Evercore ISI Annual Industrial Conference

Mar 6, 2018

Our third company presenting, United Rentals. I have covered the company a little longer than I would like to admit. I think the company and I are kind of the same age, roughly, and how long I have been in the industry. From United Rentals today, we are pleased to have the COO, Matt Flannery, CFO, Bill Plummer, and Ted Grace from Investor Relations. URI, well represented operationally, financially, knowing how the street is viewing the story. Happy to turn the mic over. I am not sure if Bill is going to start or Matt, but take it away. Well, maybe I will just briefly start and say good morning, and thank you all for coming out and listening to us. We enjoy getting out and talking to investors. It really helps shape and inform how we think about running the company. This is a vital part of how we lead, and I want to thank you all for giving us the time. We certainly hope this is an interactive program, so we would love to be as responsive as we can, and feel very good about the business right now, and would love to share and answer any questions you folks may have. Sure. I can kick it off. When we think about rate utilization and CapEx, as you have seen the year get off to what appears to be a pretty robust start, how is that influencing and sort of informing you on how you manipulate that trifecta that you always have to, but in the current environment, if you want to weave any tax reform, steel tariff, however, all the new things that every week we get a new exogenous event, it seems like? I'll take the operational part and let Bill take the tax reform and the tariff part of it. I would say that there's not a Q1 where we're going to change our view terribly. We've talked about this before. It's the least impactful quarter. You want to make sure you don't dig too big a hole in the slow season, but at the same time, no matter how robust or how soft it is, it would not inform you to make a change on CapEx, so to speak. We're not giving any quarter guidance, but we did speak about it at the end of last year of what kind of assumptions would one make. We think embedded within our guidance is a reasonable range of both time utilization expectations and rate sequentially, rate expectations. So we feel good about the end markets. All the macro data we look at, as well as our internal data from customer confidence surveys, feedback from our operators. We haven't changed anything that would imply that our guidance is not still the right range to look at the possible set of outcomes. Well said. You want to ask a specific question? We'll- How about anything related to recent steel tariff news, or even just how the tax reform is playing out in your end markets, even your decisions on expensing 100% now. Just how's that informing your decisions, Ted, around the company? We incorporated tax reform in the guidance that we gave for 2018 for United Rentals in particular. Right? It certainly is factored in already to the cash flow and CapEx guide. I think a broader question is how will it play out through market decisions from competitors? And that's developing as we speak. There certainly is an argument that says, "Hey, it might have an impact from the customer's perspective in making owning equipment more attractive." We don't think that's going to be a major factor. But it certainly is something that we need to think through. There's an argument that says it could make competitors more inclined to expand their fleets because they now have that tax advantage. Again, we don't think that's a major factor in the decisions that have made so far in the industry. But that's more anecdotal than it is based on sort of specific analysis that we've done. I think the long and short of it is tax reform is a positive for us. We think it will be a net positive for the rental industry overall. And we're going to be monitoring, though, on an ongoing basis to make sure that it's going the way that we think right now. When it comes to what we've learned since the start of the year about the industry CapEx, there's a lean toward higher CapEx in the industry. Just trying to get a feel for how that's influencing you a little bit when you think of the industry in the past, at times has been a little aggressive when the CapEx spigot turns on. People get nervous a little bit about supply-demand. At the same time, also, we've seen since the start of the year, some pretty robust used pricing on aerials, which helps inform the decision of, "Well, I buy new, I can get used maybe another couple of basis points of margin than I thought." How is that all working? As the market leader, in a way, they should be following you, but just being thoughtful about the industry broadly, given how fragmented it is. Well, I think from the demand perspective, if you wanted to use the aerial OEM as a proxy, right? That's the largest single block of assets owned in the rental business. Although the backlog numbers may still be strong, and I hadn't seen the latest report, but I think one of them was reporting 90% improvement in backlog, and the other 30-something, almost 40% improvement in backlog, but they're both guiding to 10% growth. When you think about what that 10% growth means versus the installed base, although it sounds like a big number, Ted did some math for us. It's probably about 1% growth on the installed base of aerial product. If you want to use that as a proxy, I don't feel like some of the improvements that the OEMs are able to make are going to put a huge type of supply-demand imbalance In the space. I feel good about that. I think we saw you out of ARA. I think that you still heard about a lot of people concerned about lead times that didn't have the scale to be able to leverage to do a lot of pre-buys. We actually feel pretty good about our position in that supply-demand curve and with those lead times, and I was happy to hear that lead times are stretching out. I think that helps the concern about supply-demand imbalance. From that, we can take, if the market dynamics appear to be supportive of maybe more iron could go into your fleet, you're not apprehensive all about the way the rest of the market's playing out. We can, in a way, play it straight. Hey, your utilization's strong, your rate's strong, your ability and willingness to raise CapEx isn't being influenced negatively by CapEx trends elsewhere. I think that's right. Okay. We certainly have always responded in our CapEx decisions to where the market is and where we think it's headed. I think we'll continue to do that. As we said earlier, we think tax reform or steel tariffs or whatever will have an impact at the margin. We'll flex based on that. I would expect that the impact will be very positive overall for United Rentals and the industry in general. You spoke of the seasonality issue, that the first quarter doesn't make or break a year, needless to say. Your CapEx decisions, would you need to see how trends are going, say, as far as May to address it? Or could the dynamics be robust enough or, in, say, a negative year, weak enough through April to even think about changing the CapEx budget? There's enough in our pipeline that we could pull forward some before we'd have to worry about incremental. We wouldn't make that decision publicly at any time before Q2 call. You need to see that ramp up in April, May, June. That's really going to decide how your year's going to look. Yeah. Okay. Bigger picture, your leverage and the way we think about your free cash flow guidance have a base view on 2019. It does appear you, $2 billion-$3 billion to play with between now and the end of 2019. If you're committed, as you said publicly, we want to run the company with at least 2.5x net debt to EBITDA. Can you help us understand how to think about that? If that commitment is there, be it capital allocation decisions between M&A on gen rent versus specialty versus share repo, whatever it may be. Sure. Just to be crystal clear, we've said we operate the company in a normal range of leverage of 2.5x-3.5x. We've said we'd go up above that for the right reasons, and we would go below that for the right reasons as well. The question is: Is there a rationale that suggests that we should be significantly below that right here and now? That's a discussion that we're having right here and now with our board of directors. I think it is clear that we'll be below 2.5x on our current plan by the end of this year, significantly below. That's raising the question of do we want to do something about that explicitly? Acquisition would be the ideal way to respond to that, right? Finding the right acquisition. But we're very disciplined around acquisitions, and they come when they come. If there's not a deal there, then we've got a separate decision to make about how to use the cash flow, both this year and next year, to your point, David. I think it's fair to say that share repo is the most prominent use of cash flow outside of acquisitions that we would make. Again, I'm assuming that the CapEx decision doesn't change significantly. Sure. By the way, it's a reasonable assumption, right? What's the most our CapEx is going to change in any given year during the course of the year? $200 million, $300 million, $400 million max. So that still leaves a very large amount of free cash flow for the course of 2018. So long-winded way of saying that if M&A comes, that's great. That'll be a use of the cash, and that'll address the leverage level of the company heading below 2.5x. If it doesn't come, then we've got to decide the role of repurchase. That's not just for this year, to your point. It's next year as well because we expect next year to be a good cash flow year as well. So those discussions, as I said, are ongoing, and we'll keep you informed as we reach conclusion with the board and start to execute. There's been times in your history when the cash flow was, I'd say, generally speaking, poor. So the thought would be, well, maybe you shouldn't run the business with that kind of leverage. Is this an opportunity to maybe see how it would play out in your valuation if what if you ran a company at 1.5x, 1x net debt to EBITDA? This decade, your cash flow has probably brought more credibility to maybe 2.5x plus is the right way to run it. But the conversation with the board right now are some of those, I don't want to call them old thoughts, but that thought process of, hey, maybe running the company with less leverage would impact our valuation more constructively, especially if you feel we're not in inning one, let's say, of a cycle where it's getting a little longer. Is that at least part of the conversation and exchange with the board? It is. We've explicitly asked the question, would lower leverage improve our valuation in a significant way? We've asked that question of ourselves. We've asked it of all the various banks that we deal with. We haven't gotten anybody. I won't say anybody. We haven't gotten a strong sense from that group that lower leverage would significantly impact our valuation. In fact, we've had some make the exact opposite argument based on the fact that we're now free cash flowing much more readily than we used to, and so we should and could afford to be at a little bit higher leverage. I'd love to have a different point of view. If somebody thinks that we should be operating at a lower leverage level. But we certainly haven't gotten that from the folks that we've talked to so far. We've had a public peer that's got leverage in that 1.5-2 range with very similar characteristics. And if you look at the multiple differential, it's narrowed to the point where it's pretty de minimis that it can ebb and flow. We could be a premium, we could be a slight discount. So it's hard just to look at a data set of one and draw too many conclusions. But at least we can look at that and try to see what the market's telling us that way. Unless anybody wants to jump in with a little bigger picture question, I was going to get a little granular and talk a little bit about the Neff and NES synergies and how to think about that for this year as an incremental cushion. I know it's in the guidance, but just trying to think through how Neff and NES are rolling out. Especially given you've got a little more infrastructure now with Neff and so forth. Unless somebody wants to jump in, and don't be shy. I was going to go off to that tangent a little bit on the numbers for 2018. Can we get a mic over there? Is there a mic at the end of the table you can pass down? There you go. Thanks. Thank you. Just broadly, the market likes a good productivity story. In your planning process, what is the contribution you are expecting from technology and specifically from the edge to the heart of your ERP systems? Should we expect that technology will impact utilization from here? The impact of technology on the utilization of the equipment directly is what I am hearing is your question? Yeah. Assuming, one, you know where it is. Yeah. Two, you could move it around more easily. All this stuff would seem like. Yeah. Certainly technology is part of how we have been and expect to be driving productivity across our company overall. The specific example of telematics being able to identify where the unit is, we believe has been part of how we've improved utilization and our costs for maintaining the equipment overall. It's hard to put a specific number on exactly that impact. I won't, but I would say that as we think about technology beyond just telematics, we certainly are looking for it to help continue our ability to drive productivity. Give you an example. The ability of our customers now to execute transactions online completely without having to talk to anyone, we think over time will start to accrue to lower cost of customer service, and allow us to be more effective in getting the equipment aligned and positioned where it needs to be to be delivered to those customers that come to us online. So we're making investments to improve our ability to execute transactions online. We feel like we are leading the industry in that regard. But again, it's hard to put a specific number on, okay, how many dollars has that saved us in being able to position the equipment better? We'll continue to look for ways to try and identify that, but we're not at the ability right now to put a number on it. I don't know if you've got any additions to that. I think Bill's point, when you look at our productivity metrics, just about any one you measure, significant gap to the industry average, and I do agree, technology has played a role in that. It's enabled that. I think the next step for us, technology-wise, is how do we change the user experience? How do we change the customer's use of equipment? If we can take our Total Control mentality and spread it amongst a broader customer base for the Rent Less, Do More, and increase their productivity, I think those are the future steps that we can have more customer value. Whether it shows up in time utilization, we'll see, but I think there's more to be had through technology as the industry matures. I guess to my question then about Neff and NES. Because I know your experiences with those companies and RSC has been a few years ago now, but obviously that went well. A little different part of the cycle, though, but went well. I am just trying to learn and listen from your experiences with Neff and NES. When we think of appetite for type of acquisition, your confidence in making another acquisition. Just help us where Neff is so far in getting onto your systems, getting the headcount right, the opportunities it has given you. Because a year or 2 ago, folks would have said, "Well, I do not think they will be doing much gen rent. It will be a little more specialty." These two deals being gen rent is an interesting development from a couple of years ago. Sure. I will start. Just specifically around where Neff stands in the integration, I think we are very far down the road on the actions that we expected to take in the Neff integration. We called out for the fourth quarter run rate of synergies that are about $25 million, mid-20s, I would say, million dollars run rate of cost synergies. That compares to the $35 million that we guided to when we first did the deal. So I think that is evidence that after a couple of months of integration, we are well down the road. And we will deliver that $35 million run rate number nicely before the two years that we originally called to. The key decisions have been made. We have transitioned them to our main information systems. We have made the vast majority of the headcount actions that we expected to make. We have actually consolidated a large majority of the branches that we expected to consolidate in that deal. So all in all, we are well down the road on Neff specifically. More generally, acquisitions in both gen rent and specialty are very much in the frame for us. Especially, we have been more active, but 2017 was more of a gen rent year. And we would say that we would still be interested in acquisitions in both areas. It is a matter of being able to articulate a strategy and then getting a deal that makes sense financially and integration risks through cultural alignment. Those things won't change, and we expect that at some point we will identify the next opportunity, and we will move on to it. I think an underlying question is, has two gen rent acquisitions in the same calendar year changed our view strategically about our growth and specialty? I just do not want to miss the opportunity to say absolutely not. We actually see them help bolster the specialty growth because that is a broader customer base that we can cross-sell our additional products into that both acquisitions either had none or very little of the additional product. So we will still put an inordinate amount of larger than their current base of the business of our growth capital into the specialty business. And they are still going to do, I do not know, 17 or 18 cold starts in 2018, and still have some white space and growth ahead of them. Yeah. No, I mean, specialty, you had the 2 billion revenue target out there that we're still a bit of ways away from. Just trying to see how significant is that target to you in the sense of would it influence a decision on acquisitions on, we told the street 2 billion for specialty, and right now we're 1.1.2. Well, really, the problem was Paul got to the 1 billion mark too quickly, so we had to put a larger goal up there for him. That's true. All kidding aside, certainly 2 billion would imply there would be some of that through M&A. We won't do a bad deal to get there, just to be clear. But we certainly feel with good opportunities in M&A and a continued growth rate, we can get to that target. Yeah. Because in a way, some of the things you found within Neff, within NES, that you don't really learn until you buy the company. Like, oh, the pricing that we're getting from XYZ supplier, they're getting that plus 15%. The way they're pricing their machines. That's what was sort of the genesis of the question. Are you finding from Neff, they were buying their equipment geographically, not with the full power of the company, that maybe there is a lot more you can bring to an acquisition that would seem like, well, that's just pure basic scale. That no, there's just some operational things that you've been able to accomplish internally that you bring that to bear on this acquisition. There is a little more of a positive return on. No, we can still do a lot more gen rent and move the needle. Of course, depends on the selling price. We're all speaking without knowing what kind of multiple somebody would want. But I'm just making sure we understand the experience of 2017. A, doesn't take away from the specialty focus, but B, did it increase your comfort on there's more gen rent we can do, and it's not just straight scale. We realize we do have a better maybe mousetrap than some of these other companies. I think Matt addressed the specialty still a focus of acquisition and growth overall. I can reaffirm that. What I would say about gen rent is that NES and Neff, I can't point to any major surprises that we saw once we owned them as opposed to what we thought going through diligence. What I would say is that I think they have continued to build our confidence about the ability to execute good deals in the gen rent space. Not to say that we weren't confident before, but going through it, right? We went through RSC, and that was good. But going through NES and identifying the opportunities there built that confidence. Then doing it with Neff, which I would argue was a better run company than NES was, and still being able to find the opportunities in what was a decently run company, built that confidence again. So that's what I would point to as the outcome of those gen rent growth opportunities is we just feel like, yeah, we thought we had a good handle on how to do these integrations, but now we've proven it to ourselves enough so that we can really rely on it. Yeah, I would argue Neff and NES, the credibility built running those well at this point in the cycle than RSC, you would've said, "Well, look, it was good timing. Everybody looks smart coming out of a downturn, and the leverage just. The operating leverage was there because the market went from a horrible market to a strong market." These last two deals are a little more about do you have the facilities in your company, your ability to impose your operating model on somebody else? That's what people are going to be watching if you make a large deal on gen rent versus specialty, because a large deal tends to be more gen rent. Right? It's hard to find specialty that can be north of $1 billion, $1.5 billion. That's right. It's also a good reminder for us, and to get back to the technology question about what can we do with our processes and embedding them onto a different business unit, and not just our processes, but the density of the network, and what more can you realize when you increase the density of that network? It's been a real good learning. Sometimes we take for granted what we do internally, and then doing a gen rent deal for the first time in quite some time opened our eyes again to wow there's opportunity here for us to be a better owner of this business. Yeah. Anybody? Can you bring a mic over there? Thanks. Thanks, Dave. I apologize to everybody else in the room because this is a real softball, but I'm a generalist. A generalist sort of knows a cheap stock when they see it. Usually when you're a generalist, you see a cheap stock, there's a reason everybody else can justify that. I'm just curious what you think the most misunderstood component of your business is. You talked about how maybe cash flow variability used to be much higher than it is today. I'd just like to understand two or three bullet points on that. Thanks. Sure. I'll start off. For me, it is very much about cash flow and understanding the value of that cash flow from our business. We are now very significantly free cash flow positive at a point in the cycle where in previous cycles, companies would be burning cash flow as they invested in fleet and as they look to grow in the cycle to come. I don't know that the market has fully realized the value of being as cash flow positive as we are right here and now. So that's the first thing that I would point to. The second thing I would point to is that the approach that we take to managing the leverage of our company is, I think, fundamentally different. We are a volatile industry, given the level of demand being very volatile in construction, given high fixed cost structure, meaning your operating cash flows are volatile as your top line moves around, and given the amount of leverage that we operate at. I think the market may still be pricing that volatility discount into our stock in a way that shouldn't, because we're managing all of that much better than we have in the past. So I point to those two things, right? The amount of free cash flow and the way we manage the volatility of our industry as being different than what's been in the past. The market, in my view, hasn't fully realized that. Yeah, of course. When you say we, are you talking about the industry at large? Because it's still a relatively fragmented industry from my understanding. You just said M&A is really our first priority for use of excess cash flow, which you're clearly going to have. But then at the same time, you're talking about maybe a degree of industry discipline that exists now as an industry that might be more mature than it had been historically. Thanks. My comments were focused on we as United Rentals. I would say to a lesser extent, the industry does feel like it's a little bit more sophisticated in managing the volatility than it has been in the past, right? I've been here a little over nine years, so I haven't seen a lot of cycles, but I certainly would say that just anecdotally in talking to people around the industry, there seems to be, even now, compared to five or six years ago, a greater awareness that you know what? Cycles do happen and you've got to manage for them. A greater awareness that maybe you don't want to over-fleet at a positive part in the cycle because that chicken comes home to roost later on. I think you could say it about the industry as well, but I was more focused on United Rentals, certainly about how we manage the company through the cycle is very much a United Rentals focused statement. Can you bring a mic over there? Yeah. Maybe just a quick update on what you guys are seeing in Canada. Thanks. So- Can you repeat the question? Yeah. He had asked what we are seeing in Canada. We are pleased to report, and we were signaling this throughout 2017 on our quarterly earnings, is that they bottomed out about somewhere between first and second quarter in 2017, and we have continued to see that incremental improvement to the point where Canada's rate got to just about flat by year-end 2017. Their time utilization was up significantly. They were showing growth, and we believe that trend will continue in Canada. Eastern Canada, the eastern half of the country, was already a little bit more stable, but Western Canada has really made some improvements and obviously we all know that oil and gas is making a little bounce back, albeit off of a lower base. But overall, we feel much better about Canada in 2018 and going forward than we had the past few years. I can take you back off of that with a question on mix. Obviously, we talk about rate like it is all one state, like one same store kind of rate, but not the case, right? You get different rates depending on the geography that is driving the business. Can you give us any insight on when we think about rate this year, the geographies in the U.S. that are driving and what they mean for the rate? We have been asked this question a lot, and the good news is the only anomaly last year was, and really almost last two years, was Canada was a drag. Now that Canada is no longer a drag, we are actually seeing our rate improvement be very broad-based. If you look at whatever sequential improvement you will see with us in a quarter, there is not huge variance between market, even end market, but certainly not geographic market. We like that because we feel like it is more stable, more achievable, and we are not relying on a hot pocket like oil and gas like maybe we did in 2014, 2015. We feel the quality of that rate improvement is a little bit stronger, and that is the way I would categorize it, Bill. No, I think that is fair. To back you into a utilization comment. You pulled a little CapEx into fourth quarter. How do you feel about that decision today? I think we are pleased with the decision. I got that CapEx into the field and working, even though at lower levels of utilization because of the seasonality, but it is positioned us well for the early part of the year here, and I think it really positions us well for the overall 2018 plan that we expect to play out. When you think about the seasonality and where it's challenged, David, it's important to recognize where that fleet was put, right? So that fleet was put in areas that aren't going to have as much of a spread off-season and on-season from a time utilization perspective. Sure. Yeah. Just the confidence you showed in Q1 utilization by making that CapEx decision, I just wanted to see if that was still viewed as a wise decision, so. Okay. Well, that's about all our time as well anyway, so just want to say thank you very much. Thanks, guys. I appreciate you taking the time. Thank you. Thank you, everybody. Have a good conference.