2017 RBC Global Industrials Conference

Sep 13, 2017

We're the machinery analyst with RBC. It's our great pleasure to have back at the conference this year, the senior management from United Rentals. We have Michael Kneeland, the CEO, Bill Plummer, the CFO, and for the first time joining us this year, Ted Grace, Vice President of Investor Relations. Gentlemen, welcome and thank you for coming. You clearly have been very busy over the last year. Maybe we could just start there and talk about some of the industry consolidation that's been happening. You guys have been kind of leading that charge over the last 12 months or so. How are you thinking about that? Why now? Why are you doing it now, and how are you thinking about the implications for industry returns and returns for United Rentals, maybe? We could start there. Well, first I want to thank RBC and Seth for having us here. It's always nice to be back out here on the western side of the U.S., particularly with all the weather we've been having on the East. I would tell you that we always look at it from a strategic point of view on our acquisitions, and we've been very disciplined around our strategy, our financial returns, how do we get the returns over time, and then the culture. I think the industry as a whole, we've been saying for quite some time, Seth, that the industry is still fragmented, and we thought there was going to be a consolidation as it matured, and we're seeing that. I think what's playing out is, not only United Rentals, but a lot of our competitors are seeing the same thing, that there's still legs of growth before us, number one. Number two, economies of scale. Right. But for us, it's more strategic by nature in the way in which we approach it. It's not a matter of time for us, it's a matter of opportunity, and if we're prepared for it, and how do we think about that longer term, and do we get the returns? We're not afraid to walk away. We have, and I give my team a lot of credit for the discipline that they've had in place. So one of the kind of views that we've been talking about is, like you said, this is a relatively young industry. It's very fragmented, and the way that we've been thinking about it is that this is moving towards more of almost like an industrial services model, which the RSC acquisition obviously brought a lot of the industrial customers to. And our view is that it's going to kind of smooth out the business where you'll have fewer years where rental rates are up 5%, 6%, 7%, down 5%, 6%, 7%, and more just kind of a plus or minus a couple of hundred basis points. Is that how you're thinking about the industry longer term, or you think that that's not- Well, I don't think about it just on rates- Got it. I think about it at overall returns. Just a stickier business model. I think to your point, it is a service model. Right. It's about solving. The way we look at it, safety and productivity. Those are two key drivers that we provide to our customer base, whether it be industrial or a commercial contractor. I think when I look at it from an industry overall, I think you're seeing more and more of that gathering around the services. There's always going to be some fragment, there's always going to be some break-offs in local markets. But I think, overall, the value customers are seeing, and the narrative's changing. We're more in a shared economy today. Right. Where rental was a concept versus ownership, it's now becoming more of a mainstream item. Right. The NES acquisition, though, kind of takes you a little bit back the other way, right? More of a transactional operator. Can you talk about how you're blending the model, right? How you're flexing your sales force or how you're integrating that more transactional model, local customer, versus this other move towards bigger national accounts. Yes. I wouldn't say that they're specifically transactional. NES, what they had were more regional than local players. Also, we saw the opportunity to improve the overall metrics by bringing our tools in, but also taking those customers and being able to cross-sell the items that we have. Ways of improving their value proposition longer term. I think the other thing is that I think everyone knows that we drive a lot of efficiencies in our organization. So to provide growth, our locations OEC, by almost any metric, far exceeds most in the industry. And giving us that growth opportunity enables us to utilize those facilities- Right and grow, whether it be our specialty business or our current core business. Yeah. Bill? No, I think you said it. Bill, one of the attributes of the two acquisitions, one that you have closed and one that you have announced, is the tax characteristic that comes with that. Absolutely. There is some tax savings available to United Rentals. How should we think about your ability to access that, and over what timeframe, and the implications for cash for you guys? Certainly. The real starting point is the fact that United Rentals, before the transactions, had used up what was a pretty significant balance of NOLs during the course of 2016. For a long time, we had been a fairly minimal federal cash taxpayer. We burned those NOLs last year, and this year our cash tax payment to the federal government was going to jump up significantly before the NES transaction. It is still going up, but the NES transaction brought along a very large balance of NOLs as well, and we will start using those this year. It is going to be three to four years that those NOLs from the NES transaction will significantly reduce the federal cash taxes that we otherwise would pay. It is a cash benefit over the first three to four years of that deal. We present valued it out at a pretty attractive level. The Neff tax benefit is a little different because it is skewed more toward tax deductible depreciation. The basis of the assets will come in higher, and that usage gets spread over a longer period of time. Right. There are some NOLs that come in with Neff. You are probably familiar with the limitations on the use of NOLs each year. Those Neff NOLs, along with the NES NOLs, again, will burn up in the first three to four years of owning Neff. But the bulk of the tax benefit is deductible depreciation of assets, and that will spread out over, depending on the asset that is involved, five to 15 years. Right. It is pretty powerful though. Again, the present value of it is something that is material to how we are going to realize returns from Neff. Right. Mike, you mentioned cross-selling, and United has made a big push into the specialty business over the last decade or so. But at the same time, your goals for cross-selling with these two acquisitions do not seem particularly robust. I think it is about $50 million combined over three years. Can you talk to any initial progress you have had or traction you have had with NES and whether there might be some upside to those synergy numbers? Well, it is always easier to quantify cost synergies. Right as opposed to revenue synergies. Quite honestly, most people wouldn't give us any credit to the revenue synergies anyways until you earn them. One of the things that we found out when we went through the RSC transaction, there were opportunities and more importantly, the willingness and openness of the current customer base to say, "Yeah, this is something that we want and need." It's also led us into why we did the acquisition for pumps Yeah at the same timeframe. It wasn't for upstream, it really was for the industrial sector and a broader arena. So, with NES, too early to tell. We'll report out, we can probably give you more details. But we're in the training programs, training them, identifying them, the current sales force to have a better understanding of what it is they can now articulate and sell to their customer base. Also with our, we have a product specialist, with inside our specialty businesses that can go with them to help them with the opportunities that are out there. So we haven't reported back to success. Is there upside? I'd like to think there's upside, not only there, but as we add more specialty and different segments to our business Right there should be more upside. Okay. Just maybe a little bit of comfort, right? As we think about the returns of the deal, the numbers that we announced for cross sell Right is what we price into the deal. To the extent that there is upside, I guess I would say we still like the deal even if we only deliver the numbers that we announced. Understood. If there's upside, it's really attractive. Right. Now, there was this another deal recently that didn't get a lot of attention where United acquired the portable power business from Cummins. Can you give a little bit of color on that, how that fits into the specialty portfolio and- Sure is that something that we'll see more of kind of going forward? Again, I got to give my hats off to my biz dev team because it was probably an exercise in patience. Because one thing is to identify and acquire an asset that is identifiable as opposed to something that is integrated. It took time to be able to pull that out from inside the mother corporation, or their operations. We could say that it was perfect timing, because of what has occurred, but longer term strategy was it gave us a lot more capacity in the larger power segment. We were doing very well and we were marching towards that. It just gives us a leap forward into that spectrum. We see power as still as a viable strategy for us. We have grown it, as to your point, very nicely. Overall our businesses have, as a percentage of our revenue, have more than doubled. We report on a quarterly basis, you see significant double-digit growth. Right in those segments. It is very much part of our strategy, and I think there is more that we can do. Okay. You mentioned, we have talked about specialty a little bit here. Your CapEx budget for this year is, round numbers, $1.6 billion or so. Can you talk about how you are splicing that CapEx, whether it is specialty versus gen rent growth versus replacement? Maybe that is better. Yeah. Sure. We have skewed, for a number of years, our capital spend toward the robust growth in our specialty areas. They've gotten a disproportionate share over a number of years. That was the plan this year as well, within that $1.6 billion kind of number that we've been targeting. I think it's fair to say that as we figure out what we need to do to respond to Harvey and Irma, it might change the picture a little bit in terms of specialty share of what we spend overall. It's not that we're going to rob specialty to maybe spend on replacing damaged equipment on the gen rent side. No, we're not going to do that. The specialty growth focus is as strong as it always has been, and we want to make sure that we continue to fund that. We just need to make decisions about what equipment we might have to replace. By the way, that number's pretty small based on our assessment so far. Right. It's still early days, but it's not going to be a huge amount of replacement spend. There's also a further decision about, okay, what will be the demand dynamics associated with Harvey and Irma? Do we put more fleet into those markets to help with the cleanup and the rebuild? How does all that play through the capital program? Those are real questions that are being considered as we speak. Obviously, we can't get specific at this point, but maybe can you talk to historically, whether it's Superstorm Sandy or some of the other natural disasters, how does this typically kind of play out? Is it the first six months or just sort of cleanup? Sure and then you get a repair replacement cycle, or maybe just help us think about that. Each one has its own personality and completely different. You mentioned Sandy, Katrina, are obviously large storms, hurricanes, that are related. There is also tornadoes and going way back, we celebrated the anniversary of 9/11. Yep. Going way back. First and foremost, we want to make sure that all of our employees are safe, and their families, and what we can do for them, to make sure that they are prepared to meet the demand. Typically, in these storms or any environment like this, it is recovery first. It is lockdown, recovery, then they go in and start doing the assessment, and then there starts the process of replacement, repair, and in some instances, like in Katrina, what is it they can do to protect going forward? So the dikes and the pumping systems they put in place. All of that plays out. Each one is different. Right. It is no secret that both of these were devastating. Thousands upon thousands of homes. In some instances, completely decimated to small repairs. In Irma, it was more residential as opposed to the industrial sector that it affected in the Texas, Louisiana marketplace. Both of those will play out completely differently. In some instances, we have not been able to go in to do an assessment because they are still trying to assess their plants before we can get in there, but each one is different. My sense would be, as we have seen before, there will be demand. Demand varies upon the severity, and it will play out for a longer period of time, particularly with these two storms. Yeah. Okay. The hurricanes aside, can you give us any flavor for the current business environment? One of your peers reported yesterday sounded fairly constructive about the environment. Is it fair to think about your seasonal trends are kind of running as you would expect at this time of the year? Or is there any color you could share? Certainly. As you know, we've gotten away from being detailed within a quarter. But, what I would say is that we had very good momentum coming into this quarter from, it was a strong second quarter for us overall. And we haven't seen anything significant, holding aside the storms Right that would change that story at this point. There is good momentum overall in construction activity across the economy. And that's the backdrop that you're adding the storm impact on top of. So, it has continued to feel pretty good as it did through the second quarter. Right. Okay. Thank you. Your fleet utilization has been particularly strong, stronger than we expected. I think it was up almost 200 basis points in the first half. 69.5 or something is what we're thinking it'll be this year, or something in that range. How are you thinking about the natural ceiling on that? Could this be a business that runs over 70% utilization now that you've expanded your footprint, you have the ability to move fleet around more easily. How are you thinking about the balance there? We always think about more. We're always driving efficiencies. We talk about being over 70. Is it possible? Yes. To your point earlier, right now seasonally, we typically run above 70. So the capacity, our ability to do so is there. We do have variations of geography, obviously in the Canadian market, they have winter. But I think there's opportunity for us to do better. How much better? That's an anyone's question. All I can tell you is that we're going to strive to do more, and that's why we drive our lean and our efficiency processes. Okay. Do we have any questions from the audience? Okay. Maybe can we talk, just you mentioned the construction markets being strong or healthy. Can you talk about energy markets? You obviously have a lot of exposure there, both in the U.S. and Canada. I think Canada has been sort of less of a headwind to United over the last couple of quarters. What are you seeing in the energy markets with current pricing? So, if you just start from rig counts. Rig counts have been pretty stable. That's an important feature of the market for us. That's a great starting point not to have rigs declining. We'll certainly take that. The share of our business that's exposed to upstream oil and gas, as you know, has come down, from where it was, say back at the prior peak in the 2014 timeframe. It's fairly small now, in the 3%-4% kind of area, depending on the quarter. That feels okay to us. We've made a reallocation of fleet away from those markets, as a result of the decline in rig counts. We've migrated slowly some of that fleet back as other sources of demand in those oil and gas driven geographies have showed themselves. I think we've gotten ourselves to a point where it's a good balance of fleet in those markets. The price premium that used to be there on the upstream oil and gas activity has come down. The incentive to go rushing back after that business is less than it used to be. I think that's a good thing for us as well as we think about how to manage that component of our business. But it's a small enough component so that, truthfully, we don't spend an undue amount of time saying, "Okay, what are we going to do about the upstream oil driven areas? Yeah. With the exception of Western Canada, where it's such a significant impact. That business has stabilized and we certainly appreciate that. That's much less of a headwind from that part of Canada. We'll continue to manage that appropriately. Eastern Canada, by the way, has been a real bright spot in terms of demand. They've been on a strong path of growing demand for fleet. We certainly are being very mindful of managing that and making sure that we're there to serve that demand. Bill, you mentioned price premium. Is there still a premium in the energy markets relative to gen rent, or that's kind of flattened out at this point? Yeah, I think it's fair to say there's still a premium generally. The upstream activity is still hard on equipment, right? They run it hard. You've got to recover some of that, but it's come down from what it used to be. One of your competitors has talked about aggressive pricing or more competitive pricing on bigger industrial projects just in general. Has that subsided at all, or do you continue to kind of see the usual? There's always been pricing pressure. Many years ago we tried penetrating, and that's what led us to the acquisition of RSC, who was very strong in it. Our job is every day to go out there and create a value proposition that exceeds our customer expectation. Competition is actually healthy. Yep. Keeps us on our toes and never assume anything. But the pricing pressure has always been there. Okay. You mentioned sort of your lean initiatives and cost takeouts and things like that. You have this Project Excel. Which is actually, you have been involved with for over a year, probably a couple of years into it at this point. It is meant to provide about $200 million of EBITDA run rate improvement by the end of 2018. Are you tracking to that number? Can you give us any update as to where that stands? We still feel very comfortable with that number. We have made good progress on the main initiatives that we called out, and I am encouraged. Some of the things that those Project Excel initiatives focused on were things that sort of we have done before, right? It is about how do you turbocharge what you have done before. Some were new initiatives, and I feel good about the progress that we are making in almost every one of those key projects. We will continue to update as we go forward. We are always struggling with the right way to articulate and communicate what we are doing. Right. There is always the balance of how much do you want to show your hand to the competition. In our quarterly reports, we will continue to call out the progress to the extent that we can. We feel good about the progress that we are making right here and now. Okay. Bill, following the closing of the Neff deal, which should be fourth quarter of this year, your leverage will be around three turns. You've been in the capital markets a bunch recently. Can you just talk about your comfort level with that three times leverage and your ability to kind of knock that down if you want to, and how you're balancing that versus share buyback, which has been kind of on hold here for a little while. Yeah. The three times that we'd get to right at close, we'd be just north of three, call it 3.1. By year-end, we'd be at three, right? It's in the midpoint of the range that we said we feel comfortable with. We are on a path of generating very robust free cash flow, not only this year, but next year, and the year after that, assuming the cycle doesn't turn against us. So, that three times is going to continue to trend down Right in future if we don't do other deals, and if we don't go crazy on, say, investing in CapEx. Trust me, we're not going crazy on CapEx. So we'll always have the opportunity, absent another deal, to say, "What do we want to do with regard to share repurchase?" We'll be prudent about it. I think we demonstrated that with NES when we stopped to give ourselves the opportunity to close that, get our integration well in hand, and see how it's impacting our cash flow, and get through the seasonal peak cash draw, which is long about now. Right. We'll make that decision once we've closed Neff, about when it's appropriate to restart. I would expect that we'd restart, so it's not like we're done with share repurchase. I think over time the pressure's going to be, are there enough acquisition deals to keep us paused? If not, then what are we going to do with this cash flow? Right. Repurchase, as we've demonstrated for years now, is a viable way to use that cash sensibly. Okay. Any questions from the audience? On the acquisition, we have one. I was wondering about NES pricing since it's much lower than United on a corporate level. What do you need to do to get that harmonized with United pricing? Maybe I'll start. Two pieces to that question. One is, how do you harmonize on a customer basis, right? Sitting down and having that conversation with a customer that says, "Here's the United Rentals view and approach on pricing, and it's different than the NES view," and finding a way to bridge that difference. That process takes some time, and we're in the early stages of that process as we speak. We'll continue to manage it. We've got a lot of experience managing that discussion. We believe that there is a value proposition that justifies a higher price point for United Rentals than NES legacy pricing would've had. We'll just have to manage through that, and there's going to be some attrition, right? We're going to lose some customers. But I think most customers will see the better value prop that United Rentals represents, and I think we'll get to a good point on that piece of it. The other piece of the price dynamic is fleet that historically had been on rent with sort of historically NES customers. If it comes off rent there, and we put it on rent with a legacy United customer, you'll get a price pop just from that change in sort of the legacy customer relationship. That happens more quickly, as the NES fleet on rent transactions come off, and that's a positive that we are starting to feel right here and now. I think that was at play in some of the second quarter NES-related performance numbers that we tried to tease out, and we'll see that dynamic play out over the next quarter or two as well. I think we're making good progress in managing through the price aspect of the NES transaction. You can always count on us to be very thoughtful about that question, because it's an important driver of the economics that we assumed when we bought. Bill, you mentioned M&A, or going back to your M&A comments, are international targets on your radar screen? They're on the radar screen. I guess the question is, are they at the center or are they somewhere else? We actually just had a conversation with the executive leadership team yesterday about our international strategy and how we want to think about it going forward. We have been pretty thorough in our review of equipment rental around the world over the last several years. We've had a dedicated senior executive, who's really gone out and met most of the major rental companies in all the regions around the globe. We think we've got a good map of what the opportunities are among the different markets. Now that we understand where we might play, we've got to make sure that we've got an opportunity that makes economic sense compared to the opportunities that we have here at home. That's just a matter of finding the right deal. We haven't found the right deal yet. I think it's fair to say we'll continue to look, continue to be open to opportunities, but we're very conscious of the fact that we've got real attractive opportunities here at home. We're very conscious of the fact that operating outside of the U.S. and Canada is different, and honestly, we don't want to make a mistake. We want to make sure that we're going into it with our eyes wide open, with the talent and the skills that we need to do it well, and that requires some patience. We're being patient, and we're being diligent as we try to always be. Terrific. That brings us to the end. I appreciate it, guys. Great. Thanks. Thank you. Thanks, Neil. Thank you. Thanks, everybody. Thank you.