Citi 2015 Industrials Conference

Sep 17, 2015

The last presentation of the day. We have saved one of the best for last here. We are happy to have the team from URI. To my left, Mike Kneeland, the President and CEO, and to his left, Bill Plummer, who is the CFO, and to my right, Fred Bratman, who many of you guys probably know from investor relations. We are just going to open this up to all Q&A. As we go through the presentation here, if anyone has a question, just raise your hand and I will get to you. With that, Michael and Bill, thanks again for coming. I guess just from a big picture perspective, it is interesting. I hosted a call last week with Gary McArdle from Rouse, and he provided a pretty upbeat assessment of what he is seeing through their database in terms of utilization and just overall activity levels. Some of your larger competitors who do not have exactly the same footprint as you, but they have also commented recently in terms of just improvements in activity levels. Maybe just update us in terms of what you have kind of seen quarter to date and the overall state of affairs in the market. I think we will both. I will start, and I will ask Bill to chime in as well. We continue to see our seasonal build as we have gone through the quarter. Like some of our competitors, we are seeing adjustments being made. People are scaling back on some of their CapEx spending and increasing some of the used sales as they rid themselves of some of the areas of the oil industry. Bill mentioned last week at another conference that for the first two months of this quarter that we have done slightly better on our EBITDA forecast. We did not give much color as to what the specifics were, because there is a whole host of those. The seasonal trend continues to build, and the optimism with some of our customers, looking at some of their backlogs and the non-res construction spending continues to improve. I think you covered it all. The point about our EBITDA performance in the first two months of the quarter, I think is a very direct statement that some of the pressures that we felt in the first half are starting to abate. In particular, the oil and gas pressure that we have been feeling dropped out in July. Since then, we put a little bit more fleet on rent in the oil and gas branches, and that has given us some encouragement that oil and gas will stop being the pain that it has been so far through the first part of the year. So, encouraged by that, encouraged by the demand that we are seeing more broadly, and we are looking to take full advantage of that as we finish out the year and go into next year. I understand you don't want to give minute-by-minute updates, but is it fair to say that the trends you saw in August have continued into September? We'll just stop with a statement about what we've seen in the completion of August and July. September is something that we'll talk about as we go into the third quarter earnings call. Okay. Got it. Just switching gears, again, this is Gary's view, was that the industry he feels is in a better position now given where utilization rates are for the industry to start pushing again on rates. I'm curious what your take is on that. Well, that's always music to my ears because I think it's a positive to the industry. I think it speaks volumes of where our industry is and where it's headed. We mentioned at the second quarter call that we thought that there was an oversupply and that we, inside the industry, Gary supported that theory, and I think he would state that utilization seemed to improve. People seem to have been. Sales have gone up, albeit at lower margins, which again, is something that we expected as you go through Q3, Q4. Nonetheless, you're getting the supply and demand numbers in sync. With regards to rates, we look forward to rates to shift into the positive mode longer term for our industry. I think we've been strong advocates for driving rental rate improvements longer term, and we still support that. Just to that point, Bill, if you look back or Mike, looking just at dollar utilization specifically, there's a lot of forces at play there. Obviously, the denominator has gone up just with inflation on new equipment. You're currently running in kind of the mid-40s on dollar utilization. I think the past peak was in the upper 50s. Other than just underlying equipment cost inflation, are there other factors that limit you to get back in that neighborhood on dollar utilization? I don't know that I'd say that there are factors that would limit us from going there. The question is how does the cycle play and how does that play out over time? We'll have to wait and see. I do think that we're focused on, aside from dollar utilization, how can we improve our company in ways that don't rely on dollar utilization getting back to the 50s or wherever they might have been? How can we the productivity of all of the dollars of cost that we incur? We're focused on that in a variety of ways. We're looking at our lean initiative to make sure that we're as efficient as we can on cost. We're thinking very carefully about the mix of our business, both the customer mix and the mix of cat classes of equipment that we use in order to get us a better result, and a variety of other things that we think can help us improve our ability to generate profit and margin and return, even with dollar utilization not getting back to what it's seen in the prior peaks. Yeah. I'd take a look at the numbers, Tim, to understand better. There has been a change in calculation on dollar utilization, from the old company, or I say old company, prior to 2009. We're now on the ARA metrics, and the way in which they calculate dollar utilization is far different. The industry, just for everybody's sake, both here in the room and on the call, the industry, ARA, has put forward a series of metrics by which the industry can measure itself consistently, apples for apples. We had to make changes, and we support the industry profile, and we think it helps us longer term. As Bill mentioned, mix, focusing on improving rental rates, utilizations, all those are opportunities for us. Right. Back on the lean initiatives, which I think is the Operation United, too, if memory serves. Can you update us there in terms of what the efficiencies you've realized? I think it's roughly $15 million or $20 million to date. Where can that go, and over what kind of time frame? Sure. As I sit here, I don't remember the exact number that we reported in the second quarter, but I do recall it being something in that area, if not a little bit more. We're focused on improving that. We've laid out the goal of $100 million run rate of improve by the end of next year. We've been focused on driving the lean techniques throughout our business, Kaizen and other lean techniques that will help us improve our ability to profit at any level. Eliminating waste wherever we can. We're confident that we'll be able to deliver that $100 million run rate improvement by the end of next year. The specifics of where we are in any given quarter, we'll have some ebbs and flows. We have some saves and some benefits that are seasonal in nature, and we'll play throughout that. We feel like we're on a good path to deliver that $100 million run rate improvement. Going back to the industry response in terms of the adjusting to the slower utilization or softer utilization we saw in the first half of the year. I did notice that the Rouse numbers showed that in July 2015, the highest in the two years, they showed the highest amount of used sales in July, which is kind of atypical. It's usually done at year-end for tax purposes. I guess as you look across the branches and what you're seeing in the field, I guess we can see CapEx, but oftentimes people want to focus on the used sales. Just the industry response, just maybe you can comment on that in terms of how that's helping to tighten up the market. Well, again, as you go through the cycles, and you saw this in the last downturn and in all the different variations of cycles, the way in which you adjust your fleet is typically through either sales, retail, depending upon your channel. You can do brokers, you can do trade back to the OEMs, or you can take it to auction. To your point, Tim, we're seeing a lot more sales, albeit the prices have come down because the amount of buying going out there, and more are going through the auction channel. For United Rentals specifically, we've tried to maintain as much as we possibly can through the retail channel because we have over 880 locations and a retail staff to go out there and do that. Over time, as we go through, we'll take those asset groups, we mark them down, and after 30 days, then we'll adjust the pricing, 30 days. Then we'll get to a point where we'll eventually, what we have left, we'll bleed out and put to auction. So that's the process that we go through. I think it's healthy that the industry is doing it. Coupled with the fact that the vast majority of all of the companies that you mentioned publicly have adjusted their purchases, and then you see that reflected in the OEM backlogs coming down. Back to the beginning, just in terms of your discussions with key customers and what you're kind of seeing in the field. Another company was in here about 2 hours ago and had a little bit more mixed outlook in terms of just underlying commercial construction, and they can be involved in different stages of a project or there can be some distributor issues that are impacting that. Maybe just highlight some of the areas or discussion that you're seeing amongst customers in terms of key segments or markets that are showing more strength. Yeah. Obviously from an industrial sector, the aerospace technology is another bright spot. Automotive has been a bright spot. With regards to industry as well as downstream, there's been a lot of refurbishments. A lot of cracker replacements and upgrading that has been ongoing. We've got a couple of large, one specific LNG plant underway. With regards to non-res construction, we're seeing a plethora of projects, a lot of stadium improvements, expansion, even at college levels. We're also seeing airport expansion and refurbishments right here in Boston. In New York, LaGuardia finally is getting a much needed overhaul. I know I see some smiles. I see some smiles here, for those of you who go out of LaGuardia. That's probably some. Outside of that, there's some retail, there's healthcare expansion. In Baltimore, Johns Hopkins has got a fair amount of construction underway. You go to almost every major city, you see a fair amount of tower cranes up in the air. That is another lead indicator that you see out there. Put that all aside, another leading indicator, too, is the ABI Index, which has been over 50 and has been pretty positive. That is about an 18-month window ahead of non-res construction spending. Got it. Any questions from the audience here? Just a question on the used equipment sales. I guess, what percentage of that is going internationally? Just wondering if either a slowdown in China or a stronger U.S. dollar has impacted the demand for used equipment. The question was, what portion of used equipment sales are going internationally? Hard for us to say directly for the industry overall. Might be a question better put to someone like Rouse. I can say that for United Rentals, we have two channels where our used equipment goes offshore. We have a direct channel. We have an export-oriented used equipment sales force. They account for a fairly small portion of what we sell typically. It will be in the mid-single digits share of what we sell. That is direct. We also sell to equipment brokers, and a significant portion of that business goes offshore. Hard to say exactly how much of it goes offshore, but a material portion of it. Brokers represent, I am going to say, in that 10%-15% range of what we sell as used. If the majority of that is going offshore, that gives you a sense of the scale. Add those two together, and that will give you a sense for the United Rentals share offshore. Domestically, I guess, the construction companies buying, individual companies, who is buying those, Techne and all that stuff? All of the above. A significant portion of our customer base not only rent, but they have an owned fleet that they manage as well. Many of them will use used equipment as a way to fill out their owned fleet capability. That is a significant portion of what we sell direct to equipment buyers. Thank you. Yep. I know you just ran through some of the demand drivers. Can you just comment specifically on what you are seeing on the more traditional infrastructure spend around municipal or state spending on highways and so forth? It is improving. It would go, there are different states, but I think the general consensus is that as the tax reinstates itself as far as getting established, filling up the coffers at the municipal and state level, regardless of what the federal approval or transportation bill will or will not do, has not stopped the states from improving and making improvements. We see that in New York. We see that here in Massachusetts. We see that in a variety of states. It may not be some of the major interstate facilities or highways, but clearly the state and local highways are making improvements. You will see them doing, obviously refurbishments around bridges. Our bridges are in disarray. There is a vast majority of them that are on life support, which are basically the maintenance to keep them up and running. Then you have got a lot of other roads where they are just basically milling and resurfacing currently. I think from another infrastructure, aside from just roadway, is the waterway and the sewer systems, consistently need to be improved, and right now, it is more of a band-aid. Wait till something breaks or a water main, and then you make a replacement. Having said all that, one area that you see a lot of infrastructure spending on is around gas mains. There was obviously an edict that was put out by the government to make sure that there is an inspection process for the main lines all the way to the homes, and you will see a lot of that underway. It has been underway and will continue to be underway. Just to follow up on the states, Michael, I remember a year or so ago, you had mentioned that you were able to win some business from one of the state departments of transportation, I think it was, that historically had been a big owner of fleet, and they had gone to a rental model. Has that gained any traction or follow-through, or is that kind of a one-off? It's one of those models where we want to see how we can improve that longer term. We were able to expand it from one area and bring it across the state. We see that as a positive. Including the state of Massachusetts is another area that was very open-minded. It really is state by state, and it's a very laborious process to try to educate, change the mindset. I will say that it's one of those things that it's a growth opportunity. It's just longer term. Another segment that historically had been more kind of ownership heavy is a lot of the industrial segments. I think you've noticed that maybe that had been starting to change. In a softer industrial economy, does that maybe accelerate where some of your industrial customers increase the amount of fleet that they're renting versus owning? Yeah. By the way, anytime you see any kind of disruption, whether it be even in the oil industry, where you've got costs under pressure, it enables us to go in to show them some of our managed services and/or our Total Control. In fact, I just came from a conference where we had 200 of our top users we bring together, and we've made a lot of changes. We had one customer who, where we started in one plant, and now we're across all North America. To listen to him say that it really wasn't about the unit cost, it was really, we had too many units, we just didn't know it. Our ability to be able to show them that ways in which they can drive efficiencies, we think it's a win-win for both of us. Even though it may sound counterintuitive to say less is more, we took one facility, and now we have all their facilities across North America, so it was win-win. From memory, from the Investor Day last year, I think that you outlined a goal for Total Control revenues. I think it was pushing $1 billion, and you're at $600 million or $700 million today. Is that in the ballpark? Are those numbers still kind of achievable in your opinion? Well, I think they're always achievable. We haven't quantified the number since then, so you're going to have to wait till we update it again. It's an opportunity. It's a longer-term process. You have to get to the right audience. You have to have an open-minded. I think you have to say when things are going well, people say, "Why change? Whereas when things get disrupted, people are open-minded, and as a result of that, we've been able to go in and make lemonade out of a lemon. Even in the oil industry. Even as bad as the oil industry has declined, we've had some very nice wins upstream, where companies before, they were just looking for anybody with a pulse to go out there and get the facilities up and running. Today, they can stop and think it through and put a process in place. We've had a couple of nice wins from some major players out there. It'll build over time, but we've shown them ways of saving money. Coming back to the quick discussion on rates earlier and just give us kind of an idea, the walk-in rates or daily rates is kind of a good early indicator of general kind of spot market activity. What have you seen there? Have you seen those respond, just even if it's more kind of big picture, where we were versus where we are now? Yeah, without being overly specific, I'd say that the experience is consistent with what we thought we would need to see in order to deliver the about 5% full-year, year-over-year rate guidance that we gave the second quarter. We've been more specific than that, so I won't go any further here. I do think that what we're seeing both day and week and month rates in aggregate line up with the about 5% guidance. All right. 50 basis points or five? Excuse me, about 50 basis point guidance. 50 basis points. 5%, the good old days. Things are really strong in the second half. No. Those are the good old days from a couple of years ago. Yeah. There's no inflation out there within this industry. Any questions from the industry or from the I believe the difference in your margin by region was around 300 basis points in 2014. Could you talk about some of the drivers behind those differences and any color on how those margins by region have been trending in 2015? Margins by region, it is not something we spend a lot of time looking at because they respond to different drivers in the different regions. That said, I think it is fair to say that the margins by region are probably responding the way you would think, given the challenges that we have seen in oil and gas and what that means to certain regions like our South region that encompasses Texas and Louisiana, like our Northeast region that encompasses the Marcellus region and our Midwest region that encompasses the Bakken. Those pressures, I think are playing through. I think that is fair to say. In some cases, we have been able to offset and not have much of an impact and others, less able to offset. That is probably the most prominent factor that has been driving differences in margin by region, and probably going to be the case over the next several quarters as we finish out adjusting to the oil and gas shock. Outside of that, I think the margins by region would respond to where the key pockets of strength have been. Mike articulated those earlier. Some of our regions have benefited from those pockets of strength. I will call out, in particular, our Mid-Atlantic region, which has had a pretty good run here, and they have been certainly benefiting from the strength that we have seen in construction activity around the Washington, D.C. area, and several other key cities along the Atlantic Seacoast. That is an area where things have gotten a little bit more favorable because they have been the beneficiary of some of the pockets of strength and not having suffered the impact of oil and gas. Those are the key points that I would point out by different regions and their margins. Does the recent volatility in the business change any view or strategy in terms of the M&A versus shareholder returns and that sort of thing? No, it doesn't. I think we have to look at it, as we've always said, strategically, financially, and cultural. We have a high bar. We've gone through, and there's more companies that we pass on than not that make it to the second round, and even less that maybe make it to the third round. I think right here and now, we're generating a lot of free cash flow. We do have a share repurchase that we've announced. We also have the ability to do acquisitions if need be. We'll try to be prudent, and make the right decision if that company comes along our way. But right here and now, I think our strategy has been well-articulated. Go ahead. Can you talk a little bit about just a little update on National Pump. I guess, trying to get a little surprise, I guess, at the guidance put out on rates towards Q2. My assumption was that if you separated out National Pump from the legacy business, that the legacy business would show much stronger growth. Just trying to put some framework around what the impact of maybe declining National Pump is then. I don't know if there's like an LTM you've done a number, say, yesterday for National Pump versus at the time of acquisition, or just what's happened on rates for National Pump versus the rest of the business. The question was around National Pump and giving some more insight into how it's playing through the overall company numbers. My words, not yours. What I would say is that we haven't broken out National Pump performance in any significant detail since the acquisition. Rates with and without Pump alone, we haven't talked much about. We have tried to take out the impact of oil and gas and National Pump combined in some of our metrics. Those we've touched on in the second quarter earnings call in particular. I think it's fair to say, one of your comments was you've been surprised at the impact outside of National Pump. One of the comments we'd offer is that that's been a characteristic of this current oil and gas dislocation. It's had a broader impact than I think any of us expected at the early part of the year when it was first starting to gather momentum. It's certainly been the fact that as equipment has moved out of oil and gas related areas, including National Pump's oil and gas related areas, that equipment has found other markets, and it's had a greater impact in those other markets than we anticipated. That's something that we've been dealing with over the last nine months now of the year. National Pump, similar dynamic, and we're doing all the things that we've talked about to adjust to it. We're looking to cross-sell Pump applications into non-oil and gas related areas with National Pump. We've had some success in doing that. We're looking very carefully at the amount of fleet that we have and dial back the amount of new investment in growth CapEx for National Pump. Looked at opportunities to dispose of older used equipment there as well. We're working through that. We're doing what we think are all the right things in response. We'll continue to do that as we look at adjusting to the current environment. We'll give some thought to whether we share more information about performance excluding Pump alone as we go forward. That's something we'll have to give some more thought to. Thank you. I just want to come back to an earlier comment about oil and gas branches, and maybe you've kind of seen a bottoming there. The start of the year, I think the number was around $200 million of fleet that you were going to move out of oil and gas areas. I think you're $125 million or so along the way. But then I don't know if I heard you right earlier, but you said maybe you're starting to add some fleet back into oil and gas branches. Maybe those are two different thoughts, but can you just clear that up? Yeah. So not really adding fleet back into oil and gas-related areas. We're still looking to move fleet out of those areas. I think the comment that we would make is that we've seen oil and gas fleet on rent bottom out, and there's been a little bit more going on rent in those markets. So, it's not like we're saying, "Okay, it's all over, and let's put fleet in there. Right. The fleet we got in those markets is sufficient to absorb more fleet going on rent and improving utilization. That's the way we're approaching it. Got it. Hi. Could I follow up on an earlier comment, Michael, about. I may have got this wrong. You're looking forward to rates turning positive again longer term. Can you give us a little color as to when longer term is? Hopefully they'll turn positive sooner than that. Yeah. Well, we said that we would end this year, the way in which we were trajectoring this year based on a 0.5% would basically be stating by as we finish this year, we would be starting next year down on a year-over-year basis. You're digging yourself out of a hole. But we did say that next year, we thought back half of 2016, given the market conditions that we've seen, should go back to a positive trend. And we see that over. In fact, we actually said over the next three years on average, we're seeing something like a 2% improvement. Again, with having a negative start going into next year. So that's kind of what I was talking about. This is the year that I think that a lot of us are making some adjustments. That's not to say that some companies who are seeing time utilization won't get some rate improvement. For United Rentals, we do know, according to the Rouse report, that we have a premium to the market, and we have the highest time in our market, according to the Rouse. So, as other companies make adjustments, we'll see all of that as a positive trend that enable us to do and continue to improve on rates. Thanks. Yep. Just wondering what you're seeing in terms of new equipment costs and whether you can take advantage of perhaps increased global competition, bringing prices down or global OEMs taking advantage of FX and bringing prices down. Yeah, we haven't. We go through our negotiations in the fourth quarter. I think there'll be more to come. I would just tell you that we're aggressive with our vendors, but we're partners with our vendors. We look at it as a longer-term objective, and it's not just unit price as a whole. It's parts to warranty. It's all the above that we look forward to. Training, again, is another one that is a value add to us. We go through a TCO, total cost of ownership, that helps us guide where we're going to go. But clearly, if you take a look at the pressures that we're having, we'll be looking at our vendors closely. Maybe it's come from. Sorry, go ahead. I was just going to ask you, could you just walk through the major equipment categories and tell us which one are the most firm and which ones are not, in terms of demand? In terms of demand, you said? I think if you use utilization as an indicator, and in particular year-over-year utilization, I think it's fair to say that some of the higher capacity reach forklifts are still in pretty high demand. 10K reach forklifts in particular. I think the big booms still are pretty robust demand for big booms. I think the generators, and in particular, the bigger generators, the demand is pretty robust there. You see that in the performance of our Power & HVAC region. I think trench safety products are pretty strong as well. They were up, what, 16% in the second quarter year over year for trench safety, and that's been sort of the kind of performance they've been delivering for a little while now. So those are pretty strong categories. What else would you point out, Mike? I would only point out from an area that you probably were impacted, were light towers. There's a seasonal component to light towers. However, oil and gas, because they were going 24/7, used light towers. This year, it came down to a more seasonal trend line for those type of assets. Earthmoving is the other one that I would say. Large earthmoving came down. Smaller earthmoving, the small skid steer loaders, that type of product, tampers, they were fine. They're doing very well. Michael, you commented earlier about just the South as being one area under a little bit more pressure. I think that it's been a concern amongst many is just the spillover effect in a heavily oil and gas impacted state like Texas, which touches, I think, both two regions for you, including industrial as well as the South. Then if you look at, it's interesting that the Dallas Fed puts out a monthly manufacturing and service index. It's one of the, I think, only regional Fed that just covers one state. You've actually seen a little bit of stabilization there. So I'm just curious if that is consistent with what you're seeing, again, outside of just the upstream oil and gas impact in Texas, which I think is your largest state. Yeah. Look, Texas has done very well. Texas is not the old Texas, where when oil went down before, someone hand them the light switch on the way out. This Texas is very robust, very diversified. It has technology in Austin. It has some of the major corporation headquarters, global headquarters for a series of Fortune 500 companies. So it's changed. It's changed dramatically. Yes, and we've also seen other products. When oil prices go down, some industries do well. In particular, some of the chemical industries. We've seen some foreign investment come in, and it did do some expansion. Why? Because it's stable environment. It's a good area. You've got low energy costs with natural gas. So, people thought Texas would fold up shop, and it hasn't to date. Good. All right. We got less than a minute. Last questions out there? Going once. All right. Thank you guys for coming. Thank you very much. Appreciate it. Thank you all.