Wells Fargo Securities Industrials Conference

May 10, 2017

All right. We're good to go. We're going to get started here. I'm Justin Ward, the Equity Analyst here at Wells Fargo, covering United Rentals. We're very happy to have with us today here from United Rentals, CEO Michael Kneeland and CFO Bill Plummer. Of course, Ted Grace from Investor Relations here as well. It's a fireside chat format. If you guys have any questions at any point, just raise your hand and we'll loop you in. I thought I'd start, maybe just get a quick rate question out of the way so we can move on from there. If you look at United Rentals historically in the rental industry in general, you guys have really only gotten rental rate growth when construction and industrial activity are consistently growing above the 5% range, which is not the case right now. Investors obviously are fixated on rental rates, because generally investors want to own companies that have pricing power. Considering that threshold of the 5%, does it make sense to kind of frame the rate discussion around, look, when construction's above 5%, we'll get rate, but when it's below, we probably won't? Do you think anything has changed for you guys going forward where you think you can get rental rate growth in a sub 5% construction growth environment? I'll maybe dive on that one first. The 5% number, I think is debatable. I think the intent of your question is sort of what are the characteristics that will allow us to consistently get rate? We've talked in the past about a solid demand environment, whether it's 5% or not, we'll have to see. We've talked about that showing up in terms of higher utilizations, in terms of higher used equipment prices. Then just having a general sense that the cycle is in a decent condition. I think all those things are in place right here and now. I would argue that whatever, whether it's 5% or something lower or something higher, whatever that magic number is, if there is indeed a magic number, the characteristics that we are experiencing right now should support a better rate environment. We are encouraged about the opportunities going forward around rate. The challenge is to actually make all that happen. We do not control the market. We cannot set rate as a single actor. All we can do is do everything that we can to take advantage of the opportunities that is there. I think that is what we are doing. Okay. The second quarter will be your first quarter with NES. NES is going to be a bit of a drag on some of your metrics, has lower rates, lower utilization, lower margins, et cetera. You have owned the business for about a month now. Is there any way to kind of get a feel at this point of what sort of drag we should expect on those metrics? You guys are going to be breaking that out as you report earnings, so investors can gauge kind of the core business performance in the quarter? I will start, and Bill, please chime in. I think it is too early to tell. It is just a month old, and we are putting all the data in. We are integrating the facilities, and we are training the management staff on tools that are available to them. It was 90 days later that we were able to integrate the two IT systems, or actually the IT system, so that we can pull all that data together. I think as we go through the quarter, I would say that when we do report the quarter, we will have the data and be able to point out the different metrics, and the results and the benefits, all the puts and takes. Yeah. Then we can talk about how we will report going forward. I think the first quarter is going to be the roughest because it is bringing it in, and then after that, it should get more simplistic. Mike is dead on. I think in the second quarter, we will have all the data, right? As we always do, right? We are data junkies. In the second quarter, I think it will be most useful for us to be able to talk about exactly what the impact of NES is. So we will tell you what the reported metrics are. Rate, ton utilization, like we always do. We will also tell you what the pro forma view with NES included in both periods looks like. Then we are still debating what else that might be useful to put out. Maybe in the first quarter after the acquisition, it will be useful for us to say, what does the legacy URI position look like excluding NES, right? So people have a sense of how the base business is doing separate and apart from the integration of NES. I think in the second quarter, those are legitimate things to talk about. We are now in the process, though, of scrambling the egg. Meaning fleets moving around after the acquisition, so it gets harder and harder as time goes on to say, "Oh, that is an NES impact versus the rest of the business." So much beyond second quarter, we will have to wait and see. In the second quarter, I think we will be prepared to talk about everything that gives a sense of what is NES' impact and how is the legacy business going separate and apart. Questions at this point? You got one here. I am going to go back to the rate question just because I think that is- I figured it was coming. You fenced that question really well, so I appreciate that. So here is my question. I know you are not going to tell us in a quarter what is going on, but what can you do to make us feel better, those who own your stock? So it will go up and then down kind of like a yo-yo, now it is going up. But what can you do to make us feel better about rates now, as you see them, without them breaking your longstanding tradition, but by putting a little bit more meat on that bone that Mr. Plummer- Wow. I guess Kellyanne Conway is safe. I don't think we're worried about doing her job. Please. She didn't like my answer, so your turn. When you get to be my age, you're allowed to ask any question. What I would tell you is, as we reported the first quarter, we saw demand. Demand would give us confidence going forward that rate was attainable, number one. Number two, I think the other part you would look at is some of the other companies that have reported. One, rate is a topic. Two, demand has been fairly strong for those companies that reported as well. I think the third thing would be is when you take a look at some of the OEMs that have reported, yeah, they've seen an improvement but an improvement off a very low base. So I think the industry is still keeping the demand and supply in check at this point. I don't know what the future will lead, but I can only tell you that those are the data points that I would point to. The other one I would say is also used prices continue to improve. That is also a fundamental of how you see demand. People don't sell assets if they can rent them. So those are the things that I would point out based on demand. I think those are key points in fleshing out what I had in my head, at least in the first answer. But I think, look, I tend to be very straightforward. The question about rates in the first quarter, I think it is fair to say we did not realize rates the way that we wanted to. So we are looking within ourselves and asking, what did we miss? And where is the opportunity? And what we are concluding is that the opportunity is there, it is real because of all the things that Michael said and what I said initially, right? The external environment, competitors' reaction, all of those things say there is an opportunity for better rate realization as we go forward. So we are taking that, and we are setting ourselves up from a management perspective to say, let us go do better than we have done in the first quarter. If we do, we think the opportunity is there. Just one follow-up. Now you are answering. That is really good. But I would advise you not to go to the White House, though. That is not a good place to be. Do not worry. The second question, just as a follow-up. If the trends were good in the first quarter, and good, we're talking now, let's say, your end-use markets. Would you say it's fair to say that it sounds like they're okay now, too? At least the trends are continuing up and to the right. I don't know if it's 90, 70, 30, but would you say the trends are still positive from what you're seeing on the macro side? Trying to avoid making an intra-quarter statement, let me make a statement based on sort of things through the first quarter, and you can extrapolate. First quarter was good, and it was good across different geographies. I'm talking about demand now. Good across different geographies, good across different project types, good across different customer types in terms of demand. We haven't seen anything in the macroeconomic data that suggests that there's been a dramatic change as of yet. You can reasonably extrapolate from first quarter that we had good momentum going into the second quarter, and we are encouraged by the factors that we see across construction overall. Thanks. You're welcome. We got one back here as well. Thank you very much. This question ties into rates a little bit, but keen to understand, what is your response to Sunbelt's aggressive expansion? If you match their aggressive growth in the States here, that's going to put negative pressure on rates. If you don't match it, you're inevitably going to give up some market share. Thank you. Yeah. Look, we understand that there's a competitive marketplace out there, and if it wasn't Sunbelt, it'd be somebody else. In fact, some of the other companies that have reported of recent have talked about greenfield expansion. So in essence, they are continuing to grow. We understand that. We understand it's a competitive environment. We also think there's room for good competition. You make a valid point. There's some areas that we're going to protect some of our key customers, and I'm sure vice versa. We have the flexibility of moving assets. We have the flexibility of our cash, of how we deploy our capital with inside that. To Bill's point earlier, we can do things better than we did in the first quarter when it comes down to rate. There are still opportunities, absence of some of the competitive marketplace. There were still some opportunities that we see. Competition is competition. It's not like something else has been growing, and we knew that for the last three years. But it hasn't stopped our initiatives and what we're trying to do and where we're trying to go. By the way, it's not all about size, and it's not all about market share. It's about profitable growth, is how we think about it. That's what we're focused on. When we talked about areas that we're focusing on, we spoke to that clearly at the Investor Day in December. Talked about specific verticals. We talked about the expansion going into our specialty business of entangling that customer. Those are the things that we'll continue. We have one over here. All right. First, could you talk about the positive tailwinds you see to the business as well as, I guess that includes rig count, potential infrastructure, as well as combining that with the probably underappreciated cost savings plan and potential NES synergies? Several questions in that. The synergies we announced, we are diving into it. Nothing has changed our mind. As we go through this quarter and get closer, we will be able to fine-tune that as we go through the quarter. Probably, we will have to wait and see as we announce our second quarter, what we have learned going forward, number one. With regards, what was the other parts of your question was NES Cost savings. Cost savings. And other tailwinds. Our Project XL that we announced had some cost savings. It was also focused around driving a contribution margin by looking at verticals. That is very much underway. We report that every quarter. Bill can talk specifically about it, but we always are looking at ways of driving costs. Our digital arena enables us to have a complete transaction from cradle to grave all the way through with no human interaction, all done by the customer. That can take some cost pressure out, also helps us with regards to the customer experience, and also helps us with making efficiencies inside of our own organization. And the third part of your question was? There was three parts. Positive tailwinds. Positive tailwinds. Positive tailwinds, I would say, are attributable to the construction that we've seen. As we went through December, backlogs continued to be robust. The reports that we're seeing from our customers are still very optimistic. In fact, we saw one of the highest customer surveys in the first quarter in quite some time. I think it was a record for the company. On top of that, you take a look at the rig count. Rig counts come up. It's not a big area of our business like it used to be, but nonetheless, it has secured the oil industry. Commodities seem to have bottomed and started to come up ever so slightly. That is driving some future demand, and you'll see that. As far as infrastructure, the infrastructure that's being talked on the political front, we've always said that would be accretive. We're not baking that into our number. That would be added onto as we go forward. But I would tell you that the employment numbers, the consumer index, trucking improvements that we're seeing, the tonnage weight, all points to the economy doing fairly well. All right. Sorry, go ahead. The second one I would have would be how do you balance investing in the business versus accretive M&A and share buybacks, particularly as we get pullbacks in the stock occasionally? Our priority is always to make sure that we're making the right organic investment in the business. We spend a lot of time talking about what's the right level of CapEx spend for our business, and how should we manage that CapEx level as we go through the course of a year. That's priority number one. I think I said this earlier. Before that, priority number zero is to make sure that our capital structure is appropriate for our business and where we are in the cycle. Set the leverage ratio at the right level. We talked about 2.5 to 3.5 times. That's where you start. But then you say, what's the right level of organic growth in our business for a given year? Like I said, manage that number as we go through the course of the year. M&A happens when it happens. Those deals come when they come. We are pretty disciplined about the criteria that have to be met in order to do a deal. You know our history. We have done deals, but we have also passed on a lot of deals. We will continue to take that approach to M&A. Set the leverage level, make sure that the organic investment is covered. That really involves the previous discussion about how much do we want to grow, how much do we want to try to foreclose competitive action on some of our main competitors, or are we willing to cede some market share? Those are the questions that we wrestle with as we set that organic growth number. Once you have set it, once you have decided whether or not there is a likely M&A transaction, then you look around and say, okay, what else do we have in the way of cash flow? Right? If there is still cash flow available, then you get to think about things like share repurchase. Right? Over the last several years, we have done a number of share repurchases. We have suspended our current program because as we step through that logic, M&A in the form of NES came to the fore. Right? We had the opportunity. So back in October, we stopped with the share repurchase program, and we said we are going to reassess that as we get into the integration, see what the cash flow picture for the rest of the year looks like, and then make a decision about when we restart and how quickly we go when we do. That is the process that we have used, and it has served us pretty well. Building off your comments about M&A, with the NES deal, you guys are now up to about 900 locations. Your gen rent footprint looks essentially complete and built out. Is there a location count that you guys think of as a ceiling that you would for that gen rent business? If so, can we kind of expect whatever that ceiling is, no more gen rent acquisitions and all acquisitions towards specialty after that? Or how do you guys think about that? We don't measure it by locations or the amount of locations. We look at the capacity that's available to us. If you take a look at the efficiencies that we have driven through the RSC and United Rentals over time, we probably have the highest OEC per location. In some of our locations, they have maxed out as far as the physical size of what you can do. Again, it's not a question of how many locations you have. There could be a concept where you actually have more of a hub and spoke, smaller physical locations, and much larger hub that you can run a lot more through it. In some markets, we're doing that. But it's not going to diminish us from doing acquisitions at all. Really, it's about the capacity. That's one of the things we thought about NES was, one, it gives us better real estate that we can drive some additional efficiencies and capacity and build that business up, vis-a-vis through other products, maybe more capital, or maybe it's through the synergies that we can get through our specialty. A lot of our locations for specialty are co-located within our own branches. We look at the capacity. Okay. Continuing on the specialty front. Obviously, a very important growth area for you guys going forward. It's about 20% of your business now. You guys are hoping to essentially double that business by 2020. Can you kind of maybe give us a refresher on what we should expect there over the next 12 months for cold starts, for any sort of tuck-in M&A, et cetera? Well, I think during the investor conference, we said it would be a combination of both. We've got 17 locations earmarked for this year. It's too early to tell what we'll do next year. There are other lines and other specialty items, and also M&A opportunities that we look at. We have a very robust business development team that's looking. To Bill's point earlier, strategically, financially, and culturally, we have a lot of discipline around that, so we're much more selective. So it's going to be a combination thereof. I can't say that we'll do an acquisition this year or next year of any size or magnitude, but within that timeframe and in that growth capacity, it will require some M&A. Okay. What sort of valuations are you seeing on the private M&A front at this point? If they're elevated or remain elevated or get higher, does that force you more towards cold starts? How do you think about that? I think specialty businesses, by the nature of high return assets, demands a higher multiple. We get that, and again, it goes back to our modeling of why should we own it? We look at it and say, if we're going to pay a high multiple, how can we get synergies, whether it be both cost and/or revenue or a combination thereof, to drive that multiple down to be more in capacity with our overall multiple. That's how we look at it. That's how we've approached it. I don't think that's going to change. If you take a look at some of the acquisitions that we've had in our specialty business, it's been just that. Some have been small, and then we've said we could build them out, and we've been doing that. We've had locations, we've had some capacity. We're driving some efficiencies that we can give up some of that capacity to them. That's what we're doing. We'll continue along that pipeline. I think it's exciting. Any other questions at this point? Just maybe one more on the specialty. Utilization rates in the specialty are much lower than the gen rent. How do you guys see those trending over the next couple of years? Is it structurally possible to get those up to the gen rent level of utilization? I say it's going to be difficult. Can you improve it? Probably. When you look at specialty, I know we throw those metrics into our overall portfolio, and we've had this ongoing debate whether we should separate them. The reason for that is, if you were to talk to the operators, it's not so much about the time utilization that they look at, it's the return metrics. What they focus in on is it's a complete package, it's a complete solution. We also have engineers on staff to help design our trench applications with certified drawings that we supply. The same goes for whether it be plumbing or not plumbing, but whether it's the pump or the power. These are complete design solutions specific to their needs. It's not just the generators, it's not the pump, it's everything else that connects to it, and it's also how to phase that into a job or whether it be a construction and/or industrial application. Okay. We got one in front again. Just on oil and gas, you mentioned the rig count gotten better. Have you seen any improvement in that small part of your business already, or is that yet to come? Well, I think, Ted will kick me in the shins for not remembering his stats, but I think rig count's up like 27%, and our revenue that we've seen an improvement is around 24%. So there is a correlation there. Albeit it's a much smaller part of our business, our portfolio. But to your point, it's been trending in the right direction. On that front, are you seeing the pricing in that oil and gas space that you guys saw multiple years back, or has the pricing environment changed entirely there, and you don't expect it to go back to those prior levels? I would say I wouldn't expect it to go back. Look, it's no different than having a downturn, right? You start at a lower base, and you work your way up. Clearly, I think the rates that are going out today were lower than they were at the peak. But if the business environment continues, we should start to see that improve over time. Okay. Maybe we can talk one area of strategic importance. You talked about it being a very competitive, fragmented market, and it seems to me over the next five years, perhaps the most important strategic area is with information technology and the digital strategy. It seems like an area that United Rentals can use their scale to really distance themselves from the competition and potentially transform the competitive landscape there. It's still pretty early stages of that area for you guys. Only 20% of your customers are using Total Control. You just rolled out a comprehensive digital strategy last year. Can you talk about the progress you guys think about there over the next five years or so, and is that really the number one strategic area you think you guys need to pursue there? I think we have to pursue it. It's not a question of if, it's a question of how, and how fast you can do it. It's about the customer experience. Everyone wants real live data sooner, quicker, immediately. I think that you'll see it build over time. Digital to me is an overused term because it's very broad. From phones, people think in digital, connectivity between companies, computer to computer digital. There's all kinds of ways you can look at digital. We, over the last three years, have put an enormous investment in GPS-ing all of our assets. Those assets have been feeding us data over time. We supply this to the digital as far as locations, maybe refueling, and other things that we can do with that, we offer to our customers in some form. It's pay if they want it very customized, or if it's just standard reporting, it's free. I do think that as we go forward, understanding the data, sharing that data, and helping our customers become more efficient, you'll win more business. Our industry has always been based on two fundamentals, safety and productivity. United Rentals has probably one of the safest records in our industry. We're proud of that. We're not at zero yet, but that's our goal. On productivity, you mentioned Total Control. I think as we go forward, there's ways in which companies need to talk to each other, and digital is an important part of that. I think we're very early on. We put an enormous investment in GPS so that we'll be able to use that, let our machines be able to talk to our customers. That's something, an infrastructure that we've built. I think it's very early on. I'm very excited about it, and more to come as we go through this year and next. In the more to come, is that going to require you guys to really push the innovation? Is that going to require you guys to maybe make an acquisition to bring some of that development in-house or maybe really ramp up the investment there to try and really distance yourself from the competition? We have put a capital investment. We have our own programmers, very capable, and it's not just IT. We've also made a capital investment in our sales and marketing, and particularly our marketing. We announced a new addition to our team last year. We've got a lot of things underway. Again, it doesn't follow what we want, it's up to what our customers want. We're doing an awful lot of research and gathering of what it is the customers, what are the pain points for them? How can we eliminate those? How can we drive efficiencies for them? How can we drive cost down for them? Right now, the only way they drive costs is they beat us up over unit cost. We haven't solved that model yet to say there's a better way. We have to some instances with Total Control, but to a larger mass, we haven't done that yet. I think that's the next step in our evolution. As far as what Bill and his team is doing, we've put a capital investment in our analytics department. We've separated it. A lot of good work is coming out of the data that we're collecting. I don't know if it's going to require an acquisition. It would have to be, again, strategic, and the economics have to be such that there's enormous benefit for us to warrant that type of capital outlay. I don't know how much we're talking about either. Would we shy away from it? No. If it makes logical sense, and that's something I could articulate to the investment community and to my customers of the benefits, yeah, we're all in. I would just tell everybody that it's front and center of our mind. We see that opportunity, and we're going to do our best to be the first to deliver it. Great. We did have, sorry. We have one right here. Joe. In Rock Island, the guys who do the aggregate business, they're talking about how the Department of Transportation business is going to accelerate through the year. This is not anything to do with the Trump- No whatever he does. This was a joke, anyway. But the thing about the, apparently there's a lot of infrastructure being built right now. Do you guys see that in your business? If we look at the back half of 2017, do you see business? Are you bidding for business? I hope you're not divulging anything here. No. Do you see that type of enthusiasm or business? Well, I see enthusiasm. Look, there's certain facilities or certain infrastructures that require maintenance and require updating, and there's obviously, the civil engineering has gone through and evaluated bridges and roads, and actually rated them based on safety. Those will have to be taken care first. Is there some areas there? Yeah, there's some areas where they're looked at and are being addressed. But infrastructure comes in different forms. For an example, what's happening here in LaGuardia, we're actually getting a real airport that's going to be of this century, that we've- Are you guys involved with that at all? Yes, we are. We are. Kennedy Airport announced the same thing. If you go around the country, there are numerous infrastructure as it relates to transportation in that form. The railroad is another one that is looking at ways to improve the efficiencies of the railroad and driving cost out. There is infrastructure in energy, whether it be an oil pipeline or cracker plants that can take some of the byproduct or the commodity and monetize it and make it productive. There is some infrastructure ongoing there as well. So the answer is, you are seeing it accelerate through the back half. Do you have any sense whether it is more than you expected? If I would have spoken to you in December, is it things look the same as you expected, or they look a little bit better, or they look worse? I think I would tell you we expected it. We saw that a lot of these projects have been on the books. We deal with steel erectors well in advance of anticipation. As far as what the politicians do, what infrastructure, that will all be accretive. That is not even in our plan at all. Just totally on a different subject, you talked about acquisitions. The NES acquisition looked like it was, on paper, it looks like a great acquisition. Without saying, we are going to buy this or that, there are two questions. One, are there a lot of mom and pops out there that you can fold in and save money, et cetera? What is your pipeline without saying this and this? Is the pipeline robust now or just so-so? How would you describe your pipeline? If my business development team is here, they have a robust pipeline. Say that again. If my vice president of business development, he would say, "I've got a very robust pipeline. Okay, cool. All right. Well, we are out of time. I apologize if there are lingering questions. We thank everybody for joining us, and we will see you all again soon.