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

Perfect. Thanks, everyone, for joining us, and good afternoon. So Angel Castillo Head of U.S. Machinery and Construction here at Morgan Stanley, and it's my pleasure today to have Matt Flannery, CEO of United Rental; and Ted Grace, CFO of United Rentals. So before we get started, I just want to read a quick disclaimer. 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. And with that, gentlemen, thank you for hosting us here today.

Thanks for having us.

So lots of topics to discuss. Obviously, everything you know around construction in the U.S. is very topical today. So maybe figured it would be a good place to start, just a little bit bigger picture. -- macro and a little bit broader kind of demand backdrop if you could kind of set the stage for it. So maybe give us a state of the union, what you're seeing in terms of cross construction end markets in the U.S. particularly curious how, if at all, all the geopolitics, interest rate moves, energy prices, how all of that, if at all, it's impacted what you're seeing in terms of construction demand in the last few months? Is that...

Well, I'll let Ted handle the geopolitics and the right side of it. But the demand environment feels great. It's really been strong. We had pretty solid expectations when we came out with guidance in January and the year just progressed better than we had thought. The construct of the demand has been pretty similar to what our expectations were, where large projects were going to drive most of the growth. And then we expected the local markets to be stable. And that's pretty much the way it's played out. But it's with the exception that the large project pipeline has just accelerated. It's moved further and faster than we had expected through the year and the execution of the teams allowed us to raise guidance to the most recent level that we did in July. So we're really pleased with the demand environment. and the industry overall is really on a strong trajectory. Ted, you pick that.

Yes. I mean the macro dynamics have been pretty interesting this year. We came into the year not thinking you'd have diesel north of $5. But if you look at our year-to-date results, the team has done a great job managing that unexpected cost headwind. -- it's hard to AB test to say what would have happened had things not played out the way it has. But to Matt's point, demand ultimately has been stronger than we expected despite whatever these headwinds real or perceived maybe. So certainly, the U.S. economy has proven to be very dynamic. I think we've seen that consistently. More recently, there's been discussion about rates and people wondering what the Fed is going to do, what's happened at the longer end of the curve. And certainly, we don't sit around pretending to be armchair economists, but we just remind people that if you were to look at the 10-year yield going the back more than 3 years, it is balance between 4% and 5%. And there is no discernible impact you've seen on the slowdown when it's even approach the upper end. So I guess the question the market asked is where do we go from here. But the economy and our markets specifically have proven to be very resilient, right? And that's in spite of kind of what's happened at the longer end of the curve and even as you've seen what's happened on your speculation around the shorter end of the curve, we've gone from 5.25%, 5.5% to 3.5%, 3.75% we ask ourselves if we do get into a tightening cycle, if it's 0.5 point, 0.75 point, you're still well within a range that our industry and the economy is weathered pretty well. So I guess, ultimately, we'll see, if we look at our customer confidence through last week, it is not showing any indications that our customers are thinking about their own prospects differently given all the debate going on at every level. So anything else you got there, Matt.

Agree. Agree.

And maybe, listen, I think it's totally point taking the economy, like you said on the construction side, I sell far better than expected. And I think as we look at the data, I think what I want to make sure to touch on is you still have done much better than even what the underlying has been showing, right? You look at construction starts in terms of square footage. You look at construction spending and yet you're guiding to 10% growth, right? So you talked about the macro products a little bit, but it feels like there's a little bit something here, either the data that is a little bit -- maybe it gets restated ends up being that it was better than we thought or there's something that URI is doing that's ultimately delivering better results ahead of what even the industry or the macro would suggest. So hoping you could kind of unpack that for a little bit like for us. What are you doing in terms of differently that go-to-market either winning more than your fair share? Like what is a little bit different about your results that you're driving.

So it goes back to the strategy we deployed as far back as 2010, coming out of the recession, right? We decided we have to be aligned with the largest contractors and largest projects that existed in our space because we learned if we wanted to have resiliency we needed to be those people that we're going to get to work through downturns, upturns and just really counter the cyclicality story that we were pertinent with. It's actually playing out really well. We spent a couple of decades building out this network and this connectivity, the largest customers and contractors in the world, and it's really playing out well during these mega projects. So this isn't anything new for us. We've been focusing on major customers and major projects for so long, but this is just a manifestation of that strategy. And the other big part of that strategy is our one-stop shop strategy, where we started talking about specialty once again, 20 years ago and years to the Street and more consistency. And that strategy has developed now into 7 different business units that solve different problems for our customers. And as you can imagine, these megaprojects have more complex needs. You can assume the larger the project, the broader the needs are going to be. So the competitive moat that that's created is really why I think you see us outperforming the industry overall and all the data points that you point to that show maybe we shouldn't be able to have double-digit growth right now. It's a lot of hard work. It's sticky to the strategy and -- but it's building a long-term relationship and that customers can count on.

The one thing I might add the tax on to that is the vertical strategies we've introduced. So as an example, in 2016, we publicly introduced what we call our Power Vertical strategy. And it's not that we foresaw the electrification of the economy or AI or anything along that. We just recognize that these were very demanding customers that spent a lot of money consistently and that we could have a -- our differentiated value proposition could actually be truly valued by them. And so we probably got a 10-year head start on everybody else in terms of developing those relationships, not just with the E&C companies, that focus on power verticals, but the utilities themselves. And we did that for a couple of reasons. Not only is it a huge market, but it's obviously a pretty stable market. More recently, it's had these secular growth trends, and we've been very fortunate to be well positioned. We did the exact same thing in infrastructure. If you go back to the acquisition and , that was really predicated on our belief that we could have a differentiated value proposition in the end market that clearly, there have been dramatic underinvestment domestically and infrastructure going back probably to the 60, 70s or 80s, depending on how you want to look at it. That was really part of the strategic justification for the Neff acquisition. We did not foresee Congress finally passing IIJA, we figured some point, the bills come due, and it's going to have to be paid. So we've been very -- I'd say we've been fortunate and looking around the corner and building vertical strategies that complement everything else Matt talked about.

Yes. No, I mean it's definitely paid off again, a very good performance. And I want to remind the audience, if you have any questions, raise your hand at any point. I want to make sure you get a chance to ask your questions. Otherwise, I could go forever up here. But maybe just to that point as well on the rental penetration, that's been a good story as well, maybe more for the broader industry, right? And I think part of that -- one, I guess, I want to understand, I guess, where are we today in terms of that rental penetration? Where do you think that can continue to get to? Does it stabilize at a certain point? And what impact do mega projects versus kind of local commercial half on that penetration? Does it skew it one way or another?

So ARA will report, as they measure it, rental penetration is in the high 50s. I think it might be 59% right now. That's up 5 or 6 points from 5 years ago. Where it can go? You let some people point to low 80% in more mature European markets. I don't really know if we know where that's going to go. But we think the total addressable market is even larger than $80 billion that ARR speaks to. So we really think there is a secular play here. I believe that penetration in our industry is a one-way staircase. For the 30-something years I've been doing this, I haven't seen customers rely on rental and then decide to go backwards because the industry is so much better at what we do. We're so much more reliable. And I think the sophistication of the industry and the reliability of the industry allows people to take the math that works it pencils to rent. The shared economy actually works. So we think secular penetration is a big part of the play as well.

That's super helpful. And I guess maybe to that point, you've seen just continued growth and part of that has driven more -- perhaps more aggressive growth from other necessarily entrants, but smaller players or other OEMs. So try to leverage the rental side of their business a little bit more. So as you look at that, what is it doing from a competitive standpoint? What are you seeing in terms of discipline around supply? Any concerns around that? Or -- how are you thinking about that growth that you're seeing from others?

I'll start and Ted, you can add on, but we feel really, really good about the discipline of the industry, first of all. We think the supply/demand dynamics are strong. We think the demand overall is strong, which is the first part of that, that you need. But even the behavior and the information that's available to the national companies has really created a disciplined industry that maybe didn't exist pre-'09. So that's first and foremost. The second thing is the opportunity for the industry to continue to show discipline as a leadership group. So when you think about the top few in the industry, I think we have a leadership responsibility that we don't use our pricing power to take the air out of the room or to do anything that's not healthy for the industry. But to create more value for the customer and more services. And that's what we're spending our time and energy on doing. And I think it's paying off. This is a competitive industry. There's always new competitors in the industry. But the competitive moat that we've built and a couple of -- to be fair, a couple of the other national players have built is hard to replicate. That distribution network, 1,750 branches with all the different products that we offer is quite an advantage that we continue to trade on.

Yes. I think you touched on all of that.

And maybe just another way to kind of unpack that a little bit further. I guess when you say discipline, -- is it -- are you referring to purely supply or also on the rental rate side? Are you seeing this in across both? How are you -- any way to kind of contextualize both differently?

For me, I would say just smart activity. So not forcing fleet into a market. One of our largest competitors pull back on fleet a year or so ago, and they were public about it because they had absorption opportunity. I don't know that, that would happened 20 years ago. So I just think not forcing fleet into the market making sure you're meeting the demand responsibly while running a profitable business is what we think about when I think about this in the industry.

Yes, I agree. I mean, we've talked about this discipline for a while. And I think if you go back and you think about the last few years, some of our competitors' actions, public competitors, '23 and '24 really cut back their CapEx even as they were growing their business and growing at healthy levels. They talked about rebalancing kind of their own capacity. And while the public saw that privately, we saw it much broader across the industry through kind of aggregated data we have access to. And so that is a critical sign of discipline. When you rightsize supply demand, that obviously puts the industry in a much better position to achieve positive rate, right? Now through that, even though you had negative time you've industry-wide, the industry actually had a positive rate. And I think that is the first time in the history of the industry that's ever been achieved. Ultimately, supply/demand is the ultimate arbiter rate. There are other factors, but that is probably the critical one. And coming out of that episode in '25, you saw that discipline continue where [indiscernible] industry-wide was positive year-on-year every month, and that's continued year-to-date through '26. So I guess the summary there of the takeaway is this discipline is very real, and it's helping support companies achieve positive economics on the assets they employ, and that's critical.

No, that's very helpful. And I think maybe last one on kind of the supply dynamics. I think you've talked about being a kind of the highest rates of time utilization that you've been in the past? And just what does that tell you about the backdrop that we're in today, the implications to rental rates kind of from here or we start to see CapEx pick up seems like in a very kind of disciplined way to your point. But just -- yes, what is that kind of tightness in the industry tell you?

Without talking about rates specifically, I would just say the base is there to drive productivity, right? And if we can drive that productivity through efficiency or through pricing through making sure that we're managing our costs, that's really the goal here. And we can be a better partner to our customers, right, by driving some of that efficiency as well. So I think that's what we're focused on. That's what we laid out when we set the goals for the year, and that's really what we're talking about.

Okay. No, that's very helpful. Again, if anybody has any questions, feel to raise your hand. Maybe just I guess continuing along those lines of investing in the business, I guess, part of what I want to understand. So we talked about a little bit on the CapEx front. The M&A side, surprisingly, it was an area of always that you could always drive growth in. But increasingly, I've been kind of caring about it as a potential risk. Like are you -- have you gotten big enough where it's harder to increasingly move the needle with deals or acquisitions? First, how would you kind of respond to that? And how would you kind of describe, I guess, your pipeline of opportunity on the inorganic side to us?

The pipeline is pretty robust, and we've been talking about that each quarter for quite a few years now. We have an internal team that works really hard at generating deals as well. We're just very disciplined about what's going to get over the transfer. We've talked about our 3-legged stool of it needing to be strategic cultural. And then finally, that financial hurdle that needs to cross. And that's the one that we can't get all the deals over, but we're going to be very disciplined. We've shown that in the past, more recently in a pretty big way last year. So we'll continue to work this pipeline, but there's not any shortage of opportunities. And more importantly, it's a capability we've built, it's a muscle that we shouldn't waste. So we're pretty good integrators. We're pretty good cross sellers. So any time we get an opportunity to add another -- whether it's new product or new team. to our portfolio to help serve our customers, we're not going to hesitate to do so.

I think the only thing I would add to that is if you go back and you look at our history, people have this perception that we're always doing deals, and we certainly are always looking -- but the reality is the math will show you, it can be lumpy. And there can be years where we don't have much to show for all the effort and there are years where there's a lot more to show for it. So in itself, if people see a period of time where we didn't do anything deemed to be material or considerable. That's not unusual at all. There's certainly, we think, a lot of opportunity in the GenRent side, a lot of opportunity in the specialty side. And then there are a lot of unconventional deals, corporate lift-outs and things along those lines that really are in nobody's radar screens. There are also opportunities for us as we talk about expanding our product suite and going after that much bigger TAM than sometimes people perceive.

Yes. And I know you don't necessarily want to give us an exact kind of this is what we're after. But just curious, as you think about the opportunities of the products, the 7 specialty products you have or GenRent versus potentially adding another leg to this tool, I guess, where are you seeing more perhaps opportunity in terms of without there?

You're right, we won't push shadow what we're going to do, but we would just say that we see anything that's temporary on the job side or in a plant as our right of way, as an opportunity for us to add value and help support the customer. So you could imagine that anything that falls into that purview, we're looking at.

Maybe a last one on this. Which are the 3 pieces that -- the 3 hurdles that people need to get through or the potential acquisition needs to get through, which would be harder to ultimately find, is it the -- the discipline on the financial side, getting a value? Is it the culture side? Like which one of these is a little bit tougher to get a cost?

I'd say the first 2 are gating mechanisms. And I think rental people overall and most of the deals we've looked at and most of the deals that we brought on board would be good fits culturally. So it would be the financial, and that's because the bar is high for us. We set high expectations, and we're not going to wane from that responsibility.

And maybe to your point, it can be lumpy ultimately, when deals get through inhabitor that, should we just assume that there's going to be a little bit more buybacks? How are you kind of thinking about ultimately the deployment of that capital?

Yes. I mean the philosophy of the framework we've used for returning capital or capital allocation more generally has served as well. So it always starts with organic investment and what capital can we prudently meter into the business. You complement that with the acquisitions that you're going to fund out of free cash flow. And after that, whatever we deem to be discretionary excess free cash flow, we return the dividend is a relatively small portion and the balance is returned via buyback. And certainly, we love when we have good deals that are going to help our customers and help our shareholders. But when we don't have the ability to deploy capital there, we're very, very comfortable buying our own stock.

I think last time -- or the last one, I guess, on capital allocation. Last time we talked, I think there was a discussion around the potential upgrade down the road to investment grade. I think I just would love to get your thoughts as to, one, what are the implications of that to capital allocation strategy -- is there any desire to then perhaps be a little bit more cautious near term because of that? Or is there just -- there's so much firepower that you can kind of do both -- but yes, just more broadly, what would be the kind of implications of a potential investment-grade upgrade.