United Rentals, Inc. (NYSE:URI) Q4 2023 Earnings Call Transcript

United Rentals, Inc. (NYSE:URI) Q4 2023 Earnings Call Transcript January 25, 2024

United Rentals, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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 risks 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 10-K for the year ended December 31, 2023, as well as to subsequent filings with the SEC.

You can access these filings on the Company’s website at www.unitedrentals.com. Please note that United Rentals 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 Rentals is Matt Flannery, President and Chief Executive Officer, and Ted Grace, Chief Financial Officer.

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

Matthew J. Flannery: Thank you, operator and good morning, everyone. Thanks for joining our call. Our theme for 2023 was Raising the Bar, and today I’m very pleased to discuss our record fourth quarter, which capped a number of notable achievements by our team and enabled us to indeed raise the bar this past year with record revenue, earnings, and returns. The team did this by continuing to serve our customers with an unmatched commitment to operational excellence and a laser focus on safety, all while integrating Ahern, our second largest acquisition ever. Today, I’ll start with a recap of our fourth quarter and full year 2023 results, followed by what’s driving our optimism for 2024, and finally, our updated leverage and capital deployment strategies.

So let’s start with some of the highlights from the fourth quarter. Our total revenue grew by 13% year-over-year to $3.7 billion, a fourth quarter record. And within this, rental revenue grew by 13.5%. Fleet productivity increased by 2.4% on a pro forma basis. Adjusted EBITDA increased almost 10% to a fourth quarter record of over $1.8 billion, translating to a healthy margin of 48%. And adjusted EPS grew by 16% to $11.26. For the full year, rental CAPEX of $3.5 billion was in line with our guidance. And I’ll add that with the supply chain largely recovered, we now expect a quarterly cadence of our CAPEX spend to be more closely matched to historical patterns. 2023 free cash flow exceeded $2.3 billion. We view our ability to generate strong free cash flow throughout the cycle as a hallmark of the company and a testament to both the profitability and flexibility of our business model.

Moreover, and this may be the most important thing to convey, the durability of our free cash generation provides us tremendous flexibility to create long-term value for our shareholders. Now let’s turn to customer activity. We continue to see broad-based demand across geographies, verticals, and customer segments. Industrial end markets saw healthy growth, led by industrial manufacturing and power. Within our construction markets, both infrastructure and non-res continued to show solid growth year-over-year, as our customers kicked off new projects across a diverse range of markets and these include battery plants, semiconductor-related jobs, power, infrastructure, as well as data centers. Geographically, we continue to see strength across the business and specialty specifically delivered on another strong quarter, with rental revenue up 15% year-on-year, reflecting double-digit growth across all businesses.

Furthermore, we opened 10 cold starts during the quarter, resulting in 49 for the full year. Finally, turning to capital allocation. In addition to the investments we made in 2023, we returned over $1.4 billion to our shareholders. Looking ahead, we expect 2024 to be another year of growth, led by large projects. This is supported by customer sentiment indicators, solid backlogs, and most importantly feedback from our field teams. And finally, and I’ll be quick here because I don’t want to steal too much of Ted’s thunder, but I’m very pleased to announce our updated capital deployment and leverage strategies, which cover our plans to return nearly $2 billion of cash to shareholders this year, and a reduced leverage target of one and a half to two and a half times.

This announcement reflects our work towards building an even stronger company and driving shareholder value. And what’s more, this comes after fully funding growth. Finally, before I get to my concluding remarks, I want to share with you all that we hosted our Annual Management Meeting in Indianapolis earlier this month. And this provided an opportunity for over 2,500 United Rentals leaders to gather and build momentum as we execute on our strategy. It also highlighted our incredible team, which is a real competitive differentiator for us, and offered an opportunity to remind ourselves of the culture we work so hard to strengthen and maintain. So it’s no surprise when you see everyone in action, why the team continues to win accolades, including recently from the Wall Street Journal and Newsweek.

In closing, I’ll repeat what you’ve heard me say many times before that it is what continues to be relevant and true, we are building the best business to serve our customers. Our scale, go-to-market approach, technology, and one-stop shop offering across gen rent and specialty are unmatched. Our team puts customers at the center of everything we do, giving me confidence that we’re well-positioned to continue to outpace the industry and capitalize on the opportunities ahead of us. We expect 2024 to be another record year for our company and longer term, we continue to march towards our 2028 aspirational goals that we shared with you last May at our Investor Day and I’m so proud of all our teammates who will help us deliver these results. And with that, I’ll hand the call over to Ted and then we’ll take your questions.

Ted, over to you.

William Ted Grace: Thanks, Matt. And good morning, everyone. I’m going to start my comments by adding some more color on our record fourth quarter results before pivoting toward 2024 guidance, which points to another strong year for the company. 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 to include Ahern’s standalone results. So with that said, let’s get into the numbers. Fourth quarter rental revenue was a record $3.12 billion, that’s a year-over-year increase of $372 million, or 13.5% supported by diverse strength across our end markets and our strong positioning on large projects.

Within rental revenue, OER increased by $313 million or 13.9%. An increase in our average fleet size contributed 15.1%, while as reported fleet productivity added 0.3%, partially offset by assumed fleet inflation of 1.5%. Also within rental, ancillary revenues were higher by $61 million or 14.2%, which was consistent with rental revenue growth. I’ll add that re-rent declined $2 million year-on-year. On a pro forma basis, which as you know is how we look at our results, rental revenue increased 7.6% year-on-year, with fleet productivity up 2.4%, reflecting a healthy rate environment that continues to be supported by good industry discipline. Turning to used results, fourth quarter proceeds increased better than 7% to $438 million as we continue to take advantage of a strong retail market to refresh our fleet at attractive returns by recovering roughly 62% for our original fleet cost.

Our adjusted use margin was flat sequentially at 55.3% while the year-over-year decline in margin reflected the ongoing normalization of the use market we have been talking about for the last several quarters. Moving to EBITDA, adjusted EBITDA for the quarter was a record of $1.81 billion, reflecting an increase of $162 million or 10%. The year-on-year dollar change includes a $197 million increase from rental. The year-on-year dollar change includes a $197 million increase from rental, within which OER contributed $195 million, while ancillary and re-rent added $2 million on a combined basis. Outside of rental, used sales were a headwind of about $10 million to adjusted EBITDA, while other non-rental lines of businesses were up $4 million.

SG&A in the quarter increased $29 million due primarily to increases in variable costs. As a percentage of sales, however, SG&A declined about 100 basis points to 10.5% of total revenue. Looking at fourth quarter profitability, our adjusted EBITDA margin decreased 150 basis points year-on-year to 48.5% due largely to the combined impact of Ahern and used margins. When looked at pro forma, our EBITDA margin, X used, was down just 20 basis points, translated to flow through of 46%, versus the 38% you can see on an as-reported basis. And finally, our adjusted earnings per share increased 16% to $11.26. Shifting to CAPEX, gross rental CAPEX was $430 million, reflecting a return to a more normalized seasonal cadence, supported by improvements in the supply chain.

You can also see this in our net rental CAPEX, which declined $8 million. Turning to return on invested capital and free cash flow, ROIC increased 90 basis points year-on-year to 13.6%, exceeding our weighted average cost of capital by over 260 basis points. Free cash flow also remains a good story with the year coming in at just over $2.3 billion, translating to a free cash margin of 16.1%, even as we continue to fund significant organic growth. The business continues to generate very strong free cash flow on both an absolute and relative basis. As Matt said, this provides us with a lot of flexibility to drive shareholder value across the cycle, through both investment and growth, and the return of excess capital to our investors, more on this in a bit.

Moving to the balance sheet, our net leverage ratio at the end of the quarter improved two-tenths of a turn sequentially to 1.6 times, while our total liquidity exceeded $3.3 billion at year’s end. And as a reminder, we continue to have no long-term note maturities until 2027. Notably, all of this was after returning over $1.4 billion to shareholders in 2023. This included $1 billion through share repurchases and $406 million via dividends. Combined, this translated to the return of over $20 per share during the year. Now let’s look forward and talk more about our 2024 guidance. Total revenues is expected in the range of $14.65 billion to $15.15 billion, implying full year growth of about 4% at midpoint. Within total revenue, I’ll note that our used sales guidance is implied at roughly $1.5 billion were down mid-single-digits year-on-year on a percentage basis, which implies slightly better growth within our core rental revenue.

Within used, I’ll add that we expect to sell around $2.5 billion of OEC, translating to a recovery rate of about 60% versus roughly 66% in 2023, but historical norms that are more in the 50% to 55% range. Our adjusted EBITDA range is $6.9 to $7.15 billion. At midpoint, excluding the impact of use, this implies flow-through in the 40s and flattish adjusted EBITDA margins versus as reported flow through of around 30% at approximately 70 basis points of year-on-year margin compression at the midpoint of guidance. On the fleet side, our gross CAPEX guidance is $3.4 billion to $3.7 billion with net CAPEX of $1.9 billion to $2.2 billion. And finally, we are guiding to another strong year of free cash flow in the range of $2 billion to $2.2 billion.

Now, let’s shift to our updated balance sheet and capital allocation strategy. First and foremost, we remain focused on funding growth where we can generate attractive returns, both organically and through acquisitions. Beyond that, our goal is to allocate excess free cash flow to drive shareholder value and to this end, last night we announced several exciting things. First, consistent with the intentions we shared a year ago when we introduced our dividend, we are increasing our quarterly payment by 10% to $1.63 per share, or $6.52 per share annualized. I’ll add that it remains our plan to consistently grow our dividend in line with long-term earnings. Second, we plan to repurchase $1.5 billion of common stock in 2024, an increase of $500 million versus what we bought in 2023.

So, in total, we intend to return over $1.9 billion to shareholders this year, equating to almost $30 per share, or a return of capital yield of over 5% based on our current share price. Lastly, and importantly, we are able to do this while also lowering our targeted full cycle leverage range by half turn to 1.5 to 2.5 times. As a reminder, this production follows the similar half turn reduction we announced in mid-2019. As most of you know, this is something we’ve been working towards with the idea of building an even stronger company and critically driving shareholder value. What’s more, this has all been achieved after fully funding growth. Just to provide some perspective, since 2019 when we introduced the first leg of our enhanced capital allocation strategy, our revenue has increased by more than 50%, our EBITDA has increased closer to 60%, and our earnings per share has grown more than 130%, while at the same time averaged leverage ratio has declined from 2.6 times at the end of 2019 to 1.6 times at the end of 2023.

This combination of results has supported very strong shareholder value creation that our team is very proud of and remains very focused on sustaining. So with that, let me turn the call over to the operator for Q&A. Operator, please open the line.

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Q&A Session

Operator: [Operator Instructions]. Our first question will come from David Raso with Evercore ISI. Please go ahead.

David Raso: Hi. Thank you. I wanted to look into the fleet growth that you appear to have planned for this year and also how to think about fleet productivity on top of that growth. With some carryover from 2023 and the roughly billion plus you look to add this year, right, the 3.5 billion plus a gross minus the OEC you expect to sell, the 2.5, it looks like you’re roughly say, 4% or 5% fleet growth you’re looking for in 2024. So just given some of the demand concerns some people have out there, I’m just trying to calibrate how much of the fleet growth would you argue is earmarked for projects that are essentially lined up versus the natural, you have to take some assumptions into how you manage the fleet generally? And then on top of that, how should we think about fleet productivity with that type of fleet growth? Thank you.

Matthew J. Flannery: Sure, David. This is Matt. And when you think about that fleet growth, then you’d have to net out of it whatever inflation you had for the replacement. So when we think about the fleet overall, we’re thinking about $2.5 billion of sales of original OEC, and maybe almost $3 billion to replace that, depending on what we buy and all that. So you’re talking about a 550 of growth. Within that we have cold starts that we are going to support in specialty. Again, we’ll continue to invest in the business there. And then to your point, a lot of the major projects, some bolster up some of our products that we know we’re going to be using on major projects and just general growth. So we also have some carry over to your point that we’ll be able to utilize.

So we feel really good about the positioning we have. And while we’re talking about CAPEX, we expect it to be a little more normalized cadence from what you’ve seen in the last couple of years as our partners have repaired their supply chain, probably at about 90% level, almost all the way there. How that’ll turn into fleet productivity, as you saw as we exited this year, we felt all along we needed to work through in 2023, the Ahern acquisition and some really tough comps some time from unusually high time utilizations during COVID. We’ve now leveled off at a strong level of time historically higher than we were pre COVID in 2019 and we think we can continue that throughout 2024. We think there’ll be a positive rate environment. We think the industry is showing good discipline.

There’s still demand in the markets that we serve and we think that’ll be a good guy in the fleet productivity and then mix maybe a little bit of drag off of that. Really only because if you think about the inflation of our cost that might be over the one and a half peg that we put out there, we know it’s going to be higher than that, probably more in the two to three range. So when you net that out, we feel good about positive fleet productivity throughout 2024. We don’t get into forecasting it but embedded in our guidance is that expectation.

David Raso: Well, that’s helpful. And then lastly free cash flow, a large majority last year return to shareholders, the guide for this year is a very large majority to shareholders. How should we think about the balance sheet usage, the M&A landscape, but also appreciating the lower target range, can you give us an update on the M&A thoughts? Thank you.

Matthew J. Flannery: Yeah, sure, I’ll touch on the M&A and Ted can talk a little bit about capital allocation. None of this is at the expense of M&A. We’re open for business. Obviously, we have a high bar, as always, but the pipeline remains robust. We’re always looking at assets that we could be a better owner of, and specifically, any new products that we can add to the system for our customers. So, I mean, if you just think about one turn, even with all the share repurchase and the up dividend and the lower leverage, I mean, one turn is still $7 billion worth of capacity. So, and that’s before you add EBITDA for many potential acquisitions that you’d have in. So, this is not at the expense at all. It’s opportunity we had to return cash to shareholders and as Ted said in his opening remarks, lower our leverage. Ted, I don’t know if you had anything to add.

William Ted Grace: No, I think Matt touched on the key points, but certainly we feel great about where we sit within the range currently just because it’s tremendous flexibility, optionality, and puts us in a great position to, as we said, kind of return excess capital to investors to augment shareholder value. And that’s always going to be our goal.

David Raso: And lastly for me, the implied incremental margins, if you exclude the used activity year-over-year, still a bit lower than the 50 to 60 range we’ve spoken of historically. It looks like it’s about 46%. Can you help us understand some of the inputs there that keep that incremental a little bit lower? That’s it for me. Thank you.

William Ted Grace: Yeah, of course. And David, that’s a fair observation. I think ex-used we’d be looking for flow through in the 40s and call it flat margins. The key thing to think about here is we are getting to a point of modestly slower growth than what we’ve experienced the last several years. I think we were up 23% last year, we’re up 20% the year before that, and 14% the year before that. So if you think about the nature of fixed cost absorption, obviously when you’re talking about double-digit growth, that really kind of supports pretty good absorption in those environments. As you kind of get to this year, which we view more as a transition year and you’re looking at mid-single-digit core growth. And still, it’s a somewhat inflationary environment.

It obviously creates new dynamics that you didn’t have in the prior three years. At the same time, you heard Matt talk about kind of the optimism we have on a multi-year outlook. We think it’s critical to make key investments in the business, things like cold starts and specialty. We’ll be targeting 50 plus this year. Those are great long-term investments. At the margin, do they kind of weigh on incrementals, they do. I don’t think that’s a surprise to anybody. And there are other investments we want to continue to make core to the business. Think about areas like technology, that’s long been an area, whether you want to talk about aspects of telematics, you want to talk about different aspects of performance optimization, and those are areas where we continue to be very focused.

And in the current environment, which again is this modestly slower environment, we don’t want to forego those investments that have very strong ROIs to hit respectfully kind of an arbitrary target, if you will, a flow through of some number. So we’re going to continue investing in the business because we feel really good about our outlook. So Matt, I don’t know what else.