Citi's 2020 Global Industrials Conference

Feb 20, 2020

CFO, and then as many of you, he's to their right. Matt, a lot to dig into. Maybe we'll just more from just kind of high level. You have a mirror of overall macro trends, given the geographic and end market. Give us kind of an overlay in terms of from the branches. Just from there's obviously not a little bit until we get into the heart of the buildings outlooks here and Without the quarter guidance, which you guys know we're terribly Q4 remains true, right? With the markets will remain flattish overall, and embedded in that is, in fact, the carryover decline in around the 10, could be higher in the first half, suffer than it will be in the back half of the year. CapEx industrial to, let's call it flattish guidance. We're not seeing anything that changes our view. Non-res market is still growing. So it's not the double-digit growth Number- you want to use that we're experiencing, but we still think Digit- carries the ball for us this year. To your point, Tim, we wouldn't in a Q1 use Q1 as a proxy for anything as we end Q1. Macro information supports our view that we share, and our guidance. This is still, although slowing, still growing year, and non-res is probably most of that growth weight. Non-res is a broader. Infrastructure is growing. I guess, in other- Yeah, just talk to that mid-teens in terms of- Infrastructure continues to be a focus for us, as it has been for a few years. The Neff acquisition was a result of our already focus on infrastructure. Tools and how they'd be fun- Stimulus and to help out infrastructure. It's just the latent demand that we decided to index our effort, the infrastructure space. Whether it's gotten carried or the acquisition of Neff, but mostly, I think we're aligned with the largest world, and then local that are doing and will continue to ride spend, and that effort's been playing out well. ability and support strategy, and we I would call any kind of a federal bill icing on the cake, quite frankly. Yeah. I did say Tim. Yeah. We won't get into politics here today. Yeah, that's good. Maybe just I, as a team, were as well, spend the feedback I was hearing from a lot of the suppliers. I know it just fell off a cliff. That's a little harsh. Please slow in the back half. How folks are thinking about CapEx. You have that data, just your sources. Believe that kind of balancing that, how do you think the industry has responded? Well, I think the fog's over. Forecasted growth from the OEM, the larger OEMs, a great result. End result for, and let's even forget about, yes, the drop seemed to be, what we call the drop was more since at the end of January. So take that for what it may. You would assume that it probably. I think the more appropriate thing is everybody extra capacity as we went from digit growth, and I think I encourage that 20% year over year has responded in pretty quick fashion to the industry. That supply-demand stayed in balance for, I don't know, almost three years, where we continue that supply was lower than the demand. That days in fleet, days on rent data that- and as quickly is actually very encouraging to me. Yeah. I think it's appropriate. Your large event, you pretty much said as well. Yeah. Just to function, and we will. Market is basically had like number, just I mean, just given things just- I really, I think at this point, there's a Tuesday versus that's way too granular, I think, for us to worry about because it's such a short part of our real life. But, it did drop off. Whatever the cause and effect was, I can say that we feel comfortable that the bounce back that's necessary will be there for us, given the guidance that we gave- Yeah at the end of January. In terms of the competitive dynamics, I'm curious. There's always a lot of focus, rightly, on which is a handful of the other big renters. Talk about the. I think they were constrained from an ability as the cycle was ramping up, soaking up more of that capacity. As that has changed and lead times have shortened, are you rental channel as they presumably have more, kind of update their rental fleets? I would say outside of the dealer-owned participation in the rental business is still relatively small. That really do a good job and are fully committed to it, but I think it's the tail and not the dog necessarily for these deals, right? I don't think that's going to impact it much. The question about lead times and can companies, rental companies that don't have as much leverage, can they respond quicker? That could be an outcome. I would assume the OEMs are also structuring their capacity and their build-out appropriately so that they're not carrying too much inventory, so that lead times may not the volume will early in the year, but many people that you guys meet with that are our top vendors, they're appropriately pacing their capacity and their build-out to what the demand is. So, on the margin, maybe that could smaller companies to respond a little quicker. But we're still taking out a capacity, if you use any number within the $1.9 billion-$2.2 billion range that we gave for CapEx, with a significant absorption of capacity we normally do. Got it. Okay. As far as from an OEM perspective. Yeah. Understood. Margins and returns. One of the comments, hey, it felt, but one of the facts from just the investment in some of these services, which inherently less capital intensive, which is good. Just talk maybe about one or two that are getting a larger percentage of the, maybe the attention or the investment dollars. As we said on the call- Great real clear about that. Because of that slower growth, investments that were business opportunities and solutions for more attention requirements. That is the cause and effect in these investments and been focused on these investments. But we've ramped up a little bit some of our services business and the CapEx is to spend there, not They're repairing customers are doing -saving that we think we should also whether it's owned or rented, and for people to operate investments we're making that we think are appropriate, being a leader in the industry, and great opportunity to solve more problems for our customers. There's a lot of latent demand for both services and training, and those are two coupled out that may have had specifically flow through in a slow growth quarter that we pointed out too. I didn't want to-- That 1% growth rate, that's far and away the bigger impact. That was one of the highlights that-- Most definitely the biggest impact is the slow growth and our decision, frankly, to continue to have the kind of cost structure that we believe we need to have the capacity for our customers and service the growth that we are seeing in 2020. Mm-hmm. Yeah. So just from a service effectively, you're outsourcing is one way to think about it. Just-- Yeah. Think about it as total fleet solutions. There's some mix of equipment that some of our large customers have on site that they need support for. Just because we don't own it doesn't mean that we can't add our expertise, specifically in the products that are non-dealer related. We're not talking about going after the Caterpillar business or the Case business. Those folks are very good at what they do. But there's a lot of demand and a lack of fulfillment of that demand in some of these other product lines that we're very, very familiar with, that we're the largest owner of and supplier of, that we think we can help out a lot of our customers as opposed to them having to do that in-house. Maybe do it more efficiently and effectively for them. Yeah. You're hearing that from a number of OEMs, just the shortage of service techs- Yeah It's not getting any better or not- If we could get that higher and flex that capacity appropriately to different channels of opportunity, that's really how we're looking at it. Got it. When you talk about, it's been a little bit of a pause here, but there was a kind of a crescendo of M&A over that period. Just give us a little bit of a refresher in terms of synergy capture duration. I would understand on some of the larger ones. Sure. The synergies have been captured. We've talked about realizing $6 million in the fourth quarter for BlueLine, and that really completed the realization of the synergies that we expected to get on BlueLine, which we had called out of being about $45 million. The $19 million that we also called out for BakerCorp, we have achieved as well. Both of those a little faster than we had originally talked about. So too with NES and Neff. We've gotten those synergies as well, and again, a little faster than we had expected. Presumably, the M&A playbook, it's gotten quite large over the years. Yes Pretty well-tuned at this point. Yes. Yeah, the playbook is, I believe BlueLine was our 280th deal. So we've got a pretty tight playbook on it. Yeah, that's good. Stay with you, Jess, just on capital allocation. Sure. Just some changes there. Talk about what it means from a, just the significance, obviously much more focused, but not entirely on debt pay down. Just how you're keeping flexibility with buyback and potentially, I guess, a little bit of room for M&A. Sure. Just balance it with the three. Sure. No, that's exactly right, Tim. Our priority, as we talked about on the call, will be to continue to reduce the leverage in 2020. We've earmarked about $1 billion to go towards debt reduction this year. In addition to that, when we look at the $1.7 billion of free cash flow at midpoint that we expect to generate, feeling comfortable with $1 billion earmarked for debt reduction, we're also comfortable underwriting a $0.5 billion share buyback program that we'll do over the 12-month period. And then what that does is it leaves us a little bit of room for the continued tuck-in specialty extension M&A deals that we've talked about being now, as we also focus on continuing to absorb and leverage the deals that we have done over the last 30 months and really driving the value out of those deals. Mm-hmm. From a cost to capital standpoint, there's been a number of refinancing activities. Just talk about what that's yielded in terms of how you think about your own cost of capital. Sure. We've been very pleased with the debt activity that we've had of late, having refinanced a bond last week at 4% with a 10 and a half year note. We're also pleased with the, about a month and a half ago, at sub 4% for eight-year money. We're very comfortable with where we are right now in the debt profile, and we'll obviously continue to look at opportunities to push out those maturities as that comes available. As far as cost of capital, we're sub 8% right now, and that's obviously a North Star for us in running the business for returns. Ensuring that the decisions that we're making will always yield us returns well over that cost of capital. But your internal hurdle rates for deals, you are not flexing it down with We are not. Yeah. No, we are not. That is going to vary just based on the deal, right? If it is a specialty deal or a gen rent deal, it is going to have different thresholds. But all of those deals really rest on what is the IRR that we believe we are going to be able to generate in doing that deal from the financial aspect. Then obviously, there is the strategic and the cultural aspect for us as well. Having done the deals we have done, obviously, that bar is a little higher these days, but has not flexed with The change that we've had in the cost of capital. Got it. Before I go on, does anyone have any questions? If so, just raise your hand. Matt, earlier you just talked about this ability to kind of move service techs between branches, just keeping them busy. Could you just talk a little bit about the network, moving equipment between branches, and anything you could give us in terms of insights on cost to serve? Sure. Just for clarity, if I misspoke, it's not really necessarily moving them across branches, but centralizing functions. What the density allows us to do is centralize functions. This way, spread the need in a given network for other branches and maybe centralize them, and also taking that capacity with the techs to help some of the customer service initiatives that we're talking about. But one of our inherent advantages of the network is exactly that, movable assets to hot pockets, and more importantly, moving them away from pockets that are declining. We think that's one of the big inherent advantages that scale has given us, not from a national perspective, but within given geographies. Having that network to be able to share amongst from, whether it's to serve a customer's needs that even though this store doesn't have it, there's one nearby that would, is a big part of our value prop to customers and why our surety of supply, we think, is a competitive advantage. Then taking those assets and spreading them across for real-time availability is important, and it's something that our team is very focused on. Whether it's their compensation that allows them to worry about driving economic value for all versus a fiefdom of an individual branch network. Pushed over the last 10 years, and we think it's helped the company as a whole have this return focus as opposed to just market share growth focus. That's a pivot we made coming out of 2009 that's really playing out, and the network allows us to do efficiently. If I can add one thing. What we have is to be able to manage moving the fleet across analogies that we use don't necessarily limit branch to branch, but within a specific metro, within a specific geography. Branch itself is agnostic, and it's more a function of having that pool of fleet appropriately to a customer within that area. Thank you. We'll switch to fleet productivity, Matt. As you think about the tier, I think you talked about in excess of inflation. So being full year coming off what was a fourth quarter. How do you, I guess, one, that your confidence, you obviously wouldn't have said it if you didn't believe it, but your confidence level in that fourth quarter and then maybe within that, within the components that make up fleet productivity, where do you think the greatest upside lies? As we talked about in the Q4 call, extra capacity throughout the year. Structural and expected with the deals that we had done to run high. Even though we're not giving the individual components, these three interplay with each other. The capacity was the greatest opportunity and reasons why we'll get to positive fleet productivity this year, and it's inherent within our guidance. It'll be less in the first half of the year, but certainly as we get to our seasonal build at the end, that will certainly drive our fleet positive. Frankly, that we can do that. So implicitly, it's inherent in our guidance that by the back half of the year, we'll have productivity positive for the full year. Got it. In terms of the tension that always exists in terms of balancing time and rate, just talk to how you manage that across at the branch level, where maybe parts of the market where utilization was hit a little bit harder. Relative to other areas. Is it managed, again, at the branch level? Or just talk about how you- Well, first of all, and I said this, I'll take this free opportunity to say it again. Fleet productivity is not at all a change in the field. It's a change in the way we communicate. The tenets of strong, rigorous rate management and assets have not changed at the branch, and it's still a very strong focus. It's at the outputs and the interplay of mix is what we've changed from a communication perspective. What I would say is it happens at the rep level when we're talking about rate management. We have a proprietary pricing algorithm that even at the rep level, as I am quoting you an asset, I can get on my feet. This is a very rigorous process to continue to make sure that we are getting the fair rate for the services that we provide, and that is rep to rep, branch to branch, and rolls up to the overall company. The fleet management part of it from the asset allocation perspective and the asset absorption perspective is done more on an asset class. Category of assets have different attributes and different goals for them to achieve, and the branches have to earn their way, not just to new capital, but to keep capital. This is where we get to use this fungible fleet throughout that. We will aggressively move assets as we have to. Two, getting through the absorption of the BlueLine and everything sit a little bit longer. There was obviously a disruption to the external. If you are worried about cross-pollinating employees into one cohesive branch. Getting the cost synergies out, and we are probably a little more internal focused than external focused. That will not repeat in 2020. We will be much more aggressive on moving fleet if it is not absorbed at the local branch network fleet productivity metrics. How does mix play in? Should specialty continue to grow? On one hand, I think positive for mix, but you mentioned earlier some challenges within industrial. Do those balance out or think about mix in that you have provided. It is definitely a factor in terms of how it plays into what ultimately the fleet productivity will be for any one period, in that it is not just a do drive for time or drive for rate, but really the overall fleet mix growing specialty, but also as we think about the mix of gen rent fleet that we are renting to customers, that we continue to move towards more price. You are going to see that show up in the mix calcs. Why the move to fleet sense in being able to provide an output across the interplay of those three factors are not being made for just one factor. It is actually across the board. Got it. Okay. Maybe I will switch to Specialty. It was great, helped to set up just a great day with all the team there in New Jersey just to highlight the various components and parts of that story. Maybe talk to, Paul had outlined there that a target of getting that business to $3 billion-ish in revenues in four to five years, which come a long way in a pretty short time. So maybe just talk about some of foresee there, which I presume is in an organic. Have any M&A. So we- On goal. Many years because of M&A. But that goal- Sure if there's some M&A opportunities that meet the threshold I just inferred to earlier. You're talking about whether it's in 2020, whether it's a four-year or five-year K here, it's going to be somewhere in that 6.5-8.5% organic growth without any M&A to get there. We think we certainly see a path. We will continue to invest in specialty growth. Part of it's going to be penetration, part of it's depending on the product line, building out their network. We still have different levels of maturity in the different specialty businesses, but we think there's ample organic opportunity to reach that goal in the next four to five years. Mm-hmm. I'm sure it varies widely within that, but is there a way to, as you think about with rental penetration in gen rent in the fiftyish zone, what if you summed up especially any way to size that in terms of rental penetration? It would be a mixed bag, depending on the asset class. Trench would be the lowest. You've heard the trench guys talk about if you've been to Specialty Day, non-compliance is the single largest opportunity that the whole industry has, including United Rentals. Even though we're the largest trench player in the space, in the world, we can get plenty of growth out of North America, the U.S., and Canada, just strictly by continuing to eat away at non-compliance and drive penetration of the product. We don't have to take an ounce of market share- to get growth in the trench business. Power, a little bit more mature, right? Depending on what level of power you're playing in. That's why we'll continue to add products to our power and HVAC group. It depends on each asset class. I wouldn't guess what the overall penetration is, but I would say it probably lags gen rent overall in specialty. It's a little bit more of a solution-based product, more reliance upon having the talent to do it, as opposed to if I'm just dropping off a boom lift or a skid steer. You've got a little bit of engineered solutions in a lot of these products, and so I would think people and talent is probably more of an inhibitor than fleet penetration. I think as we continue to invest in the people, we'll continue to get some secular penetration in the space. But from a profit standpoint, that presumably, the discussion to drop off the, in your example, to drop off the boom lift, that rate's probably first, second, and third part of the discussion, whereas specialty, I'm assuming price or rate is a lot further down in terms of- It's an engineered solution, right? It also depends on the end market you're going to, but I would agree. It's more solution-based. A lot of these products, even the drop-and-stop products, you're there to drive productivity and safety for the customer. So how you, the broader your usage of the asset and the problem you're trying to solve, gives us more opportunity to help the productivity, save the customer money, and that'll dictate the price. Got it. Maybe let's talk the used market. It's always a little difficult in just looking at the results from a margin perspective. Is there so much noise that can kind of filter into that? Just, and I don't know if you were at Ritchie this week, but a big Ritchie auction, just update us in terms of what you're seeing from a used standpoint and what you're assuming or what's baked in for 2020. Jessica? Sure. So market continues to be healthy for us because as you know, Tim, we sell the majority of our used fleet through our retail channel. Which in the fourth quarter was strong, especially considering we sold about 40% more fleet through retail fourth quarter 2019 than we did fourth quarter 2018. As we think about 2020, the look back to 2019 and using the auction markets more than we had in the past was really more a function of the beat-up fleet that came off of the oil patch. We think we'll still continue to see a little bit of that bleed in through, call it the first half of the year, first quarter. But, as far as used, still continuing to leverage a strong retail market, that's really how we're thinking about 2020. Yeah. You've mentioned oil and gas. When you think about from a full cycle perspective, the profitability of oil and gas, is it, I mean, is some of the cost maybe a little understated when you think about, I'm renting this asset at this price, which is great, but then am I flowing that through in terms of what I'm ultimately going to realize? It lags, right? So full cycle, it's still a profitable business, but it's a great point that it lags. So when that fleet is out there earning its money, it's worked a little bit harder. You get a little bit higher rate, by the way. You get a higher rate on the product when it is on rent. You are probably doing a little less R&M to it because it is not turning as much. It is out there on the rig, and it is staying out there. Then when you bring it back, you got a lot of catch up to do, quite frankly. There is just a timing difference, and that is why you see it as the rig count dropped 25%, our volume dropped 31% Q4. You see all that coming back. Now you are playing catch up Yeah with those assets, and that is probably more the attribute that is unique to oil and gas because the assets just stay parked out there, really worked hard, which is why we charge a higher rate for them when they are out there. That catch up is the $12 million that we talked about in the third quarter and the eight-ish million dollars that we talked about in the fourth quarter. That lagged R&M that hit us all at one time as that fleet is coming back, and we are making the decision of do we put the repair into it, or do we send it off to auction? You get that timing blip of all of that R&M hitting you at one time. Yeah. The important thing is we'd only serve the oil and gas market, other than maybe a handful of pumps that are specialized with fungible assets. We're not going over there having oil and gas specific assets that we're trying to rent in there that we can't move to other markets. I think that's important as we flexed at one point in time, pre 2014, this was almost 12% of our business. Now it's under 4% of our business, and we'll continue to manage that appropriately. But full cycle to the work, because we had to answer this question for ourselves. Even with all the lag and pain that we've absorbed for the last two quarters, it's still a profitable business. Yeah. At 4%, but it doesn't take up the discussion. No. Never has. No. All right. Maybe just in terms of, you mentioned R&M and balancing R&M versus fleet age. Again, this goes back, mix has changed and especially as you've grown via M&A, that's presumably playing a role. Fleet age at 50 months to it. Do you get to the point where that limits your ability in a potential softer environment to age the fleet further? Or are you starting to get to the point where there's a little bit more of a trade-off between R&M expense and extending that fleet age? Some of it, to your point, is the attributes of the assets we bought. You could see it within the data. When we bought BakerCorp, we bought tanks that had 25, 30 year life to assets, significantly different profile than our standard base. When we look overall at the fleet age, and it is why we are saying we are going to spend $1.9 billion of maintenance CapEx, inflation adjusted for the 165, whatever our net ballpark that we are going to sell, it is because we want to keep that fleet age in the high 40s, that we continue to have that headroom for a day when there is a downturn. We are very deliberate about managing this fleet age so that we do have a minimum of 12 months headroom. We still feel we have that headroom. The difference between 47 months and 50 months. Can you get it without too much R&M, additional services to your customers. When we look at that, you guys get to see the whole number. We look at that cat class and within our relevant useful life, or you will hear us refer to RUL rules that we will make those decisions. That RUL will actually include cat class by cat class, the anticipated R&M, and where that breaking point is for as opposed to putting it up for sale. Mm-hmm. Is there anything inherent, compared to, say, five years ago, that more or less one way or the other? What I'm getting at is Tier 4 engines being a bigger part of As that becomes a bigger part of the pie, or just more technology and sensors on the machine. Does that factor in at all? We haven't had it long enough, right? Tier 4 specifically, I don't think it's been around long enough and broadly enough to really have. We're not anticipating for that, but we'll keep an eye on it. Obviously, we aggregate as much data as anyone as far as what we're seeing. in these changes that have evolved in the systems overall of this equipment, whether it's Tier 4 or whether it's computer boards running the circuitry on the scissor lift versus the old hardwire. There's a lot of changes that we track along with our OEMs. We're not anticipating that there's a huge issue going forward or any kind of wall of change that we're expecting. Got it. Maybe talk about digital and just as Total Control has become just adopt. What benefits that accrue well to the customers and then, ultimately to you or I. I'm just curious if you're actually able to get customers to pay for it or is this just going to increasingly become kind of a cost of doing. Control's been around for at different levels, 15 years, as you can embed telematics into the platform and into the system. That's Total Control working tremendously for a portion of our customer base. How do we get contractors on job sites so that they can be exposed to or that they can utilize to drive safety and product? I would say we're 80% there in the use of technology internally. It's embedded in just about all of our systems. Even with us being the leader in usage of technology based in our industry, I would say that we're only 15% of customer facing opportunities with Total Control could be out there. But we've spent the energy and the resources to have over 300,000 telematics devices on our rolling stock, on our assets that we designated where there can be value, and we're getting that use internally. I think now the next opportunity is to show a broader customer base draw from that investment, make improvements to often is still lagging and something it's a great opportunity for our customers. Interesting. Okay. Just going back to that, what are the milestones where you say those decisions aren't obviously going to be made in February, but at what point is it April, May, in terms of your commitments to the OEMs, just how you can kind of flex that as you go through the year? And what will be the, obviously, the demand environment will impact it, but what will you be watching in terms of errors that will signal within that range? We won't see, so Q1 is such a small sample, so you won't see one. It's when we get to that seasonal build of April, May. We see better the absorption of the fleet and demand. We may pull forward Q3 capital, pull it right, so we have slots that we're pretty much the largest customer for just about every one of our top 10 suppliers together, so that they can plan. We'll have the ability to pull forward. Before, we wouldn't see an increase or decrease for that matter in our CapEx spend until we get to the midpoint of the year, where we'd see how that seasonal build work capacity we had and what of our spend starts, which you could almost call a given, that we're going to spend our $150 million to $200 million on specialty regardless of where we end up in that range to fund the cold starts and the organic growth that we have. Flex in that $300 million range, really, we wouldn't really see what that would be until we got to our Q2 call. Okay. Last one for me, just on the oil and gas weakness is well discussed. Was the kind of the austerity measures and the pullback and freeze in CapEx directly in the oil patch, has it been enough to kind of trip the having a broader secondary impact in those intensive regions? In a knock-on effect in the other businesses surrounding that area. As I said before, in 2015, 2016, there was no knock-on effect because people were building the infrastructure around it, whether it's centers, the housing, the multifamily dwellings, everything that pretty much built out. Oil and gas business didn't get even back to that peak. There was no extra infrastructure, and therefore you didn't have that knock-on effect within the areas that we were serving the oil and gas market. Perfect. Great. Thanks, guys. Thanks. Thanks for having us. Yeah, yeah.