Goldman Sachs Industrials Conference 2017

Nov 14, 2017

We'll get started. Good morning once again, everyone. I'm Jerry Revich from Goldman Sachs, and really thrilled to have with us from United Rentals, Michael Kneeland, Chief Executive Officer, Bill Plummer, Chief Financial Officer, and also with us today, but sitting down, is Ted Grace, Vice President of Investor Relations. Gentlemen, thank you very much for joining us. Well, thanks for having us. As with the rest of the sessions, we'll run it in a fireside chat format. If you do have any questions, please raise your hand. We'll have mics circulating. To start the conversation, gentlemen, over the course of your tenure running the business, we've seen big improvement in cost structure, logistics, pricing. Can you talk about your strategic priorities from here, looking at the business over the next 3-5 years? Well, thank you for noticing the strategic changes that we've made. I think it's more of the same. We still are looking at ways to drive better efficiencies. We have that built into Project XL. We have been talking about lean over the years, and we still see opportunities there. Utilizing a digital format for means of communication and also driving efficiencies both for ourselves and for our customers. Driving profitable growth longer term. That can be in the form of, as I mentioned in Project XL, whether it be verticals or it could be in the form of product changes and also in our specialty arena of how we're going after the business. I think those hit the key points. Driving better penetration in our existing business, doing it more efficiently, growing in the specialty areas, looking at adjacencies. Those are all the elements of the strategy and the big picture that we've been driving, and we think there's opportunity in all of those areas going forward. Hey, Jerry. I would also say that, and I've said this several times, of developing a competitive moat, in the way in which we think about the business. Yes, we're a rental company. We're a service organization. How can we engage our customers in a way that can drive a value proposition to drive returns longer term? A couple of things I want to unpack within what you gentlemen said. I guess maybe just to start on that last point. You folks have a really significant national footprint. Can you talk about how the digital strategy fits in helping you build those moats, and talk about, if you don't mind, what proportion of the business it is today? What do you think it could look like in 2 to 3 years? Yeah. It's been a journey. I think the word digital is somewhat overused in the form of how people think about the word. Everyone says we've got to be digital. What does that mean? For us, it's a means of communication for our customer base. We've done a lot of research with our customers to try to better understand some of their pain points. When you look at digital, we want to be able to provide a means of communication to our customers that go far beyond just the typical 7:00 A.M. to 5:00 P.M. operating schedule that we have. We want to be able to have customers real time, the ability to place rentals, inquiry, research, review their business portfolio, take machines off rent, and in fact, pay. If they want, they can utilize some of the other avenues that we bring in, like the GPS, to help them manage to be more productive and efficient. That is how we are trying to assist them going forward. Our industry is about safety and productivity. If we can find a way in which we both are win-win on productivity, it is something that we are worth investing in. As far as the business, collectively, all of our digital aspects and connectivity with our customers is running about $160 million a year on a trailing 12 months. It is up significantly in third quarter. It is a means of communication with our customer base longer term. Where it goes, I think everybody in the room and is listening, is that digital presence is growing, and it is going to be growing even further as we go forward. United Rentals will continue to invest, continue to think outside the box, and also every day, listen to our customers and try to find ways that we can eliminate the pain points and drive efficiencies. Can you talk about how the Total Control system fits in your ability to do that, the $160 million figure? Does that include your bigger customers that use Total Control, placing orders online? Is that additive? Can you just frame the ecosystem for us? I just, at the beginning of the month, in October, we had a conference. We had 250 of our top users there. Every year, we have a conference to identify areas of improvement and areas to drive new learnings. What can we do to improve the system? Inside of that 160 are people who are actually using it to place orders. Total Control is also used just a plain management tool. So they can track assets that they bring in, whether by purchase order, by asset. They can geo-fence it. There are numerous ways that they can drive efficiencies. In some instances, with Total Control, they look at it from the standpoint of how can I bid another job. I can look at a like job, and understand what dynamics played out, so to help them better understand what they may need in the future. So it is a one-stop shop. It's always evolving, and it's something that we are constantly investing in as we go forward. I think over time, it will play a larger role as we bring more tools to it. But it's also a change management for our customers. Just because you have a digital aspect of a company doesn't mean necessarily that very many people use it. But it's shifting, and it's going to continue to shift that way. Total Control is a very big part. Out of that 160, I just want to point out that there are a lot of users who use it just in plain management, not just in placing orders, but they can do both. In terms of your market position with customers who have a Total Control system, how does your market share compare to periods where they don't have access to Total Control? What does that mean from a United opportunity set as you continue to build that user base? Well, it's obviously Total Control with our customers provides an entanglement with them. By and large, we are winning more market share with them. We have to earn it every day. It's not just providing them with a software package, it's also providing them with the services that back that up, that we continue to focus our efforts on. We see significant growth with our Total Control users on a year-over-year basis. We haven't given that number out, but it is a nice improvement on a year-over-year basis. And my sense is we'll see that grow over time. Earlier in response to the first question on the strategic priorities, you gentlemen touched on Project XL. You had outlined at your Analyst Day $200 million of savings by the end of 2018. Can you talk about how far through that we got through in 2017 and what have been some of the puts and takes as you've gone down that path? Certainly. So $200 million run rate by the end of 2018 was the target we laid out, and we feel that we're making good progress against that target as we sit here and now. The initiatives, some of which we've talked about and provided some data around, as you would always expect, there are going to be some that are running ahead, some that are running a little behind. But the ones that are running ahead more than outweigh the ones that are running behind. We feel good about the progress that we're making. We've shared data around a couple of the key initiatives. The focus on growth in the infrastructure vertical is one. Improvement in our fair market value realization of used equipment is another. Continuation of the lean and other operational improvement initiatives to make our business more productive is another set of initiatives. I would say all three of those are running nicely ahead of what we expected. The others that might be a little bit behind are really, we believe, a matter of timing in the implementation. So another area that we're focused on, for example, is in our business, the major key accounts make up a significant portion of our revenue, something north of 60% of our rental revenue. That other 40%, smaller and medium-sized accounts, we see as an opportunity to penetrate more effectively. That's one of the Project XL initiatives. That initiative is right at or maybe slightly behind what we had targeted, but it's developing nicely. All in all, we feel good about the Project XL timeline and the delivery. We're going to continue to drive forward because we see those initiatives as being significant opportunities for us. Bill, what's the benefit that you expect to realize in 2017, just so we can understand how much of an improvement we should be thinking about 2018 versus 2017? We haven't quantified a specific dollar amount for 2017 and for 2018, other than the $200 million run rate. As we've said before, the reason we haven't done that is because it's very difficult to carve out a true incremental impact from some of these initiatives. For some of them, we can't, and in the cases where we have been able to, we've shared data over the last few quarters on specific projects that can kind of give you a sense of what they're contributing. But for others, it's going to be more challenging to say what's truly a result of this initiative versus other things. As we get a little bit better view of how to call out a number, we'll share that. But it's a very challenging thing that we're trying to do, saying, "Okay, this is the true incremental impact of the Project XL initiative." More to come as we get deeper into the project. Okay. In terms of free cash flow prioritization, can you update us on how you're thinking about it from here? Very big M&A year for you folks. How should we be thinking about the targets for capital deployment from here? Certainly. I'll start, but Mike, correct me if I get anything wrong. We're facing a pretty robust free cash flow year this year, and it'll be a good free cash flow year next year as well on our current thinking. As we look at the use of that cash flow, we've been on a path of slowly de-leveraging our business down toward the bottom of that 2.5 to 3.5 range that we've always talked about as the range for leverage, net debt to EBITDA. We'll continue to devote a significant portion of the free cash flow that we generate to a gentle de-leveraging path. That still will leave some excess free cash flow that we will devote to share repurchase to the extent that we don't identify acquisitions. Acquisitions come before share repurchase, but acquisitions come when they come. If we don't have either an immediate acquisition or a high likelihood of a significant acquisition happening in the next several quarters, then we'll devote money to buying back shares. That's been the way that we prioritized our use of cash flow in the past, and we'll continue to do that going forward. You'll note that the board just recently reauthorized the billion-dollar program that we've been working against. There's $373 million left on that program. We expect to execute those repurchases during 2018. Once we complete the current program, the board will have another discussion and another decision about whether they'll institute another program beyond that. In the meantime, we'll continue to look for acquisitions that make sense, that meet our criteria, and that are disciplined. If we find them, then the cash flow will go toward the acquisitions. If we don't find them, then we'll continue to buy back some shares while we're also gently de-leveraging the company from here. I remember when you folks acquired RSC, one of the points that you made in that process is we want to put capital to work in acquisitions early in the cycle to earn a return for the cycle. When do you draw the line in the sand to say, "You know what? After date X, the cyclical risk reward is too high. Large scale M&A is off the table for us unless it's an extraordinary situation." How do you as a management team think about where that line in the sand is? Yeah. Always a difficult question, right? Because nobody knows when the cycle's going to be over. But as we look at the environment today, talk to our customers, look at the demand in the marketplace, look at all the economic statistics. Our sense is that this current cycle still has some room to run, which means that right here and now, we still think it makes sense to think about doing acquisitions. How much room to run? Hard question to answer. But again, we've got to put a stake in the ground. We believe 2018 will continue to be a solid year. We believe 2019 is going to be a growth year. Beyond that, it's hard to say. Our approach for 2020 and beyond is we want to build flexibility in our thinking about those years. But if we're right and 2018 is solid, 2019 is growth as well, then two years is pretty good runway for doing deals right here and now. We continue to think about now as being an opportune time to do acquisitions if we find the right ones. So that's probably the best way I can answer that question is we're still saying let's continue to look for deals, be disciplined about it, but if they show up, then we're not afraid to do them. The only thing I would add to that, Jerry, is United Rentals invest longer term. If you take a look at several of our acquisitions, you mentioned RSC. RSC, when we bought that company, our primary end market was still declining. Non-res was declining. I think we were all just happy that there was light at the end of the tunnel with regards to the economic environment. Our industry was nowhere near recovery. Today, we can say that was towards the bottom, and then we moved forward. But at the time, it was very difficult. In the same philosophy, if you take a look at what happened with the pump business, oil was blowing and going, and we went in and purchased National Pump. When we did that purchase, our strategy was, how can we lever that to a broader audience? Because it was so myopically focused. Around 55% of their business was upstream. How can we take a look at that and capitalize on it? Would I do it again today? Yeah, absolutely. Do we have a speed bump with oil prices dropping? Yes. But now today, you look at the recovery that we've had. We're much more diverse in our portfolio. Again, it goes back to customer entanglement. I would say that we're always open-minded. We always have to understand where we may be in the cycle as we think about it with a three-legged stool, which is strategically, we can get comfortable, culturally, we can get comfortable, and then financially, we have to understand where we are, and then we have to risk adjust it as we think going forward. But acquisitions are going to come not only when we would like to have them, but also when they come available. Michael, on the National Pump point, to be just a good example, have you been able to get the earnings power of that business at a low point in the oil and gas cycle to comparable levels to where it was before you bought it through diversification? Can you just give us a sense for the order of magnitude of success on leveraging that portfolio across the business? Well, if you take a look at their business today, their business is now about 25% upstream versus 50%-55% upstream. The market hasn't fully recovered, because we were at 1,800 wells being drilled. Today it's around 900, so it's still down significantly. Yet that business has recovered nicely. We've diversified our portfolio geography-wise, product-wise, and customer vertical-wise. I don't have the numbers in front of me. Michael has them in memory. I don't have them committed completely to memory, but I think certainly we've made the round trip, the decline and the rebound in the business. We see opportunities to drive it nicely higher. The cross-sell has been a tremendous benefit for them. Focusing on other verticals has been a tremendous benefit for them. If oil and gas continues to improve, then that'll help improve that business going forward as well. The two large-scale acquisitions you closed on within the past year, can you talk about how it increases the competitive moats, Michael, to the first point you mentioned at the beginning of the conversation? How should we think about those acquisitions as a chess set in terms of as we think about what other assets you folks might be interested in? When we bought NES, we purchased NES with the idea that at the time, our utilization numbers were much higher, theirs were lower. We believed that we had systems in place that we could help expedite driving efficiencies in a market that we saw that was growing. It is in a product that we are very familiar with in the aerial products, and also with the vendors that we deal with. We saw significant synergies that we could add directly. On top of that, there was a customer portfolio that we could expand our cross-sell opportunities with. From that perspective, it became a win-win for us. You saw in our results, time utilization significantly improved. And at the same time frame, utilizing the capacity in the market instead of creating additional capacity through us doing just growth CapEx. I would say that was very much along the path, bringing technology to their customer base that they didn't have. With regards to Neff we are very early stages. We have cross-sell opportunities that we think are pretty attractive. But I would also say that in this segment of earthmoving, and it's a vertical that we've talked about with Project XL, is an opportunity for us because, one, we have some of the product, but we just didn't have it at the order of magnitude that they had. Two, it gave us a geographic footprint in a very high-growth area in the Southeast. Three, it expanded our customer base for our technology to be utilized as well. And I think we still have some learnings to be had as we go through the integration. But again, developing that moat would be more customers, different products that we could then take that to a broader audience across North America, learn from what they were doing very successfully, and being able to replicate it. In terms of the end market outlook, maybe we'll start on the verticals. When you folks look at infrastructure, private non-res, industrial production, can you talk about where is the cadence of activity strongest from what you folks are seeing and hearing from customers? Do you want to talk about verticals or do you want to talk about geographies or? Well, both, but maybe we could start on verticals. Okay. Starting on verticals for a moment. Infrastructure is an area that we didn't have a big share in, and we saw that as an opportunity. Bringing Neff into the equation helps us learn, helps us find a way. There's significant opportunities for growing that. Utilizing the technology, utilizing our GPS, utilizing our logistics, our Total Control, our management systems for that customer base, we think is going to be very attractive. Infrastructure is obviously a hot topic, whether we're going to see some sort of infrastructure. Regardless of what happens, there's significant opportunity for us. It's also an area where there's a shifting of going from ownership to renting. We see that as a play for us to participate in. When you talk about oil and gas, oil and gas has come up not to where it was in the past, but it's done better. When you take a look at the industrial portfolio, I'll start with the two areas that were weakest. It was chemicals and downstream. Why? One, the plant shutdowns, the high capacity, and also from an industrial recovery. They're probably the ones that were the lag. We are seeing industrial improve. When we take a look at 2018 and 2019, projections are to be very robust, particularly 2018, and then going into 2019. So we see that as an opportunity. Other verticals that we're dealing with is, we have entertainment. That's another area that we are focusing on. What am I missing here, Bill? I think you hit the key ones. Geography-wise, both coasts, East Coast, West Coast. We've pointed this out on our call. Eastern Canada doing very nicely. So it's not just the U.S., it's both areas. Western Canada seemed to have found its leveling point with oil. Not to where it was at prior peak, yet it's seen a nice inflection point there. Southeast, growing strong. Obviously, with Texas. Texas came under pressure with the hurricane. There'll be a longer play there over time, but we see that still being a viable market. Overall, from what we see, whether it be private non-res, construction, and industrial into 2018 and then likely into 2019 as being pretty good. From a pricing standpoint, you folks have said in the past that rental rates are well below prior cycle levels when adjusted for inflation. Can you talk about what you attribute that different cycle over cycle to, and any opportunities to narrow the gap that you see? So, it's a great question, and it's a great topic that's very near and dear to our hearts that we've talked about. I think the industry has changed. We talk about returns necessary in this industry. We talk about pricing as being one of those. And it's starting to play out. We're seeing it more and more. Most companies are talking about it. Most companies are using tools today. Most companies are seeing improvement in their rental rates. Most people are talking about returns. We think that, along with some of the consolidation that we've seen in this marketplace, will bode well going forward. It's also a maturing market. There's still a lot of, I wouldn't say cowboys, but I would say there's a lot of independents out there yet that manage differently. But I think over time, to get sustainable returns, you have to get pricing as part of that equation, and we're seeing that. There's more tools today than we have ever had before. If you take a look at what happened with the oil and gas within our industry is a great way of looking at it, because we mentioned that we were over-fleeted. It became a fact that the industry was over-fleeted. But the industry reacted. It took down its capital. They made the adjustments that were necessary. Then as volume improved, they managed their fleets more efficiently today than they did in the past. As a result of that, I think that the industry is being better stewards today than they were in the past. I think that's part of the discussion that everyone's having, and the tools that are provided to everybody. You folks have obviously really improved your utilization. Others in the industry have, not to the same extent, but they have as well. Could that be playing into it, in that, the returns on capital are effectively now more driven by utilization versus price compared to the last cycle? Do you see that factor playing out? Yeah, I think it plays into it. I think the improvement in utilization just reflects what Mike was talking about, right? As people think about the business differently than they have in the past. They see utilization as a lever that they can pull more actively than they used to in the past. I think that's all good, right? It helps in driving better returns, and it's part of being more mindful about how to manage the equipment rental business. So I think it's played a role. Any questions from the audience? Can we have a microphone up here, please? Thank you. Right here, please. Hi. I will start with, what do you see as the potential benefits of tax reform, some of those plans? I find it interesting if that could drive your earnings power closer to $20 in 2019. It would be interesting in what you see as those benefits. As well as in terms of the acquisition pipeline, how does it look today versus the beginning of the year? Tax reform first. It would be good for us. Just on the House and Senate proposals, obviously dropping the corporate tax rate from 35% to 20% would certainly be a benefit. We are a full cash taxpayer at the federal level today, so that would certainly drop right to the bottom line for us, that rate improvement. The proposals both include 100% expensing of CapEx for tax purposes. Right now, our bonus depreciation scheme is only 50%. Obviously, we are a large CapEx spender every year. That incremental expensing of CapEx would be another positive for us. The proposals include a limit on deducting interest expense. But for companies below a certain cap, the interest expense is still deductible. We would be below that cap as proposed in both House and Senate versions, so that would not be a headwind for us. What would be a headwind is we have Canadian earnings and profit, right? We have cash sitting in Canada and profits there in Canada. Both proposals have a tax on the E&P that is outside of the U.S. So that would be a little bit of a headwind for us. Also, a headwind would be the impact of losing deferrals on like-kind exchanges. That benefit would go away. We have a fairly significant deferred tax liability for like-kind exchange deferrals. We just have to start recognizing those deferred gains as we sold equipment into the used market. So that would be a headwind for us as well. But the headwinds are materially less than the positives. Net-net, the impact on our cash taxes would be positive. Regarding M&A, I think was your second question, and sort of the environment there. There are still assets available. And we continue to evaluate them. I think as I said earlier, it's something that we think is appropriate at this point in the cycle to still be thinking about acquisitions. But we're going to do it in the disciplined way that we always have, right? Looking for the three-legged stool that Mike talked about, and making sure that we don't get crazy and say, "Hey, we're generating a lot of cash flow, times are good. Now's a good time to buy things." Well, now may be a good time to buy things, but it depends on what you're buying and what you're paying for it. So we want to continue to be mindful that we're making good decisions in acquisitions. But we feel like there are opportunities out there. We've cleared a couple of them off the decks with NES and with Neff. But we continue to look both in our general business and in our specialty business for deals that make sense. Any other questions? Yes, can we get the microphone up here, please? Thank you. Yeah. I'm just curious, a technology question. Obviously, companies are now in a unique position to collect the huge amount of data about their customers and also about their internal business processes. I'm just wondering if you have any examples or any descriptions of your kind of work and what the benefits might be for predictive analytics or other things within your business. Well, obviously, digital is one overused term, and big data is the second one. We have been collecting data both from our equipment on GPS on usage, and also on our customers. I mentioned about doing a study. We did some ethnographic research trying to understand the customer dynamics. That was what really was what led us to the digital aspect of it. We were in an industry where it was more B2B, belly-to-belly type business. What we realized there were different classifications of types of customers out of that data that we collected. There are customers who are the B2B, bring me the donuts, let's have a conversation. There are customers who said, "I need some information that I can collect to help me make a better decision." Then there were customers who said, "I like to have information fed to me electronically on a constant basis for me to do things, handle my transactions." Then there was a customer who says, "I know what I want, I know where I want it, and I really don't need to talk to anybody to execute it." That's what led us to the digital front. I would tell you it's a journey. We're still collecting it. We're still utilizing it. Bill has a team of analytics that is helping us on different fronts, whether it be utilization, whether it be on our pricing, whether it be on our logistics. But we're also looking at ways in which, again, going back to that moat. What is it we can bring to the customer to drive better efficiencies as opposed to just thinking about us as a unit cost? How can we reduce the overall spend? How can we reduce and drive better, become truly a partner with our customer? I would say that we're very in the early stages of collecting that and developing something with it. But it's a great question. Okay. Last question over here, please. Just one second. When your competitors are shrinking your fleet, where does it go that it leaves the market and is no longer in its capacity? Well, when we shrink our fleet, we do it consistently. We look at our relatively useful life of our assets, the rental useful life. When we sell it is often to third parties, whether it be customers who are using it for, give you an example, painters. We have sold it to farmers. We have sold it to people who are growing their business and maybe even electricians who need something. They are typically people that we sell to are often our biggest renters as well. On top of that, we also sell to third parties who then take it and broker it beyond North America. Lastly, we also sell it back to vendors because not everyone can afford a brand-new asset. So they will bring it in and do a complete remanufacture or refurb, and then resell it to help generate people in the industry. It is all the above. Great. Please join me in thanking the United Rentals management team for joining us. Michael, Bill, Ted, thank you, gentlemen. Thank you, Jared. Thanks, Ted.