Morgan Stanley's 7th Annual Laguna Conference

Sep 11, 2019

Good afternoon, everyone. Next up, we have United Rentals, and we're pleased to welcome Matt Flannery and Jessica Graziano, CEO and CFO. Matt, maybe you can just kick it off. Obviously you're about 4 months into your new role. Can you just talk about some of your key priorities going forward and especially given some of the concerns in the macro environment more recently? Certainly. Great. I would say, give Mike credit for having done a great job starting to prepare me. I've been kind of rolling into this opportunity to lead the company. As I think about my days and how it's changed, the first and foremost thing we had to focus on is getting the executive team in place. Jess was already in place, very fortunate for that. On top of that, we've had two very qualified candidates to split the duties that I was doing as COO. Dale Asplund is the Chief Operating Officer. He's been with the company 20-something years plus, since 1998. Paul McDonnell is our Chief Commercial Officer. Some of you may remember Paul from road shows that we had done in specialty. Paul also leads our sales efforts, and now marketing reports under him as well. Very blessed to have deep knowledge of just the company and the industry to replace the work that I was doing. Underneath that, and I think this is a testament to the depth that we've built as an organization, we had to replace the CIO role with an internal candidate. Dan Higgins is doing a great job. We had to replace Paul's direct reporting relationship to the specialty businesses, which we did internally as well. This has kind of moved that cadence down through the organization as well as a couple of new hires to help with some other initial initiatives that we have in the beginning of what we're trying to formulate as forward-looking growth strategies and things we're focused on. That was the primary focus I had. Aside from that, as I think about how my time is spent, obviously much more interaction with the investment community. Although I got to spend time with customers yesterday up in L.A. That was an aberration, not one that I get to do as much as I did in my old role. But I'm spending a lot more time with the investment community and with our board, and a lot more time focused on strategy. Aside from that, capital allocation has taken up a lot of our time in my first few months. Jess helped lead that. You all saw the result of that was us changing our leverage range. I would say those are the primary things as well as making sure the strategic focus is still there. I tell the team all the time, we have to run the business day in and day out, but we have to look towards the future. One eye on the ground and one eye in the sky. I guess speaking of that eye on the sky, if you can talk a little bit more about the macro environment. Obviously, there is a lot of factors impacting the construction markets right now between interest rates and uncertainty from tariffs and trade. What is your view going forward, and what are you hearing from some of your customers? We are still seeing, believe it or not, our customer confidence index has been pretty stable for the past six to eight quarters and at a good level. It has not impacted our customers and their backlogs yet. I think it is obvious to everyone, and we expected it this year embedded in our guidance, is that the growth rate of 2019 was not the growth rate of 2018 and 2017, but it is growth, right? It is not negative growth. We continue to see that playing out. We will get into our planning process in the back end of this year, see exactly what we think 2020 will hold for it. But we are really not-- I get an unsure and uncertain tone out in the marketplace, but we are not seeing it manifest itself with our customers in our end markets. We are going to stay in tune and flexible to adjust to whatever the market gives us. But to be clear, we do not have that negative pall over what 2020 is going to look like, and we will adjust accordingly as that pivots. You did see some unexpected headwinds, though, in the second quarter between some weather challenges, and then also some integration challenges. Can you talk a little bit about what gives you confidence that you've correctly identified what those headwinds are, and some of the steps that you have taken to remedy that? Right. We view them both as temporary. Weather specifically was very temporary, and the project delays, and we feel like that's back on track and our customers are working hard to keep their projects on time. But separately, some of the challenges that we had with a late fourth quarter integration and the fleet utilization that we endured for that, I think you're seeing from our peers that the end markets are still strong. This was a United Rentals internal issue of stacking the three deals on top of each other. We talked about it ad nauseam, quite frankly, at our July meeting. We've moved past it. Maybe it was an oversight on our part. We've had great success with integrating companies. We will and have had great success with the BlueLine integration. We're still growing pro forma off of this integration. But for the first time, we had a little bit of challenge with time utilization, and we just wanted to be transparent to the community about what we saw, and that was the explanation of the 2.2% or 220 bps time utilization gap that we reported in Q2. That's it. Frankly, moved past it, have remedied it, and how much of it was weather and how much of it was integration, we'll never know. But the good news is the remedy of how you're going to repair it was the same. And- That's just more outward-facing time, more customer engagement, filling that project pipeline in our sales force. That's what we did. Great. Ashtead reported yesterday, and they did see some weakness in some of the same regions that you guys had called out. Were you surprised by that at all? Because I think from our perspective, we would've thought that there might've been some share shifts going on in those regions. Yeah, I didn't get to listen to the details, but it's no surprise to me that there was some slowness of rate of work and growth in the Gulf States. Mm-hmm. Once again, those project delays will have a lingering effect. I think some of the industrial markets we talked about upstream is down. It was the only vertical that we tracked throughout the second quarter that was negative for us, and that's pretty much in line with where the rig count has been moving. Mm-hmm. So they probably had experienced some of that as well. I think those would be the drivers. Got you. You've alluded to some of the green shoots that you've been seeing. I think you also spoke to fleet productivity getting to over 1.5% in the third quarter. Can you just elaborate a little bit more fully on what should be getting you guys there? Yeah. I'd love Jess to talk about a little bit more, but to be clear, 1.5% is our target. That's what we peg our inflation. So fleet productivity is an output, and we'll continue to give color on time utilization rate and mix and how it interplays with it, but it's real important to note that we want to continue to achieve over our cost of inflation of fleet productivity, and that's why we peg that 1.5% as a target. But this will always be an output that we'll report and give color. Jess's team has done a lot of work to help communicate this to the investment community, so. As we communicated during our second quarter call, as we look forward into the third quarter, and without really giving any kind of intra-quarter update at this point, our thought is as we continue to move through the absorption of that BlueLine fleet, right? As Matt mentioned, some of the issues that we had worked through in terms of the stacking of those integrations in specific areas, the continued absorption of that fleet, we have talked about taking us really out through the peak time of this year and call it through the fourth quarter. As you think about the opportunity we have in fleet productivity coming into the third quarter, it is doing better from a time utilization perspective than we did in the second quarter as, again, we sort of work through that fleet. That also assumes that we will continue to have a good rate environment and positive mix. Now, obviously, we will update everybody in October to exactly what that looks like because we have still got September to go. But what we saw at the end of the second quarter would set up that fleet productivity continuing to get better sequentially as we moved out of the second and into the third quarter. Next year, we will sunset all these deals, and you will get more of a like-for-like comparison, and I think then you will see one of the reasons why we moved to that type of communication. Great. You mentioned that one of your key priorities was capital allocation, and you did lower the range of your leverage target. Can you just talk about some of the key factors that went into that decision? If there is capacity to lower it over time? I will just start. Okay. I would just say that first and foremost, our capital allocation strategy has to support our business strategy. When we think about what we need to support the business, we view this change as an end opportunity in how do we handle excess cash as opposed to any kind of a trade-off of our business strategy having to be dampened or in any way taken away from because of a capital allocation strategy or a goal to lower our leverage range. But Jess, give some more color. The work that went into making the decision to take that half turn down in the range included a pretty comprehensive perception study that we did across the market. It included current investors, prospective investors, prior investors or past investors, as well as our sell side analysts, where the overarching resounding message that we got back was lower leverage and wanting us to move towards a lower leverage range. When we looked at that and we thought about our opportunity to continue to grow our business, which is fundamentally our number one priority, we assessed the fact that, to Matt's point, we do not believe that there is any trade-off of our living within this 2-3 times range and being able to continue to grow the business at a pace across gen rent and specialty, and even enhance into services for our customers. We believe that we can do that without having to trade off operating within this level of leverage that we think is right for our business. For us, we felt very comfortable that lower range was really answering some of the concerns that we were getting from the market, answering our goal towards trying to reduce volatility in our equity, and also wasn't going to inhibit any kind of growth opportunity that we saw for ourselves. Yeah. I think you guys are currently 2.8 times levered and are targeting to get to 2.5 by the end of the year. Can you just help us think about how we should be thinking about just purely from EBITDA growth versus dedicated debt pay down? I don't have the split off the top of my head. But you're right, we're going to continue to focus on getting the leverage down as we finish the year. Where we end up, we're targeting somewhere around 2.5 times. What's important is as we pull the plan together for 2020, which we've just kicked off about a week ago, as we pull all of that together, there's that next Key capital allocation conversation that we'll have with our board, where our continued focus is going to be to reduce the leverage as we go into 2020. I don't know what that'll look like in terms of, is it 2.3? Is it 2.2? I'm not sure. But there's a definite priority, if you will, in continuing to take the leverage down. Gotcha. Maybe moving over to CapEx, you obviously reduced your 2019 CapEx guidance Yes on the call, just because of your intention to absorb the BlueLine fleet. Has there been any significant change in the composition of your CapEx as it relates to specialty versus gen rent? Maybe just talk a little bit about where you're focusing your growth CapEx right now. Sure. We'd moved a significant amount of growth capital towards specialty. Maintenance capital has been playing through as we had expected. We did not change any of our replacement capital plans. When you look at that 500-plus of growth capital, specialty got what they originally allocated plus some, and then the remainder, we shifted to the markets where they were absorbing, where they were utilizing it and bringing the highest returns as any operator would do. So that's the way we've looked at it. I would say the markets that were still challenged with time utilization, we didn't want to burden them with any extra capital. because we wanted them to absorb it naturally. We didn't want unnatural actions. We think the discipline that the industry shows and that we hope we do a good job in leading is very important. So to put more fleet in there and to have people have to go through unnatural acts to put that fleet on our rent, we don't want to chase revenue for revenue's sake. We wanted to be very focused on where we're putting our growth capital and where we could get the returns. When you think about the maintenance side of that equation, we've had Terex up here just talking about they see a huge replacement cycle coming in 2021. Is there any big shift in how we should be thinking about how you're replacing your fleet, and do you see a similar acceleration? Other than for the size of our fleet having grown, Yeah right, almost $15 billion worth of fleet, we don't have any walls. When I look out over our fleet age and the cycles of assets where we want to replace them, maybe part of that's due to a lot of M&A activity, we don't have any large wall that we see coming. Certainly, the OEMs will know what they put into the market and what they expect their replacement cycle to be. But without visibility to everybody else's assets, for our assets, we don't have any wall or any big dip for ours. So I think our maintenance capital will be pretty steady as a percentage of our overall fleet. Can you maybe just characterize what your appetite for M&A is now, as you're still kind of working through some of these big deals over the past couple of years. And obviously, given some of the leverage reduction, what your capacity would be to kind of get outside of that range for the right acquisition? Sure. I think, and this is part of what we meant before where this was an end strategy, not a beginning strategy. We looked at what could be on the horizon and the cash flows that we could generate and what we forecasted our business to be, there was no reason to not lower the range because we didn't think it prohibited any of the future plans that we may have. We certainly have talked a lot about the lean towards specialty and adding more products and services to our portfolio is first and foremost. We always have a robust pipeline of opportunities that we look at, and frankly, only a very small percentage of deals get through that pipeline. Although the past 30 months have been quite robust in the acquisitions that we did, at a multiple of 10, it was the deals that we looked at. We have a high bar. There's a high requirement that needs to be filled, and we are not lowering those standards. If anything, those standards will remain because we filled a lot of the needs that we had. If the right deal is there and it makes sense for the shareholders, for the company, for the customers, the whole cultural, strategic, and then last but not least, financial barriers that we need to meet to do a deal, we'll do a deal. If we ever need to do a deal that would pierce our, which we don't see one, by the way, that would pierce our leverage, it would be short-term, and we would have a very direct path, and Jess and I talk about this a lot, to getting it back within our range in a short time. When you think about what we've done in the past 30 months, we've done 11 deals, four large deals, and then the other deals at the both ends, that's about as robust an M&A two-and-a-half-year stint that you could expect, and we naturally came to 2.5 times leverage. We don't really see the leverage and the M&A as inhibited. It's more about are there good deals out there for us to have, and will they help us serve the customer and shareholders better? In the meantime, our focus is most definitely to absorb and leverage the benefits that we believe we are getting and will continue to get out of those 11 deals that we've done in being better owners of the assets that we've acquired. When you think about your portfolio right now, is there any holes that you see in terms of geographies or products that you would be interested in filling? There's still some specialty fill out we can do, and each different specialty segment are at different levels of maturity. right? Trench being our longest-standing, oldest, most mature specialty business. But when we think about the opportunities geographically for them, we still see double-digit growth opportunities for our existing specialty segments for quite some time. And then as we look at other opportunities to add additional products and services, right? So whether it's safety training, whether it's servicing customers' equipment, there are other opportunities that we can grow non-core rental revenue streams that may not necessarily fall in specialty the way we categorize it, but are yet still organic growth opportunities for ourselves and serve our customers in a deeper fashion. And that's where our focus is. The more problems we're solving for our customers, the more differentiation we have in the market. That's where we'll be focused. Just by way of dimensionalizing what that organic growth can look like for specialty as we continue to focus on expanding that footprint. We've talked about doing 30 cold starts this year- and supporting the growth of that extension of the footprint. Can you also maybe just talk a little bit about cross-selling? I know that's also been a key part of the M&A story. Where is it right now, and what pockets have kind of been driving the cross-selling stream? When we think about, we talk a lot about our pivot coming out of 2009 to making sure we're focused on the large customers, and each one of those segments of large customers is national for the ones that need a national footprint. What we call strategic, which is more of a regional footprint. They may not have the breadth of needs as far as where they're going to do work, but could be quite large in the regions. We'll call those strategic accounts and our assigned account programs. That is our focus, and that's where you're seeing the most cross-sell. Obviously, the broader scope of the project, whether it's a plant or whether it's a ground-up capital project, that's where the broader needs are going to be. So we have better success cross-selling multiple business lines into those customers. But I would think we'll continue to try to drive that deeper into our assigned account program as this is a differentiator. Our customers, just like we all do in our business lives, want to bundle the people they're dealing with, and if we can make that easier for them and solve more problems for them, that's where we'll continue to focus, and that's where our cross-sell success is. Obviously, you talked earlier about how robust you see the environment currently, but can you talk a little bit about what the recession playbook would look like if it were in fact to happen and what levers you have and maybe how it would look different this time around relative to last cycle? Number one, I am hoping that nobody in this room would see anything that was like 2009 again. I think even the starting point of the conversation would be how severe, how broad, how deep do you think whatever downturn and when it comes would be? We have modeled the Armageddon scenario. Jess and the team have done a lot of work. Even in an '09 type scenario, which I do not think anybody in this room as well, nobody at our organization is forecasting, we would fare much differently. We have built a much different company today, and we have stress-tested it, and our strategy was born out of that experience in '09. This is not coincidental. This is actually very intentional. As far as speaking to how we would fare on it, Jess and the team have done a lot of work, so maybe you want to add some color. Sure. To the point you were making, Courtney, about what would be different this time than what was the way that we went through it the last time, we have not gone as far as to give a downside scenario or even multiple scenarios because, as you can imagine, as Matt mentioned, it is going to be highly assumptive to what do you think the severity and the duration is going to be, and then how is that going to impact your revenue and then ultimately your cost decisions. If you just think about how we are different now versus where we were before, there is this aspect of much stronger customer mix in our focus on larger national accounts, larger regional accounts that we believe are going to have stability and resilience through whatever the next downturn might look like. We have stronger business mix, where as we focus on growing our specialty business, there are aspects of that business that are non-cyclical, counter-cyclical, and again, going to be more resilient to a downturn in certain areas and across certain verticals. When we think about our focus on operational excellence and cost efficiencies, and you think about just over the period since the last downturn, the, call it 1,500 to 1,600 basis points of EBITDA increase margin enhancement that we have had, that has been largely over a flat rate environment. That provides us a much stronger starting point for whenever the next downturn could hit us. The strength of the business is going to provide, again, that resiliency in the way that we go into it. Then there is CapEx decisions that we would make that would allow for us to have a lot of flexibility in what we would bring in and what kind of cash flow the offset would generate. On top of that, over the last 10 years, we have been really conscious about building a much stronger balance sheet, a balance sheet that has, again, a lot of resiliency in lowering our leverage, pushing out our maturities. Those of you that follow the stock or were invested in the stock during the last downturn will remember, we had to fire sale fleet to be able to get the cash to pay a maturity that was coming due because we could not access the market. There is no scenario where that would be the case again. As we think about maturities pushed out to 2023, we think about the strength of our balance sheet, we think about our cash profile, we feel very confident that we're going into anything that comes next in a much, much stronger way. Want to open the floor for questions. You guys touched on this a little bit, but thinking about cycle over cycle improvement, not just for your company but for the industry more broadly. There's been a lot of consolidation, not just that you guys have undertaken, but some of your competitors have as well. Thinking about the level of rate discipline that's in the market today versus where it was maybe three or four years ago, how much more discipline do you feel the market is now and kind of going forward? Sorry, I should say more near term, what are you seeing from Rouse in terms of the supply and demand balance that would support the outlook for rates, in the next one to two years? Well, I think we have seen more discipline. First of all, we have the data, right? Last time, we didn't even have the data to look at. Now we have about 50% of the industry is covered through that Rouse data that we subscribe to, and many of the large players, if not all the large players in the space subscribe to, and we're the ones that have the charge to lead that discipline and that responsible behavior during any environment. Frankly, we have seen very good discipline in fleet growth. We've seen good discipline in rate management, and it's one of the reasons we think that big is getting bigger is good for the industry. There's always going to be a place in the industry for mom and pops, but as the industry grows and the top 10 continue to get more than their share of that growth, we think that that helps lead the industry towards a more disciplined, fruitful manner. I also think everybody, big and small, has lived through the scars of the past. I think those are deep. There's a lot of reminders of that, and I'm really pleased, even in the up cycle, because bad behavior could have showed up in the up cycle as well. This has been a really good run here, and people could have overspent and out-kicked their coverage, so to speak. We didn't see that. We saw good discipline in the up cycle, and I'm hopeful that we'll see that throughout the rest of my tenure here and hopefully beyond, in the industry. Maybe just moving on to your Total Control platform. I think when you last disclosed, it was about $1.8 billion in sales. Has it continued to grow from that level? Can you talk about how differentiated it is relative to what you're seeing from some of your competitors and where some of it's coming through? I can't really speak with any real knowledge about how the competitive products are that are out there. What I can speak to is our Total Control customers grow. Actually, this year, it was double the pace last year. This year, if we maintain that 18% growth, and we'll report this out on an annual basis at a multiple of times of the general business. Part of this is because our whole mantra on Total Control is rent less, do more. If we're going to be able to show our customers how we can help them be more productive with the fleet, that not only we rent from them, but the assets they own and the assets they get from other places, right? If it's assets we don't carry, let's say cranes, for example. They could track all this in the Total Control system. We can give them the KPIs. We can give them the metrics. This is a differentiator. Now you're a business partner, and you're not beholden to three bids and a buy. Whenever we add a new product to the portfolio, that's another opportunity to drive more share, more volume with that customer. When they're embedded with that Total Control system, it's real important that we support that with not only the products and services they need, but the additional KPIs. We do peer group settings so they can see actually how they're comparing against like companies. All anonymous, nobody's sharing proprietary information. It's really been a value add for these customers, and it's something we'll continue to focus on and continue to grow. How broad we get it down into our customer base is really a customer pull. We're going to give it to them. If they feel like their projects or their plants can benefit from this information, we're there to supply it to them. Great. Maybe just lastly on your EBITDA margins. Obviously, they've been impacted by your acquisitions, but how should we be thinking about margin normalization as we lap some of these deals? Is there any reason why you shouldn't be able to achieve the 60% flow through that you talked about? We don't see any reason why we shouldn't achieve it right now. As you mentioned, there is the impact of the acquisitions that's still playing through the 2019 margins that we've been talking about. As we anniversary the acquisitions and our results as reported start to converge with pro forma, I think what you'll start to see is a clearer view of the type of flow through that we would expect at that 60%. Awesome. We're out of time. Thank you guys so much.