Evercore ISI Industrial Conference

Feb 28, 2017

I'm very happy to have United Rentals as our next presenter. As we've been doing all day, maybe a couple of words from the company, then we'll open up to Q&A. From United Rentals today, you all know Ted Grace from Investor Relations. We also have United Rentals CEO, Michael Kneeland, and CFO, Bill Plummer, who I guess now has known Michael for long enough. I don't want to really give my age away, I guess. Yes. But obviously, we really appreciate you taking the time. Thank you. We'll kick it off with some comments and open it up. Sure. Thanks, David, and I want to thank you all for showing up here today, and it seems like it's a full room, so I'm sure we'll have plenty of questions. United Rentals, I think some of you participated and attended our investor presentation that we had in December. Obviously, 2016 is behind us. We laid out a strategy of where we see opportunities. We talked about Project XL. I'm sure I'll have more questions about that. As we reported our full-year results and gave our expectations into this year, we are making sure that we are looking at our capital spend. The capital that we do have will be going towards our specialty as well as our Project XL endeavors. I think we'll just kind of get you going for Q&A and get the most out of this meeting. This is your time. I want to thank you all for coming and look forward to the questions. Bill, do you want to add anything? No, I think we'll move right to Q&A. Look forward to it. Well, I'll kick it off just with a simple update if you could provide us on NES. Where do we stand with that, and what should we expect regarding updating numbers and so forth once the deal closes? Sure. I'll start. Moving to close, obviously, Hart-Scott-Rodino is a major milestone. We filed HSR in the early part of February, and with a typical one-round review, you'd have your answer after 30 days. We are in that process today. The 30 days for us would expire in sort of the end of the first week of March, sort of midweek the following week. Everything that we've seen so far is there's nothing unusual in that process that we've seen. Somewhere around March 8th, 9th, 10th, we would expect that we'll have completed the Hart-Scott process. Aside from that, the other conditions to close, we've been working at diligently and feel like we've made very good progress on those. Our expectation is that we'll be in a position where we could close along about mid-March. Whether we close immediately or we wait until the early part of April, we will really determine after we get through the major conditions to close in Hart-Scott. Obviously, from an accounting perspective, it is easier if you close on the beginning of a new period as opposed to late in an old period, just from a standpoint of getting the financial results incorporated. Our controller has been reminding me of how much easier it is if you close on April 1st than it is March 15th. We will move as expeditiously as we can to get it closed. We are in good shape is the basic summary. Yeah. I was impressed by your last quarterly earnings conference call, and it sounded to me like business was picking up. From your vantage point, I do not know what you have been saying today or what you have been saying, but it seems to me like you guys are on kind of a roll. Is that true? How do you guys see the economy and your business right now based on what is going on and maybe what you see in your pipeline? Maybe I will start that one as well. On a roll, I would say, certainly felt like a roll was building in Q4, and that is the sense that you got from our earnings call. The quarter really built momentum as we stepped through the last 3 months of the year, and it gave us real good momentum coming into this year. I think the results in Q4 reflected it in our comments about what we have seen so far through the third week of April, excuse me, third week of January, said about what we have seen to that point. I think if you step back and just look at the industry broadly, there is a pretty good tone out there in the industry as well about the level of demand. We hear it in anecdotal examples. We heard it, we were just down at the American Rental Association annual conference yesterday. You heard a broadly positive tone as well. All of that gives us a sense that things are headed in the right direction, right? Whether you look at anecdotal comments or whether you look at some of the metrics, right? We saw construction starts, I guess, last week, come in up 12%. We have seen things like just today, consumer sentiment at a 15-year high. A fair amount of positive indication of what is going on in the market broadly, the economy broadly, and construction, and not a lot- No, the only thing I would say is that as we did our third quarter call, we took our capital off, with anticipation of some projects that were going to be ramping up. We were prepared. We have the discipline to look at our capital on an ongoing basis, made the adjustment. As Bill mentioned, as we went through the fourth quarter, those projects came online. We didn't see the typical seasonal drop that we would see after Thanksgiving to the severity that we typically would see. As Bill mentioned, when we reported our third quarter call, in the third week of January, we saw that momentum continue into the first quarter. Just one follow-up. David does a lot of reports, and one of them was about the used vehicles price going up. I would think that would also go over to your business where you would I don't know how much used vehicles you sell because you're always buying and selling, but is that also another indicator that things are a little tighter? Well, obviously, used prices for us in general is an indication that the market is firming up. It goes to more the supply and demand, so that individuals would be spreading their capital as much as possible by buying used fleet. We saw that in the numbers that were coming out of the most recent auctions. Too early to tell if it's a trend, but it is certainly a welcome positive, again, for our industry. Thanks. Yeah. Weather. Is there any kind of pull forward in the weather? Any pull forward in demand? You talk about good demand, good weather. It's 60 in Chicago. Did wear a shirt and a jacket here today, but I often get that question, and I've spent 38 years in the industry, so I would tell you that weather is very hard to predict, as we all know, right. And for a construction site, even though you may have a week or 10 days of good weather, doesn't necessarily mean you're going to have a whole season. So it's very difficult. What I would say is, if you have a project that's ongoing, clearly, the weather benefits you and able to move that along faster. But I don't see where people start other than what we saw in the report, startups. I doubt that was weather-related. It's probably more project-related. On the flip side, if you look at California, you could say, okay, the rain and the amount of deluge they've had there impacted on the flip side. Weather is one that's unpredictable, and as such, I don't think people plan specifically for any kind of start or finish. For the NES savings, it's $40 million run rate exiting next year, or $40 million total, but the idea of getting maybe 30, 35 of it by the time you're exiting 2018. If we wanted to think of the accretion this year or just even the EBITDA addition, is about $14 million, $15 million of savings in the first 9 months a reasonable cut at how we get to 40. Just trying to get a feel for the accretion because I'm coming up with about $135 million, $140 million of EBITDA that will be added in 9 months of NES this year. We'll beg off on being more specific, but I think we said the $40 million of cost synergies we expect to realize on a run-rate basis over the first 18 months. And we would expect that the bulk of those would be in place by the end of the first 12 months. I won't characterize it any more than the bulk of by the end of the first 12 months, but we'll get some pretty quickly, right? They're things that we know how to do. It's about looking at the operational costs and attacking each line of operational cost throughout the P&L, whether it's SG&A cost, consolidating branches, and just taking those good old-fashioned, sensible cost actions. It'll happen fairly quickly in that $40 million of synergies. There's a question in the back. Could somebody bring the mic over? Sure. I'll bring it over. Yes. You got it. Thank you. In terms of competition and pricing, is the market, you feel like, healthy enough and big enough such that your European/U.S. competitor can't really muck it up? Well, Gary, I would tell you that it's a competitive marketplace. I don't point to one competitor or another. The market is the market, and we respond according. What I can tell you for United Rentals, we manage our rates very aggressively. We have the tools and systems in place. I will always tell you we can always get better. As we go forward, we continue to improve, bringing in subject matter experts internally to help us better manage rate. I will tell you that the way in which our people are compensated is based on returns, and the best way they can do that The other thing I would tell you is that we do look at where we stand to make sure that we have our premium. So as rates do fluctuate, we try to understand where we stand within our peer group to make sure that we're trying to command the premiums for services that we provide. But again, the market will be the market, and we'll be competitive. We have a different customer base that we go after, but everyone has their own specific strategy. Can you just talk about what your suppliers are telling you in the cost of acquisition on equipment as steel prices have gone up, and how you're planning for that, and what do you expect for 2017, and maybe even, I know we don't look out to 2018, but what you think the price acquisition costs will be then? Thanks. We've talked over a long period of experiencing inflation on procurement of somewhere in the range of 1%-2%. If commodity prices are going up, we'll be a little bit higher in that range, and if they're going down, we'll be a little bit lower in that range, right? That's the all-in of what we purchase in a given year. I would say that it's fair to think about that as continuing to be the range. We negotiate as hard as we can, and we think we get good purchasing prices regardless of where commodity prices are. But it's not going to change our overall purchasing results in a given year dramatically. I think that's the way I'd characterize where we are today. What was it in 2016? In '16, I guess we were seeing some of the benefit of some of the commodity price declines that we experienced in 2015. We haven't given the exact number, but it was toward the lower end of that range. I have a question. NES. Are there, maybe again, it's a little bit larger than the average deal in a market that doesn't have a lot of sizable players, but are there other assets out there like that, at least say half the size that maybe a little below the street's radar that you're hearing at least somewhat similar multiples? The NOLs helped a lot in that deal, in that deal. But are there other assets you'd say, there's $200 million, $300 million, $400 million kind of deals out there that maybe the multiple that NES you're able to acquire for isn't bad, maybe you could do as a deal similar multiple. Yeah. Look, to answer your question, are there other deals out there? Yes, there is a multitude of companies. It is a very fragmented industry, number one. Number two, whether you can get the multiples, really depends upon where is it located, what type of business is it? What kind of returns? What is their growth projections? How much capital they have deployed? All of those go into the equation of what kind of multiple you would start out with. If they have NOLs, obviously we value those, and that would be part of the equation. The only thing I would tell you, David, is regardless of any acquisition, we have a very disciplined organization that looks at strategically, financial, and cultural aspects, and we are not afraid to walk away. To answer your question, there are other companies out there. Obviously, you need a willing seller and a willing buyer, and it comes down to timing. I guess I was fishing around, have you gotten engaged in conversation enough to hear, "Yes, I will sell at a similar multiple." It does not sound like it. We do not comment on any acquisition or any individual that we may be talking to. In terms of their pricing strategies, obviously, AWP, EP platforms, not applies some other parts of the business, but in terms of their overall pricing, it's a very different customer mix, it sounds like. Is there a pricing change to URI's pricing as the price of the year introduces? As Bill mentioned, we're still very much going through the process and due diligence of their team and our team putting things together. They have a different customer mix. We have to understand what those dynamics are. But we can't sit here today to tell you anything about that, because until we actually settle, we're not going to get that involved and that level of detail until then. So, we'll have to wait until we come back after we close and we've completed our due diligence on that. The oil and gas markets, have we at least gone back to the position where we know you're not seeing equipment come out of the regions anymore. Are we starting to see a little bit go back in? And what does that mean to me if the answer is yes on pricing now, rental rates in traditionally oil and gas markets? Well, obviously, to your point, middle of 2016, we saw the bottom, and we started to see a turn. We started to see rig counts go back up. I will tell you that the process has changed. Technology has enabled them to be much more efficient, respond quicker Do kind of more with less. As a result of that, we as a company, we've actually taken down our percentage of our revenue in upstream oil and gas. The area that we would see any kind of improvement is in our pump segment. As far as pricing is concerned, pricing, I would tell you, we don't go into that level of detail. Given that you're starting to see some positive, I think it would take some time to see any kind of historical levels that you saw before. You will price it out based on usage. If they're using it 24/7, are they using it double shift? Those pricing will be according to each application. I'm going to tell you this, it's nice to hear that oil is not our anchor like it used to be. To your point, seeing the rig count going in a positive direction is going to help it. There was a picture in the paper the other day of some plant getting built and a picture of some of your equipment in a plant, getting built somewhere in the Midwest. Want to get a sense from you on inquiries for industrial demand, factory remands, other inquiries for new builds. How do you see, and obviously this is on the landscape of the Trump push for domestic industrial production. Yeah, I think it's too early to tell at this point in time. I think the projects that you're seeing were very much well underway, number one. I think the MRO where you see people going in and retooling is a necessary process. We had expected some of that. I think when you look at the numbers that were published in the Dodge Data or the industrial forecasts, last year, obviously, industrial went, came down. This year it's coming up slightly, but in the low single digits. Again, MRO is probably one area that continues, and it's a necessity to maintain that plant going forward because maintenance is very important. You can't have that as a wasting asset. I think as far as the rebuilding and building out of America, I think it's going to take time. It's going to take time to get those plants papered, engineered, and let so that they start working on them. If I could just add on. You said down at the trade show, smaller companies had a much better tone. Is there a concern on your part that some of those smaller companies start buying equipment ahead of this upturn that we're all expecting to see and then leading to a potential oversupply? That's always a worry. I like to think that we've learned by our mistakes, but I've been proven wrong in the past. What I would tell you that I think that people, it's not a foregone conclusion. We don't know what we don't know. We don't know what the impact's going to be. I think as the hard numbers and facts come out, people will make their judgments accordingly. When people ask me about infrastructure and people ask me about tax, that to me would be incremental above and beyond what we're seeing today. Question over here. Can you just kind of speak qualitatively to the biggest puts and takes year over year, potentially in utilization? You already spoke to oil and gas from a call there, but just if you look at your various end markets, what you're kind of focused on and could be the biggest moving parts year over year? It's a wide variety, but on the industrial side, I would say we obviously had a pretty significant slowdown in industrial activity that carried over a decent part of last year. If we reverse that in any significant way, that's going to be a plus for us. It'll be several different industries that might be driving that, right? In fact, you might say autos are about the only industrial segment that might represent a decline, just given that we sell so many cars. There may be a little bit of a tailwind from oil and gas. I'm not going to put that as the bigger potential driver, but that might be a little bit of a tailwind, just given the increase in rates. As you look at some significant infrastructure projects that have kicked off, they may represent a positive on a year-over-year basis. I think we all experienced LaGuardia at some level. That's a project that got rolling last year, and I think it'll be going full blast for the bulk of this year, and in fact, the next several years. That could be an example of the kind of infrastructure and longer-term projects that have kicked off that could sustain us for this year and for the next several. If I look across geographies, there's probably an opportunity in the Midwest. Last year, that was a region that was softer for us. If we could get some more activity going in those states, that might be a positive for us year over year. Depending on what the Trump administration actually gets done and whether it has a positive effect on the legacy in industrial belt of the country, that might be a positive. The places where we've been strong, I expect will continue to be strong. The East Coast and the West Coast have been strong for us, and so I would expect those to continue to be nice contributors. Maybe not so much of a growth year over year as maybe we saw last year, but certainly would be nice contributors. I would expect Eastern Canada to start to show us some improvement over where we've been. So I'd expect that to be a positive geography for us. Western Canada is probably just going to be all about the oil and gas activity. So it's hard to say that's going to be a net positive. The piece in Western Canada. Western Canada The biggest hit. That's the oil and gas story. Eastern Canada was a little bit of an anchor on us as well. But Western Canada was the big bat. What about this? Thank you. You're welcome. Before the oil downturn, we used to talk about three up to potentially four points of rate growth. It is actually a competitive industry, like we talked about. And over time, through the cycle, URI has done near 40% incremental EBITDA margin. Just wondering, as we think out over the next few years here, with energy improving a little bit, the market has gotten more competitive, but energy is coming back. Is that still possible? How would you put that all together? It is still possible. I think a lot is going to depend on the competitive dynamic in the industry, how that plays out going forward, right? Relative to the demand that we are seeing. We have moved away from talking too explicitly about rental rates and thinking about our industry. But I do think it is clearly an important driver. And what we want to do is make sure that we are thinking about the possibilities, whether rates come back or whether they do not, right? And we feel like we have got a plan for either scenario, and we will just wait and see how it plays out, right? How much leak is added by the competitive environment is going to be a key driver, and we are just going to have to respond to that, whatever it is. We are not able to dictate rates by ourselves. We just take whatever is available to us to the maximum that we can. You have specialty offsetting that as well. Assuming that the higher end is offsetting at 10% growth environment. I guess just putting it simply, something in the 30s still reasonable for incremental EBITDA to look at, or is that the 2013 and 2014 type of environment? It's just so hard, right? Because the rate environment is going to be an important driver to that incremental EBITDA. Like I just said, we just have to wait and see. Okay. Yeah, I was going to say, the only other thing I would tell you is that during our investor presentation, our investor day, we talked about Project XL and things that we were doing that's within our control, and where we're putting our some cover capital investment, both for short and long term. In part, we still have more, we believe, on a lean process that we can do, that we can control. We think we can utilize technology both internally and also from the digital aspect for handling with our customers. We're also focusing on, as you mentioned, growing our specialty, but also growing specific segments within the general rental aspects where we know that contribution margin is better than others. Those are the things that we can control and focus on. Ted, you can add. Yeah. The last thing I'd add, Ben, is to impact the 2013, 2014, oil is at $90, $100. Triple digits. That's stimulating a lot more economic activity beyond the well site. That was critical to kind of our industry's demand opportunity at that point. Now you see the rig count go from 380 to 733. That's a great first step. But you need to see that second derivative and the third derivative translate into construction, public, private, res, non-res, and that's what's critical. That was a big headwind we had in certainly '15 and '16, was managing that supply that came out of those parts of the country. But to fully absorb all the equipment that was brought into services markets, that's just another consideration you need to take into account. Approaching a rate question another way. Say just for this year, if your rate did turn positive, how much do you think would be driven by existing markets that have been strong, the Southeast, whatever it may be, or the delta from big negatives, Western Canada, oil and gas? I mean, you would think that the largest delta is oil and gas. I'm just trying to have you answer that question. If I can get you a positive rate second, third, fourth quarter, or third, fourth quarter, is that more the previous pain goes away? Or is the market on a run rate like the Southeast can actually start just pushing rate? Is the market that robust? Yeah. Interesting question. That's what I say when I don't have a prepared answer. What I would say is That's why you hired Ted. Good hire. Yeah. Go for it, Ted. I'm going to let you. We're not getting into that level of granularity. table if he was here saying, "You're not talking about me. But even if we were, it would be hard to say, well, there's enough momentum on the positives to offset whatever negatives might be out there. And it would be hard to say that the bad guys going away is going to be a powerful enough force to drag everything to an overall positive. It's just a very difficult thing to try and quantify, especially if you're doing it on the fly. So not only don't we want to go into the detail, but it would be tough to do even if we wanted to. Yeah. You may face it as spirit offense question. Every market influences the other one, right? Equipment flows between the geographies. But in a simplistic way, say the Southeast is, hey, it's been a good cycle. It continues. Is it accelerating to the point that we actually can just push rates? Yeah. I'm just trying to get a sense of- It also depends if- bad or not as bad or good actually getting better. That would be more specific than we'd be prepared to get. But as a concept, I think it's possible, but the question is how much could you push rate in order to get the overall rate to turn positive? That's a hard thing to say. Could we say, though, that Canada at something in the low double digits percent of sales is still negative in rate currently? Yeah. I think we actually disclosed that. Down 6.7. Down 6.7 in Q4. So on a year-over-year basis, it is still quite a drag. Can you help us a little bit this way? If you do not give rate any more intent in the room. The Southeast historically, especially Florida, warm weather locations, the rates historically are just not as high. Market is always open, a lot of equipment down there. The return of some other markets, you name it, just general Midwest, oil and gas, that the Southeast no longer would dominate the growth as much should help the rate. You do not geographically adjust it when you give rate. That's right. The more I can get other geographies getting better, just inherently should be help to the rate. Is that fair? I'm generalizing the rest of the country versus the Southeast, not to pick on Florida, but Yeah just the idea of that mix is positive. Mathematically, that's true, right? The question is how much of the rest of the company would have to get better in order to give you a comparable impact to the Southeast doing something, to drive things from good to even better still. That mix question is the hard part. That's the hard part. Yeah. Other companies we cover, it's like, oh, yeah, make more money on a big piece of mining equipment versus a right? Right. Your business is a little bit tough for people to realize, like, it's different geographies have different rate profiles. I- And the mix shift really can change. Absolutely. To your point, David, as you know, the seasonality, with Canada and the Northeast, as you go south, changes. As a result of that, the relative rate changes over by geography. To your point, you can take from one area to the north, by moving it to the south, makes logical sense and business sense, but it could impact your rate. Geography mix does play. That is why Bill said it is very complicated, and we just do not go into that level of detail because it is so complicated. If you look at infrastructure projects, actually on a larger scale than many in our current administration versus more roadwork oriented stuff from the 2012 stimulus, what would be your content on, say, a large bridge project versus a highway road paving project or something of that nature? Well, I can tell you that if you go over the Tappan Zee Bridge, we have a fair amount of equipment. We have had it there for quite some time. One is, depending upon the size of the bridge, type of bridge, will tell you the duration by which it takes. Yes, it would use more aerial work platforms. It would use a variety of different other products that we would have. Material handling devices. Other bridges, you may have more in the, if you are into more water, you would use more pumps, and things of that nature. Each one is different, but I agree with you that when people think about infrastructure, they think it is purely about roads, but it goes beyond that. It is our waterways, and we all know what we experienced up in Michigan. We all know that our waterways have seen their useful life. That would take, if you think about it, replacing piping, replacing stations, improving them, expanding them, putting better filtration systems in play. All those would take a variety of products. Each one is different, but bridges is another one that, we have a lot of bridges that are not, I would say, the caliber that we would like them to be in. We spend an awful lot of time and money just keeping them up to maintenance. That is kind of where we were with the Tappan Zee Bridge. It was way beyond its useful life. The monies that we were putting in, it was not going far enough with the maintenance to keep it up efficiently. So they replaced it, and it is very costly. Not all bridges are required to replace. They can be fixed. All of those play into that. Bridges, waterways, sewer systems would play very well in the general marketplace. Even if these are done by larger. Sorry. If they are got by the larger national construction companies instead of smaller regional companies who have their companies, who are not as well capitalized, do they own more equipment than the smaller companies? Is there bigger opportunity if these are much larger projects? Well, we are doing very well on Tappan Zee. The general contractor there is extremely well-financed and well-heeled. Again, it is specific to the project, it is the duration, and it is what we do not know. We do sales, we do service, and we do rentals, all of the above on that project. Michael, can I just add a couple of things? Yeah. If you go back to stimulus, there was $27.5 billion for roads and highways, $8 billion for Amtrak. Call it $33 billion for direct fixed investment. I mean, we'll see what Trump's proposal looks like and what Congress can do, but it literally could be an order of magnitude bigger. It's roads, highways, bridges, power plant conversions, water, sewer. I mean, those are the things the white paper seem to talk about. So it's a dramatically larger prospective program. We think our fleet is very well-positioned, and our national account strategy, and I'll tell you, your last question, uniquely positions us to punch arguably well above our weight in terms of capturing that kind of stuff, and the cross-sell, right? So our ability to actually provide all the equipment needs to the contractor is also pretty unique. If you look at the other large national contractors, there's really nobody that has a profile like us that lines up so ideally for large infrastructure work. Maybe time for one more question? Just one quick question. Go ahead. Just based on where you were, let's say, 6 months ago, do you feel better about the way things are now, including Trump and all the stuff you see in terms of infrastructure, blah, blah? Or is it the same business-wise? Yeah, I think that I would say that me personally, I would tell you that I think we're feeling a little better. 6 months ago, we had just come off. We were in the process of the election. Oil was just rebounding, and we saw the fourth quarter start to improve. Also, when you take a look at the numbers that came out within our industry in private non-res, and as Bill mentioned, the 12% new starts in December. The backlog in December was at an all-time high. So those are all things that make us feel better, coupled with the fact that consumer confidence is at a 15-year high, as well as we're seeing improvement in both CFO and CEO surveys. Great. Thank you. Yeah. Thank you. All right. Thank you very much for the time. Appreciate it.