United Rentals, Inc. (NYSE:URI) Q3 2023 Earnings Call Transcript

United Rentals, Inc. (NYSE:URI) Q3 2023 Earnings Call Transcript October 26, 2023

Operator: Good morning and welcome to the United Rentals Investor Conference call. Please be advised that this call is being recorded. Before we begin, please note that the company’s press release, comments made on today’s call, and responses to your questions contain forward looking statements. The company’s business and operations are subject to a variety of risk and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the Company’s press release. For a more complete description of these and other possible risks, please refer to the Company’s annual report on Form Ten K for the year ended December 31, 2022, as well as to subsequent filings with the SEC.

You can access these filings on the Company’s website at www.unitedreynolds.com. Please note that United Reynolds has no obligation and makes no commitment to update or publicly release any revisions to forward looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations. You should also note that the Company’s press release and today’s call include references to non-GAAP terms such as free cash flow, adjusted EPS EBITDA and adjusted EBITDA. Please refer to the back of the Company’s recent investor presentations to see the reconciliation from each non GAAP financial measure to the most comparable GAAP financial measure. Speaking today for United Reynolds is Matt Flannery, President and Chief Executive Officer, and Ted Grace, Chief Financial Officer.

A construction site with heavy equipment and people in hard hats working on the next infrastructure project.

I will now turn the call over to Mr. Flannery, you may begin.

Matthew Flannery: Thank you, operator, and good morning, everyone. Thanks for joining our call this morning. As you saw in our third quarter results, the team continues to raise the bar, as evidenced by the new high watermarks we set across this quarter’s revenue adjusted EBITDA and returns. As you’ve heard me say many times, our employees are the key to our results. Their focus on safely supporting our customers is paramount to generating value for our shareholders, and I’m most thankful that our team again delivered a companywide recordable rate below one. This goes without saying, but safety is not only a differentiator in the eyes of the customer, but it’s also critical that we take care of our most valuable assets. Our team looking towards the rest of the year our reaffirmed guidance for 2023 reflects our confidence in the outlook of our business, and as I’ll touch more on later, this is driven by both what we hear from the field and the tailwinds we see on the horizon.

More generally, we’re confident in the strategy that we’ve developed. The competitive advantages we’ve created over the last decade position us well to continue to outpace the industry as we drive towards our long term goals. Now, let’s dig into the third quarter results. Total revenue rose by 23% year over year to $3.8 billion. A third quarter record within this rental revenue was up 18%, with broadbased growth across verticals regions and customer segments. Fleet productivity increased one and a half percent on a pro forma basis, adjusted EBITDA increased 22% to a third quarter record of $1.85 billion, translating to a margin of over 49%, while adjusted EPS grew by over 26% to a third quarter record. And finally, our return on invested capital expanded to a new record of 13.7%.

So let’s dive into a bit more of the details behind these results. Used equipment sales more than doubled year over year to $366 million as we normalized volumes and rotated out older fleet after holding back in 2022 Rental CapEx was in line with expectations at just over a billion dollars, reflecting a more normal quarterly cadence. As the supply chain is recovered, our need to pull spend forward should be behind us. And now to [indiscernible] As we approach the first anniversary of the deal, the integration remains on track, and a highlight continues to be the quality of the team. As you know, people are one of the key components we add when we bring companies on board and integrate them into United Rentals. Looking forward, this added capacity, combined with my comments on CapEx and supply chains, Eshould position us well to serve our customers as we enter 2024.

Ahern is another great example of the strength we have in leveraging our balance sheet as a way to benefit both our customers and our shareholders. Now, let’s turn to customer activity and demand. Key verticals saw broadbased growth led by industrial, manufacturing, metal and mining, and power. Non-res construction grew 9% year over year, and within this, our customers kicked off new projects across the board, including numerous EV and semiconductor related jobs, solar power facilities, infrastructure projects, data centers and healthcare. Geographically, we continued to see growth across all GenRent regions, and our specialty business delivered another excellent quarter, with organic rental revenue up 16% year on year and double digit gains in most regions.

Within specialty, we opened 14 cold starts during the quarter, resulting in 39 new specialty location openings this year. Turning to capital allocation, in addition to the investments we’ve made in growth, we returned $350 millions to shareholders through share, buybacks and dividends this quarter and remain on track to return over $1.4 billion of cash to shareholders this year. As we look ahead, we feel confident in our outlook. This is supported by the ABC’s Contractor Confidence Index, which remained strong across the third quarter, as did its backlog indicator, the Dodge Momentum Index, which advanced sequentially in September. Furthermore, non res construction spending and non res construction employment both remained solid. And most importantly, our own Customer Confidence Index continues to reflect optimism, while early indications from our field team on their expectations for ’24 are also encouraging.

Finally, I’d like to acknowledge the team for their efforts in earning our company’s recent selection to the 2023 time magazine’s World Best Companies and the US. News and World Reports Best Companies to Work For list. Recognition like this comes as no surprise when you see our employees dedication and hard work in the field day in and day out. So to wrap up my comments, today Q3 was a strong quarter. We remain very pleased with how the year is playing out. Looking forward the opportunity ahead of us around large projects is unlike anything in my career, and we’re uniquely positioned in the rental industry to win more than our fair share of the 2 trillion plus of investment we see on the horizon. Not only do we have the scale technology and one stop shop solutions to make us a preferred partner, but we have a history of execution our customers can rely on.

We set high expectations for 2023, and I’m proud of the results we’re delivering. We feel good about the rest of the year and what’s ahead for United Rentals and our investors. And with that, I’ll hand the call over to Ted before we open the line to QA. Ted, over to you.

Ted Grace: Thanks, Matt, and good morning everyone. As you saw in our third quarter release, our team again delivered strong results that were consistent with our expectations and, importantly, keep us on track for another record year. I’ll add that we continue to feel very good about our prospects beyond 2023 based on our strategy and the tailwinds we’ve discussed extensively. While it remains a little premature to say too much about next year, given where we sit in our planning cycle, I will say that 2024 is shaping up to be another year of growth. Certainly more to come there in January with our focus today on our third quarter performance and the balance months of the year. Now, one quick reminder before I jump into the numbers.

As usual, the figures I’ll be discussing are as reported, except where I call them out as pro forma, which is to say the prior period is adjusted include Ahern’s, standalone results from the third quarter of last year. So, with all that said, let’s get into the numbers. Third quarter rental revenue was a record at over $3.2 billion. That’s a year over year increase of $492 million or 18%, supported by diverse strength across our end markets, as you heard Matt say, within rental revenue OER increased by $413 million or 18.5%. An increase in our average fleet size contributed 22.2% to that growth, partially offset by a 2.2% decline in as reported fleet productivity and assumed fleet inflation of one and a half percent. Also, within rental ancillary revenues were higher by $83 million, or 19.7%, while rent declined $4 million.

On a pro forma basis, which, as you know, is how we look at our results, rental revenue increased by a robust 10.2%, with fleet productivity up one and a half percent, reflecting a healthy rate environment that continues to be supported by good industry discipline. Turning to used results, third quarter proceeds roughly doubled to $366 million, reflecting more normalized volumes as we continue to refresh our fleet. The decline in our third quarter adjusted used margin to 55.2% was largely due to expanded channel mix required to drive higher volumes, the impact of some cleanup actions we took on Ahern fleet and the normalization of supply demand dynamics. Importantly, we continued to take advantage of a robust used market by driving strong volume growth in our retail sales at attractive pricing.

I’ll also note that our average fleet age was 51.6 months at the end of the quarter, which is essentially back to pre Pandemic levels. Moving to EBITDA adjusted EBITDA in the quarter was a record $1.85 billion, reflecting an increase of $329 million or 22%. The dollar change includes a $264 million, increase from rental within which OER contributed $252 million and ancillary added 19 million, while rent declined $7 million year on year. Outside of rental, used sales added about 85 million to adjust EBITDA, while other nonrental lines of businesses contributed another $15 million. While SGNA in the quarter did increase $35 million year on year, as a percentage of sales, it declined 180 basis points to 9.9% of total revenue, reflecting another quarter of very good cost efficiency.

Looking at third quarter profitability, our adjusted EBITDA margin decreased 80 basis points on an as reported basis, but increased 20 basis points on a pro forma basis to 49.1%. This translates to as reported flow through of 46% and pro forma flow through of better than 50%. Notably, if we excluded the impact of used in the quarter, our core flow through exceeded 53% and was in line with second quarter results. And finally, adjusted EPS increased 27% to a third quarter record of $11.73. Shifting to CapEx Gross rental CapEx was $1.3 billion versus net rental Capex of $664 million The $257 million decline in net rental CapEx largely reflects our return to more normalized use sales levels this year. Year to date, gross rental CapEx through the third quarter has totaled almost $3.1 billion, representing about 90% of our full year CapEx plan, which is in line with both our expectations and historical year to date levels.

At this point, it is our sense that the supply chains have largely normalized, which should enable us to return to more typical quarterly cadences going forward and better match the timing of deliveries. With seasonal demand turning to return on invested capital and free cash flow, reich [ph] set a new record at 13.7% on a trailing twelve month basis and remains well above our cost of capital. While free cash flow also remains a good story. The quarter came in at $339 million, translating to a trailing twelve month free cash margin of 12.8%, all while continuing to fund robust growth. Moving to the balance sheet, our net leverage ratio at the end of the quarter was flat sequentially at 1.8 times, while our liquidity totaled $2.7 billion with no long term note maturities until 2027.

Notably, all of this was after returning $1.5 billion to shareholders year to date, including 750 million through share repurchases and 305 million via dividends. So let’s shift to the guidance we shared last night. We reaffirmed within our ranges for total revenue, EBITDA and free cash flow, reflecting our continued confidence in delivering a record year. Within this, we raised the midpoint of total revenue by $50 million to a range 14.1 to 14.3 billion reflecting cleanup actions being taken to dispose of some older fleet acquired that comes with no margin benefit. Just to avoid any confusion, that is to say the fleet is being sold at the values they are recorded at on our balance sheet. You see this in our implied used sales guidance of $1.5 billion at midpoint, which is an increase of $50 million versus our prior guidance.

Adjusted EBITDA guidance is 6.75 billion to 6.87 5 billion, which maintains the midpoint at $6.825 billion. And finally, I’ll point out that we expect to generate free cash flow of which will return a little over 1.4 billion to our investors for your repurchases and dividends this equates to more than $20 per share or around a 5% yield on return of capital at current share price levels. So with that, let me turn the call over to the operator. Operator, could you please open the line?

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Q&A Session

Operator: At this time we will open the floor for questions. [Operator Instructions] first question will come from David Raso with Evercore ISI. Please go ahead.

David Raso: Hi, thank you for the time. I know you don’t want to give 24 guidance, but can you help us with just two elements at least how you’re thinking about it? The productivity measure and let’s just think of it as reported basis ahern [ph] anniversaries in mid December and the toughest part of the time [indiscernible] comps we start to anniversary soon. Given peak supply chain constraints about three or four quarters ago, how should we think about productivity with those two items sort of anniversary? How are you thinking about productivity’s? Ability to go back to flat to maybe up all in as reported and then also any help you can be at all with. You notice you mentioned the supply chain now is loose enough you can go back to your normal cadence on capex.

How are you thinking about the fleet going into next year? There’s some carryover growth, but just curious how you’re thinking about replacement CapEx next year? Or is there some growth capex just to help frame those two big building blocks for thinking about 24 as an up or down year? I know you’re saying up, but just want to get some of the pieces. Thank you.

Matthew Flannery: Sure. David, now, without giving guidance, I’ll just try to help out first. On your first part of the fleet productivity, I think you captured it well. We absolutely expect next year to have positive fleet productivity. Well, anniversary the very tough, and even on a pro forma basis, when you think about this year, we still had tough comps from a time utilization perspective, and we’ve talked about that over that unusual time that just we didn’t feel was healthy and put way too much hand to mouth orders and customer relationships at risk. So we’ve run really strong time this year, as I told you guys in July, back over what we were in 19, and we think this is a more appropriate level, so we wouldn’t expect time to be a headwind next year.

And with that being said, the industry still needs to get rate. So if we think about the two largest contributors to fleet productivity, we call one flat and the other one positive, and then mix will be what Mix will be. We certainly expect to have positive fleet productivity next year. And as far as fleet CapEx cadence, I think the supply chain is not 100% back to normal, but probably close, probably about 90%. There’s still a couple of categories of high time UT assets that we can’t get as quickly as we want, but frankly, I don’t think we’re going to be able to front load them either because they’re just in tough supply. So I think a more normalized cadence is the right way to think about what we’ll do from a capital perspective. And we’re not going to give CapEx guidance right now, but think about off of our base of $21 billion a fleet, we usually want to sell eleven or 12% of the fleet a year, right, to keep it fresh.

And as Ted mentioned in his comments, we’re really pleased that we got back to pre pandemic fleet age and we want to keep that rolling. So roughly, if you think about those numbers, you’re talking about somewhere between two point three, two point five billion dollars of fleet sold to get to that 11% or 12%. And if we think about the replacement capex on that at this point, certainly higher than 15. Let’s just round up to 20. You’re talking about somewhere between $2.83 billion of capex for replacement next year, depending on how much we sell. And I use that as a baseline, and anything over and above that will obviously communicate in January. That’ll be our growth CapEx. We do expect 24 to be a growth year, and we expect there will be some growth CapEx, but we just haven’t worked through the planning process yet.

We’ll give you better guidance in January. All right, thank you. And lastly, with all that said and how you’re perceiving the world going into 24, I know I asked this last call too, but the leverage down at 1.6 times the net debt EBITDA at the end of the year. Can you just give us some framework or how you’re thinking about M and A versus other uses of that balance sheet in cash flow or the leverage is expected to know continue to go down next year. Just trying to get a sense how you’re thinking about it. Thank you. I’ll help let I’ll answer a little bit of it and I’ll let Ted jump in. You know, we always talk about the use of our capital is going to be to grow the business. So first and foremost, feed the organic growth to meet the demand that our customers expect us to meet.

And then secondly, M A, if we find opportunities of where we can be a better owner of business. We certainly have shown a history of that and frankly, we’re pretty good at it. So why not utilize the balance sheet for that? That pipeline remains robust, but we have a high threshold. So I’m not pointing to anything imminent other than the fact that we’re always looking and we’ll have a specific lien to any new products we can add or specialty, but then also to add capacity, like we did with a couple of deals, including Ahern this past year as far as after we’ve used capital for growth. I’ll let Ted take that. Yeah, thanks for the question, David. So, as everybody saw, we are leveraged about 1.8 at the end of this quarter and the implied guidance would have us at around one six at year end.

So a little bit below that bottom threshold we had introduced in 2019 of two. We do think the strategy overall has served us very well and it’s accomplished a lot of what it was intended to accomplish, which primarily was to allocate excess free cash flow to reduce the equity volatility and improve valuation. And so when we measure kind of our absolute and relative beta, when we look at our absolute and relative multiples, we think that has been quite successful in delivering what we wanted. In terms of what’s next, certainly that’s something we’ve talked about that we’re still working on. We would expect to have an update for the street as we introduce our 24 guidance and all the related capital allocation programs that will be underpinned by that plan.

So more to come there in January. Thank you. We’ll take our next question from Rob Wertheimer with Melius Research. Please go ahead. Thank you.

Rob Wertheimer: So my question is on rental gross margin. And I think Ted mentioned that you still have some cleanup, I guess, activity on the [indiscernible] fleet, which may be depressing gross margin. I think you have extra depreciation, but it seemed a little sequentially weaker than 2Q, and I’m just wondering if there’s any other driver or if it was incremental activity related to Ahern that drove that. And I guess Ahern probably didn’t have specialty. So I wonder if you could address the s three gross margin as well. Thank you.

Matthew Flannery: Yeah, so if we look at that gen rental gross margin, I’d say in line with our expectations. While you did see the as reported margin down 320 basis points versus 270 last quarter, pretty minor. When you convert that into dollars you’d be talking about just that 50 basis points being equivalent to about $12 million of cost on a revenue base of about 2.3 billion. There’s always puts and takes within cost structures As everybody knows depreciation was part of that. So if you think about that 50 basis points, the incremental depreciation we recognized in the quarter as we go through final purchase accounting on ahern was probably 30 of those basis points would have been captured in that and otherwise you always have one time costs or other cost dynamics that may be hitting you.

We don’t think there’s really much to be made of it. The question is a very fair one to ask in the scheme of things. Given the numbers I just walked through, I think it’s pretty we would characterize that more as quarter on quarter noise within specialty. You saw flat margins I guess year on year off record at 52.2%. So very strong performance there. There really wasn’t much to call out. We did have some mix shifts within the different pieces of specialty that would have been relative headwinds. But again, if we can grow a business at 16% and generate 52% margins we feel really good about that.