Goldman Sachs Global Industrials Conference

Nov 12, 2014

Good afternoon, everyone. Thank you very much for joining us for this afternoon session. Really excited to have with us from United Rentals, Michael Kneeland, Chief Executive Officer, Bill Plummer, Chief Financial Officer, and Fred Bratman, Senior Vice President of Investor Relations. Fred is in the back if anyone has any questions after the presentation. We're going to run the session in a fireside chat format. If you have any questions, we will have microphones circulating around the room. I'll kick off the discussion. First, Michael, Bill, thank you very much for joining us. Thank you for having us. Gentlemen, I'm wondering if we could start the discussion to talk about how you see the industry in this cycle compared to the last cycle, and maybe touch on just with the consolidation with you folks and RSC, how you see the competitive positioning difference as well, and layer on some of the issues that one of your bigger competitors is seeing and whether you're seeing that show up in the marketplace, too. Sure. Well, I think that when you take a look at this downturn, this cycle versus last cycle, they were very different. This cycle obviously came off of a very severe recession in 2009, and then we saw a dramatic improvement in secular penetration in rental, which fueled our growth up until, I would say, this past year. Still a little bit left over, but then as your primary end market began to show some legs, and it continues to build momentum as we go through this year, and then as we point to next year. I'm sure we'll get into that. When I look at the industry, some of the horizons changed. Obviously, we've integrated ourselves with RSC. We've diversified our portfolio. We have another competitor who's growing. Almost all of our larger competitors are growing. But I think we're all smarter. I think we've all learned a lot. I think we have better tools today, to help manage the company better than we ever had before. I think that the industry is on solid footing for a lot of future growth, not only this year, but for the foreseeable future in the years to come. That excites me a lot. Hopefully, I answered most of your question. If there's more to it, let me know, and we'll go from there. Sure. Thank you, Michael. I'm wondering if you could talk about the difference in the competitive landscape as it relates to national account type customers since you folks acquired RSC. How are those discussions different? Are you folks effectively working on a negotiated basis instead of a bid basis or competitive bid basis that you might have seen in the past? Is that different at all? Well, for us, if you looked at us prior to that, 60-plus percent of our business was non-res construction. We had a small, just in the low double digits of industrial. Today, we're about 48%. The remainder is a little bit of residential and municipal environment. The way in which we go to market, we've changed from 2008, 2009, to be more account-focused. 40% of our business comes from what we call key accounts. That's where we have a direct one-to-one relationship with the customer, and we have it in several tiers. National accounts is anyone over $500,000 of rental revenue, and they have to be across multiple regions. Then we've got a regional account, which could be $250,000 and above, but are primarily within a region, and that can be multi-state. Then we've got what I call our local accounts. For an example, like here in Boston. There's plenty of contractors who would find ample work, would never go beyond Boston proper because there's no need for them to do that. Those type of accounts, we have a one-to-one relationship, and that's how we're focused on. With regards to how we get that business, we have to earn it every day. We have to have a value proposition that warrants our rates and our ability to win contracts. Have to have a strong safety record. Companies are sticklers on safety, as they should. We happen to believe in that as well. Making sure that all the employees, and not only our employees, but our vendors as well, that the environment is safe. That's a critical component. Part of our work is negotiated, but we go out to bids. They're multi-year contracts. That's part of our business. That's not all of our business. You take a look at the remainder of our businesses. I may have had the numbers mixed up. I think it's 40% of our national account business, then we've got the rest of our businesses that tie into 60%. So we've got about 40%, which is local transient accounts. They will eventually grow up and we want to make sure that we're getting our share of that. That's basically demand-driven in the local markets. Back when you folks were completing the RSC acquisition in the financials you published, you were looking for pricing this year to be up 3%. It's been significantly stronger than that. Can you talk about what really surprised to the upside from an industry standpoint compared to a few years ago, and how do you see the pricing cycle from here? What surprised? I guess I wouldn't categorize it as surprise, but what has continued to allow price appreciation better than that 3% kind of area, I think, is that the overall backdrop of construction activity is better than maybe we had in mind at that point. It's broader and probably more robust than what we had in mind when we put that long-ago forecast in for 2014 rate appreciation. I think that there's also been, to Mike's point, a recognition on the part of people in our industry, in the rental industry, of the need to focus more on returns. They've been, I think, better stewards as a result of how they manage price in the marketplace than maybe we expected way back when we put those long-range forecasts together. I'd point to those things that have allowed for a little bit better rate cycle than maybe we thought we would get at this point. I think those factors continue to be set up to help move rates higher even going forward from here. As we think about 2015, we think there's certainly rate available to us next year. But what we've been saying is that we don't expect that it will be quite as robust as this year. This year, as you know, we're targeting about 4% full-year rental rate improvement. We're saying that we don't think we'll get quite to that level next year. That's really driven by the fact that, as I like to say, trees don't grow to the sky. I said that earlier today, and it's a reversion to the mean. It's a recognition that rental rates can't compete or can't continue to go as rapidly higher as they have been. If you look back on the last few years, we've had very strong rate realization. It's been 5% plus in one year. It's been just about 7% in another year. It'll be about 4.5% this year. To string that many very robust rate years together just doesn't seem like something that we should be planning our 2015 around. That's really the biggest factor of why we're saying maybe next year will be down a little bit from this year. How much down? Our view is that 3% continues to be a sustainable level of annual rate growth. That's kind of the range that you need in order to continue to improve the performance of our business and the industry, we believe. That's sort of the absolute lowest that we would plan around for next year, in fact, for several years to come. I'll throw out one more tidbit. Even if we got zero rate improvement next year throughout the entire year, as long as we finish 2014 the way we expect with 4.5% or thereabouts, we'll still have 2% of carryover in 2015. That should play out during the year at the very least. So got a good starting point. As always, we try to deliver more than whatever our plan is, whatever our guidance is to all of you. So that, I think, you can bet on, is that whatever we tell you for 2015, we're going to work to deliver more than that because it's that important to our business and our returns. That's the key takeaway. We're always going to try for more. We are always looking at ways to improve our value proposition to command more, and that's something that is the spirit of United Rentals and the way in which we think and go to market every single day. If we're sitting here a year from now, I guess the probability that you get 4% pricing next year as well will really depend on how the spring and the summer shapes out. Is that fair to say? Yeah, I think it's fair that those will be very important months for us, and we're going to be focused on driving rate as much as we can. It needs to happen. We believe that our customer base understands the need for us to move rates higher as long as we're being prudent about moving rates higher. And to Mike's point, we're delivering incremental value and getting better at being on time in our deliveries or picking up rapidly or servicing effectively. I think the customer base will accept that kind of a rate improvement. You mentioned that 2-point carryover just from flatlining pricing at year-end. Is there any carryover benefit from repricing some longer-term business to current market conditions? Please remember for our RSC's business, because they priced annually, we tended to see better price realization in 4Q and 1Q as you catch up to leading edge. Any similar opportunities? There are. In many of our contractual relationships, we might renegotiate the terms of that contract annually. We have a slug of those that renegotiate late in the year. We're starting down the process of resetting those for 2015 as we speak, and we certainly are seeing some encouraging signs there. So there should be some benefit from renegotiating those contractual rates as we play out through 2015 to help support whatever rate realization that we ultimately are going to deliver. Typical seasonality makes it relatively tough to get pricing November, December, January, February. To what extent is the more mild winter this year helpful at all? Does that factor in in terms of construction activity? What are you seeing versus normal seasonality? I guess what I would say is that we have continued to experience robust demand here in the fall of this year, so it's carried good momentum coming into winter this year. How that plays out in rate, we haven't offered specifics, but I'd say generally, we feel good about how the fourth quarter's rate development and utilization development is progressing. That should position us well with good momentum going into the first quarter of next year. Again, without being more specific than that, I think we like where things are shaping up right here and now. Take the weather aside for a moment. We continue to see momentum building in non-res construction, and that's a key takeaway. Our customers are more optimistic about the next 12 months. The unknown variable is really the weather, right? We don't know if it'll be wet, we wouldn't know if it'll be another polar vortex winter, or it'll be a severe snow. We don't know that yet. But to Bill's point, we like what we see. As you alluded to, you folks, I know, are really focused on returns on capital when you evaluate each of the folks who run individual regions. You mentioned that you're surprised, or in a positive way, how well the industry's maybe applied some similar thought process to their fleet. Can you just talk about what maybe examples where you've seen that in the marketplace where folks have pulled in from a CapEx standpoint, and made the more disciplined decisions that are chasing business? Yeah. Well, I can't speak specifically about what others are doing, but what you can take a look at is what we've experienced out in the field. Yeah, the nationals have been spending, no doubt about it. They've had access to capital. I think capital is coming into the independents. I think it comes at a higher price, and I also think that people are talking more about returns. We've had an industry that hasn't had a stellar track record through every downturn. We've had multiple companies that have, not gone out of business, but basically have filed Chapter 11 and have left a bad taste in investors, rightfully so. There's more tools today, Jerry, than we've had. For an example, the Rouse reporting. I think there's about 35 companies that give a nightly feed to Rouse on every contract that goes out that day. They can do an analysis based on the market data. Where are you in your peer group? When we look at that, we see a premium, but that premium is, we know we're raising our pricing, our ability to get pricing, but we don't see that gap widening. We see it continue to be steady. That tells us that everyone is coming along. It's a useful tool. We didn't have that before, and it was anecdotal hearsay, and today we have that type of tool. We have pricing tools. More than one company is using it, and I think it's a worthwhile endeavor. I think we've become smarter in the way in which we think. We have to get returns. That's fundamental. It's even more so for the independents. You see that report on a daily basis? No, it comes out once a month. It's at one quarter in arrears for legal purposes. It only reports to you where you are in the peer group. You don't know specifically, and it's done by market, it's done by category and class of equipment. It's very granular, and it helps us. By the way, it also helps us make sure that our pricing mechanism is working. Just to shift gears, can you gentlemen talk about National Pump, how that integration is going? The cold starts that you have planned, how many of them are National Pump related? Then just maybe touch on how much you expect to grow the fleet over the next 6-12 months at National Pump. The integration is going very well. We integrated our information systems several months ago. That's playing out very well. We've been working very hard in developing our approach to cross-sell. How are we going to get pump customers to take Gen Rent fleet, Gen Rent customers to take pump fleet, and making good progress on that cross-sell dimension as well. Not just for National Pump, by the way, but also for our other specialty offerings. I'd characterize the integration is going very well overall. We're certainly investing the capital to help support their cold start growth plans. They are starting, opening up the new branches. I don't remember off the top of my head the actual number that we've got scheduled for this year, but it's going at least as well as in our acquisition plan. I think the story is that the National Pump acquisition is playing out very much the way we expected, if not a little better, in the early stages here, and we're encouraged that that can continue as we go forward. In terms of fleet size, where do you see that over the next 6 to 12 months at National Pump? I guess we haven't talked about the expected fleet size for National Pump specifically. We have talked broadly about doubling the business over a few years from where we acquired it. If you just kind of straight line that growth rate, you can interpolate where it might be next year. But that's as granular as we've gone in our statements about National Pump in particular. But I think the fair thing to say is that it's performing well, and therefore, we're going to be at least on the path that led us to, say, double it over the next few years. If the opportunity is there to do it even faster, we're not shy to do that. On the broader topic of M&A, how are you thinking about opportunities from here? Anything that you are evaluating that could be a similar size as National Pump, or are we thinking about more bolt-ons? I think about a year ago, there was, I guess, potential discussion about one of your larger competitors potentially being sold. Is that a type of transaction that would still be of interest to you folks? How would you think about it? I would tell you that we are always acquisitive. We always will be looking. It is safe to say that we have a very high bar. Yes, we will do bolt-ons where it makes sense. Yes, we will look at other adjacencies, again, if they make sense, and we can improve upon it, not just buy it, like we did with. A classic example to look at it would be the pump acquisition. We understood what our customers were looking for. We knew what we were re-renting. We did a lot of research. We were very selective, and we were very happy to craft a deal with National Pump and acquire them, giving us a nice footprint from which to build off of cold starts and utilizing our geographic footprint. A lot of people ask us, "Okay, strategically, tell us more." Well, yes, they have a portion of their business is upstream. A large, for us, only 6% of their business was in the commercial sector. That was a huge opportunity for us to cross-sell them into our current customer base. So it is things like that that we look at. We looked at the culture. How are they around safety? How are they around the customer and their systems? We look at the returns, but we also look at the strategy. Now, we also have the discipline to pass on deals. You could have a tendency that you can always justify any deal. We have kept a high bar, and we are going to continue at that level. So yes, we will do bolt-ons where they make sense. From a larger acquisition, again, we have to make sure that strategically it makes sense, what we can do with it. It has to be more than just cost synergies for us. We will always keep our mind and our eyes open. The important fact is also that we have the capacity to do that. We are going to be looking at growing organically, some bolt-ons, and continue to look on the horizon. Looking at the per unit rental costs in your business, since you folks have taken over leadership, your per unit costs are down about 40%. I think a big part of the improvement has just been the available fleet improvement and the utilization improvement. I am wondering if you could talk about how much more room you have to continue to improve in that area. You mentioned big telematics investment on the last call. How much of an improvement from those efforts in particular do you expect? The how much room question is always a challenge, right? Our approach is that we have lots of room to continue to improve our cost. I do not know how to quantify lots of room, but it is something that we work at every day, and we think that it is going to be an important part of how we continue to drive our return performance. We have talked about improvements that will result in $100 million of EBITDA impact, positive impact, over the next few years. Our lean management rollout being a key part of how we achieve that. In our view, that is a very reasonable target over a three-year period. I think Mike and I would both agree that if we only did 100 million, we would be disappointed. We think that that is the scale of opportunity that is in front of us in the near term. Could it be multiples of that? It could be. It is up to us to find the ways to find opportunities to continue to drive those cost reductions in order to really position ourselves well. The good news is we got the scale and leverage the economies of scales so that we are better positioned to be able to find those opportunities than anybody else in the industry. We just got to be smart enough to do it, and I think we have got the folks who are smart enough to do it. On telematics. Telematics for us is, I know a lot of people would say, "Oh, telematics have been out." Yeah, they have been out. We will have ways in which to assist our labor force with telematics, also with our customer, assisting them, and also give us data that we can utilize with our vendors. Our investor day is coming up. You will learn a lot more about that. Fred is out in the audience, and he will throw something at me if I say anything. He can reach from there. Yeah. He can reach. Yeah. He'll probably aim. He's got a pretty good arm. But yeah, we're very excited. Again, it goes back to our value proposition, Jerry. We have to continue to think about ways that we can drive value, and telematics is one way that we'll bring forward. For those of you who didn't know, we said that about 160,000, 180,000 units will have telematics. That's basically all of our gas or diesel powered, including our small electric scissor lifts that will have telematics on it by the end of 2015. We've got some things that we'll show you that we're going to be doing with it to help our customers. Bill, I am wondering if we could talk about CapEx allocation. You spoke about 2015 CapEx being similar to this year. Can you talk about how the components of that capital are shifting? Then, as you and Michael look across the company, and you look at the bottom-up request for capital, which regions are showing the strongest returns on capital in their proposals? The overall capital plan, I did say about the same, roughly that $1.7 billion level as we see in 2014. I think I, at the time, said it could be a little less, it could be a little more. I think realistically it is very unlikely to be a little less than $1.7 billion. What I meant by a little more is something like $1.8 billion. So, that $1.7 billion to $1.8 billion range is how we are thinking about the overall spend, gross capital for next year. I think one point that I should make is that, and we will talk a little bit more about it at the investor day, as we think about our used equipment sales plan for next year, we are in the early stages of really looking at how we age our fleet. Preliminary indication is that maybe we can and should be aging our fleet a little bit more than we have thought about in the past. So we might sell just a touch less in used equipment next year than we did this year. So that is another dynamic that could play into how our fleet size is managed throughout 2015. In terms of allocation of that capital and places where it might be more attractive return and less attractive return, we are certainly seeing good, robust demand across a variety of different geographies to start there. With really the only weak spot being Eastern Canada. So we have got, I think, a lot of opportunity to invest fleet across a broad geographic footprint, and help continue enhance our returns. So it is hard to single out any particular region that we are going to emphasize, right? They all have robust opportunities, and the return profile is getting better in the vast majority of our geographic footprint. We're going to spread it pretty good by geography. I think more importantly, two things. One is when you look at the customer segments that they're going to serve and the cat classes that we invest that fleet into, I think we've been working very hard on our process for selecting the more attractive pieces of whatever business they have, and allocating capital to those areas. That's a process that I think will be more robust in 2015 and help continue to drive our improvements in return. That's pretty exciting. We've got a huge range of customers and projects and types of equipment that we can offer out. Selecting the best mix is a pretty important lever for us for improving, and we've been doing that, but I think we're getting better at it all the time. That's going to be probably the most important driver, along with our management process of saying, "You know what? Every month, let's go back and review who's working out the way we expected, who's not working out the way we expected, and how do we reinforce the strength, and how do we allocate away from the weaker areas?" That management process is getting stronger in all aspects. Good. Let me open it up for audience questions. Over here, please. Yeah. The microphone's coming. Sorry. In the booklet you handed out, there was a chart about customer confidence. Can you elaborate on that from what you see in specifically non-res construction? Yeah. Every month, we have a third party that goes out to our customers and does a survey. What we're seeing is how they're looking at the past 12 months, and then how they judge the next 12 months. As you can see by the chart, it grew in the third quarter. The vast majority of our customers are saying, "We see the next 12 months equal to or greater than the past 12 months." We don't give the detail broken down by industrial or non-res construction. It's a broad base of customers that we put it out to, and to us, it's a valuable tool. That's just one metric. We do go out and spend time with our customers. We also go out and spend time with our field and try to get a better sense of what they're seeing out there. We just don't use one metric. This just happens to be one that we thought was important that we put out there. Okay. Perfect. We will stop there. Gentlemen, thank you very much for joining us. Please join me in thanking Michael, Bill, and Fred. Thank you. Thank you. Thank you.