Bank of America Merrill Lynch Global Industrials & EU Autos Conference

Mar 18, 2014

Great. Hi, everybody. I'm Ross Gilardi. I'm the Senior U.S. Machinery Analyst at BofA. I'm based in New York. Great to be here today. Thank you for coming. Next, we're very pleased to welcome United Rentals. With us today, joining us from URI, our CEO, Michael Kneeland, CFO, Bill Plummer, and Director of IR, Fred Bratman. United Rentals, as you all know, I think, is North America's largest equipment rental chain, the undisputed market leader. Rental is a big theme in the U.S. machinery sector. In this event today, we just heard from CEO Aaron Jagdfeld of Generac, who's a big vendor into rental. We'll have the CEO of Oshkosh, Charlie Szews, who's also a big vendor to rental. We've got Jeff Dratel from Ashtead later today. So it'll be great to tie all the comments together. But first, we're just really fortunate to have URI with us. Gentlemen, thank you so much for coming. The format is, I'm just going to hand it over to Michael really quickly to give some brief overview comments, and then this will just be an interactive fireside chat format. Thank you. Great. I want to thank Ross and the BofA team for having us here. We're very excited to be here in the U.K. and get exposure to a broader audience. Just some opening comments. 2013 is shaping up to be a positive year for us. We see one of our primary end markets, non-res construction spending, to improve as we go through the year. We just reaffirmed our outlook last week with the acquisition of our pump business, the specialty business. I'm sure we'll have questions on that. We expect rates this year to be around 4%. So again, improving conditions as we go through 2014 and into 2015. Again, talking about the acquisition, we're very excited as we focus on driving better returns and tying in closer with our customers from the learnings that we had through the RSC integration process. So I'll leave it open for Q&A. Great. Thanks, Michael. So maybe we could just step back a bit. United Rentals has obviously come a long way in the last five years, and maybe if you could just talk a bit about what has changed so dramatically in just the way you're running your business that has just really contributed to the fundamental improvement in your performance. Well, United Rentals was historically a roll-up company. Then we put ourselves on the market in 2007. That was a failed transaction. As we went into 2008, we kind of sat back. When I brought the management team, Bill joined me in the later part of '08. We really tried to leverage ourselves. Who do we want to represent? What customers do we want to go after? Then we were staring at a downturn. Clearly, we said that we focused on going after larger national accounts. Why? Because of our national footprint, the critical mass that we had built. Then we started focusing on cost reductions and driving efficiencies, and we took out, at the time, around $500 million of costs, 250 to 255 of that was permanent. Then when we went through the downturn, we started seeing a major shift towards renting versus owning. That's been fueling the growth for the industry. I think that will continue. I don't see the end of that. The levels may fluctuate, but I think it's going to be a continuous trend. On top of that, we did the acquisition. We wanted to diversify our portfolio. We were heavily focused on non-res. Today, it's about 48%. 48% is industrial, non-construction related with the acquisition of RSC, and then about 4% is all other. So we're in a good spot, and then we're focusing on driving further efficiencies through our lean process. It's been a journey, but it's been an exciting one. Maybe you could just talk a bit more about National Pump. Obviously, it's a very big acquisition for United Rentals, and just what it really does for you strategically. It certainly helps continue to drive the thrust that we've had as a company toward a greater share of our business in specialty rental equipment areas. That's one of the key pillars of our strategy, and it continues us down the road. So Pump now joins Trench Safety, Power & HVAC, and Tools to make up our overall rental portion of the business. Our view has been that all of them are attractive growth opportunities for now and for the future. So it continues that strategic thrust. It brings along greater exposure to certain key customer sets and includes very significantly oil and gas exposure, which we believe is in a long-run upcycle for oil and gas drilling activity in North America. So that's an attractive component. The overall characteristics of the business, high margin, high return are very much in line with where we want to be, so it helps enhance our margin and return characteristics as a company as well. I think I'd throw those three ideas out as a starting point. Great. I think a lot of investors were probably very pleased to hear that you remain committed to your share repurchase, even with the National Pump acquisition. Clearly, the stock is a lot higher now than when you announced the authorization, which I guess is a high-class problem. Why is continuing to buy back stock even at these higher levels necessarily the right thing to do for United Rentals? Clearly, there's a lot of growth opportunity out there, and how do you weigh that versus just buying it back more opportunistically over a longer period of time? Please. I was going to say that, as I mentioned in my opening comments, we're under, we believe, at the beginning of our cycle with non-res construction spending. We're also looking at enhancing our returns longer term. That's another reason why we brought in the acquisition of National Pump. I think we've got some runway ahead of us as to where we are today, and where the market will be three years or four years from now. Again, it's a commitment we made. We knew that going in, and we thought it was the appropriate time to make that commitment. Just to add maybe a touch to that. The notion behind the share repurchase was not about buying our shares at a specific price. It was more about making a decision about how you're going to allocate cash flow from the business. A portion of the cash flow that we expect to generate over the next several years, we judge, was appropriately returned to the shareholders. The business has enough cash flow to support its organic growth needs. It has enough cash flow and the capital structure position to be able to support a significant size acquisition if we decided to do that. When we looked at the cash flow beyond those two uses, we said, "You know what? We're very comfortable that there's something left over. Let's dedicate $500, return it to the shareholders, see how things develop over the course of the 18 months that we said we would execute that share repurchase, and then we'll reassess at the end of that. I think that's the backdrop to the notion of doing the $500, much more so than, oh, the share price is up, so we don't want to buy any shares at this point. Great. Okay. Well, I've got to ask, big announcement from Hertz today. You've just announced the acquisition of National Pump. You're committed to your share repurchase. Is it fair to say that Hertz is likely off the table now for a while? Well, we don't comment specifically what's on the table, what's off the table. I would only say that I think strategically they had to do what they had to do, and that's great. I think from our perspective, having better visibility of another public player in the marketplace can only enhance our industry at longer term. Even though they have been public, they've been tucked under a much larger public umbrella. I think being pulled out will give it a lot more visibility for us as an industry. I think it's a good thing. I was watching the clock. It was 8 minutes and 13 seconds before you said Hertz. So congratulations. Any questions from the floor? You mentioned improvement in non-res. Some of us investors who've been with you for a while, this is the Holy Grail that we've been waiting for. Could you just give us a bit more insight into how you see this non-residential cycle playing out and what it really means for pricing? That 4% pricing, we've been around these levels for a while. What does it take for pricing to go up from there? I'll handle the first part of the question, then I'll ask Bill to talk about the pricing part of it. If you take a look at some of the fundamentals that have occurred, last year was the strongest year since the downturn on the ABI, the Architecture Billings Index in North America. Only 2 months out of the 12 months were below 50. That is a continuous trend if you go back the year before and the year after that. Again, it was the strongest of the last four years. Residential construction spending has continued to improve and grow, and it's been stabilized, and that is also a leading indicator. The third thing is, almost any outside analyst who's looking at non-res, whether it be Dodge or Reed, whatever it may be, they're all predicting, including the American Rental Association, improvement in non-res construction spending not only this year, as it goes into this year, but more importantly, this also sets the stage for 2015 and 2016. As far as pricing, I'll ask Bill to speak to that. Sure. What does it take for pricing to continue higher? Certainly, the cycle to continue to play out to the upside, I think, is an important consideration. It doesn't have to accelerate dramatically, the cycle doesn't, in order for us to continue to realize price improvements, right? There are other factors that are pushing prices higher. Equipment cost inflation is real. It's exacerbated by the Tier 4 requirements on certain components of the fleet. So that pressure is going to continue the pressure for the industry overall to raise rates. That's just one factor. We will see the cycle continue, according to our view. That inflation pressure will continue and all of that sets the stage for rates to go higher. I think the other point that I would make particular to United Rentals is that the good news from our perspective is we don't need rates to go up at the same rate as they have been going up in order to continue to drive improvements in our business. Even if rates only go up 3% a year, 3.5% a year, that's still a favorable backdrop for us. We can continue to grow and leverage the scale benefits that come from being our size. We continue to look for opportunities to improve our operational performance within our business. When you lay all that on top of whatever rate growth there is, it's still a very attractive improvement in return opportunity that we have at United Rentals. In our investor material, in fact, we present a slide that looks at the improvement in return on invested capital that we would see over the next few years under certain assumed scenarios. The rate assumption on that slide is only 3.5% a year. You don't need a lot of rate, but I would argue that the industry and United Rentals is well-positioned to continue to drive rates higher. Maybe just further on the non-res theme. Can you give us some very specific examples, aside from looking at some of the forecasts that are out there, of just things you're seeing in your business today, different types of projects that are happening now that maybe weren't happening 6 to 12 months ago, that can actually illustrate that things are picking up? Well, I think if you take a look at some of the geography across North America, clearly there's been some stark differences from where they were and where they are today. If you take the Florida market, for an example, in Sarasota, they're building the state's largest shopping mall. I didn't think shopping malls would be on the forefront, but nonetheless, it's a very large project. It's not just projects. There's a lot of undercurrent. There's retail. There is power plants, upgrades. There's significant industry that's benefiting from the low cost of natural gas. There's the changeover of the automotive industry as they build out new models and become more effective. There's the influx of new expansion of foreign investment in the automotive industry, both from BMW. If you take a look at Hyundai and a few others, so the continuation and expansion there. Arizona, again, another area where we saw significant change from the downturn. In fact, we were all just in Las Vegas during ConExpo, and they are actually building more casinos. You would think that we played that out, and there are casinos almost in every state, but we are getting close to it. There is a lot of projects and a lot of things are underway currently today. Questions from the floor. One in the back. Yeah, thank you. In terms of the timing of the pick-up, there have obviously been some concerns around bad weather in the U.S. so far this year. Do you have any comment on whether that has impacted you at all so far? Are we through that now, do you think? Well, just last week, we reaffirmed our outlook, and that is towards the tail end of the winter. We know there is going to be some seasonality to our marketplace, but it does not hinder what we consider the industry as a whole or our ability to achieve our objectives. I do not know what else I could say. Just wondering if you could talk a little bit about the competitive landscape versus some of the peer group, and whether you view competitors as a major issue or whether you think that the owned fleet outside of rental is a bigger issue for you, or perhaps a bigger opportunity. I've said this, even though one of my competitors is in the room. I've said this on many occasions, that I think that our competitors are acting as good stewards of the industry. They continue to professionalize. They continue to higher levels of service. They also are continuing to improve on rental rates and returns. I think that our competitors, our leading competitors, have been good stewards, as we have, out there in the industry. Actually that's good to the extent that they're showing growth and opportunity only substantiates our story that we're seeing out there. It's just not United Rentals, it's us as an industry as a whole. Maybe just more on that note, Michael. In a sense, what kind of industry fleet growth do you expect in 2014? Maybe what do you think you actually saw in 2013? Is there a risk if the fleet grows a lot faster than non-res construction actually recovers, particularly maybe as more of the independents are lured to accumulating fleet just by your improving profitability and returns? On the fleet growth, I don't have the numbers for the industry. The American Rental Association talks about overall rental revenue growth in 2013 that was in the high single digits. They expect that to be somewhat higher in 2014 going forward. How much of that's from fleet growth versus flow rate versus mix improvement, it's hard to say on an industry-wide basis. As to the question of whether there's a concern about fleet growth ramping up significantly. Look, it's always a risk. We can't control the industry. I think it's realistic to say, though, that what we've seen from some of the medium-sized and smaller players to date has been more fleet replacement than growth of the fleet overall. And again, that could always change, but I think there's still a level of cautiousness among industry players, the mid-sized and smaller players, I'll say. Cautiousness around growing too aggressively. There's still a lot of memories from the 2008, 2009, 2010 downturn that make people reluctant to aggressively grow their fleet. And look, if they do decide to ramp up their growth expectations and compete aggressively, we think we've got a great platform from which to compete against aggressive expansion. You talked about, basically, inflation of equipment cost driving maybe some of the rental pricing. Are you seeing that as a factor that maybe is helping you gain market share over the smaller to medium-sized independent players? Yes. I do think that the scale advantage that we have in procurement helps us manage those inflation pressures better than the other guys, and that gives us a better opportunity to compete at any given customer. Certainly, that's an advantage that we try to leverage as much as we can, and it's one that the smaller players just don't have available to them. Take, for example, the impact of Tier 4 emissions requirements, right? We have the advantage not only of the scale of our buy, but also being able to blend that purchase in with the other non-Tier 4 equipment that we buy overall, and that gives us a pretty attractive overall purchase price inflation profile. If you're a smaller player, if you're paying 5%, 10%, 15% more for a Tier 4 compliant unit, that's going to hurt you a lot more in terms of your overall portfolio than it will for United Rentals. That's a real advantage. How do you think about the maintenance planning of your fleet and the aging out of a fleet in the current period, as well as on a go-forward basis? Shall I? Yeah. Our view is that the maintenance planning is really driven by the need to keep the equipment up and ready for an effective rental experience for our customer. We plan to do that, and whatever it costs, it costs. It's just part of our business. We do it on a pretty rigorous basis, maintain the equipment. To the extent that there is a significant change in the mix of equipment or there's an unusual set of circumstances around maintenance activity, our view is, again, you do what you need to do in order to keep the equipment up and running effectively from the customer's perspective. Hopefully that's responsive. If not, ask another question. We'll just follow up. There's no real variability in terms of the aging of the fleet. You want to keep that relatively consistent, or do you think about moving that level back and forth depending on the demand in the market? There is some variability with the age of the fleet. In the past, we've talked about numbers like an incremental $3 million or so for each month of incremental fleet age held over an entire year. Maybe it's a little higher than that, but it's in that neighborhood. So it's a fairly small number in terms of the absolute dollars associated with aging the equipment. But again, that's less the consideration for us than it is how we invest to make sure that the equipment is up and ready for our customers to have a good rental experience. That's the main driver of how we think about managing the maintenance program. I would only add that, I'll answer the question maybe a little differently. We've stated that we're very comfortable between 35 and 45 months as far as the age, and as we go through the ups part of the cycle, it will swing the pendulum closer towards the middle or maybe even slightly above in that 40-month range. Age, to me, it's not like the equipment is changing dramatically its functionality. If you take a five, 10-year-old piece of equipment, there isn't dramatic changes. It's really about the maintenance and how well you maintain and how well it is viewed. So it's appearance and maintenance. We have brand-new equipment that breaks down every day, just as soon as it comes off the truck whether it's new or used or being utilized. So it's about the maintenance program. We have a very rigorous maintenance program that we measure ourselves by. Michael, maybe just more on that note before we go back to the field. Last week, we were at ConExpo, and we saw several of the Chinese construction equipment players. SANY, in particular, was talking about trying to forge more relationships with North American rental chains. Are you sourcing more Chinese equipment these days? What's the end customer's view on Chinese equipment, and is that potentially a source of cost savings for you going forward? Yeah. It's been 23 minutes into this before I get the Chinese question or China question. Look, I look at this and say, today, we have a very diverse portfolio of equipment that's not always built in the U.S. I think for Chinese equipment, it's a question of when, not if, and it's how they go to market, and it's the support and customer acceptance, building out a distribution network that supports it in a broader sense beyond the four walls of China. So it depends how they go to market. I can remember growing up in the '60s, and we're talking about cars that came from Japan. But today, that same equipment or those same car manufacturers are doing exceptionally well, and they have set the stage or set the bar for service. To me, it has always been about the support that goes with it, the parts, it is the services that go all the way along with it. Over time, I think they will realize it, and we will always look at opportunities. We buy, as I said today, a lot of equipment that is just not manufactured in the U.S. Thanks. Question in the back. This is just a sort of follow-up question on the sort of structure of your fleet. Given your more positive comments on the non-res cycle and the fact that one of your largest suppliers of aerial work platforms has said that the larger fleets in the U.S. have now more or less replaced their aerial work platforms, should we expect a changing mix within your fleet as you move towards larger, bigger ticket type projects? It really is driven by customer demand, is the way in which we look at it and the trends. As far as our mix is concerned, we have a very large aerial work platform fleet, and what we are trying to do now is offset it or grow our other segments that are higher return. Actually, in some instances, benefit through the aerial work platform. For an example, a generator or compressor, pressure washer, whatever it may be. So we are bringing in other product, and that is kind of in sync with bringing in the pump side of the business as well. So we have a large fleet. We are not going to diminish our aerial work platforms, but you are going to see other segments of our fleet grow faster. Just on that, maybe you could expand a bit more on the opportunity in Power & HVAC, which of course is a key part of your specialty rental business. What the main drivers are going to be there? Well, we've had a very robust organic growth pattern there. We've rolled out 18 locations last year. We've got 13 teed up for this year. Reaching out to our portfolio. Again, when we did the RSC transaction, they used to re-rent the power, the HVAC, the trench. We brought it in-house. And the customer acceptance, quite honestly, has surprised us to the upside. We've had significant growth in those segments, and we've reported that. Strong double-digit growth. We're putting the infrastructure in play. We're doing it organically. We've had a few bolt on over time. But in reality, it's mostly organic, and the way in which we're growing that business. It's part of our longer-term strategy. Question. As a rental market, as penetration increases, it does seem like some of the construction equipment OEMs are trying to embrace the rental channel more. Have you seen that change? Do you see that becoming a more competitive landscape now? In terms of direct competitors from the OEMs, Caterpillar's still the main direct competitor. They certainly seem comfortable with continuing to support their dealer network in their rental activities. I've seen outside of Cat, though, it's hard to put a finger on any of the OEMs who've really gone toward rental. In fact, Volvo went the other direction in 2013 in divesting of theirs. I think it's very clear that many OEMs have tried the rental channel in the past, and not many of them have been able to succeed longer term. I think that will continue to give OEMs pause as they think about rental as a strategy for distributing their equipment. That said, I'm sure some will try, and we say good luck to you. In the meantime, what we try to do is to build the best rental company in the world, and make it more daunting for them to think about that as a way of approaching the market. I would also add that, if you take a look over time, my company that I came from in Baltimore, was spun off from JLG in the 1980s. As Bill mentioned, we had Volvo that just separated. We had Atlas Copco with RSC going back. We've had John Deere play in this space. It sounds enticing, but it goes counter to the distribution network that they have. On top of that, even when we owned Wynne, which is an operating system which was completely separated from the rest of our business. To compete with that, we separated it, we sold it for the reason, and it's growing on its own. Our competitors don't want to put money in our pocket. You would see that same pattern, in my belief, with an OEM trying to be a rental company. Having said that, we just had the opposite where one rental company got involved as an OEM with regards to Snorkel. We don't know where that'll go over time. Michael, you've got about 850 stores now, I think roughly, maybe a little bit less than that. What kind of long-term store growth should we expect out of United Rentals? I think you guys seem happy with the scale that you have now and your national footprint. If you were to sort of just give us a rough estimate over the next five years, do you think that 850 stores becomes 1,000? Does it become 1,200? Or does it more or less stay the same? Well, I think it's not going to fluctuate dramatically. We're in all 10 Canadian provinces. We are in 49 of the 50 states. We have a laundry list of people who want to go to Hawaii. That's the one state that we're not in. We're in 99 of the top 100 MSAs. Again, we're not in the Hawaiian market. We are very well covered. Having said that, should our strategy change? Is there a possibility? Yes. But right here and now, where you're seeing our growth and our footprint relates very closely with our specialty businesses. Yeah. Hi. At the back, thanks. ConExpo a couple of weeks ago, there was a big push by all the OEMs on technology and telematics, machine control, things like that. I don't know whether that's maybe more heavy industry road building than perhaps most of your rents. But do you see clients asking for these technologies? How do they affect your business in terms of the duration of rent, what people are looking for, and what opportunities is there for you in these builds? Well, I think it's an ongoing debate within our industry. At least, as the way in which we think about it. I can't speak for my competitors. But I do think that when we buy the equipment, the data that that equipment yields belongs to us and not so much the manufacturers. We have lots of information that we'd be willing to share with them on the last 15 years of our existence. We have records that go all the way back on almost every, in fact, every piece of equipment that we've ever owned. So we have lots of data. The question is, what do you do with it? And I think that is something that we collectively have to focus on and understand. Can it enhance your ability to do some further maintenance or preventative maintenance? Can it help you with your predictive analytics? Can it help you with types of jobs? Those are all questions that have yet to be answered. It's still costly in some regards as far as the connectivity. Having said that, we're working to figure out a way in which we can lower that cost based on our scale. It's an ongoing debate, and do I think it's the trend going forward? Sure. We have to always just say, okay, lots of data by itself is meaningless unless you do something with it, and that's what we'll have to be tasked with. What can we do? How can we take a look at that and say it benefits us or benefits our customer in some form, but we haven't identified it yet? Just a question on capital deployment. You have a buyback in place, and going forward with the need for growth and your M&A model as well, how do you balance growth and M&A with returning capital to shareholders? You used exactly the right word. It is a balance. We've got to make sure that several things are balanced against each other. First is supporting the organic strategy of the business. Make sure that's well taken care of. We talked about $1.7 billion of gross capital spend this year. We talked about something like that over the next several years. Let's make sure that that's taken care of. That's assured. Okay, great. If you got cash flow left over, then you could do a couple of things. One is you could delever the capital structure further, and that builds dry powder to make acquisitions. Or you could return the excess cash flow to shareholders. We've judged that we can do a little bit of both. We're on a path toward delevering over the next number of years down into the lower half of the 2.5-3.5 times leverage range that we've talked about. That leverage is measured by net debt to EBITDA. We're at the midpoint of that range today. We'll continue nicely into the lower half of that range over the next couple of years. That still leaves us excess cash flow to be able to execute a share repurchase. We announced $500 million back in October. We announced we'd do it by the end of 18 months. We still believe that that's the right allocation of our cash flow over the next now 13 months or so. We will execute that program, and then we'll get to the end, and we'll reassess and make a separate decision about whether we do more or whether we say, "No, let's continue to build that dry powder in anticipation of some acquisition." Or indeed, if the recovery's going, maybe you ramp up the organic growth. But trading off those uses for cash flow and striking the right balance among them is a discussion that we have every day, it feels like. Twice on some days when the field wants more organic growth CapEx. But it's an ongoing discussion, and we continue to have it. We'll continue to have it with the investor community as well. Maybe that's just a good lead into how we could sort of wrap it up, and maybe you could just talk a little bit more about returns and your return philosophy. Obviously, you've stated that returns are going to be a much bigger driver of compensation going forward. URI still got a return on invested capital of around 7% and room to improve that. Can you be a little bit more specific on what are going to be the key thresholds and timing for management to maximize compensation? What levels do you have to achieve over the next several years, and can you give us some sense as to getting to that 10% number, what kind of timeframe you're thinking about? I'll start out, and Mike, please chime in. I think rather than think about a specific level of return, we think much more about how do we continually improve the returns year over year. In fact, that's the way our incentive compensation structure is set up. We judge ourselves on how much our return on invested capital in excess of our weighted average cost of capital, how much that economic value improves from one year to the next. So you're right, there's still room to go from where we are today in ROIC, up to the 10% kind of hurdle rate that we've established for ourselves. As long as we're making progress year over year, then we think it's all good. It all counts toward improving the economic performance of our business. How long does it take us to get to that 10% level? Again, I'll refer you to the investor materials that we have. We show there a three to five-year horizon for ROIC getting nicely above 10% in the three to five-year time horizon. It is done with what we think are very reasonable assumptions for the performance of the business. Rate improvement, utilization improvement, growth in the fleet and so on. So that's broadly the path that we're on. As things get relatively better or relatively worse, it'll move us earlier or later in that three to five-year time horizon. Mike? I would just say that Bill's right on. We're focused on returns. It's not all about top line growth. It is about profitable growth. That has been our story, and we continue to beat that drum. It's been a learning curve for me on definition of ROIC. I think there's a multitude of ways. The way in which we have it is after-tax with goodwill. As Bill mentioned, we have a definitive map on how we intend to get there. We didn't put it there with a hope and a prayer. We put it there because we see a path. That, along with our structure, where we're focused on our growth opportunities, and on top of that, our lean process of driving further efficiencies will get us there. Great. All right. With that, I think we're out of time. Thanks, everybody. Thank you. Thank you. Appreciate it