, but that's one we also do well in. And then data centers have kind of emerged more recently and the related power opportunity. And the reason I bring that up is there's going to be an ebb and flow to all these. But when you aggregate them, you're comfortably looking at well north of $2 trillion of investment in hard assets in the U.S. and Canada over, call it, 10-plus years, and that's the kind of runway we think we're facing with these tailwinds.

That's a great overview. And maybe to tie into that, I think more near term, I guess, again, there's a little bit of concern around some of the uncertainty with macro, but great kind of next medium-term or longer-term backdrop. One question we get a lot is on the rate discipline, right? Because I think there's concerns as to have we proven the degree of discipline in the rental industry versus maybe what we had in '08-'09. So could you talk about just what you see as kind of the main factors that give you confidence that this has actually changed and it's not more theoretical and you're actually seeing the evidence today in your markets?

Well, first and foremost, we see it in the results, right? We see in the metrics, and you hear that for those peers that we have that still give you the rate detail. You see it in our fleet productivity. And it would be easy to talk about the COVID bounce back and how that lack of supply created rate discipline. But it has actually happened before that, even when we were coming out of the oil and gas dislocation in '15. And you think '16 through '18, where there was a lot of opportunity for people to trade off rate and volume, we saw this industry discipline. We saw this industry discipline show up this year, and we saw it show up through COVID. Even though it was a short duration, that was a pretty severe drop, and we saw people hold rates. So I think right now, there's a couple of public peers that are even talking about time utilization being down, but their rate being up. That wouldn't have happened 15 years ago. So I just think it's really apples and oranges. The industry is so much more disciplined. Consolidation at the top and public information has been part of it. Rouse Analytics has been part of it. We have data now that helps. So there's been a lot of reasons for it. But I feel very comfortable about the way the industry is responding and the discipline that to show.

And I think to that point, one consistent message that I hear from the company is just focus on kind of the fleet productivity and efficiency, right? So again, running your assets and kind of managing your portfolio rather than using the rental rate as the lever. But that brings the other point, right, that you mentioned utilization. So I think that's one factor that you've talked about, keeping that kind of flattish versus last year. There's been other pockets within the rental world where we're seeing utilization rates come off materially or a little bit more drastically. So just -- what are you seeing in your markets that maybe allows for more stable utilization rates in your portfolio?

Well, we certainly tend to focus more on large customers, large projects, key accounts, which is an advantage. I think scale and density is an advantage. So when you have more fleet in a given market, you could certainly -- the logistics advantage to that. The opportunity to continue to drive more efficiency with more scale is something we've really focused on. It's tech-enabled. We've embedded technology into our processes as far back as our proprietary delivery system, we started in '07 that we call FAST. So this has been an evolution of us making sure we continue to drive efficiency and fleet utilization, and we're seeing that play through this year. Last year was a great year in time utilization. Like we said, if we were able to mirror that this year, we'd be very pleased.

Yes. No, that's great. And again, to the audience, if anybody has any questions, just raise your hand. But if not, to that point, again, fleet management, equipment. Just curious, any comments around equipment pricing, equipment availability, what you're seeing on that front?

I'd say the supply chain is largely healed, right? We've talked about 95% or maybe a couple of specific products where the OEMs aren't quite where they want to be, but I'd say it's largely yield. And so it's put us in a very good position where we don't have to make any early commitments to purchases. So it's allowed us to come back to a normal practice of responding, right? Measuring the business, where are we? Where did we expect to be, what course corrections do we need to make. When there's more opportunity, we can flex up very readily. You can imagine for most, if not all of our OEMs, we are their biggest customer, and that affords us to a lot of benefits. And conversely, the way we structure our contracts, we can flex down. And it's really important to have that symmetry in that way to flex your fleet.

And I think one of your competitors recently talked about potentially running, I guess, year-to-date at a lower level on CapEx versus perhaps what they had kind of indicated. Could you talk about maybe you talked about the flexibility and the fact that you have maybe able to kind of respond more or faster to the market, just what you're seeing in terms of your CapEx?

Yes. I view that as more -- maybe they had some capacity left over after '23 because they're still showing fairly good growth rates. So I wouldn't tie the CapEx to the end market or even at execution. So I think that's a good thing. If people are able to still drive growth over and above what their CapEx is, at the end of the day, that's what fleet productivity is, is your revenue growing faster than your fleet is growing. That's the goal. So we see our peers focused on that same goal regardless of whether they're having some headwinds on time or not. And I think adjusting their CapEx versus their rate is once again, another way seeing the industry react differently than it did pre '08, '09.

And maybe just a little bit of a longer-term question, right? The penetration on rental equipment, I think it's in the 50% to 60% range. It's continued to be a driver kind of a secular tailwind. And one thing that has kind of come up on some earnings calls on the OEM side is that perhaps customers might hold on to the -- if they were going to do rent to purchase, they might rent for longer. Have you seen that impact your business today? And then just as you think about '25 and beyond, where do you see that kind of rental penetration go from here?

So we're always a little cautious on rental penetration, right, because changes on how you measure it. But I think that mid-50s range is probably about right, but there's a huge variance in there by product line. When you're talking about aerials and reach forks being at the higher end of that, right, and a lot of the specialty products being much lower end of that. But within that, we feel that there's still secular penetration in a lot of products. There are still end markets that aren't penetrated. And then in Specialty, even more so. So we don't set market share goals, so to speak, but we do look at where there's space for us to get more share, where there is space for us to take embedded opportunity in fleet that's owned and show them a better, more efficient way. And I'd say 10 out of 10, but I'll be cautioned to say 9 times out of 10, once you get a customer to realize they can rely on the surety of supply of the rental channel, which the industry is so much better at it, through my 35-year career here, they don't go backwards because it doesn't pencil. It makes a lot more sense. Just a soft cost alone, forget about the capital costs and the complexity that we could solve that problem for them in a much more efficient fashion.

Yes. And you brought up a good point in terms of the market shares as well, the dynamic. So I think it's like doubled over the last decade or so in terms of the top 3 players. And right now, one thing that comes up a lot, you mentioned that with the megaprojects and some where we're seeing the strength continue, you're getting more market share than perhaps you would have prior to this. So how does that play out over the next, I'll call it, the medium term in terms of -- does that mean the players, the independents that are maybe more exposed to the smaller markets, you see that kind of going away? Like how does that market share ultimately continue to grow? Is it your acquiring assets? Is it businesses are kind of making way for again, the bigger fleets?

Well, I've said for a while, I think the bigs will continue to get bigger, and you've seen that play out over the past few years but certainly over the last 15 years. And I do separate the business into 2 factions. Let's just say half and maybe it's 40% now of that local mom-and-pop, one store supplier embedded in their community. There's always going to be a place for that company. That's always going to be there. And then let's talk about the top 10. And to be that meet in the middle, so to speak, when you're that local, regional, that's a tougher place to live. And I think that's where you're seeing most of the consolidation. It's not saying that they can't be good supporter suppliers, but the larger customers' level of expectation has been raised, and scale gives you the ability to meet that expectation through fleet offering, one-stop shop, technology, right? Giving them information through telematics that it's going to be harder for you to do if you're suboptimized from a scale perspective. The other half of the industry I was talking about with the local community, they don't care about that. Small contractors really don't need that. It's -- the larger your customers' needs are and the larger their projects are, it just gets a little more complex. And I think there's a bit of a competitive advantage that the larger companies have there.

A lot there that I definitely want to unpack a little bit more in a few minutes. But just maybe switching to Specialty rental. That's another one that you brought up, right? That's been a great business in terms of growth. Also another area that has doubled in terms of its contribution to your overall revenue. Just would love to talk about the opportunity and what you see there, right, both from an organic basis and an organic basis in terms of the growth opportunity within Specialty.

Yes. We think we've got double-digit growth in Specialty opportunity for the foreseeable future. Even on some of our most mature Specialty businesses when you think about power and trench, still showing really strong growth. Part of that is through cross-selling and part of it is through filling out white space. We have white space geographically, but more importantly, by vertical. And then when we think about adding new legs to our Specialty, which we did a few years ago with the General Finance acquisition, where we added mobile storage. And now recently with the Acme acquisition, we're adding matting. And these are products that we tested on our own before we took the deep dive, made sure that the cross-sell would work, that our customers would see us as a viable supplier of these products. And they did. So we went and found a partner that had enough scale for us to have a broad offering and then build out the network. And once we add these products and these companies and this skill because the people and the skill those people have the knowledge, there's a bigger part of it as the timber matting is pretty easy to get. But to get to people that how to deploy it and some of the systems that they built, it's really -- we feel like we'll double the size of that business in the next 5 years. And the more of those that we can find, that -- those will be our primary M&A targets. Those are the no-brainers for us. But it's not easy to find people to scale in these niche products. So it takes a bit.

Any way to quantify that, I guess, of that doubling, how much of that you think will come from inorganic versus organic, growing the verticals that you already see are kind of attractive?

Yes. So even ex -- Yak this year, we'd be double digit in Specialty even without it. And I think I said that on the last earnings call. So I don't think it requires organic. I mean, inorganic, I just think it gets there faster. I think organically, we could build it out. It's just harder. Takes a little bit longer, and you got to do that by their spilled analysis of what's more effective way of doing it.

And maybe just, again, given that there's a lot of kind of -- it seems like the market every single week decides whether we're going into a recession or whether it's going to be a phenomenal 2025. It keeps changing. But to that point, as a specialty business, you mentioned, again, you see double digits continuing there. What's kind of the level of sensitivity of that business in a macro whether its recession, et cetera?

I'd say in the scheme of things, it's a lot more insulated than the more core kind of General Rental business, right? Depending on what aspect of Specialty, it sits somewhere from less cyclical to noncyclical, the countercyclical. Right? So if you think about kind of the stuff that's more infrastructure related, statistically, that's exhibited a countercyclical tendency. So that would obviously provide very good balance in a more caution area outlook. Some of the stuff, a lot of it is actually solving customers' problems when something breaks. So if you think there's just a random distribution of bad things happening, whether it's power outages or your pump breaks, that's definitionally noncyclical and then a lot of the other things we do just tend to be less cyclical across that business. So certainly, across a cycle, it provides a lot of ballast.

And again, if anybody has any questions, feel free to just raise your hand. I did want to go back to M&A and you talked about, again, the inorganic opportunity, you talked about that within Specialty. But you've generally talked about it as also GenRent is an opportunity, right? And it's, again, a very fragmented market. So can you just maybe talk about the opportunity set overall? Like what is the capability to do more consolidation within GenRent? And just the kind of size and scope of the pipeline as you think about both?

Yes. So the pipeline remains robust. All product lines, GenRent, Specialty products. Not a whole lot of new products right now at scale. We just executed on the one, but we're always looking for that. Those are the, as I said earlier, the no-brainer for us. But there's a robust pipeline as far as our ability to do it. I mean, financially, we don't have the issue. We've got low leverage, plenty of dry powder. So there's plenty of opportunity for us. It's really just making sure that we clear the three legged stool that we've always talked about, right? The strategic, the culture, and we found plenty of targets that we're looking at fit those. And the last is the financial. And we're very disciplined there. It's got to meet our return models. And I would say that's -- if we don't get deals over the [ transmit ] because they didn't meet that last hurdle, you have to find a willing dance partner. Some people value their businesses the way they value, as they should, but it has to meet what we can pay for it, and we won't exceed that for any reason.

Yes. And in terms of the size, again, there's maybe been some more tuck-ins of late, but there might be some more kind of medium-sized type players out there. How much are you willing to lever up? I know you've recently brought down your leverage targets. Are you willing to kind of lever up to kind of back to 3 to 4 turns or something?

We don't see the need to. If the once-in-a-lifetime deal came and we had to go above 2.5 for a period of time, which is the top end of our range, we do it with a very quick path and communication to how we get below that quickly. But frankly, you do the math, there's not really a lot in our space that would pierce that, not something that we're concerned about. We wouldn't have lowered the leverage had we not already felt that way, quite frankly. Because we want to use our capability, our balance sheet to support growth and strategic growth to drive profitable growth. And we think our -- the guardrails we've put around leverage aptly allow that.

And a lot of this has been also kind of U.S. -- from business model in the U.S. What about the international opportunity, particularly as M&A? I think you've done some in Australia. Talk about the opportunity set to kind of try to replicate what you've done in the U.S. and other markets?

Yes. So we view international as a strategic option, not a strategic imperative, right? Because you really don't tie it to the network that we have here in the U.S., frankly, no different why we're not in Hawaii because it doesn't tie to the network. And we know that because we're in Alaska and they have to ride that bumpy wave. And so we feel the same way about international. It has to be able on its own entity to make the returns and to drive the United play. We got both of those. Europe, we got through the Baker acquisition, if you recall. We bought the company for the U.S.-based business, but they had 8 stores over there in Europe that were performing well. So we said, let's learn about this market. And I feel a little differently about that. I think it will be a little tougher to run the United Rentals consolidation play in Europe that we did in the U.S. So we did a small deal there. That's really just a tuck-in for the same niche industrial products that we're serving with the former Baker team. So that was just an add-on and, frankly, a deal a long time in the making, a small deal. Australia is a little bit different. We -- that came with the General Finance acquisition. Once again, they were a full service, self-sufficient public company before GFN bought them. So they had a management team, a structure that we knew had capacity. So we held on to it. We took a look at it. There were plenty of suitors for it when we bought the deal, but we said let's learn about this market. Since then, they performed very well. We've bought a GenRent business, a small gen rent business to start to learn could we have the full offering in Australia. Even though it's not as big a market in aggregate as Europe is, what it does have is just a single entity. So we could run that play where we're solving more problems for the same base of customers. I'm not -- we're not going to go all the way to bright green right now, I call it a yellow caution, but we have dipped our toe in the water with this acquisition to see can we cross-sell can we you're on the United play there. And if we find out we can, and that's a good place to deploy capital to meet our return demands, that's an area we may do that in the future.

And maybe getting back to -- you talked about the network and the density of your assets. So I think 1 aspect is a differentiator for you is the digital solutions. Then to the market right. So as you talk about the megaprojects, the ability to kind of help your customers and again, comes down to density, everything from that to the took control, again, digital solutions that you have. Or total control, rather. Can you talk about how differentiated is that of an aspect of your business, the digital solutions side in terms of go-to-market? Is it mainly versus the independent or smaller players? Is it also -- are you in different stages versus even your other top 2 competitors? Just help us understand that kind of solution.

Yes. So the total control system is something we got through the RSC acquisition. And at the time, we were trying to build our own to catch them was United reveal. So I was really glad we bought them, and we scrapped our project, and we put all of our resources in to continue and expand this. So we've had this for over a dozen years. Some of our larger peers are starting to build similar systems. It's a smart thing to do. But I think after that, it's really hard for people -- you have, once again, you have to have the scale and the need and you have to be serving a customer base where that adds value. But we are finding that we've all built procurement platforms where people can source their equipment online and interact with us online. What we're really finding is it's the information that we can give the customer that's a bigger part of their digital need. Now we have, as I said earlier, technology and better than our internal processes, and that's been great. But I think we're only 20% there or what problems we can help solve with the customer through information, through telematics. And we've made that investment. We have over 300,000 telematics devices deployed on our assets, such a big investment that over time has allowed us to understand what information we can mine and more importantly, what information is valuable to the customer. So I do think that's a competitive advantage for us specifically, onw that we've been, like I said, working on for a dozen years and I do think it's harder once again, to be that subscale midsized regional probably is not going to be able to spend the time and the resources to do that.

And as you think about, again, being 20% of the way there, right, investing in this, I guess, beyond the telematics and continue to penetrate this, what's the other 80% in terms of -- is there other technology that you think would help you either operationally or value to the customer?

Yes, we view that as competitive, but I would just say continuing to find out ways for us to drive safety, productivity and sustainability for the customer. Because that's what they need. So we can help them solve their problems either through data and analytics, AI or just consumption management, which is the base of what total control started along, that's a value prop for them that we really -- whether you tie into their back-end systems, there's continuing -- we're continually finding ways working with our customers that -- where we can add more value to that.

And maybe tie into some of the first topics that we were discussing. What does your telematics data insights give you into the health of the market? Like how much more of a pulse do you feel like you have today based on utilization or everything else of your assets based on your telematics versus maybe a decade ago and your degree of visibility that you had into your business?

Tremendously much more information. More importantly, for the assets where we're connected to the J bus, where we're talking to the machine. And I think in the future, this is all going to be done by the OEMs and we'll get that information off their embedded telematics. We just wanted to make the early investment to get a head start on this work. But I think when we can truly do preventative maintenance before the machine breaks down, that the default codes are all accurate work, and we can anticipate problems before they become problems. That's the real win from productivity. I think that's -- we're getting there, and it's better at some products than others. But working with our partners at the OEMs, when we really get there in that, that will be a game changer for uptime, which is what the customer wants. This is all about selling uptime for the customer.

And sorry for jumping around, but maybe going back to the capital allocation question, right? We addressed it from an M&A perspective, but you have the capability to do ample buybacks, and you initiated a dividend last year. Can you just remind us maybe how you're thinking about that and perhaps the willingness to return more capital to shareholders? Weaker macro, whatever kind of fears usually might lead to actually more free cash flow generation for your business. So can you think of -- can you just talk about the shareholder return aspect of things?

Yes, absolutely. So once we've kind of figured out what we think our discretionary excess free cash flow will be, we'll just figure out the optimal way to return that to our shareholders. This audience knows you've only got 3 options. So you can reduce net debt, you can return it via a dividend or you can buy back stock. Given where the leverage is now and how we manage maturities and liquidity and all other kind of leverage considerations, you could say that is probably not going to be an area where we'd look to channel excess capital. So you've got your dividend and your buyback. We've said that we do want to grow the dividend over time. It's our intention. We want to join that list of kind of dividend aristocrats that have a long track record, but do it at a reasonable pace in line with long-term earnings. So that's going to leave the majority of excess free cash flow for buyback, which we would plan to return through that mechanism.

Yes. That's perfect. And I know we only have a minute left. So maybe as you think about running your business, again, a lot of volatility or uncertainty. What's kind of the biggest risk or what keeps you up at night? Because everything else, again, a lot of great kind of medium-term, longer-term tailwinds, a lot of opportunity for the business. So like what's kind of the top concern that you...

First and foremost, it will be people all the time. We're a people-based organization. And so I'm going to worry about people. And if we can continue to employ, train and retain the right employees, we're going to win the race, right? So we think that's a key differentiator for us. Not a lot of folks have talked about culture for as long as we have in this kind of environment, but we do because we think it's a differentiator. And at the end of the day, through all the technology, through all the AI, through all the advancements in the equipment, that last mile is going to need to be done, of service is going to be done by people in our industry. So we just need to put the right tools in their hand and support them enough so that they can give a superior customer service that I think is expected in the United Rentals. So that's what I worry about because that's a big enabler for us.

That's great. Well, Matt, Ted, thanks for joining us today. Again, I appreciate your time, and I think that brings us to the end of the time. So thank you.

Appreciate it.