Evercore ISI Industrial Conference 2022

Feb 28, 2022

All right. Thank you, everybody. I am really excited for the next presenters as our Evercore ISI Industrial Conference continues. I am excited to have the CEO of United Rentals, Matthew Flannery, CFO of United Rentals, Jessica Graziano, and the Vice President of Investor Relations, you all know him well, Ted Grace. With that, maybe I will open it up. If you want to give a little preamble of sort of what you are seeing, and I think most people know you are the largest construction equipment rental company in the world. Largely North American-centric in your sales, though interesting, a little Australia, a little Europe now to throw in the mix. I will open it to you. I have questions I am happy to start firing at you, but if you want to give any overarching message right now, I will open the mic to you. Sure, David. Similar to what we talked about in January on our earnings call, we are seeing a very strong demand in the end market. We feel really good that this has pivoted at some point in 2021 from a recovery of COVID to a new growth cycle. We are seeing that manifest itself where the macro is staying intact for us. We talked a lot and continue to talk about the breadth of the demand in our space, both geographically and by verticals. We are not relying upon any hot pockets for the growth that we are experiencing. Additionally, we feel really good about the supply-demand dynamics in the industry, continuing to foster a constructive environment for the rental industry. We feel just as good sitting here today as we had back in January and excited about the 2022 prospects. Okay. With that, I know it is the topic of the day, obviously, with Russia and Ukraine. Just curious how you are digesting that news. Are you hearing anything about demand maybe positively impacted by higher energy prices? Or other aspects of your cost structure being challenged due to what is going on there and the impact that is having on inflation? I will leave it open-ended how you want to answer that question. Yeah, I will start and ask Jess to add in. We have not, obviously, it is way early other than how perfect it is for those poor people in Ukraine, we have not seen any business impacts from this. As you know, we do not have any direct exposure there. But even thinking about from a supply chain perspective, anything that is happening due to the conflict, we are not seeing anything right now. Could there be a fuel price impact, right? Which we are all seeing around North America right now. That could have some impact. A net positive of that could be the impact it has on maybe spurring some activity in what has been the one laggard we have had of oil and gas. So whether that is in Western Canada or whether that is in the Gulf States, we were already starting to see, that may accelerate due to the conflict. Early days with time to develop. Jess, I do not know if you had anything to add. I do not, actually. I think early days is the right way to frame it as I even think through the P&L, right, and the impacts that we could have on the financials. Early days at this point, and nothing that we are seeing at this point that would really cause us any kind of concern. What percent of your costs typically are fuel? I do not know that we have ever isolated them. Ted, I do not know if you have that number handy. Small number. Very, very small. Very small. Very small. Very small. Yep. Very low single digits. You consider half of it would be recoverable through fuel charges on the rental side. So yeah, the answer. Okay. That would be operating costs, David, just to be clear. Repeat that. Sorry. Cash operating costs. Yep. When it comes to wage inflation this year, while we're on the theme of inflation, can you help characterize that a bit between maybe just traditional wages and commissions versus any incentive comp? Sure. Nothing out of the ordinary for us this year as we think about continuing really even through COVID, right, and through last year and the way that we're thinking about it for this year is continuing really kind of normal merit trends that we've seen, labor costs and increases throughout the organizations consistent with what we've seen. Nothing that we would call out where we've had to lean in in any kind of extraordinary way to be able to either retain or procure our labor. As you know, David, we put a lot of work behind supporting our employees. Our retention is very high. Our turnover is incredibly low. We see that benefit play through in periods like this one where we don't see a lot of issues on the labor side for us internally. On the equipment inflation, the equipment purchases, as the years move forward, we're almost into March. Being the big wallet that you are in the industry, I'm not sure if this question impacts you as much as that, but have you seen any OEMs come back for a little bit more than originally agreed upon? There's some thoughts of maybe the inflation number, which maybe you can offset or not with rates, but just give us an update on how the pricing is going for your equipment as the full-year CapEx plays out versus what you originally thought. Yeah. As you know, we pre-negotiate our all 2022 spend, and we're pretty sure and feel comfortable our partners Yeah. To those agreements. We understand the challenges, and that's why we priced in a little bit more than our usual 1% to 2% increase, as we told everybody in January. We feel that's sufficient and we'll go from there. On the demand profile, I'm just curious when you see, and there's some positive, there's negative. You see some of the API data a little bit weaker as a lead indicator. You see the mortgage applications reacting a bit negatively to the higher interest rates. Other indicators. Contractor backlogs look pretty strong. C&I loan growth maybe starting to turn back up. There's some positives, some negatives. You've spoken very strongly about you're seeing robust demand. Just curious, is there anything on the horizon that's making you a little bit anxious about the demand profile? I can leave it open-ended at that, but I think there's some thought out there as well. I'm curious your thoughts on this for demand. The infrastructure bill is more spending, but the limitation in labor and construction, it might be just chasing the same workers and maybe you just take them out of the private market to support the infrastructure spending. Just kind of curious, some of those demand drivers and that labor issue. Yeah. I will answer the latter part first from the labor perspective. For us, David, the infrastructure, where it gets funded from, irrelevant. It is basically going to be the same contractors that we do business with, and they are going to have to deal with the labor challenges. I call challenges versus shortages because we have not had projects get delayed or canceled because of it. I do think people have to work a lot harder to fill the space that we all hear about on a daily basis, including ourselves. But we think that that will be overcome. I think the bigger question is, if the macro stays intact and absent any geopolitical impact to that, we are just seeing the reality of a strong end market. More importantly, the forecasting from our customers and our field leaders, which is the additional information that we get over and above anybody else on the call as far as macro, that you pointed to, we feel really good about. Nothing has changed from our view. As long as nothing escalates to a ridiculous degree on the geopolitical, we think that the end market is going to remain intact. We see infrastructure as icing on the cake. Probably not manifesting till as early as 2023, but not really a 2022 event from our. Not a meaningful event for 2022 from our perspective or from our guidance. Any conversations with contractors looking out to projects maybe in 2023 or later, where they are digesting the rising interest rate environment? The Fed has not acted yet, but obviously the 10-year has already moved. Any conversations, early days on the rate impact on business? Yeah, not meaningful from the customer's perspective. I think you would have to get into the developers, and if people are starting to see some capital spend down the road that maybe they would want to do differently, but we are not really hearing that. That is why it would start to manifest, and we have not heard that yet. Our customer confidence index, just as recently as, I believe we just ended at the end of January, Ted, was as high as it has been anytime in post-COVID. So we are not seeing that from customers yet. Can you remind us on how broad that survey is of your customers? Yeah. What's the touch point of, say, total business? The sample size is about 900 strategic and national accounts, and then we've got a broader set that's everybody. But the number we quote is strategic and national. I mean, the correlation's close to one. What are you actually asking them in that? Is that simply your project visibility, growth in your backlog of business? What do you ask them? Yeah. So it's done during the net promoter score process, and essentially what they're asked is, "On a forward 12-month basis, do you expect your revenue to be flat to up 10% or more?" And so it creates essentially a diffusion-based index that we can measure. I mean, we get the data on a daily basis because the net promoter score process is done as a normal follow-up. When you say highest you've seen, I assume that's an over 10% number then. It's not flat. It's not 10. It's above that. Yeah. The easier way to state it is that the percent of customers that see their revenue down is about 2%. And that's on a 12-month look. Okay. Forward 12 months. Yeah. I mean, best laid plans can go awry, but obviously an interesting data point to start the year. Inflation, right? You look what the CPIs are, the PPIs are. A layperson could say, "Hey, this market's tight. Why can't you get rates at least at that high single that CPI and PPI run?" What do you answer that with? We would answer it more from the perspective of fleet productivity, right? And answer it really from the perspective of in an environment like this one, we do expect that we would be able to generate fleet productivity that would exceed inflation, right? The inflation as it affects our business. So, not speaking to rates specifically or utilization specifically or mix specifically, but rather as we're managing the business and we're thinking about that kind of productivity that we can generate in a market as constructive as this one with the kind of demand-supply dynamic that's playing through this one. Again, we're encouraged that the opportunity for that constructive top line should be there. We felt that way, and that's implied in our guidance, right? We knew what this We felt supply and demand dynamics were going to drive the other two factors. Now the time utilization by the second quarter should get more normalized. We said the other two factors would be the opportunity, so we were pretty deliberate about that back in January, and frankly, during our planning process. Yeah. I'm just trying to think of the fleet productivity numbers for the year. I mean, there is an element of size of fleet in that calculation as well. Like also, the rates didn't collapse as much, that kind of mini mid-decade downturn or even last year versus what we saw in 2009. The comps aren't as easy to grow rate that high. Be it rate or time, I would still argue, you wonder why the rate growth alone can't be at the rate of CPI or PPI. Whatever you get on time utilization is gravy. Fleet growth is gravy. I'm just curious, when you price, do you think of it that way at all? As this customer might be seeing higher price increases in other parts of their business, why aren't we able to get a similar rate regardless of utilization or precise ute? Again, and once again, the reason we talk about fleet productivity is the asset category, where you rent, all those things. So it's an output. Rate truly is an output of the decisions you make. When I think about the methodology of how we're approaching our customers, we all understand inflation, we all understand the need to outpace inflation. We're going to get as much help from that through our relationships with our customers as we can, as well as making sure we're driving efficiency. So, I don't think what you're saying is any different than how we're feeling about it, other than to put a number on it. We do certainly feel there's opportunity to drive fleet productivity well above our inflation that we pegged at 1.5% in a normal year, expecting that 1.5% will be a little bit higher, and we expect to get the appropriate return to offset that. Okay. I was looking at the guidance, it feels very fleet growth is the biggest component, then there's 300 basis points, something like that above and beyond that. There's a little acquisition carryover, but basically it's kind of, whatever, 7%, 8% fleet, 2%, 3%, 4% on ute and rate. The math doesn't, I should say it this way, the guide doesn't seem to support that answer, that we should be able to keep track with inflation via fleet productivity. You would think that would be more- The difference would be if we're talking about our inflation versus a, whatever CPI number you want to throw out there. You hear people talking mid-single digits to high single digits. I think that would, to your point you made earlier, we didn't have double-digit drops in rate or fleet productivity or anything during COVID. To compare that world where we were down 17%, up 12%, that was a totally different world back then. We're much more steady as she goes in the business right now. That's important for our relationships with our customers and for us in the planning process. I feel that we're in a constructive environment. I don't think going to double-digit fleet productivity in the back half of this year is probably a proper expectation. Sure. Okay, that's fine. When I think about when the cycle has these moments, I haven't seen it quite like this, but the lead times are that long on getting equipment. At the same time, you have to always make that projection of where do you think the industry fleet will be as well, right? You're the big 800-pound gorilla, but you got to be thoughtful. On my crude math, the industry fleet was shrinking from the middle of 2019 through the middle of 2021. But the last two or three quarters, it's starting to grow again. The demand might be there to absolutely justify it, right? But it'd be nice if everybody else was shrinking their fleet and you're the only one, right, growing your fleet. When you try to look out now a little further than normal, just given lead times from your suppliers, how are you digesting, and Jess, I do not know if you have some analytics you want to share with us on how you approach this, but thinking about the fleet size exiting 2022, when you look at the numbers, Ashtead, Herc, H&E. They all have bigger CapEx growth, especially Herc and H&E. Ashtead. We got to be a little thoughtful of how much do we want to add to our fleet in 2023. If there is any tipping point where, hey, we want to focus a little more on rate, but there might be some markets we want some fleet to particularly grow for infrastructure. Kind of a broad question, but how are you digesting all that this early in the year? We are probably having earlier conversations with your suppliers for 2023 than normal. Yeah, I would say that you are dead on. That is appropriate. Being that 2022, let us call it pretty much a known, as long as everybody gets supply chain that they think they are going to have. Any incremental opportunity is going to be back half of the year, if at all. You are really talking about 2023 when we are having strategic conversations with them. As far as how our competitors are acting, first off, we are very pleased to see our top two competitors participating in a consolidation of the industry. We have said for a while, the biggest getting bigger is a good thing for the industry. I think them consolidating capacity versus simply adding capacity is a healthy way to do it. Kudos for that. As they have bigger fleets, their replacement cycle will be bigger, their spend will be bigger just for that alone. When we break it down from growth CapEx, I do not think it is tremendously different. We do think the demand as well as the share that the bigs are gaining is appropriate for those levels of spend. We did not see anything that made us scratch our head and say, "Oh, we better think about this different." With all that being said, your point about the balance of growth and profit. We have pivoted to profitable growth, as you know, a long time ago. We are not going to chase the last dollar if it is not a smart dollar. That said. Oh, go ahead, Jess. Oh, no. The only thing I'd add, David, is if you think about kind of start to end at midpoint, we'll look to grow just over $1 billion given gross and used sales. As we think about that as a starting point going into 2023, we certainly haven't started any planning processes on 2023, but we feel good about it, right? As you just think about the kind of momentum we think could continue out of 2023, you add the opportunities that we think we're going to start to see from the infrastructure bill. It's again, kind of set us up for discussions going into 2023 that we think could be really sizable to the business. The equipment availability so far this year, I know this is not the hot and heavy moment of when you take iron, but it's coming, right? It's March tomorrow. Obviously, you're not going to call out any individual suppliers on this call, but can you give us a sense of their ability to hit the dates they promised? Has there already been a little slippage on something you expect in April, May, is now June? Just a little color on that would be great. Net-net, we're on target to what our plan was. Some are falling, some are accelerating. I think that we're not expecting in the first, as I kind of alluded to earlier, we're not expecting in the first half of the year to have any positive surprises, and I certainly hope not to have any negative surprises. If we do, we've already strategized about flexing used sales in the short term to help offset that. I'm expecting that we'll stay pretty close to plan. If there's any upside, I'm hoping by the back half of the year, some of the supply chain challenges that the few that are slipping have will remedy. To be fair, some of them also may have had a little bit of early January, some plant challenges with Omicron spiking up. We talked to some of our partners that had a temporary challenge in specifically the first half of January, where they may have had 30%-40% of their staff out because of Omicron. That is all temporary. It should be behind everybody right now, and at this point, we think everybody will catch up, get on target. The incremental margins implied for this year, I thought it was nice to see back kind of above 55. When you think of, and again, I am not asking for guidance for 2023, but when you sit back and go, "How are we going to build a model for 2023 with certain targets," right? Obviously, if you grow the fleet a ton, you are probably going to give up on rate a little bit, and the margins are not the same. When you sort of build your framework, and look, anything could happen, but the backdrop for 2023 at the moment, you would say with the infrastructure bill and so forth, at least looks fairly solid. How are you building that model for 2023 in those planning sessions? Is it a 55% EBITDA target? Is it, "Hey, we might go lower targeting growth given the infrastructure bill," whatever it may be. I am curious your thoughts. Premature at this point in that level of detail. What I will tell you is we think about in the long-term planning that we do, with a focus towards continuing to increase margins over time. It is really about starting with how constructive we think that top line will be and the focus that we have on being able to generate that productivity at appropriate levels, right? To be able to outpace the inflation that we think, at least now, kind of looking forward with some of the macro estimates that are out there, looking to get ahead of the type of inflation that could continue in the short term. Beyond that, as we think about, okay, how does then the cost structure need to respond accordingly to be able to support those better margins, and kind of that flow through in the 50s, if you will, similar to what we think we're going to generate this year. It's really about the discipline side and the productivity side, right? In terms of keeping the discipline focused on insourcing, not leaning in on third-party, high cost, variable cost. Working through areas where we can continue to belt-tighten and then shift towards continuing to challenge the teams on increased efficiency, increased productivity, continuing to develop out the use of technologies that we have across the network. All of that comes into play when we then look at on net, what do those margins look like, and what are we going to challenge ourselves to be able to provide in terms of higher margins over the period. But dovetailing off of that, right, you're not working in isolation. There are competitors who have Sure pretty strong organic targets for growth, as well as you said, it's a constructive situation that they're rolling up some of the smaller players themselves. But when you think of the competitive dynamic, how should we think about your reaction to some of those targets of what Herc is doing around some of the urban centers and obviously, Ashtead's organic growth on branches. I'm just curious, how do you react to that? I think they both have some white space that they continue to fill out. My point about M&A before is, at one point in time, we had heard people talk about they were going to do it all organically. Net-net, we see this pivot as a positive for the consolidating capacity versus only adding capacity. We feel whether it is through end market growth, some of the tailwinds we talked about, whether it be infrastructure. We see an opportunity for some onshoring in the future. I think today's political environment would only support that. We see the industry, and supported by ARA's numbers right now, update. We see double-digit growth from the industry. We feel good about that opportunity. How long that plays out, we have often said I am very pleased that we do not have to forecast for 5 years, that we have a model that we can flex pretty quickly because I am not sure anybody is any good at it. We do see this as a beginning of a growth cycle, and there is nothing we are seeing today, David, that changes my mind on that for the next 12, and even to be fair, today, 24 months, admitting we really only have 12 months visibility. If it- Given how tight the market is it fair to say also, despite some of their organic growth initiatives, that people are being disciplined on rate where their H&E, right, was the fourth quarter number, but it was up to 4.7 on rate, coming from a little bit of an easier base to grow rate, I get it. I mean, is it fair to say your rate growth is accelerating as we get into the year, right? I mean, that is part of the game plan and what we are seeing across the industry. Is that a fair assumption? The competitors are enabling that as well, right? They are not I think the industry has learned over the years and is responding very appropriately. I am proud of the industry, right? This is nothing like we had seen in the past, either on the way down during COVID or on the way up if anybody is trading off growth for profitability. I think the industry has responded very well. Very pleased. When I think about the capital allocation decision you made, curious to be a fly on the wall when that conversation was going on about doing $1 billion of share repurchase, and even put it out there as we expect to do it this year. Also the lay of the land of what you see on M&A. First on the repo, I am curious of the cadence of that. Obviously, the market's been volatile, to say the least, of late. How should we be thinking about your decision to do the repo, do it this year, and maybe have you been a little more opportunistic earlier in the quarter, given some of the activity in the market? Yeah. The decision to do the repo, I'll start there and I'll talk to the cadence in a sec, but the decision to do the repo was really on the whole as we looked at the strength of the cash flow first and foremost, right? When we looked at that, we looked at generating at midpoint another $1.6 billion of free cash flow this year. We looked at where the balance sheet is, which I'm really proud of all the work the team's done on a balance sheet that's, from our perspective, rockstar status at this point and just keeps getting stronger. We looked at the opportunity that we have, maintaining that target 2x-3x range, and basically from our perspective, not having any real limitation to the type of M&A that we would want to do, should it come available, to further supplement growth for the organization, because for sure the growth is priority number one. On the whole, then looked at it and said, "Okay, we can also get back into share repurchases with this program and feel comfortable that the organic strategy will support M&A opportunities and still provide this billion-dollar capacity to do that program within 2022." You talk about fly on the wall. That's the conversation we had. When you lay it all out, you just say, "Hey, we can do this $1 billion," and it's no real huge sweat when you think about the way the opportunities could otherwise lay out for growth in the year. The cadence, if you're modeling it, I would say, we're going to still pretty much stay true to form in terms of a consistent buy. Could we lean in a little bit here and there if we see a dislocation? We might. I wouldn't expect that we have half of it done in the first quarter, right? I think it's going to be something that'll be a bit more steady throughout the year with perhaps a few lean ins here and there. I do feel very comfortable that we will finish before the end of the year. General Finance was a decent sized deal. I think maybe near about a $1 billion. Right. Now, half an EBITDA term for you now is $2.5 billion. So that's a lot to play with, and thus, $1.6 billion of free cash flow doing a $1 billion of repo. You got $600 million of cash, let's say roughly $2.5 billion to play with on the balance sheet. Exactly. That's a lot of money given your historical acquisitions. Does it also signal to do the repo that there aren't going to be many General Finance sizes anytime soon? Or no, we've got over $3 billion to play with half a turn in the excess cash flow, that there could be deals of that size in the next 12-18 months. Yeah. Or an aggregate of deals getting to that size. I think it is more of that number was not a limiting number. We could do exactly what we did. What did we put? About $1.4 billion That is right. Yep. in deals in 2021. We could duplicate that without even any concern, in 2022. That realization really is what drove the decision, and I think Jess covered the rest of it well. We are running out of time, so my next question or last question relates to that. When I think of M&A for you, right, it has been very specialty centric, except for a couple nice number 5 through 10 size consolidation on Gen Rent. Should I still think specialty? Any appetite with what you have built in Europe and Australia to take the plunge and actually make a non-North American centric acquisition? When we think about our prioritization, first and foremost, like we did with General Finance, it will be new product category. If we can add another product to the portfolio, especially off of something that is a base that we can then grow through our network, we had told you all we expect to double the size of that category for us, that business in the next five years. We are well on track to do that. And it would be specialty overall, frankly, because we have more footprint to fill out in most of our specialty businesses and more penetration to drive. But we are not afraid of doing tuck-in deals. We did a couple last year. If we think that the right opportunity there to add capacity in a given geography on the Gen Rent side, is a smart business decision and the numbers work, we are going to do it. It is a strength of ours and not something that we should shy from because we have the capital to put the work and the capability to integrate and drive synergies. So you will see more of that continued thought process, David, in that priority. I did not hear international in that. Is that safe to say, then, we are still thinking very North American? There are no targets in our mind right now, but we see that as not a strategic imperative, but yet a growth opportunity, and now we have a lens at which to look at it through. But it is not necessary to do our one-stop shop business that we are focused on in North America. That is our main strategy. All right. We're out of time, but really appreciate the conversation. To be continued. But great to hear the update and have a great rest of the day. Thank you so much for taking the time. I really appreciate it. Thanks. Take care, folks.