Thank you, everybody. Very excited to have United Rentals here. I don't want to tell you how long I've covered them, but I was a little younger when we first started talking about United Rentals last century. Look, obviously, we all know Matt Flannery has done a great job, United Rentals now for... Been there many years, but as the lead man for-
Four years now.
It's probably felt longer to-.
32 all in, if you count acquisition years.
Matt Flannery, United Rentals CEO, and Ted Grace, all know and love, many years investor relations. Congratulations on the CFO spot.
Thank you.
Congratulations, and you can bring a great understanding of what investors are looking to learn as the CFO. It's great to have you here. I guess with that, there's no 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. Just, we could not have had a better situation than a couple of years of you have the biggest fleet in the industry, and people 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.
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, you know, the infrastructure bill? Just to put some meat around what is maybe unique this cycle versus trying to analyze traditional housing hurting private non-resi.
Well, to start with the housing, then Ted's done a lot of work in quantifying some of these tailwinds that we have. When you look at multifamily versus single family, there's even a divergence within residential. Significant, 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 or a lot of equipment there, period. Even the residential side, which is a very small piece of our business, has actually held up for us because the multifamily has actually grown. As far as the other opportunities and tailwinds, we spoke at length about the infrastructure bill, IRA, the megaprojects 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. Real good opportunities. 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 non-macro related opportunities, we get a lot of comfort in saying that, you know, 2023 is a growth year regardless of the macro environment. Ted, share some of the work you've done.
Yeah. Just quantifying the public pieces, you'd start with infrastructure. That piece of the legislation allocated $550 billion to infrastructure. Within that, there's about $510 of addressable market. There's $40 billion for electric buses and trains. In short of building a factory, we're not gonna participate in that piece. You'd say $510 billion, it's intended to be spent over five years. 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. A little over a year after it was signed by the president. That was very consistent with the timetable we had outlined, you know, based on kind of the research we've done there.
When you think about that's our assets are used on both sides of the aisle. We're pretty, you know, agnostic to whether it's public or private dollars. That's the first piece. You know, we think we're incredibly well-positioned. When you think about these projects, they're gonna 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. You think about our go-to-market approach, you think about our fleet architecture, that combination of Gen Rent and specialty. You think about the technology, Total Control telematics. You know, these are all things we've done that, frankly, are different than virtually all our peers. 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. That's the first piece of public. The second piece of public is the IRA. This one 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, you know, 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.
In the context of a $900 billion market, that's six points of 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 confused with the genset side of the business. This is actually, you know, adding value to utilities, and it's grown from probably 5% of our mix then to now, north of 10. Here again, we think we've got 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-
Yeah.
pieces as well.
Yeah. Can you go through these? The idea of your housing exposure direct isn't the concern. The concern is.
Right.
hey, Amazon's not building that second headquarters. CBRE yesterday said, "We're not doing the office tower in Dallas." Those sort of knock-ons, which, you know, say just they play out traditional housing leads to that a year and a half later. At the same time, some of the pieces like manufacturing, which is $100 billion of a $530 private non-res, appear to have some of those mega project-
Yeah.
benefits on the private side. If you have similar type math, it'd be interesting.
We do. We've looked at autos and we've tried to find kind of like a neatly packaged report. We haven't found anything, certainly we've looked at some of the OEMs that have announced specific initiatives. One in particular has talked about spending $50 billion in North America by 2026. Without naming names, they have about 12.5% market share. If you gross that up, that would imply you're looking at $400 billion north. You know, that'll take years to spend. That's, you know, they are talking about their own objectives, and I think they're ahead of the curve by 2026. If it takes 10 years and it's $400 billion, just play it through our numbers, $40 billion a year, you know, that's four or five points of tailwind to the market, all else equal.
Here again, you know, this is gonna 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, it's unlikely to be that. It's gonna be the household names where we again, are very uniquely positioned to lead those projects. You look at semis. To date, you know, they're certainly north of $250 billion of projects. You know, that's an area where again, these are being executed by the biggest E&C companies. Matt 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. We think that's pretty well-insulated, as is autos, right?
I mean, unless people think we're gonna pivot back to internal combustion, electrification is the future. Those ones we think are pretty agnostic to the macro in the broader sense. Then the last one we've talked about is energy. Again, with geopolitics in Europe, you know, call it Eastern Europe specifically, you know, even if you see a withdrawal from Ukraine and reparations and begging for forgiveness, it's hard to see Western Europe go back to buying Russian gas. 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. When we think about these are, you know, five very large kinda tailwinds that we think about in isolation, largely economically independent.
You know, again, in the context when you all think about this in the context of a $900 billion market, you know, that's what gives us kind of the optimistic outlook we have in a multi-year process that is, you know, whether it's three, five, 10 years, I mean, these are the tailwinds we see that are easy to point to that are, you know, right in front of us.
Any one of them individually could replace the headwind that would come from commercial retail or if you wanna say distribution. To Ted's point, there's just a lot more opportunities to backfill anything that happens to drop.
I'm not asking for you to opine upon a competitor's guidance, but the idea of, Ash said this morning, if I saw the numbers correctly running around the conference, part of it's price, but for their next fiscal year, gross CapEx in the U.S. up 18%, 19%. When you think of the supply chain availability...
Mm-hmm.
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, "Yeah, we just laid out the demand that we hope we can get 20% more equipment." Just trying to get a sense of the reaction.
Yeah. I think that when you think about these megaprojects and some of the drivers of where we think the tailwinds are gonna come from, I think outside of us, Sunbelt's probably as well-positioned as anybody else to get some of their more than their fair share based on their overall market share, 13%.
Yeah.
I think there's plenty opportunity there. As far as the CapEx number, you've heard us talk about this before. It's people calling our guidance a 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-$700 million more in Q4 2022 than we would have. To be fair, if I really wanted to quantify it, say in 2021, we had a $200 million-$300 million pull forward. Whether you wanna add $300 million-$400 million to the back end and take it out of the baseline, you're gonna see more about a 20%+ CapEx growth from us as well.
How much is that 20% a decision of trying to toggle between not wanting to, you know, challenge fleet time ute 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 what went into that thought process.
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.
Yeah.
Because of the lack of supply and the amount of demand we've had. We'll get to more normal used sales volumes.
Sorry to interrupt you. Replacement today, we'd say is 2.6?
2. 4 probably.
2.4 to 2.5.
We'll sell about $2 billion of OEC if you assume cumulative inflation of 20% over seven years.
Okay.
2. 4.
2.4 replacement.
Right.
Your growth CapEx, you know, $600 million-$700 million, something like that.
Correct. If we're also going to be pulling the same levers we did last year for supply and demand, right? If we have to hold off on opening up some of the used sales channels that we haven't been enjoying for the last two years because we needed the assets, we still have that opportunity. We are pulling forward capital. We're gonna make sure we're ready. Between the fourth quarter pull forward, we told everybody in January, we're gonna have a heavier Q1. At least 20% of our full-year CapEx we expect to bring it in Q1. We're not gonna get caught shorthanded here in April. 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's 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.
The confidence to do the pull forward in the fourth quarter and then first quarter spoke to confidence for a bull, spoke to uh-oh for a bear, right? The demand profile does feel like it's being, 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 don't think I can get to that extra $50 million in the fourth quarter. I can't even get it to you now late third quarter." Like, where are the lead times? Are they shortening notably? If they 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 three vendors. We have pretty much three qualified, really qualified vendors in each category. That share has been split a little bit more than maybe historically. I think that's because some of the folks that had a higher share, they are limited. There are gonna 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%-7%.
Most of them, right.
We feel good about the opportunity we're gonna have. If there is any pull-forward opportunities, do not expect it to be in the first half of the year at all. That's why we're front loading, 'cause we wanna 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.
Let's assume the megaproject drives the business while the commercial office tower goes away. The way you're structuring these contracts for these megaprojects, 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 with multiple years. We want some good economics on it." What are those conversations like? How would you compare the traditional office tower versus a megaproject for-
It's really about the.
Sell factor.
National accounts, right, versus local accounts.
Yeah.
They certainly, just as we do with our vendors, they'll leverage their scale. There's also a lower cost to serve-
Yeah.
-on these megaprojects, It's actually valid. It wouldn't matter what type of large project, but our national accounts have a price expectation that we'll meet. We feel very comfortable. The conversations are more about surety of supply, quite frankly. You know, this has been a couple of years of tight supply. The total cost of equipment rental on a project is 2%, 3%, but it can have a really large impact on the speed at which that project can get done, which is how they're really paid.
Yeah.
When you think about that, the conversations with our key customers is more about, "Here's what I'm gonna need. Are you sure you're gonna have it in time? Are you gonna be ready?" than price.
The pendulum of power, you would say, is still with he who has equipment.
I would say our-
Actually.
our value is well appreciated for these megaprojects.
Okay. These megaprojects, are they bringing to light some specialty product that you're like, "Oh, that might be the next acquisition"?
Not anything unique that we haven't thought of before.
Some things you don't currently own.
Correct. But yeah, I wouldn't say unique, but I would say that the larger the project, the broader the breadth of need.
Yeah.
Certainly it's a competitive advantage. I mean, outside of cranes, there's not really anything on a megaproject that we won't be supplying at pretty large scale.
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 General Rentals, there are still some opportunities to go, "Hey, we..." Especially if the equipment stays tight.
Mm-hmm.
That General Rentals is not the preferred when you think of returns on capital and so forth. As we sit here today, like competitive advantage of having equipment or maybe getting some geographies who are a little lighter, is General Rentals right there with specialty if we think of whatever the next deal we're gonna hear about?
No. I would still say we have a lean towards building out that specialty footprint, deepening penetration on all of those products.
Okay.
I'd say specialty overall is much less penetrated than General Rentals product lines for the industry, and the same is for us. I think we still have a lot more head space in specialty. Most of our cold starts are with our specialty teams, and we'll usually spend an outweighed amount of our growth CapEx compared to their 30%, approximately, share of growth CapEx on specialty growth.
When we think about your productivity number, the amount of equipment you're bringing on doesn't sound like it's stressing your time utilization. At the same time, you know, H&A rates up 10%, time utilization down 100 basis points. When we think of time utilization, the way you'd run the business this year ideally, would it be, I wanna take the iron, win that business, it's multi-year business?
Mm-hmm.
I would take time utilization within 100 basis points of a year ago all night and day, and then play the rate game, what I can get on that, right?
Yeah. I said it last-
The idea of rate, time utilization's not gonna be flat. I mean, it's just, it's just a too high comp level.
Other than the fact that I said this last year and I was wrong, the team outperformed my expectations, so I may not be the most credible person, I would take within 1% of 2022 time utilization 100%.
At some point, there's some products that you gotta lighten up a little bit so that we can be as responsive as we need to be for these key customers.
Okay. Sure. 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. I'm just curious, was there a thought? I mean, like the way Caterpillar's done free cash flow, it's all repo and dividend. Not saying you wanna give away all free cash flow every year. I'm just curious the thought process for 2023. How do we even wanna 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.
Mm-hmm.
The dividend had a, you know, a significant statement by it saying, "Hey, we believe in our cash flow." The repo, I'm just curious how that also factored in the $1 billion. I'll let you answer.
Yeah. Do you want me to start or...
I would just say when you think about. First of all, we already had the repo out there, right? That would've been a bad mess to pull it back. Most importantly, we didn't need to.
Yeah.
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. I view the, you know, 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 the bow on that resiliency package, basically. 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. 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 at what comparable equities were paying. It could be direct peers, it could be indirect peers, kind of the XLI, the S&P. You know, we felt like it should be more than a token dividend. 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 kinda, you know, 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. This year, we've talked about little over $2.2 billion of free cash flow, be about 18%.
It leaves us with a lot of, you know, kind of latitude to do other things, you know, to 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. There were a lot of factors that went into scoping it. That's, you know, at a high level. We've been pretty consistent in the, not just the strategy to execute the buyback, but the dollar value. These are all things you take into account when you think about scoping the size of any commitment you're gonna make, publicly.
When you see changes like this sometimes at a company, more perception, and 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.
No.
No. Just simply you just wanna
We use the same metrics.
Yeah
... revenue, EBITDA, and two return metrics that drive short-term and long-term comp. No change to that.
I think there's-
Sorry.
I actually think about it. Admittedly, I lean towards thinking about it as an operator. When I think about why we didn't do it a couple years ago, even though we had to, was we wanted to make 100% certain that it wasn't gonna impact the way we run the business.
Okay.
Right? This is about distributing excess capital, not running your business to hit a number for to distribute. 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? We know time you set a very healthy level. These conversations you're having with customers, if the pendulum of power you feel is still availability is still a weapon, and our scope to do these megaprojects is probably not as unique as nobody else can get equipment, and you have the biggest fleet, but still, it's a competitive advantage dynamic. When people think about, "Uh-oh, here goes rates," and they're gonna really dissipate quickly, what's your response to that?
Number one, I think we value partnerships. 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? I don't like to even think about it as power. You can commoditize yourselves on the way up just as much as you could on the way down. I've always thought that, 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. 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.
Educate me on if it is a multi-year project, what kind of pricing are you establishing in year one? Are they signing up, "You're our three-year supplier"?
One of the reasons why these, why rental is so important to these projects is there's not many assets. If it's a 2.5, three-year project, there's not many assets that are there for three 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 quarter of the time of the project. There won't be set pricing for multiple years, but there'll also be different equipment needs, and there'll be different phases and different contractors who are really our customers, right? The construction manager runs it. It's all the subs that are coming in, and they'll be coming in at different phases.
To the point of the question, do we get locked in at a number that inflation may run away from? It's not necessarily fixed pricing. There's a reasonable expectation, but as dynamics change, we can flex with the market.
When it comes to winning the business, not saying they can't switch you out, but are most of these conversations like, you're it, you've got this for three years. It's not up for renewal necessarily a year later.
The switching costs are more painful than the dollar of savings or anything else. It's really about you do your job, you meet your, the demand, and you give the service you need, you're gonna be there. It's about the incremental trades that are coming in, who's gonna win that bid, 'cause it'll 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 'cause 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? Yeah, there you are. Come on, Omar. Yeah. Actually, there's a Diane, can you get the mic over to Omar? Thank you.
Just to let David rest a little bit. Two quick ones. One, you talked about the fact that any one of these new verticals stimulus acts 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, how much concern do you see on crowding out private sector activities? Number one. Number two, in the power sector, how much of your business is OpEx related versus CapEx? I think there's quite a bit of OpEx-related equipment that you provide. Historical share sense as to how much was one side of the, you know, financial.
Sure. I'll take the first part, and I'll let Ted answer the MRO section. So as far as the megaprojects getting crowded out, it would just be a better supply-demand environment. What we're not gonna do is we're not gonna trade off one for the other. The customers are gonna be doing those megaprojects are the ones we're gonna be focused on because that's the long-term play that we decided many, many years ago coming out of the Great Recession. It's 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. 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 were gonna get more than their fair share of the work, and it's playing out in a better way, in this instance. I don't see any change there. It may create some opportunity where the big guys are focused on 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 see in a normal versus a normal operating environment. 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.
Omar, I don't have those numbers. I can come back to you. Certainly, the base of the business is gonna be MRO. That was the intent when we started the strategy in 2016. The last couple of years, as you've seen renewables, you know, 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. That's part of IRA, as an example. You know, certainly, you know, you don't see a lot of conventional power plants being built these days, right? 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. I think I'm comfortable saying the large majority is gonna be.
More MRO than capital.
MRO. I can come back to you with those numbers.
Similar in downstream, right? Where we're inside the gate. 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, you know, your Blue Thursdays, what kind of, you know, pricing we think we could get and the channel. What was your folks internally, their interpretation of how Ritchie went in Orlando? How does that measure up with what you were thinking you might be able to get on proceeds as a percent of OEC?
I think it came out strong, specifically since you know, I don't think there's a great need for companies that have other channels to go to auction in a tight market. When you think about that 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 five years ago, where people might be getting rid of floor plans or stuff like that. I actually think it bodes very well for the pricing strength of the, of the end market. The used end market.
Yeah.
You were there, right?
Yes, I was.
Yeah. It was.
Hopefully, you didn't see a lot of new product going across the ramp, I wouldn't imagine.
No, I remember those days where it's dealers just blowing out new equipment.
Exactly.
Yeah, it wasn't. It was the opposite of that. It was pretty old.
When we looked at the numbers, I mean, the only thing that looked weak, it doesn't affect us, was the truck sales were obviously.
Yeah.
-below FMD. Otherwise, the construction equipment did very well across pretty much every segment.
We're about out of time. We have, like, 30 seconds left if anybody has one last acquisition question or something. We'll see if Matt will say on the way out the door.
See if I trip up.
Yeah.
Pipeline remains robust. I can even save you the question.
Yeah. Well, look, obviously appreciate you, wrapping up a great first day, so.
Great.
Thank you.
Thanks, David. Thanks for having us.
Thank you very much.
Appreciate it.
Thank you.