Morgan Stanley Industrials and Autos Conference

Sep 13, 2012

Slides

Okay, welcome everyone. We're pleased to continue this track now with United Rentals. I'm very happy to be joined by Mike Kneeland, CEO, Bill Plummer, CFO. Also in the audience, we have Fred Bratman, IR and Corporate Communications. Where are you, Fred? He is going to be there. He is in the back. Okay, great. Without further ado, we're going to move right into the chat before we open it up for audience Q&A. Gentlemen, thanks for being here. Thank you for having us. Thank you. Okay. A general observation I have is that it seems like when there's been news this past year, actual news from the company or from your competitors, the reaction has generally been good. It depends on a setup going into a quarter, things like that. Your news has been pretty solid. When there's a lack of news, sometimes the stock trades off. People get concerned. Maybe it doesn't screen well in terms of a high debt load and so forth. What can you tell us about the current state of things that might calm people's nerves a bit? I think you said in the past that things are generally getting better. We've got the elections ahead, perhaps that helps. How's the business looking right now? Well, what we've been talking about in the past few days is around how we see our end markets, and the strength that we're seeing, in particular, around our rental rates, and how that is indicative of the strength that we're experiencing. Having said that, we also were very upfront about our time utilization, and areas around our time is going to be down a little bit lower than the guidance we gave. Add that all together. Basically, we said that the guidance that we gave after the second quarter, we're very comfortable to be within that range. It's the mix in how we get there. When you talk about the market and what we see and what we're hearing from our customers, basically, we're hearing that they're still optimistic. There's a sense of caution, or I should say, concern around what they're hearing and seeing that everyone in this room and all the investors are hearing in the news and around the election. It's very negative. So that has raised some awareness. But on balance, what we've been seeing across a broad range of our customers, geographically and customers alike, has been positive. The uncertainty that you referenced, does that ever work in your favor? Are people more inclined to rent versus buy now? Well, obviously, uncertainty is in our favor. When you talk about if I buy an asset, how long can I utilize it? What's going to happen in the marketplace? What's going to happen to the capital markets? All that uncertainty plays well for our industry in particular. Based on your experience, you've seen election cycles before. We got a close race right now. Does that up the uncertainty, and might it help your results over the next couple of months? Well, we could debate. No one cycle is the same. This one, I think, is particularly negative. I think given where we are in our economic recovery, or the softness we're seeing in the recovery, just exemplifies that. Okay. You mentioned the utilization being a little lower than what you expected. Is that a direct indication of lower demand, or is it more your own choice about how you're going to run the business? Yeah. I'm going to let Bill answer that question. Sure. It's much more about us than it is overall demand. To Mike's point, our customers are telling us still that they expect things to go well. We certainly are seeing our customers demand equipment right here and now. The utilization measure is just one measure that is saying that our fleet size relative to the level of demand is not quite what we expected, perhaps. But overall, the demand is good. I might add, that's flowing through to good profitability, and that'll result in margins and returns that are very attractive for the company going forward. Mike said that we're sticking to our financial guidance, $4.6 billion-$4.7 billion of total revenue for this year, $1.950 billion-$2 billion of EBITDA for this year. That's all well in hand. It's going well against those measures. It's just the mix is going to be a little bit different. Can you tell us anything about the mix for the type of equipment? Anything playing out there that might be affecting the utilization or affecting the pricing? Sure. So one of the things, when you look at a year-over-year utilization comparison that represents a headwind for us, is the change in mix to reduce the aerial work platform portion of our fleet mix. Last year, we were 48%, 49% AWP. This year, after the merger, and after some of the fleet changes that we've been doing for the legacy URI side, we're 45% AWP. Well, many of you know that aerial work platforms tend to operate at significantly higher levels of utilization than our fleet on average. They may be in the 80s, whereas our fleet on average are in the high 60s. So that mix change certainly would have a significant impact. Same with growing our Trench, Power and HVAC specialty region. That business typically operates at lower levels of utilization. Very high returns, very high margins. That's why we're growing it. But the fact that we are growing it is going to be a little bit of a drag on utilization. The effect on- I just want to add one other thing about that is that we talk about time utilization, and we talk about our time utilization ticking down a little bit. I just want to make sure everyone understands the impact that is related to closures. We had 181 closures by the end of July. It took us 2 years to close 150 locations when we were optimizing our footprint, and we had to do it very quickly, and for a lot of reasons. We made the promise that we would measure our integration through the eyes of our customers, because ultimately, that is who we serve. We couldn't afford to have overlap or confusion on what sales rep was calling on what customer. We couldn't afford to have what branch was going to be trying to utilize what territory. We had to do that rather quickly. As a result of that, we did. We understood that there was going to be a dis-synergy when we looked at our overall revenue synergies over time by 2014. We knew that the dis-synergy would come quicker. I think we could have probably did a better job around projecting that, and I think that is in part in play with what our time utilization. We are very much on top of it. We have integrated over 1,400 sales reps, and we have got assigned territories. We have got management from both sides. In fact, the differences between optimizing a footprint and integration, you also have to have the best of both worlds. Whereas you may have a branch manager who came from legacy RSC versus legacy United Rentals, and he may be managing a different group, a different company, or people that he was not used to. There is a mixture that you are blending there over time. Progress is coming, and we are making a lot of progress. Look, we could have done better as far as promoting that, or advertising that, or communicating that more efficiently. Is there any risk that during the integration process, and especially with the closures, the competitors are going to see it as an opportunity to maybe come in case someone in the local office has taken their eye off the ball? Well, I think that obviously they have to say that, and they have to try that. But the customers that we're after are much larger. They're national. They're industrial. These are customers that rely heavily on our broad footprint and the product mix that we have. A lot of these contracts are also under contractual obligations. We have to perform every day. We have to make sure that we've got the levels of services in order to earn their business, and that's something that we have to focus on. We do those, and we do them well, which we have been through this whole integration. We haven't lost our eye on the ball with our customers. We give them no reason to do that. Okay. Now, Bill, back on your point about the mix shifts. Any explicit impact that's having on pricing as well? Because the pricing has been better than expected. Are the mix shifts helping? I don't think you could point to the mix shifts as having a significant impact. Certainly to the extent that different components of our portfolio are behaving differently. It may have a little bit at the margin, but we've been seeing good price realization across our entire product mix. I don't think the shifts are going to show up very much in what we've realized. Okay. Also for you, Bill, tell us a little bit about the balance sheet management, the priorities for cash. I always get the sense that there's a lot of long-only money that's a little bit frightened about the volatility in the stock. It screams as a somewhat highly leveraged story. So how do you rank your priorities in terms of paying down debt versus investing for the future? Yeah. It's interesting. We've always been a highly levered capital structure, so it's always interesting to see the focus that people put on that point at different times. As a broad statement, we feel very comfortable operating at the levels of leverage that we are today, and we're going to become even more comfortable going forward. In some of our one-on-ones today, we've been talking about the notion that as we look forward, we're going to be a lower levered company in the future than we have been in the past. We're at a point now in our lives, and with the combined United Rentals RSC, where we expect to start throwing off very significant free cash flow next year. By very significant, I mean in the $400 million-$500 million range, assuming that the forecast that we put together, and as we published in the S-4 registration statement earlier this year, plays out over time. There's no reason to believe that we're not on a path to be able to do that. So that's very significant free cash flow next year and in the following years. We'll devote that, at the highest priority, to paying down debt. That's going to be part of the story for getting us down to leverage levels that in the past we may have talked about 3.5x-4.5x total debt to EBITDA. In the future, we're likely to be talking about materially lower, 2.5x-3.5x over the next number of years. So the leverage story is changing toward a lower level of leverage. I don't know that we'll go dramatically lower than that because we are capital-intensive, and we do get tremendous value out of having a relatively higher debt mix. But we want to make sure that it's within a reasonable range, that it's well managed, and most importantly, that we can execute the strategy of the business in terms of how we want to grow, where we want to grow. Without worry about whether we're at risk for a default against our debt. Share buybacks also on the cards? It's something that we're going to be talking about as we go forward. I think our view right now would be let's start realizing some of the reductions in leverage that we expect to see over the next year or two. Let's get a better sense of where the market seems to be headed longer term. If we play it out the way we think it'll play out, long about the end of next year, early 2014, I think it'll be a legitimate question to ask, should we return funds to shareholders in some form? Okay. Whether repurchase or dividend it'll depend on where we are and what we see coming. Okay. The strong free cash flow is partially being enabled by the fact that you had the foresight to invest early in the cycle. CapEx probably going to be down a bit next year. Share with us where you think we are in the overall cycle. Do you think is the time to start taking your foot off the gas a little bit in terms of building the fleet and maybe benefit from what you've already built some? Is that the point we're at now? I think- I'm sorry. Go ahead, Bill. I think that's right. I think we put a significant investment into growing our fleet this year for the United Rentals side of our business. The RSC side made a significant investment in growing their fleet last year. I think the combination of those two investment choices has positioned the fleet size for a good run to the upside in terms of our overall market. Next year we can get away with, if you will, spending something comparable to what we're spending this year, maybe a touch lower, and still grow our fleet, position ourselves to experience nice growth without having to put a huge amount of capital into the business next year. We could probably say the same thing for 2014, 2015 and so on as long as the market continues to grow reasonably. Obviously, if the market growth takes off, we've got enough flexibility to be able to step up our rate of fleet growth in order to take full advantage of that. But we want to make sure that we see it coming, we have a better confidence in it actually happening before we start planning around significant growth in our capital investment plan over the next couple of years. Great. The only thing I would add to that is just if you take a look at what Global Insight is projecting for our industry, starting last year, they're projecting a CAGR growth of about 12.5%. We could debate that, we can discount that but nonetheless This is for rental, not for the underlying structure. This is for rental. Yeah. For our industry specifically on the rental growth they see. Coupled with the fact that you want to put a capital investment in your assets, we have to see rates improve. We're still below our peak and that's not even adjusted for inflation. So I still see significant upside. So you have to balance the two together. On that topic, do you think that your return on invested capital can improve? I can think of a number of secular drivers that might help you in that regard, not the least of which is the permanent change of having bought RSC and cleaned up the industry some, a more lean, competitive landscape, the synergies that you're going to get. Perhaps rent versus buy is something of a permanent nature. Maybe Tier 4 helps. Maybe bonus depreciation going away helps. Do you think returns are going to be going up as we move further into this cycle? Absolutely. A lot of our costs will be fixed costs, meaning we don't need to add more locations. We may have to add more variable costs around people. But on that front, United Rentals with its critical mass and where we are today with the combination of RSC as well our goal is to have a relative cost position longer term. We're doing a good job today. We can do a better job tomorrow, and that's where our focus is going to be. Coupled with the fact we're trying to grow profitable growth with our customers. Absolutely, we're looking at ways in which we can improve our return on invested capital. And our goal, which we've shared with investors, is to over the cycle, on average to be over our cost of capital. And that's something that the industry has not done very well. But we do believe that given the infrastructure that we have and the efficiencies that we see that we're going to capture, and then focus on we can get there. Great. Let's pause for a moment and see if we have any questions from the audience. Right there. Is that Matt? That's Matt. Yep. Hey, guys. Hey, Matt. Hey, Matt. You talked about Vance's first question about how you were seeing better than expected rate and then utilization being a tad weaker. Which has a higher contribution to flow through, and therefore to EBITDA when you talk about those two metrics? Sure. Rate by far has a higher contribution. Its flow through impact is very significant in the high 90s % area, whereas time utilization, 60s to be rough about it. Clearly getting more rate is a preferred approach than getting more time utilization. That said, you want to make sure that you're leveraging time utilization appropriately, and we're focused on doing that. The focus on time utilization has been fascinating to me, and I'm going to try and restrain myself from getting off on a rant that I got off on earlier in the day. But time utilization you're interested in it for two reasons. One is as a measure of how efficiently you're managing your business right here and now. How well are you leveraging that capital? And the answer to that question for us right here and now is very well. We feel very good about our ability to drive growth and profitability and margin and return out of our business at the levels of time utilization that we are right here and now. Even though they're a little bit lower than they were last year, or will be in the back half of this year. It's going well. Our business is going well right now, and time utilization is one measure that if you just look at that, you're going to miss the story. That's the story of time for right here and now. The other reason you care about time is what it might tell you about the future, what it might tell you about where the market's headed. And from our perspective, time utilization is not telling that story well at all. Because of our closures, there are factors unique to us in driving our time utilization. It's not telling you what's going on with the market. We prefer more direct measures of what's happening with the market. As Mike says, look at what's going on with rental rate. Rental rate is a very important indicator of how healthy the market demand is. Look at what our customers are telling us. We survey them every month. We compare the surveys this month with what we saw in prior months. That story is still very robust in terms of our August survey that we just completed, I think, last week. That's a good sign for us. We look at the projects that are out there that are starting and that are in process. That's all good. We look at the geographic breadth of demand. That's all good. As we look at what's coming, it feels pretty good to us, and time is not telling that story. It's frustrating for us, I'll speak for myself, for me, to see all the focus on time utilization but not have the discussion encompass everything that's going on in the company. It's a good story right now. In the rates tailwind, there aren't a lot of pricing stories in industrials. How much longer do you think we'll see that tailwind? Is it just through the end of the year, a couple more years? We- Yeah, I was going to say, Matt, if the market does anything remotely what is suggested by Global Insight, it can only improve. We have tools in place. We have a compensation in place for our branch managers and district managers that behooves them to get the maximum return. My sense is that it'll continue to improve. Do we need the macro levels to improve at some point? Yeah, absolutely. All indications are that they are starting to show up. We look at residential construction. Although we don't participate in it is a fundamental of the economy or macro level in specific markets. For an example, areas like Florida, Arizona, and California are doing much better today than they were a year or a year and a half ago. We could argue that it's off a bounce. The residential market in some of these areas are doing better today than they were before, and that has a trickle effect throughout the economy. Rates are imperative to this industry to get over its return on invested capital. My sense is that it will continue to march forward, particularly if we come anywhere close to Global Insight. Thank you so much. Thanks, Matt. Another question right there. Possibly another source of frustration, but there has been some talk about the used equipment values coming off the boil. Maybe you can give us some perspective on the cycle we've seen in used equipment values, and how does it impact you both directly, which is fairly obvious, but any other indirect impacts that we should be thinking about? Then I had a follow-up. Well, I've been talking on one-on-ones, and I would ask you to take a look at or think about this, that over time, as we just said last year, we were actually walking away from business. We had a record time utilization. Because of that, we were remiss in trying to sell assets because we could deploy them on rent. On top of that, if you take a look at the industry overall, the smaller players, the regional players they didn't have the ability to go out and buy. So the only way they can get their revenue is maintain their assets. This year, not only is United Rentals, but other companies are actually buying new assets. We have to manage our age, so you're going to have more assets go to market. In the second quarter, our used sales growth was 20%, so we're selling more into that market. That would be one factor. The other factor I would ask you to take a look at that we have to balance against is the emerging markets. What role are they playing? Did they play in the strength of used equipment last year versus this year? Obviously, some of the emerging markets aren't as strong as what's being reported on a year-over-year basis, and so what impact that has. So those are the things you take a look at. Then take a look at, specifically, if you're talking about the Rouse report, some of the segments that are buried inside of that. Yes, on general, the numbers come down. Not significantly, but it has come down. But inside of that, there are pockets where they're actually improved year over year. All those things you want to take a look at. For me, I want to make sure that I watch it over time and see how it plays out. But I think it's really too early, and I think it's more an indication that we're selling more, and we're bringing more to market to refresh our fleets. Are you concerned, Mike, that if we went into more of a slowdown next year, that this time China, Brazil, India, they are not going to be there to create the demand and perhaps, the higher free cash flow that resulted from selling equipment into a large global liquid market during the last downturn might not exist this time? It is only part of it. Only about 20%, or 25%, maybe at the peak, was being offshore. There are other markets. The South American market is still robust. Mexico still seems to be growing at a nice clip. So you have a lot of diversity out there. Some of these markets, like Brazil, like China, very difficult to put used equipment into that marketplace to begin with. So again, you have got to take a look at every one of those. Now, let us take a question right here from Mark. Great. Thanks. If you could, just real quick, obviously, we get the CapEx direction, but is there any change there as far as the mix? You did mention that aerial work platforms, the mix there has shifted down. Is there any reason to shift it back up or any sort of targeted verticals? The shift in AWP was something that we were targeting strategically pre-transaction. The RSC transaction got us there very quickly. 45% is what we had talked about as an AWP share of our fleet before the deal, and we feel that we're where we want to be right now for AWP. As for the other components, we've done some nice work in raising slightly the amount of earthmoving equipment in our fleet. We feel pretty good about where we are there. We've put in place some other components of fleet that are attractive to industrial customers, compressors, welders, things like that. We feel like we're in a pretty good shape there. The thing that we are continuing to do in our fleet mix is to grow the specialty products, Trench Safety, power, HVAC equipment. We want to continue to increase the share that they represent. It'll come out of the others relatively rough equally. We feel pretty good about the mix with the exception of wanting to grow the specialty stuff more going forward. Got about a minute left. This is one more question right there. There's a microphone coming. There you go. You probably can't understand my accent, but could you just comment on the success of the integration of the RSC acquisition? Clearly, there were branch closures, and I applaud you for doing them quickly. There's cost savings that come out of that. Then there are these dissynergy issues that you mentioned, and on the dissynergies, if you can talk about your rate of progress in sort of putting that behind you as well as the cost-saving- Sure integration benefits that you've garnered. When you take a look at the, I am very proud of the integration process that is underway. We had a lot of cooperation from both sides very early on. From the time we announced the deal to the time we closed it, April 30th, we had streams of business process underway, and that enabled us from the 30th. In the first 30 days, we redefined all of the territories for all sales reps. We used Tactician as a tool to help us define what market would yield and what is the correct ratio of territory for sales rep. In 5 weeks, we went from two operating systems. We completely integrated both companies on an operating system and financial system within 5 weeks. We are completely on one version of WIN that we have incorporated. We have also rolled out a Salesforce automation tool to all of the Salesforce. We are all on salesforce.com. That training has been completed as well. As I mentioned, 181 locations through the end of July. There will be a few more in the next 2 months. That number drops off significantly. Very much a lot of progress, very successful. We have also married up the management staff, the branch manager, district manager, and region vice president. At the branch level, it is about 60% the legacy United Rentals and about 40% of the legacy, and that is just by sheer numbers. District manager is about 50/50, and our VP level, 50/50. Very happy with the progress we made in a very short period. As a result of that, we were able to take our cost estimate from $70 million to $80 million realized this year. We are striving very hard to outperform that number as well this year as well. We also were able to take the $200 million up to $230 million. We are now entering the phase into which we are looking at the process. There are a lot of great things that both companies did. What we need to do is take a look at it and do a gap analysis and say which ones are the best and how can we merge the two together. For an example, just yesterday, we rolled out, we call Rental Flow, which really is a combination of United Rentals's Workbench and RSC's SPIN. It is the process by which you maintain your equipment when it comes off rent to getting it ready to back on rent. We took the best of both worlds and merged the two together and just rolled it out. I think on the integration front, a lot of progress, a lot of hard work, and very happy with the results. Okay. Well, keep up the good work. With that, we are out of time. Thanks very much, Mike and Bill. Thank you. Appreciate it. Thank you.