Bank of America Merrill Lynch Global Industrials & EU Autos Conference

Mar 21, 2017

All right. Good afternoon, everybody. Hopefully, everybody's recharged after lunch. Standing room only lunch. Sorry about that for anybody who didn't actually grab a seat. But thanks for being here today. We're really delighted to have United Rentals be with us from the States. I think this is the third or fourth year they've been in attendance with us in London. But particular pleasure to have CEO Mike Kneeland, CFO Bill Plummer, and Director of IR, Ted Grace with us. We're just going to keep this real interactive and pretty much go straight into Q&A. Before we do that, I know Phil and Michael would like to say a few words. I really have nothing more to say other than thank you, Ross, for and for the Merrill Lynch BofA conference for having us here. We've always enjoyed coming here. This is really your time. We have no real canned presentation. It's really up in the Q&A. Sure. Okay. Well, maybe I'll just kick it off to get it going. Look, one of the remarkable things about your company and the space in general, particularly United Rentals, I think a lot of people doubted, including ourselves at times, was the free cash flow generation through the cycle. And you generated close to $1.2 billion in free cash flow last year. You're guiding to $700 million at the midpoint this year. What is sustainable annualized free cash flow for United Rentals through the cycle? Do you have any particular number in mind or a way to think about it? Well, I'm going to let Bill go with it because this is right up his alley. Sure. Bill's going to duck the question. We haven't quantified cash flow across any particular view of the cycle, so I won't do that here and now. The reason we haven't quantified is it's a pretty challenging question to answer because it depends so much on where you start from, right? Where you are when the downturn comes. If the downturn started tomorrow, it's not, but if it started tomorrow, obviously we're coming off almost $1.2 billion last year, so whatever decline we would see could be to a level that's still relatively attractive. But if the downturn came from a lower base of free cash flow, then it'll be more challenging. I think the fair thing to say is that we expect to be a robust generator of free cash flow from where we are, regardless of what the cycle does from here. To the extent that the cycle continues on for several more years before the downturn really does come, should be all the better from a free cash flow perspective over the long haul. So it depends is the short answer. Okay, fair enough. I think some of the key points are the margin gains are structural. If you look at our EBITDA margins now, we're in the high 40s. The prior peak, 2008 peak EBITDA margin was 32%. So we view that all as structural. Our capital discipline is a lot more rigorous, so we're a lot more attuned to managing our CapEx dynamically, very frequently assessing where we are. I think you'd see us react quite quickly if the environment required it. Mark? Yeah, just a question on cash flow. What's recently been some key takeaways for your company or on the state of the industry at the moment in the couple of times? Well, I personally didn't attend, but we had several people there. From all indications, what I heard was there was a sense of optimism. It also was felt at the American Rental Association that was held two weeks prior to that. I think there was just a general sense that there is optimism in the U.S. There's still some questions and challenges in a broader global market. But people were saying that it looks okay in comparison to the year prior, where we had an oversupply that impacted the OEMs. Maybe just back on the capital allocation and cash flow discussion. You're back in the M&A game. You're acquiring NES Rentals for close to $1 billion. Maybe you could talk a little bit about that. You've had this long-stated desire to grow your specialty rental business, that you bought a gen rent business. Maybe you could walk us through the thinking there and maybe what's next. Yeah. Well, first of all, we've always been in the M&A game. We are very disciplined, and we walk away from deals that have multiples that we don't think are attractive, or we think that it isn't warranted of getting a return over the three to five-year timeframe that's acceptable. That being said, there are still plenty of companies that we look at. For NES in particular, we looked at it from a strategic point of view, and we looked at the customer crossover. Although there is some, it wasn't significant, and so we see the opportunity for expanding our overall customer base that we can then take our technology, our services to help improve their business, number one. Number two, also expanding our cross-selling to our specialty businesses. So that was the strategic part of it. The financial part of it, when you take a look at the multiple we had, take a look at the synergies, particularly most of the cost synergies, and there were also some revenue synergies, as I just mentioned. Then when you add in the tax event from the NOLs, it quickly became a very attractive financial picture for us. Then from a cultural, they are focused on safety. Clearly, when they look at the customer, here's a company that didn't have all the financial resources for them. They had them, but as a result of that, they really had to focus in on their customer. They didn't have a lot of customer churn that you would normally see. Very customer-focused, and it's about serviceability and also about safety. When you look at all three of those, and we've been very vocal about having all three when we look at an acquisition, it actually ticked off all three of those buckets. Let me just add one other. Part of your question was around specialty versus general rentals acquisition. To be clear, we never said we weren't going to do general rentals acquisitions. We've always said that we're focused on acquisitions that meet the criteria that Michael just talked about. We were absolutely looking to grow our specialty businesses through acquisition and organically, by the way. But we were also looking for general rentals opportunities. The hurdle may be a little bit higher for general rentals, finding the returns in a general rentals acquisition that make sense. But when we do find that return, that strategic fit, and the cultural and integration fit, we're not afraid to do general rentals as well, and you see that with NES. Maybe just because of the various levels of knowledge on United Rentals just in the room and people listening in and so forth, maybe you could review your specialty rental business real quickly. How big is it today, and what have you said in terms of what are your financial objectives for the specialty business, kind of within what time frame? Sure. I'll start. The four businesses that we include as specialty are Trench Safety, Power & HVAC, our pump business, and our tools business. So those are the markets that we categorize as specialty. We've been growing those robustly over the last several years, led by Power & HVAC and Trench Safety. Recently joined with now renewed growth in our pump business. That growth has been organic, and that growth has been through acquisition over time. It's driven by the fact that those businesses, for us historically, have driven higher returns overall. We want to continue to grow. They represent something like 20% of our business today. We'd like to grow them as rapidly and grow the share as rapidly as makes sense, commensurate with the returns that they can generate. You'll see us continue to invest both our organic CapEx and also continue to look for acquisitions to support those businesses because they have led the way in enhancing our returns over the last number of years. What's the typical multiple premium that you'd pay for a specialty rental business over more of a general rentals business? Is there a typical spread? Typical is a hard word, right? The answer is it depends. Maybe I'll just write a little sign and put it depends out front so that we can point to it. But the businesses certainly will come typically at a higher multiple. Whether that's 7, 8, 9 times, even higher sometimes, depends on the specific business that we're talking about. That compares to a general rentals business that might come at a 6 to 7 kind of range. So those are very broad multiple ranges. I wouldn't get too locked into them. I would get locked into whatever multiple we would do. Can't speak for others, but whatever multiple we would pay, the question is, can we still drive a return that's attractive? Once we grow it, once we cross-sell it into our customer base, and once we apply the integration expertise that we feel we've built up. If the answer is yes, we're not afraid to pay a higher multiple for a business that's more attractive. Well, look, why I'm asking all these questions really around M&A is what I'm really trying to get at is you've got a lot of free cash flow. You've delevered the balance sheet. You've termed out a lot of your debt. Now you're back. You're making the first acquisition you've made in a couple of years. I think most would agree that the rental market is still relatively fragmented in the grand scheme of things, and you're the industry leader. Does United Rentals really view itself as a consolidator of the industry? I mean, certainly your number one competitor in the world historically, while they bought a lot of much smaller businesses, hasn't been as active in M&A. I'm just kind of wondering if that's something you feel like you shoulder for the industry. I think we get labeled as a consolidator. It's not that we set out to say that we will be that player. I think if it hits the criteria that I articulated and Bill on the returns, yeah. We're game. We're ready. We'll do that. Do I think the industry will consolidate? Yeah. It's going to. It will continue. The customer is changing the way in which they go to market as well. I think all those will play into a consolidation. How fast, how soon, and who? That's yet to be determined. I think one thing, just for the edification of those not as familiar with us. We've got 900 branches across North America. We're in 49 states, all 10 Canadian provinces. We're in 99 out of the 100 biggest MSAs in North America. The footprint is largely in place. We're actually rationalizing The footprint to get more efficient. We're not exiting markets per se, but we're actually servicing them with fewer locations. Acquisitions, we term it smart M&A, but it would have to even be on the financial characteristics. It would have to bring something, whether it's new clients or new markets, new products. Something that would allow us to add more value to our customers. Got it. Thank you. Question in front. Can you elaborate a little bit more about how you see the acquisition potential across the different options at different points in time? Because having reduced the share they were serving, is that a moment in time, or is that because there wasn't M&A available or weren't any better at that point? How much understand how you see that fit, and where CapEx sits. Is that the first time in many Certainly. We talk a lot about this, and we've included some material in our investor deck. I'd certainly refer you there. As we think about it, the starting point is really, first and foremost, have we got the capital structure of the company in a place that's commensurate with where we believe we are in the cycle? We've talked about using net debt to EBITDA leverage. We've talked about operating in a 2.5-3.5 times range. We'll be toward the bottom end of that range in the good part of the cycle, and toward the top end of that range in the bad part of the cycle. We make that assessment first, right? Where are we in our leverage? If we're at a point where we feel comfortable with our leverage for where we believe we are in the cycle, then we go to, okay, what's the right amount of organic capital to put into the business right here? That will set the amount of free cash flow that we're going to generate at a given point in the cycle. Leverage, check it, make sure you're good, then make your decision about organic CapEx. If you have cash flow left over, that's when we start to evaluate, okay, is there an M&A opportunity that's available for us in the near term? If there's not one that we see, could there likely be one in the near term? We like to preserve a little bit of flexibility in terms of where that cash flow goes in case an acquisition opportunity pops up. If we don't foresee a significant acquisition opportunity, then that free cash flow is truly free. That's where we start to ask ourselves, do we want to return some of that cash flow to the equity investors? Over the last several years, our judgment has been, yes. We've got enough cash flow to cover organic, to make sure leverage is well managed first, then cover organic, then cover any reasonable expectation for M&A, and to give a part of the cash flow back to shareholders. We make that assessment really on a daily basis, and keep circling around in that loop to try and optimize where we think we are, and make all of those demands on cash flow fit with the overall strategy. Hopefully that helps. Sorry. Sure. How do you differentiate between dividends and buybacks? Well, to date, we've looked at dividends and asked ourselves, where is the value to our shareholder base of dividend relative to other uses of cash, like buyback? And we've decided that buyback makes more sense than dividend. The challenge with the dividend is it's not written in stone forever, but it's pretty difficult to pull back a dividend, right? And so we don't want to put ourselves in a position where we reasonably might need to pull back a dividend when the tough part of the cycle comes. And because we are so cyclical, I think it puts a pretty high hurdle on committing to a dividend. So if that's the way you're thinking about dividend, maybe it makes more sense to use your cash flow to buy back shares as a way of rewarding shareholders for being alongside us. There's a lot of debate about that. Quite honestly, probably every six months, one of our directors asks the question again. So we continually reevaluate, and we'll do that. But so far, we've decided that a dividend is not where our company needs to be right here and now. And certainly stay tuned if we ever decide to change that. Next question at the front. Can I ask you to just give a little clarity of the sort of signposts you're looking for in assessing where you are in the cycle? Because you're thinking about those very issues, and I suspect some of the signposts historically would be things like interest rates starting to tick up. But clearly, we're coming from a very different point in terms of interest rates than where we were historically. So I was just thinking a little bit about that. And then at the same point, how are you thinking about, or you might at least think about a normal cycle in terms of economic activity, and then we've got this Trump inflation, not inflation. How the hell do we assess that? Yeah. That's a great way of putting it, too. I would tell you that there's a lot of different things that we look at. We do look at very broad-base projections of GDP growth. We look at it from the standpoint of both the U.S. and in Canada. We step away and take a look at inside of that, specific verticals, what's happening in certain industries. Because although GDP growth may be affected in the U.S., a lot of the multinationals, if the rest of the globe is working, it doesn't affect them as much. Interest rates is one. And to your point, we have come off very low interest rates, and one could argue it's well long overdue. Others could argue, well, we're not fully employed yet, even though our employment's come down, there's still a lot of employment on the sidelines. Inflation hasn't shown any means of that. But to your point, you have to measure and take a look at it. We do look at used pricing of equipment. We look at utilizations. We have, as Ted mentioned, a broad base in 99 of the 100 MSAs, and we go deep in listening to our employees, our management, of assessing their customers, our customer surveys, and then all the other data that's out there that's readily available, whether it's the ABI Index, whether it's the industrial index, or whether it's information on projected starts, stops. The American Rental Association has their own economist that does some analysis as well. It's not a perfect science. It's probably more of an art. The good part of it is that we have the flexibility within our company, and I'm sure our industry, that we can scale back quickly, and we can ramp up quickly to react to any given market conditions. But those are probably some of the other things that I look at is part-time employment, so not permanent, but part-time. I'd also look at trucking tonnage. It tells you that you're moving inventories typically for a reason. I think if you go through last year, the tonnage came down, shipping was under, most of you probably follow the trucking industry, come under a lot of pressure. The strong dollar in the industrials last year struggled in the U.S. We have another question in front? Yeah. Right. You can actually give me the mic. It was just going back to the dividend capital allocation policy. I think your words were, for such a cyclical business, and I was trying to equate that with your leverage range, and even the bottom end of the leverage range seemed reasonably high for such a cyclical business. First question. Second question, going back to the, are you wanting to be a consolidation market? If you're in all the states, are one, and you're rationalizing to get efficiency gains, does that mean you've naturally come to a size that you don't need to grow from here? Well, I'll- Why would you not add more cash back to sell? I'll reverse the question, and I'll answer the first one. One is capacity in the marketplace. The other part of it is opening yourselves up to new customers, expanding your customer horizons. Yes, we're in every market, but we know there's a lot of niche companies that are out there. Classic example is the NES. I said there's some crossover, but not a lot of crossover. So there's additional customers that we can go after and expand. We're doing a lot of things with technology. We GPS all of our assets. We think that for a value proposition that we can deliver to the customers going forward. We're also looking at where the customer is changing. We know that just consumer as in whole has changed dramatically. A decade ago, we weren't shopping online like we are today. Big box has come under a lot of stress because of it. We want to make sure that we're understanding where the customers are. So we're spending an awful lot of time on that. You're right, and it also may be just a fleet mix. We may be buying a company that has a mix that's not like ours, that we can expand into, learn from it and take that and put it to a broader audience across North America. So those are the things why we would do acquisitions. Quite honestly, taking cost out of the system as well and driving a lot more efficiencies. On the capital front? Sure. I'll take that and you're asking a question that I asked myself quite a lot when I was thinking about joining United Rentals a little over eight years ago. A high level of leverage in an industry that is very cyclical and very capital intensive, sort of your basic finance classes might tell you, "Don't do that." The reason we do do that is, A, because we are so capital intensive, it puts a real premium on keeping your cost of capital down, which means debt versus equity. Right? The reason you can get away with that is because the assets in our business are so liquid, that even in the down part of the cycle, you have the opportunity to liquidate assets in order to make debt service. That theory of how you capitalize a business in this industry, has been tested time and again, and was severely tested during the downturn in 2009 and 2010. Top line collapsed dramatically. Cash flow from operations collapsed as well, but you were able to support debt service by liquidating fleet. In fact, in that market downturn, which was as severe as we've ever seen, it's fair to say that we as a company, were able to liquidate every unit of fleet that we wanted to into the used equipment market. That supported cash flow, which allowed us to maintain debt service without any stress whatsoever. That's the theory of why you maintain such in your view, high levels of leverage. It works across the cycle, and it keeps that cost of capital down. Just one quick follow-up, if I may. I attended a digital day yesterday here in London, where there were a lot of U.S. and European companies talking about how value-enhancing digital would be for their businesses. I forget which one it was, but one of them said that for construction road building, they reckon they can get the capital employed down by 30% or more. Were that to be the case, is that a risk for a business like yours, where if that is the case across a number of industries where assets can be more efficiently utilized, people know where they are, they are maintained better, there isn't the downtime. Is that an opportunity or is that a threat? We see it as an opportunity, and here's why. Ever since we did the acquisition of RSC, we've got Total Control. We've been going out, our value propositions to our customers is less is more. We can go in and show them, and we've taken them and taken rental costs out of their businesses and drive a lot more efficiencies for them. What it means for us is we get more market share of that customer. We've had customers who have converted to United Rentals, and we had one example of that at our investor day, where I think four years ago, three years ago, it was less than $1 million of rental revenue. And I think today it's around $10 million of rental revenue. But we actually went in and showed them through our system, and we GPS all of our assets. We can also tell them when a machine is low on fuel, so it doesn't go down. We can also tell them when it goes out of a geographic location. We can also tell them when they haven't used it for more than 24 hours. It alerts them. Also when their purchase order is coming due, do they need it? We've taken a lot of cost out for them. That's something that we do every day. Again, we think that it also takes out surplus out of the industry. Because right now, if you're just doing it, at the end of the day, you'll end up with too much fleet. But if you can drive efficiencies at a broader case or a broader arena, then I think it makes the industry overall more healthier. So we're actually on the same path as that company you're talking about. Yeah, I think the case study we shared was we saved the client half a million dollars at one facility and took our revenue from $10 million to $40 million. Okay with that same customer as they adopted us across their whole platform. Gentlemen, I think we've set a new record, by the way. I think we've gone 28 minutes without a rate question at a URI conference appearance. I just want to make sure we've got about 12 minutes left, so we have time to talk about rate a bit. The industry seems to have done a great job rebalancing itself. Time utilization is still relatively high. Sunbelt seems like they're being more aggressive in the national account business, and you can kind of see that in the mix figures that they report. But specifically, what do you see right now happening at the national account level? And given some of the improvement we've seen in the used equipment market recently, is that a sign that pricing has now hit a definitive inflection point upward? So just overall, not necessarily just focused on national accounts, but overall, I think it's fair to say that the demand tone continues to be good. That certainly is positive in terms of the industry's ability to absorb the fleet that it has. And we, therefore, have right to be hopeful that translates into improved rate performance going forward. We've stopped talking in detail about rate and time utilization. So I won't make any new ground there, but it's very important for us to be pulling that lever around time utilization in order to realize productivity in our business. But also very important, pulling the lever as well as we can around rate realization in the marketplace. We're not the rate setter in the market. And so time will tell exactly how the rate path goes from here. But the level of demand that we've seen and the relative level of discipline that we see across the industry in the amount of fleet that's being added right here and now is encouraging. It's going to be important for us, though, not just United Rentals, but the industry overall, to maintain a level of discipline as things tend to develop. So if that doesn't address your question, please ask it again. But that's how we're thinking about it. What about the Gulf Coast in particular and the big oil and gas regions? You made a huge effort to reallocate fleet out of the Gulf Coast and put it to use in more productive areas and did a good job with that with National Pump. Are we now at the point where rig count is recovered, where because fleet's been diverted out of the Gulf Coast, you could actually see shortages in any of the major oil and gas regions? I think it's too early to tell, Ross. They've come up, but they're still at lows in comparison to the peak. I think there's more of an environment of volatility as before when it was just go. Technology and advances that they have made in oil identification and extraction has gone leap years from when they started. Technology also drives that. We didn't buy the pump business to be in upstream oil. We're diversifying that, and it's doing very nicely on that front as we reported in the fourth quarter. If it comes, upstream is 3% of our business. It'll be welcomed. But I think it's just too early to sit here at right here and now. We've seen some volatility in the oil prices, too. I think the other thing that we just try to remind people of is, as Michael mentioned, upstream is about 3% of our mix. What matters much more to both ourselves and the industry is the economic stimulation that would be a byproduct of oil and gas growing. So it's the residential investments, the non-res construction, the public investment. That's really what can consume a lot more construction equipment. This is a good start. But obviously that activity lags as you wait for that stimulus to kind of become manifest in other economic metrics. All right. Well, since you hit on stimulus, maybe we could just make sure we touch on that point. That was part of his question. There's a lot up in the air politically in the world right now, to say the least. Help us think about the fiscal stimulus initial proposals that are kind of on the table. I don't know that too many people that are really expecting $1 trillion to be spent over the next 10 years. Whatever the number is, help us think about what that means in terms of the overall market size and just what's your general sense is that what parts of your business would it matter most for? I imagine there's certain parts of stimulus that would be more accretive for your fleet than others. Yeah. I've publicly said this, that we do believe with the administration or the general consensus is that our infrastructure is in dire need. Those of you who've flown into New York or LaGuardia, you understand that, or driven around New York. That's just a small flavor of things that have happened or things around North America, or at least sticking to the U.S. Do we think we need it? Absolutely. The question is politically I think there was willingness on both sides, but I think that was a very short window, and memories get lost. It'll be determined what they pass. I will tell you that we welcome it because to Ted's point earlier, it's not just the stimulus portion itself, it's all the add-on that goes along with it, what it does for the economy and the surrounding communities. But specifically whether it's bridges, sewer treatment plants, water infrastructure, those are all right in our sweet spot. I've said this that anything that they pass will be incremental to what we see in the industry today. The reason I say that is it's an unknown. We don't know what the number is. We don't know when it will happen. Once they do pass something, just to make sure everyone's on the same page, it's going to be like 18 months to 2 years before you actually realize it. For U.S. for size, the total U.S. construction market now is just to take over $1 trillion a year between res, non-res, public, private. Just to play with numbers, if you got a $1 trillion stimulus program over 10 years, it would be 10% additive, all else equal. It seems like people view that as the really optimistic/aggressive case. It seems like more people are kind of let's say optimistically in the $500 billion over 10 years, so it'd be 5% additive, all else equal. All right. Well, hopefully we hit on most of the major topics. Does anybody have any last questions? We're just about out of time. Just one at the back. Just this one here. Just one right here first. Could you just give us a feel if there's been any big changes in supplier terms? That would be the first one. And then whether there's a significant margin differential between the general and the specialty businesses. On the supplier terms, no significant change recently. We've always negotiated aggressively with the suppliers and realized the result that looks something like 1%-2% annual inflation over a long period of time. That continues to be the case with other terms being very comparable to what they've been over prior years as well. No major changes with regard to supplier terms. I forgot the second part of your question. Margin difference between general rentals and specialty. There I'll point you to the segment data in our 10-K to 10-Q information to give you a broad sense. We've got the one Trench, Power and Pump segment that gives you a broad sense of their margin relative to the other gen rent segments. So that'd be a good source for you to look there. But obviously the margin and return characteristics are attractive in the specialty areas. That's why we put so much of our focus and our capital behind those businesses. Just on those supplier relationships, I mean, are United Rentals finding any bargains on new equipment these days? I mean, the pricing environment for new equipment still seems very competitive from the outside. And does that mean anything in particular for you guys, or has it been more of an opportunity for you? We don't talk in general terms about specific vendors, but it's safe to say that there's some opportunities out there. We've also publicly stated that we see an inflation number that's in the low single digits. Low single digits. Yeah. I think there was one question back there. I'm trying. Yes. You mentioned how the market is now more balanced with the fleet. Even OEMs have gotten their inventories down. Is there a concern to you that dealers are likely restocking, some other rental houses have higher CapEx? Should we be getting too excited before we finally see that pickup in demand? Historically, with time utilization where it is and used equipment prices rising, I mean, have you ever seen a period where you see that high utilization, yet rental pricing remains relatively flattish? Historically, have you seen that? Yes. There's been times in my 35 years I've seen it. I worry, to your point earlier, I don't know how optimistic and excited people get or anticipate of what they will or won't do. This is an industry that historically is getting better on discipline, but it's not quite there yet. Part of it is the way in which it's structurally designed is that if you don't order your assets, the small players, you don't order your assets in the first quarter, the likelihood of you getting anything becomes very tight because larger well-established companies like ourselves and similar competitors can suck up demand rather quickly. Sometimes it's kind of like you put the cart before the horse. That's what happened, I think. In part, oil came down, they were fleeting up at the same time and got caught. I'd like to think that people will be more cautious this time, but history will. We'll have to wait and see. I guess the way I heard your question was a little different. I mean, time utilization's definitely improving. You can see that in a lot of different statistics. Did I hear you correctly? Did you suggest that orders and backlogs have ticked up for the public OEMs? Yes. You checked orders have ticked up for the year. I think some last quarter. It's more on the earth-moving side, Ted, but not on the aerial side. Aerial's even. Okay. I mean, something we do worry about. That's why you threw out the data point. I was curious to get more color on it. We'll follow up afterwards. Okay. All right. Thanks very much to everybody. Thank you. Thanks for being here.