RBC Capital Markets' Global Industrials Conference 2015

Sep 9, 2015

Morning, and for the RBC Global Industrials Conference again. As always, we're very pleased to have senior management from United Rentals here with us. CEO, Michael Kneeland, CFO, Bill Plummer, here on stage. Vice President of Investor Relations, Fred Bratman, in the audience, always available for follow-ups and investor inquiries afterwards. As many of you know, United Rentals is the largest equipment rental company in the world. Close to 900 branches, about $9 billion of equipment OEC in the fleet. What some might not appreciate is about half the business comes from industrial or non-construction customers at this point of the business. Gentlemen, thank you for joining us again this year. Thank you, Seth. Certainly, the first half of the year was probably more challenging than I think a lot of us thought it might be. We have started to hear some anecdotal commentary about fleet utilization levels being pretty strong, activity picking up here over the last couple of months. You've previously indicated that July EBITDA was a little bit better than expected relative to your internal projections. Is there anything you can share with us as far as the metrics that you have out there, or trends that you've seen July, August into the early part of September? He's going right to the punchline. Sure. I think what we would say about August overall is something almost exactly the same thing we said about July. It came in better than we expected at EBITDA, and that is after adjusting our forecast to reflect the benefit that we saw in July. I think the overall feel of how the quarter and the rest of the year is developing is very much in line to maybe slightly better than what we had in mind when we gave the overall guidance for the remainder of the year. Just to clarify, did you recalibrate your outlook after the July numbers, and then you came in above that recalibrated number? We did. We re-forecast every month. Okay. Then we see how the next month comes in, and we do it all over again. After we saw July, we adjusted, and August came in a touch better than that. Is that I was just going to say, just to answer a little bit more of your question, we saw that our typical seasonal build. You are right. The first start of the year was not to our expectation. As a result, we had to make adjustments along the way. As we are going through this quarter, we are seeing our typical build. Okay. But is the EBITDA performance being driven by internal initiatives, cost controls, or is utilization maybe tracking a little bit better? Rates, I think everybody understands are under some pressure. What would you attribute the EBITDA performance to? Really, it's a number of things. It's not such a dramatically out-performance that you get super excited and stand up on the table about. But it's coming from a variety of different things that are going just a little bit better than what we had in mind in the forecast, all throughout the P&L. Collectively, would you say you're comfortable with your EBITDA towards the upper end of your guidance range at this point? I won't characterize it any further than the range that we've given. Okay. He's trying. I got to give him credit. Yes, he's trying. I appreciate the- But we have seen some of your competitors, for example, have reported recent, since you reported, fleet utilization numbers seem pretty strong, frankly. Both within energy markets and just in general across the country. It seems like the non-res cycle is getting a little bit healthier. So would you characterize it as utilization levels are maybe a little bit better, rates are kind of what you would have expected, or is there some other mix at work? Yeah. We talked about how to approach this and decided that we'd make the comment about EBITDA and not go into much more detail- Okay than that. So I'll stop there, Seth. Okay. We do not want to report every quarter here. Understood. One of the big debate topics on the stock obviously has been the CapEx number, right? Yep. Mm-hmm. That ultimately, kind of ties back to your view on the cycle, where you think you are in the cycle, how much longer you think the cycle will go. I think we would all agree there is probably a little bit too much equipment supply in the market at this point. Can you calibrate for us your decision process? You took your gross CapEx number down about 5%-6% for this year. I think you have acknowledged our view is that there is a little bit too much equipment supply in the market. Can you just kind of walk us through your thought process around those two data points? Sure. I'll take a stab at it. I think it would be fair to say that we still feel that there is an excess of supply in the marketplace that is being addressed as we go through the next several months. That certainly is an overhang from the oil and gas dislocation earlier in the year. That's still weighing on the marketplace. It's also still the result of some fleet growth in the earlier part of the year, that is still being absorbed in the marketplace. I think the thing that's encouraging to us is that as we look at the overall demand level, it's still robust. We're encouraged that the market is going to be able to absorb that excess of fleet, but it's still a process that we're working through as we sit here today. Right. Yeah. Seth, I would just tell you that, yes, we took out on our CapEx this year, and I would also say next year. People forget that as well. We also said that we're very open to making adjustments as necessary. We're not growing our fleet exponentially. That was never our objective going into this year, or actually last year or this year. That being said, what gives me comfort is the fact that several companies have tilted back their CapEx, which is good for the industry overall. I think it shows the stewards or the ownership of the industry is more positive. I take that all as good news. Okay. You had previously given us a data point, I think about $125 million of fleet had moved out of oil and gas markets. I think the target ultimately was about $200 million. How is that progressing? Then, as the kind of add-on to that question, when do you think the market finds better balance, just broadly? Is it first half of next year? If you were handicapping it, how long do you think that takes? I'll try that one as well. I think we are progressing and moving fleet out of the oil and gas markets, continuing to make that effort. It's been a while now, right? That we've been working at it, and it's getting later in the game, and I think we're making relatively more progress. Relatively. We're making more progress every day. That 125 number, we weren't going to update it today, but it's improved. It will continue to do so as we go through the remainder of this year. As for how much longer is it going to take, your guess is as good as ours, but we've been thinking about it as a first or second quarter of 2016 timeframe, where we work through the oil and gas excess, we work through the other equipment excess, and you start to see a little bit more of a normal market in, say, the late winter, spring of next year. That's our expectation, and so far we haven't seen anything that says that we're not going to be able to see that kind of a pattern. Do you believe that you can maintain, with rates under some pressure, do you believe you can maintain a 60%-ish EBITDA pull-through margin without the benefit of having the rate growth? We do. Obviously, it gets harder if you don't have material rate growth. But the focus that we've been putting on our lean initiatives, on remixing our customer group and our fleet, and just being vigilant about cost overall, we think that we can still deliver 60% flow-through. That's certainly our view for 2015, and that's our baseline for thinking about 2016 and 2017 and 2018, as long as there's not a material change in the cycle. Right. If, in fact, the industry is seeing time utilization improve- Sure as you say they are, then the other question would be is why wouldn't they get rate? Why couldn't they get more rate? One would have to ask that question, right? Well, United is the rate leader in the industry, right? Well, and we're not afraid to say Look, we know that if you take a look at the Rouse Report, we know where we stand amongst our peers. Not only in rate, but also in time utilization. And we're the ones that are trying to make sure that we're good stewards. Right. We've taken back capital. We're always ones of trying to improve the industry and to say it's about returns. Market share is one thing, but history hasn't been kind to this industry based on market share. Right. How much of the rate pressure do you attribute to just energy business coming off, while at the same time United is trying to capture more of the national account business? I mean, is the national account business inherently a lower rate business for you? I wouldn't say it's the national account that's dragging it. I think that what we said in Q2 is, as you went through and you saw the decline that we saw very late in Q1 through Q2 in the oil, at the same timeframe as the industry ramped up on fleet purchases at the same time. The repositioning of that fleet, let's just say it's an additional $1 billion that people had to redeploy throughout the marketplace, I think had more of an effect on rate than anything else. When you look at rate and time, it's always rate's first, time's second, and it doesn't surprise me that time utilization has stabilized. But I'd like to see rate start to improve. My sense is we probably won't see that until next year. Okay. Everybody has the rental playbook, has been you take fleet out of the energy markets, you move it into the commercial construction, non-res markets. How much of that pressure that the industry is seeing is a function of the local, the independent guys kind of trying to defend share because they've re-fleeted this year as well, right? So they don't want to put this capital to work and not be able to use their equipment. Yeah, it's hard to parse out because we don't report or try to understand by market, by branch, as you mentioned, close to 900 branches. I will tell you that there's markets, to your point, that people are landlocked, so when they take assets, they have to redeploy the assets within their given marketplace. Others have the ability to redeploy that. When they redeploy that, you're entering a market that everyone else is adding fleet to it. The way in which you deploy it is through rate. That's the dynamic in this industry that has been played out. We do believe, as we mentioned, that we think that this will go through this year. The good part of it is oil, since July, has basically stabilized and has not declined any further. It is, again, like us, I am sure others are redeploying those assets out of those markets. Can you talk about in a market like Dallas or some of the energy markets, have you seen the contagion, the knock-on effect? Has that been a material headwind for you, or is that really more just kind of noise that has not materialized like people thought it might? No, I think there has been a contagion effect. It is certainly non-trivial, but it is certainly not been the disaster that some people expected. If you talk about Dallas in particular, that is a market that the overall demand level there is pretty good. We have not seen the fleet on rent side of the equation really significantly impacted by the oil and gas dynamic that is going on in the more western part of Texas. There has probably been some price pressure to the discussion earlier that has come about as fleet has moved from Midland, Odessa, or somewhere else into that market. You are not seeing as much price realization as you might otherwise have seen. But it is still a good market for us. You could say something similar about Houston and the surrounding industrial area. That has been a good market for us, even with that dynamic of fleet coming in from oil and gas. The contagion effect is there. It is real, no doubt about it, but it has not been a disaster like some might have expected. Yeah, I think it didn't allow us to get the rate improvement we would want, right? The markets are still very vibrant, and they've had the capacity to take in more fleet. If you recall, for the last several years, a lot of our regions have been asking for more CapEx. Yeah. We're intentional in not doing that. Some of our regions looked at this as an opportunity to go after some of the projects and customers that up until now, we've been holding back. Okay. When we look at your capital budget for this year, $1.6 billion gross, I think 450 plus or minus is growth capital. Is that about right? 450? That's about right. how much of that is still earmarked towards the specialty business? You've talked about specialty being a relatively high return business for United. in particular, are you still looking at investing in the pump business? specialty is still a significant part of the growth capital that we're putting into the business. Our power and HVAC and our Trench Safety businesses have been growing very robustly for several years, and that certainly is the expectation over the next number of quarters. we're feeding that very aggressive through increasing fleet size at existing branches and through cold starts, right? We're moving to put new pins in the ground, so to speak, around those businesses wherever we think it makes sense this year and next year, at the very least. The pump business is also seeing some organic growth, where believe it or not, we're opening a couple of cold starts for the pump business. that's reflecting the demand that we are building through our cross-sell effort as we get into more accounts who have pump needs that the pump business hasn't accessed before. the significant part, and I don't remember the numbers. Apologies, it was vacation last week, and I've still got vacation brain. a significant portion of our growth capital will go into our specialty businesses overall. That does leave a little bit of growth capital for the Gen Rent side of the house. we think we've got good pockets of demand that can absorb that growth capital at a good high return, high margin kind of level. looking for the opportunities. If you break down that number, it would look like somewhere around, of the say 450, 500 round numbers, about let's say 200 would go to Gen Rent, another 200 or so, or 190 would go to the specialty business. then there's probably $60 or $70 million that is going to refurbishments, taking assets and refurbing them. then we've got about $25 million that we're spending to GPS all of our assets this year. That's considered CapEx. Yep. That's kind of the breakdown. So, as Bill mentioned, we have plenty of opportunity for some of those. The one thing we weren't very good at, hindsight being 20/20, is the pump business got all the headlines around oil and gas. Rightfully so, because that's where the lion's share of their business came from. But to be quite candid with you, we bought that business to incorporate that with our industrial. That was what our customers were asking for. As Bill mentioned, that cross-sell opportunity, we've identified $70 million of opportunity to cross-sell those products. So that's what we're doing. That's why we looked at that acquisition as a win-win. I'd do it all over again. Okay. So just to be clear, the new pump branches that you're opening, are they targeted towards the oil and gas market, or are they targeted towards more just the other part of the business, the construction, the kind of- Yeah. more traditional markets? The other part of the business is the main driver of the thinking. Yeah. Okay. where we see our own oil and gas opportunities, we're not afraid of that. that's not the driver of opening new pump branches right here and now. Okay. Do we have any questions from the audience? Okay. People want to keep going. Don't be shy. Yeah. The company historically had talked about long-term model, driving fleet utilization north of 70%. This year's number's going to be in the 67.5, I think is your guidance. Is 70% plus still an attainable number in your opinion, given where we are in the cycle? Maybe if you could just sort of layer on top of that, how many more years do you think that we see in the non-res construction cycle ahead of us? And how you're thinking about that. Bill and I will tag-team on this. I see three to four years. When we talked to McGraw Hill, we talked to Scott Hazelton with Global Insight separately. They both see multiple years of expansion in non-res construction and more, in particular, the rental industry as a whole. I would say that that gives me a lot of comfort of where we are and where we intend to go. We're going to have bumps along the way. Okay. As far as time utilization, would I love to have a higher utilization this year? Yeah. I'm getting dragged down by pump. We just told you some of the things that we're doing to offset that, and we've seen some nice improvements and some nice wins with our industrial accounts to help offset that, and we'll get through that. We're doing a lean process. Yeah, we still see the opportunity to drive further time utilization. It just became, we have a speed bump that we have to overcome. We'll do that, and I'm happy to say that even though we have the highest time utilization, according to the Rouse data, we still see opportunities to improve. Okay. No tag team needed. Bill, we're looking at round numbers, 1.4 billion, 1.5 billion of free cash flow for the next couple of years. A couple of your competitors pay dividends at this point. Has your thinking towards the dividend changed at all since we last spoke, since last year? You're obviously very active with the share buyback. You raised that program recently. How are you thinking about capital allocation going forward? Sure. On the specific question of a dividend, it's one that we hear from investors, and we talk about as a management team and as a board quite frequently. As recently as, when were we in Dallas? May. We had another discussion on overall capital allocation in which we addressed dividend policy there again, and again concluded that we've got what we believe are higher and better uses for the cash flow than instituting a dividend. It's still not risen to the level of something that we think is appropriate right here and now. We believe that the cash flow we generate is best served first to make sure that we're covering all the organic growth opportunities that we think make sense. That's what we baked into our long-term thinking about our gross capital program. That's the billion six this year, that's the billion six next year, and so forth. Could that change? Yes, it could. We could spend a little bit more, if the market justifies it, or we could spend a little bit less if the market justifies that. Sure. That's the first priority, is to make sure we're supporting the organic growth that we think makes sense. The second priority then is to make sure that we execute the acquisitions that we think make sense. In fact, those two could reverse order if the acquisition really makes sense. We're always looking at acquisition opportunities, and we'll continue to do that, and divert the cash flow to that opportunity when it makes sense. We think we've got a good handle on the leverage in our capital structure over the next couple of years. It's heading in the direction that we want, but we wouldn't be averse to thinking more about reducing the absolute debt level, if the cycle started to suggest that that was the most prudent way to go. Right here and now, as we think about the next couple of years, the cycle we think has growth continued over those next couple of years. No need to think about being aggressive about de-levering even more than what we are already planning to do. The leverage picture, we think, is pretty good, and that leaves us free to do more share repurchase. You opened the door on the acquisition- Sure comment, right? When you think about an acquisition, are you looking for something strategic or more of a cost-cutting type of exercise? What do you think your core competency would be? What would be more attractive to you, to your eye at this point? Yeah. I'd say both. We certainly want to make acquisitions that enhance our strategic position. The RSC acquisition was exactly that on the strategy side, in that it repositioned us much more focused on industrial and non-construction, and certainly was able to shore up our position in many markets around North America. It also was a great cost-cutting opportunity for us as well, and the cost synergies worked out even better than we expected. We'd love to find another one like that. All that said, we all know what the landscape looks like. We know what the possibilities are. We've just got to find a way to make sure that we're getting enough strategic value and cost-cutting opportunities to make it make sense, and we're looking at that every day. Are there other categories within the specialty area that, a new vertical within specialty, is that in your pecking order, would that be your most attractive vertical versus just a gen rent competitor? Not necessarily. It can be all of the above. Just as Bill mentioned, you could find a gen rent that is very attractive to us and maybe a market, maybe a customer, maybe a segmentation that we just don't have, or the products that they have. Couple that with the cost ability, the synergies that you would be able to generate. Having said that, we're very open and looking actively at the adjacencies that are out there. Listening to our customers, finding out what value they would see in it, and we're being strategic in our thinking out there. Right now, we've got the pump business, the power business, the HVAC, the trench business, and our tools. They've all shown substantial growth. We want to make sure that we continue on that path. If there's other opportunities, we're open-minded to them. Specialty hasn't historically been an area where you've seen the bigger national. You haven't had as much competition from the national operators. Are you seeing more interest from the big national guys on the specialty side, do you think? I think people are talking about it more. Certainly those who don't have the economies of scale, they're still thinking about just geographic footprint. There's some that think about the benefits of having the adjacencies. That's their strategy. Our strategy, we believe is, we've got a customer base. Our customer base is very open to us bringing in an adjacency to have the same level of service that we give them today with our products, to be able to get that type of adjacency with that service has been fairly attractive for them. That's the way we approach it. Okay. Any questions from the audience? Nope. Okay. I think we're about done. Thank you very much. Appreciate it. Thank you, Don. Appreciate it. Thank you.