Goldman Sachs Global Industrials Conference 2013

Nov 14, 2013

Good morning, everyone. Thank you very much for joining us for this morning's fireside chat with the management team from United Rentals. We are very excited to have with us Michael Kneeland, CEO, Bill Plummer, CFO, and Fred Bratman, Director of Investor Relations. Gentlemen, really appreciate you making the trip. As a starting point, I am wondering if you could talk about, across your business, what are the opportunities that you are most excited about over the next 12 to 18 months? And within that, maybe just touch on the specialty rental business that you folks have been building out as well. Sure. First, I would like to thank Jerry and Goldman Sachs for having us here today. I would tell you that what excites me is we started out the year, I said the back half would be stronger than the first half, and that has proven to be the case. We are starting to see the early signs of the recovery in our primary end market, private non-res construction spending. Typically lags residential by about 18 months, and all indications are, including with the ABI index and other outside resources, everything seems to be trending towards 2014 to be a better year than 2013. And on top of that, 2015 looks to be even a better year. We see the beginnings of our recovery in our end markets are longer term. We think we are very well-positioned because the integration with RSC, for all intent and purposes, is behind us, so that we can focus on capturing that business. With regards to the specialty business, one of the things that attracts us to the specialty business is one, the returns, but also the second part would be is how it gives us a better depth around our customer base. RSC, as a standalone company, did a lot of re-renting of products they did not have, like power and HVAC and trench. Those are products that we have. We have integrated that into our contracts with our national accounts. And with the visibility that we have through Total Control, we see other products that rise to the potential. It is a way of engaging our customers, getting more share of their wallet, and driving us deeper, integrating ourselves deeper with that customer base. Again, very optimistic about the outlook. And two, we are growing the adjacencies as much as possible, Jerry. Michael, any other adjacencies that could be really significant drivers for you beyond the specialty business? What are the other bolt-on or other opportunities to augment industry growth for you? Well, right now we have power, HVAC, and tools. Tools came over from the RSC transaction. Again, all of these are highly accretive, nice return businesses. We are looking at what other possibilities are out there. Some rise to the occasion of tank business, pump business. There has been scaffolding business. All these other areas are opportunities that require a little more work on our part to understand it, see how it fits, and see if it is an opportunity for us to dive into it with our customer base, learning and listening to our customers at the same time. I am sure there are others, Bill. No, I think you hit it. I think there is work for us to do, and there is mindset for us to get our heads wrapped around, right? Some of these businesses are valued differently than we are used to thinking about the gen rent businesses. Some of them are growing much more rapidly than most of our businesses. Even though we have got rapid growth in our trench safety and in our power and HVAC business, you have to wrap your head around very rapid growth as opposed to just reasonable growth. So, there is education and understanding that we need to build as we think about how do we grow in those areas, and we are going through that thought process. Bill, can you talk about the returns profile of organic CapEx in the core part of the legacy business, and how that compares to the returns on capital you get from incremental investment in the specialty businesses? Yeah. The specialty businesses that we have are very attractive return businesses. Those are going great guns, both in terms of growth, but also in the returns that we get out of them. And to the point where it's challenging for the average unit in our gen rent business to give you the same return. That's not to say that the returns of incremental growth in our gen rent business are not attractive. You all know the economics of our business, right? High fixed costs, and so if you can flow more volume through that fixed cost, you get a very nice incremental return for fleet growth. That's how we're thinking about growing on the gen rent side, and it delivers attractive returns. But the really attractive returns are in our specialty business today, and that's why we want to grow those as rapidly as we possibly can. We're in a good place now of being able to get good returns out of growing in all of our businesses. And what we're trying to do is to strike the right balance of how much fleet goes into specialty, how much goes into gen rent, and how can we continue to move the returns higher of the combined business. Just order of magnitude, how wide, and obviously both at a really good point in the cycle, but how wide is the gap between the specialty and the base business? I don't know that we've given great detail, but I'd say that incremental growth in our gen rent business will give returns that are nicely above the hurdle rate that we set for ourselves, which is 10%. Again, that's for incremental growth in the gen rent side. You could get several hundred basis points more return out of our specialty business, and I'll leave it at that. Another way of looking at it would be in our investor presentation, we do have a segment on fleet mix. The other, if memory serves me correctly, is somewhere in the 58 range in comparison to something in the 45 range for some of the other assets to kind of give you a direction. Bill, you touched on it a moment ago, the hurdle rate for your business, 10%. Can you talk about the initiatives that you're taking to continue to improve the returns profile of your franchise? Yeah, certainly. Clearly, return is the numerator, is about profitability, and the denominator is about asset efficiency. We're working at both ends of that measure. So on the profitability side, it's about thinking carefully about where we can improve the profitability of our business. Obviously, some of the major activities that we've had recently, consolidating our branch footprint, integrating RSC, have really helped improve our profitability. The next legs of profit improvement for our business are probably going to come out of things like remixing the business in a fundamental way. By that I mean looking at our customer base and identifying the customers who give us the best profit result, and trying to figure out a way to do more business with those most profitable customers. So we've got some new tools and some real deep thinking about how we can improve the customer mix. Something similar in terms of the fleet mix. Looking at the contribution to profit that comes out of our investment in different components of our fleet and saying, "How can we do more in the components, in the cat classes, that give us a better profit and return result? How can we do more in smaller earthmoving, or how can we do more in compressors, and shift that mix in a way that gives us a better profit result?" So, that mix focus is a very important driver for improving profitability. Another focus is really becoming more efficient in the cost that we incur in our business. We've talked recently about lean management techniques that we're in the very early stages of starting to roll out across our business. How do we look at the activity that we do, pick up and delivery, maintenance operations, and how do we make all of that more efficient so that we incur less cost? Between the mix initiative and the lean management initiative, those are two very important parts of how we're going to drive profit improvement going forward. On the capital side, it's about how do we remix the investment level so that it gives us even more profit out of the capital that we employ. That's about growing specialty. That's about being very disciplined about when we do invest capital, and again, it's about getting the most out of it once we do. So those are some of the high level initiatives that we're focused on to help continue to drive return improvement. Let me pause for a second. There are a couple of seats up front. Please apologize for the short seating. Bill, in terms of the capital budgeting process, can you talk about where the demand is from your branches and how you're limiting that? Presumably, demand for capital is pretty high at this point in the cycle on a bottom-up basis. Yes, the demand for capital is very high. You heard us earlier this year increase by $100 million the amount of rental capital that we expect to spend this year, partly in response to the aggregate demand that we're seeing. We could have invested a lot more than the incremental $100 million. It could have been $300 million more, $400 million more, and I think the field would say we could put that to work. For us, the story is about really narrowing down to what are the key business opportunities of incremental growth that we want to serve that will get us that improvement in profitability and that improvement in return that we talked about earlier. So it's about picking and choosing where you're going to put incremental growth. That story is at least as good and probably better in 2014. We expect that demand will continue to build in 2014. We're in the middle of our annual budgeting process. We know already that our field is demanding a huge amount of incremental growth capital. I think I'm on safe ground here in saying that we're not going to give them everything they demand. Again, it's going to be about how do you pick and choose the business that you do want to serve so that you get a better overall result. That's the discipline that we're trying to instill in ourselves across our business. It's about change management. It's about changing the way we've been in the past to create a better future. Everything that we've laid out, that we've talked about, it's not about top-line growth. It's about profitable growth. It's about changing the way in which the management levels, all the way down to branch levels, think about the business. Bill talked about customers. Different customers have different contribution margins. They're not all equal. We want to make sure that we're getting our biggest bang, and we're going after the ones that do. Where we decide and how we spend our capital and where they deploy that asset, I think that decision process is very important. We've incorporated some new tools that we're rolling out that will enhance that. We've rolled out our rate tool. We've rolled out efficiencies around sales management, directing people where to go. We're looking at our national account portfolio managers to focus in around how do we monetize customers who are renting a particular asset, but there's opportunity to rent other assets. How do we take Total Control, which is a wonderful asset that we have, and take a look at and see the roadmap of what is it that we're missing that we could add that is more accretive? All of these things on top of what can we do as a management team from driving efficiencies changes what I think is our return metrics. The natural challenge at this point in the cycle is when you do limit the branches to how much CapEx they can take, there's a market share implication as well. Can you talk about how you're thinking about building that balance between maximizing your returns while not allowing your competitors to improve their positioning? Well, it's a balancing act, and it's one where it's important. On the same token, I don't want to drive a market share in an arena that's not going to be accretive. So we have to make sure that we're spending our money in the right direction. All indications are, and the way in which we look, and the way we're thinking about this year, next year, we're not going to be losing market share. We think that we're gaining market share because our customers are spending more share of wallet with us, and that's an important factor. It's not just about do I have the largest fleet of aerial? Yes. Do I have the largest fleet of reach forklifts? Yes. There's a whole plethora of other products that fit into that arena that we don't have a large portion of that we have to bring in, and we will bring in to capture that customer base. Is it the larger accounts that we're focused on? Yes. Is it the industrial ones? Yes. The transient, smaller customers, we want to make sure that we're after the profitable ones. In terms of opportunities of just continuing to ramp up the Total Control system, can you talk about, I guess, what proportion of your portfolio could ultimately flow through Total Control a couple of years from now, as you see it with what's the ultimate right customer base? Well, that's a huge question because I think in general, the customer base is changing dramatically. You're seeing that not only with us, but you're seeing it inside of the industry when you pick up and you look at mobile applications that are being applied. My sense is that we're focused on two areas around Total Control. One is giving visibility to the customer of what it is they're spending and where they're spending it. The other portion is what we call consumption management, where we actually will go in and assist them. I know this may sound odd, where spending less is more. A lot of times they focus in on unit cost. That unto itself doesn't yield a return from a customer perspective. We've gone in and monitored several of our major customers on their own fleet, and their utilization levels are dramatically lower, much lower than one would think. So there's a lot of opportunity there. We have a couple of case studies where we have taken customer spend down by 30%, and we've taken our spend up almost to 100% of their spend because they see the value add of what we've been able to achieve for them. So there's the Total Control as a system. I think you'll see more and more companies try to develop their own. But what you do with that and how you can use it for consumption management, I think is a total different concept in the industry. So you're going to see more of United Rentals coming out with technology advances. We just came out with a new version, Total Control, for our URdata customers. We're blending them together. We have a new mobile application that we think is cutting edge. We just had in about 300 customers, about 70% were Total Control customers, 30% were high potential candidates for it. Overwhelmingly, they were just taken aback. These are actually users that we bring in. We get their feedback every year and say, "What can we do differently, and how can we improve it?" GPS. We have GPS technology. We can determine fuel usage. There is a plethora of applications that we're rolling out for our customers. Again, it's value added consumption management, but ways in which they can drive further productivity for themselves. Michael, Bill, over the course of your leadership of the company, your fleet availability has sharply improved. You're talking about incremental lean initiatives. How much more room do you have to improve? Where do you think utilization levels can max out once you get through those efforts? How long is that journey? Well, you're right. It's a journey. I got to tell you, for 35 years in the industry, doing the same thing over and over again, and the outcome, I said that we could probably get somewhere between 68% and 70% in that sweet spot. Now, keep in mind, our time utilization is ARA metric driven. Everything that's serialized is part of our time utilization, regardless of size and regardless of price. I did a Kaizen event in Acworth, Georgia, and I have to tell you that it opened my eyes to the art of possible. Not only my eyes, but management's eyes. We've got eight beta tests running. All senior management is going through it. Each one is coming back with their eyes being opened to the art of possible. Here and now, I could tell you that I do think what I know now, I think that something north of 70 is possible. When? I can't tell you because we're just starting to initiate that in January. It'll be more to come. It's going to be an ongoing journey. It's never ending. I'm happy to say that not only from management, but deep in the organization, right down to truck drivers and mechanics who are part of this process, have come up with very unique ways to drive efficiencies. That to me is cutting edge and will clearly define the way in which we go to market in the future. Michael, can you talk about your key metrics that you're focusing on for your direct reports for 2014 and how that compares to the incentive structures you had in place over the past couple? Any tweaks that you're making? Where do you want the organization to pivot, if you will? Well, obviously, we're leaning a lot more towards return on invested capital. Bill, myself, all the way down to the management levels will participate, have participated, and you'll see more focused around that. There's other soft things that we do. Safety is a key component. Diversity and other aspects of the business are important as well. But I think some of the main drivers will be around the fundamentals of the business when it comes to returns on capital. Can you talk about how much visibility you have in terms of projects into 2014 today, and how does that compare to the visibility you had a year ago? If you can, just talk about larger non-res projects to the extent you have visibility that's improved. Yeah. Well, we do it in a multitude of ways. We have our marketing department that does deep dives in different verticals, and they're seeing an upward trend to the project activity. We've spent the last several years as a country focusing on fracking. We now need to monetize it. We're going to be an exporter of natural gas in the not-too-distant future. So LNG plants, where it used to import, now are converting to exporting, and we're going to see a couple more LNG plants being built. We're seeing a lot more projects around chemicals. Some of the byproducts of oil refinery, and also the price of the natural gas for energy for companies close to the market. It's a good working pool. So we're seeing foreign investment come back in the form of new plants. Car plants are growing. In particular, foreign car plants continue to expand. Those are things we're seeing. Western Canada continues to grow in a multitude of areas, energy related. Florida is coming back with not only residential, but non-res construction spending, but it's more agricultural related as well as California. Then you got technology. Technology continues to grow. Companies like Google, Apple, some of it's being brought back here. Some of their technology is housed here, cataloged here, stored here, their warehousing. So you're seeing opportunities there. The other thing I would say is our customers. We go out to our customers, and we ask them specifically, "Do you see the past 12 months equal to or better than, looking into future 12 months, better than or equal to the last 12 months?" I would say it's closer to like 90% see the next 12 months better than the reverse. So that we take to heart because they are very close to it. They're the ones that are bidding. They're the ones that are looking at what projects are out there. Again, I think that it all bodes well with what I said before was 2014 better than '13, and then '15 being stronger. Can you talk about opportunities in pricing? Obviously, challenging third quarter for pricing compared to last year anyway. You do get the benefit of higher equipment costs for the industry next year. How do you think about how much upside you have for pricing, at least as you do your budgets nationwide? I think it's helpful to say what we've said about pricing next year. Our expectation is that it won't be dramatically different than the 4% plus that we expected this year, at least on our initial view of 2014. Obviously, that assumes a certain backdrop in terms of the macro environment. If things are better, I think we'll be able to realize even more price than that. If things are worse, it makes it a little bit more challenging. But we feel like there is a very nice undertone that will support pricing, not just next year, but for several years to come. You mentioned a very important component of that is equipment inflation. As Tier 4 requirements roll throughout the equipment fleet, just broadly across the industry, that will support pricing over the long haul. I think as you also look at where demand for equipment could go if the rebound continues to build here versus where it is today, that would be supportive of nice pricing gains as well. We feel good about the price environment that will come not only next year but over the next several years. Will it be as robust as it has been for the last couple of years? That would be hard to repeat, just given that we are coming off the bottom of the 2009 recession in terms of the absolute value of year-over-year price improvement. But if you told me right here and now, "Bill, you only have 3% a year price for the rest of your life," that is not a bad place to be, right? That will help put me in a position where we can continue to drive improved profitability and enhance those returns. I am not saying that that is what we think the world is going to deliver for the rest of our lives, but that is not a bad starting point in terms of the pricing environment. Then it is up to us to manage the business well enough to be able to realize improved profitability off of that nice base. 4% pricing next year, not 3%? Yeah. No, we have said that next year will look similar to this year, and this year, we are at least 4%. Okay. Let me open it up for any questions. Yes, can we have the microphone up here, please? Yeah, I was wondering what the Hertz rental equipment business would do for you people. Make us bigger? What else? Shall I, or you want to take that? Let me just take a quick stab. I think what it would do is, for our business, it could do two things, one of which is they are strong in some of the industrial applications where we are located in other areas as well. Also, they have a broader footprint beyond North America, so they do have a presence in Europe, a presence in China, and probably some other areas that I'm not familiar with, or at least I'm not familiar with where they're located beyond those two areas. But I think that plus buying power, critical mass around our buying power. You'd have to take a look at it from a strategic standpoint, where and how it would fit. Any other questions? I have more questions. Yeah. Emily? Yes. Just in that scenario, let's say we're sort of in the spot of the cycle where we are right now over the next couple of years, where would you be willing to take leverage to? I'll try that one. We haven't set a fixed sort of maximum that we'd be willing to take leverage to. The philosophy that we take is let's find the deal that makes sense, right? From the three criteria you've heard us talk about before. It's got to support a strategy that makes sense, focuses us on the right customer segments, positions us the right way with our fleet, supports the footprint in the right way. All of those elements of the strategy have to be right. It's got to be attractive from a financial perspective, and that revolves around the ability to drive improved profit and return. Then it's got to integrate well, and in particular, the culture has to fit well with what we have so that you can manage through all the integration challenges. All those things lined up great in the case of RSC. When we thought about RSC, we didn't say, "Hmm, it's going to take us up to a certain level of leverage, and so that might not be a deal that we want to do." What we said was, "Can we manage the leverage that it would take us up to? And most importantly, can we move that leverage down rapidly to a range that we think is comfortable?" I think that's the way we would think about the Herc asset or any other large acquisition. Obviously, we won't be crazy at the peak leverage that we would go to. That threatens our ability to do a lot of other things. You won't see us going to six or seven times debt to EBITDA. But would we go up toward the top end of that range that we have talked about, 2.5 to 3.5 times? Sure. For the right deal, would we go above that range? Yeah. Again, if we could see a rapid decline over the next year or two after getting the deal done. If you look at what has happened with RSC, right? It is a year and a half after RSC. We bumped up pretty significantly for that deal, but now we are driving it down very rapidly, and I think we would use the same mentality with another big deal. In terms of what the Herc franchise would add to you, nationwide presence, big position with industrial and national construction accounts. Strategically, what else beyond reducing or improving the buying power on the equipment does that potential scenario bring to you? Yeah. I will take a stab at it. I think those are important considerations, right? To position us with those national accounts, position us with the large industrials. We have got a national footprint already, so the footprint is not the main driver, but an important aspect of the footprint is the synergies that we can get out of rationalizing the footprint. You saw that hugely in the RSC deal, right? That would be another attractive part of acquiring the Hertz asset or any other large equipment rental company. That plays to the value of doing the deal as well. So, I think those elements of the strategy, but also the cost synergies would be what we would focus on in looking at Hertz or any other large company. How that compares to organic CapEx. So you mentioned you are limiting how much you are putting out. How do you view the returns profile of just loosening up your corporate policy, as some of your branches would love you to do? How do you view the returns profile of that strategy versus the acquisition? Yeah. That's an interesting question that we talk about a lot among ourselves and with the board. I think we would certainly expect that an acquisition would enhance our return profile in the near term. The challenge with acquisitions is obviously you've got to pay the premium, right, in order to get it done, and so it can make it very difficult to get an attractive return right off the bat. It takes some time to get the benefit, either in cost synergies or reposition yourself in the marketplace. It probably adds a deficit relative to organic growth in terms of the impact on return. But over time, it can make for a much more attractive scenario if the acquisition repositions you in the marketplace. That's how we would have to think about, again, Hertz or any other large acquisition, is where is it going to put me over 2, 3 years down the road? Organic growth right here and now, it's a nice shot to returns, right? We're not going to put a huge amount of fixed cost into the company in order to support a reasonable level of organic growth. The return benefit is very significant. The thing you have to be mindful of is where does that position you for the longer term, right? Organic growth means putting more fleet into the rental market overall. Acquisition just reshuffles who owns what. You have to think through how much organic growth you can do relative to the amount of growth you can get from an acquisition, right? And balance those over the long haul as well. Those are the kinds of things that we have to think through in making a decision about whether to do an acquisition or to just go organically. Just one other thing that Herc would do, would add, is diversifying our fleet because they have a heavier component for earthmoving. What? Earthmoving. That's one area that is about 13% of our portfolio. That would increase. You guys know something we don't know about the availability of Hertz? Yeah. It's a question that's come up recently several times now. Multiple times. Any other questions? Gentlemen, can you talk about for your industrial business, how good is the outlook? Presumably, the big growth that you're seeing next year is driven primarily by non-res, but maybe that's not the case. Can you just flesh that out for us? Well, I think from an industrial standpoint, like I said, we're seeing a resurgence of manufacturing coming back into North America where it was being put offshore. We're seeing it coming back on due to the cost of energy-related expenses for those companies. I think that the visibility that we have, and I said this earlier in our one-on-ones, that in the energy sector, the plant shutdowns is something that is very well methodically planned out as an industry because they all can't have a shutdown in the same quarter or in the same year. So these things are usually planned out 2 to 3 years in advance. So the visibility is there. They may move a quarter here or there based on deliveries and if their production's running really hot. But by and large, it's pretty stable and pretty visible. Again, as I mentioned from the industrial sector, there's more manufacturing that's coming back to the U.S. I think longer term, you'll see that continue to grow. Your exposure to the Gulf Coast, how significant could that become for your business? Obviously, you can flex the fleet. How big is your physical presence today? Any plans for additional locations? Well, as Bill mentioned, we have a pretty good presence right now. We're in all 49 states. I know I joked that Fred would love to go to Hawaii to be the branch manager. What about Alaska, Fred? Yeah, well, he wouldn't. He doesn't want to volunteer for Alaska. But Texas right here and now is our number 1 state. Then you've got California, Louisiana, and that area is in the top tier as well. The Southeast is growing. As I said before, you're seeing a resurgence of companies coming back. They're coming back to automotive. A lot of the automotive is in that Tennessee, Louisiana, Mississippi, and you also have Boeing and rowing in that area. So those states are growing. Ironically, when we talk about the Northeast, the Northeast historically has been a net loser of growth when it comes to industry. Having said that, in upstate New York and Albany, we've seen a technology boom with some of the chip plants they've built there. So that spawns other industries in and around that product there. Each state is reinventing itself and trying to find ways to bring industry in. Last question, mix of CapEx 2014 versus 2013 by equipment type. Sounds like specialty is probably going to be up again. Can you give us more context around other pieces? I think specialty will be taking a somewhat higher portion of the mix next year than this year. The rest of the CapEx will be driven by that mix consideration that we talked about earlier, right? So you probably look for a little bit more oriented toward the non-AWP and or reach forklift components of our fleet. But keep in mind, it's a huge fleet, so moving the percentages takes a lot of change, and so it'll be a gradual.