United Rentals Q1 2024 Earnings Call Transcript

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April 25, 2024

There are 7 speakers on the call.

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 uncertainties is included in the Safe Harbor statement contained in the company's press release.

Operator

For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10 ks 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 atwww.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

Speaker 1

Please refer to the

Operator

back of the company's recent investor 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.

Operator

Flannery, you may begin.

Speaker 2

Thank you, operator, and good morning, everyone. Thanks for joining our call. As you saw yesterday afternoon, 2024 is off to a strong start and playing out as expected. And I'm pleased with our results across growth, margins and fleet productivity, all executed through the lens of putting the customer first and with an unwavering focus on safety. Coming into the year, we knew the key to success would be doubling down on being the best partner for our customers, and that's just what we're doing.

Speaker 2

And we're meeting their needs and finding opportunities to deepen our relationships with them. For example, we broadened our product offering to include matting we're executing on our plan to open more cold starts. And just as critically, we're doing all of this while maintaining our focus on operational efficiency. The team continues to demonstrate its commitment to our strategy and we remain confident this will be another year of profitable growth. Today, I'll start with a recap of our Q1 results and then discuss our recent acquisition of Yac, followed by what's driving our optimism for the year.

Speaker 2

And finally, I'll give a very recent example of our When You Are culture at work, which in my mind is a true differentiator. So let's start with some of the highlights in the Q1. Our total revenue grew by 6% year over year to $3,500,000,000 a first quarter record. And within this, rental revenue grew by 7%. Fleet productivity increased by a healthy 4% and adjusted EBITDA increased to a 1st quarter record of $1,600,000,000 translating to a margin of 45.5 percent.

Speaker 2

And finally, adjusted EPS grew by 15% to $9.15 another first quarter record. Now let's turn to customer activity. We continue to see growth across both our gen rent and specialty businesses. Within Specialty, we delivered double digit growth across all lines of business. By vertical, we saw growth across both construction, led by non res and our industrial end markets with particular strength in manufacturing, utilities and downstream.

Speaker 2

And we continue to see numerous new projects across many of the same areas we've discussed the last several quarters, including power generation, data centers, automotive and infrastructure. Additionally, the used market remains strong, allowing us to sell a 1st quarter record amount of OEC. In turn, we spent $595,000,000 in the quarter on rental CapEx and this is consistent with our expectation. As a result, free cash flow was $860,000,000 in the quarter. Our ability to generate strong free cash flow throughout a cycle, while simultaneously funding growth is a critical differentiator.

Speaker 2

The combination of our profitability and capital efficiency, coupled with the flexibility we've engineered into our operations, enables us to consistently generate strong free cash flow and create long term value. Now turning to capital allocation. Our number one goal is supporting growth, while also maintaining a strong balance sheet. And after funding organic growth, including 15 cold starts and completing the Yacht acquisition, we also returned $485,000,000 to shareholders in the quarter via share buybacks and our dividend, all while remaining comfortably within our targeted leverage range. Speaking of Yac, I want to share some initial thoughts now that we started the integration process.

Speaker 2

This acquisition is a textbook example of our M and A strategy at work. Through YAC, we've added more capabilities for our one stop shop platform, enabling us to be even more responsive to our customers, while also generating attractive returns for our shareholders. And for those of you not familiar, the app provides temporary access roadways and surface protection similar to our purchase of general finance in 2021, the And similar to our purchase of general finance in 2021, YAC is a leader in its market, yet still has plenty of room for growth as we bring this capability into our network. Since we've closed the deal, we spent a lot of time with their team and we're even more excited with the potential here. Turning to our updated outlook.

Speaker 2

As we look to the rest of 2024, we remain optimistic about the opportunities for growth. Thus far, the year is playing out as expected. Our updated guidance reflects the addition of Yac with our underlying expectations unchanged. Customer confidence remains strong while our team in the field is focused on the opportunities ahead. And while these indicators are tangible examples of what gives us confidence in our ability to deliver on our guidance, it's the team's daily actions which further bolster our belief that we will continue to deliver strong shareholder value while supporting our customers in their normal operations and times of emergency.

Speaker 2

A good example of this was our response to the devastating news of the Key Bridge collapse in Baltimore back on March 26. In true United Rentals fashion, we were all hands on deck helping with the immediate emergency response and ongoing work. This support included a broad range of assets, including mobile storage, power, light towers, portable sanitation and fencing, as well as both our aerial and dirt equipment. And what's more, through the acquisition of YAK, which had just been completed, we're also able to provide the mats needed at the site for the operations. This is a perfect example of our differentiated business model, where we provide unmatched support through our one stop shop offering to our customers and ensure they can safely and efficiently focus on their own operations.

Speaker 2

It's also a true testament to our culture and the people that work for United Rentals. So in summary, we're excited by both the immediate opportunities, particularly on large projects and the longer term outlook we see. We've built a resilient company with a well proven strategy that positions us to continue to drive profitable growth, strong free cash flow and compelling shareholder value. And with that, I'll hand the call over to Ted and then we'll take your questions. Ted, over to you.

Speaker 1

Thanks, Matt, and good morning, everyone. As Matt highlighted, the year is off to a strong start as healthy demand and strong execution supported 1st quarter records across revenue, EBITDA and EPS. Consistent with our strategy, we remain focused on allocating capital, both rental CapEx and M and A investment to drive profitable growth while also returning excess cash to our shareholders. Combined, this supports the solid earnings growth, free cash flow and returns you see embedded in our updated 2024 guidance. So with that, let's jump into the numbers.

Speaker 1

1st quarter rental revenue was a record $2,930,000,000 That's a year on year increase of $189,000,000 or 6.9 percent, supported by both the market tailwinds we've been discussing as well as our strong positioning in large projects and key verticals. Within rental revenue, OER increased by $138,000,000 or 6.1%. Within this, growth in our average fleet size contributed 3.6%, while fleet productivity added 4%, partially offset by soon fleet inflation of 1.5%. Also within rental, ancillary and re rent revenues were higher by $51,000,000 or approximately 10.8%. Turning to used results, supported by the strong demand Matt highlighted, our first quarter results were consistent with expectations.

Speaker 1

Used revenue came in at $383,000,000 at a healthy adjusted margin of 53.3%. As we've talked about for the past few quarters, our used margins reflect the ongoing normalization of the used market following the extraordinary conditions created by supply chain issues that peaked in 2022. From an OEC recovery perspective, which we view as a key indicator of the health of the used market, our proceeds equated to better than $0.59 on the dollar versus $0.50 to $0.55 prior to COVID. So another quarter of very solid results there. Moving to EBITDA.

Speaker 1

Adjusted EBITDA was a 1st quarter record at $1,590,000,000 reflecting an increase of $84,000,000 or 5.6 percent. The year on year dollar change includes a $108,000,000 increase from rental. Outside of rental, used sales and SG and A were headwinds to adjusted EBITDA of about $27,000,000 $4,000,000 respectively, while other non rental lines of businesses were a $7,000,000 tailwind. Notably, SG and A as a percent of sales declined 40 basis points, setting a new first quarter best at 11.2%. Looking at 1st quarter profitability, our reported adjusted EBITDA margin was a healthy 45.5%.

Speaker 1

Due to the used dynamics I just discussed, consolidated margins compressed 30 basis points year on year, implying flow through of 42%. Excluding used, however, our core EBITDA margins increased 70 basis points, equating to flow through of 54% in the quarter. And finally, our adjusted earnings per share increased 15% to a Q1 record of 9.15 dollars Shifting to CapEx. Gross rental CapEx was $595,000,000 which was in line with both our expectations and historical seasonality from a percentage of full year perspective. Turning to return on invested capital and free cash flow, ROIC increased 50 basis points year on year to 13.6%, which remains well above our weighted average cost of capital, while free cash flow was off to a strong start at $869,000,000 Moving to the balance sheet.

Speaker 1

Our net leverage ratio at the end of the quarter was a very solid 1.7x, while our total liquidity was just under $3,600,000,000 And as a reminder, we continue to have no long term note maturities until 2027 and a very manageable distribution maturities thereafter through 2,034. Within the quarter, I'd highlight that we issued $1,100,000,000 of 10 year senior unsecured notes to fund the Yac acquisition and we're very pleased with the market reception. The notes priced at a coupon of 6.1eight percent representing both the lowest coupon and the tightest credit spread to treasuries in the high yield market for all 10 year issuers since August of 2022. Notably and probably most importantly, the transaction also marked the lowest spread to treasuries that United Rentals has ever achieved for a bond of any tenor. While this is driven by a number of factors, we view it as further evidence that credit markets continue to reward the company for its track record of impressive growth, strong execution, smart capital allocation and prudent balance sheet management.

Speaker 1

Looking forward, you saw last night that we raised our full year guidance to include the acquisition of YAK, which is expected to contribute approximately $300,000,000 in total revenue and $140,000,000 of adjusted EBITDA in 2024. In terms of the specifics on the updated outlook, we've raised our guidance for total revenue to a range of $14,950,000,000 dollars to $15,450,000,000 implying full year growth of just over 6% at midpoint. Within total revenue, I'll note that our used sales guidance is unchanged at roughly $1,500,000,000 We raised our adjusted EBITDA range by $140,000,000 to $7,040,000,000 to $7,290,000,000 On the fleet side, we've raised both our gross and net CapEx guidance by $100,000,000 to $3,500,000,000 to $3,800,000,000 $2,000,000,000 to $2,300,000,000 respectively. And finally, we've raised our free cash flow guidance by $50,000,000 to a range of $2,050,000,000 to $2,250,000,000 after funding growth. This is enabling us to return over $1,900,000,000 to shareholders this year, which translates to about $29 per share or a current return of capital yield of roughly 4.5%.

Speaker 1

So with that, let me turn the call over to the operator for Q and A. Operator, please open the line.

Operator

Our first question will come from Steven Fisher with UBS. Please go ahead.

Speaker 3

Good morning. I just wanted to start off on CapEx. I know you said it was in line with your expectations, but it seemed to be maybe at the low end of your target range for the quarter. Can you talk about some of the factors keeping it on the low end there? Was it sort of weather or project timing or any other factors?

Speaker 3

And I guess related to that, have you made any changes in your thinking about the level of growth CapEx embedded in your plan for the year, either kind of mix of gen rent or specialty rent, any changes around that growth CapEx? Thank you.

Speaker 2

Sure, Steve. So actually, no, we don't feel that way about the Q1 CapEx. Certainly wasn't any kind of designed outcome to temper the CapEx for lack of a better word. It was about from our original guidance. So let's not include the $100,000,000 that we just upped it for the YAC deal.

Speaker 2

It was about 17% of our of the midpoint of our guidance. So it's about we always say we're going to get back to normal cadence by about anywhere from 15% to 20% in Q1. You could expect us to do somewhere between 35% to 40% in Q2, somewhere in the 30s in Q3 and then whatever balance in Q4. I think what it really points to as opposed to the last couple of years with the supply chain about mostly repaired, we no longer need to front load Q1 and we could bring in the capital back to, let's call it, a pre COVID cadence and that's how we viewed that. As far as for the rest of the year, we reaffirmed our guidance and actually upped it, considering the opportunity to invest more in GroWeact.

Speaker 2

So we don't feel at all like we're going to move down our CapEx. It's pretty much reaffirmed the guidance across the board just with the addition of, the YAC revenue and the YAC CapEx needs.

Speaker 3

Okay, terrific. And then maybe just one on a vertical. I know there's been a lot of focus this year about power generation and you have included that in your positive commentary for a number of quarters now. I guess I'm just curious given that the theme around power generation has intensified. I'm curious if you could give us a sense if you have any direct color on the types of projects that you're seeing in this in your pipeline of power generation in 2024 relative to what you've been seeing in say 2023?

Speaker 2

Well, so first off, this is something that we've been building this focus on this vertical as far back as 2016. So this is anything new for us and it's now over 10% of our business. So this is a big segment and a big focus for us. But you can imagine whether it's traditional power, right, T and D work generating, whether it's alternative power, right? We've been playing in this space for a while.

Speaker 2

And then when you tap on top of that the needs for all the data centers and all the opportunities here for growth, even before we start really accelerating the transmission work that's needed and building out the grid for all the needs that we as we continue to electrify specifically in the EV space. We think this has got growth well beyond 2024 and this is one of the tailwinds that we're focused on. Ted, I don't know if

Speaker 1

you had anything to add. No, I think you captured it all. Great.

Speaker 3

Thank you very much.

Speaker 2

You're welcome.

Operator

Thank you. And our next question will come from Jerry Revich with Goldman Sachs. Please go ahead.

Speaker 4

Hi, this is Clay on for Jerry. First question, can you update us on your M and A pipeline from here? What's the range of capital deployment towards M and A that you expect to deliver over the next 12, 18 months?

Speaker 2

Sure Clay. So we don't actually set targets nor do we even set plans or budgets for M and A, right? That's just a belief of ours that I think that could force people to feel the need to do M and A and we're actually very opportunistic here. But to be clear, we work the pipeline regularly and we have a robust pipeline. We really have a lean towards things that you just saw us execute on like Yash, where we can add new products that we think we could be a better owner of by significantly growing them when we introduce them into our network.

Speaker 2

So that would be the real gems in the pipeline. But we don't really have anything imminent that we would forecast other than we continue to work the pipeline. And when we find the right partner that meets all of our 3 strategic criteria, as well as getting to the financial output, we'll act. So stay tuned. We're working the pipeline, but we don't have a plan or a budgeted number that we feel we need to meet.

Speaker 4

Thanks. And as a follow-up, can you talk about the opportunities you see for Yac XS, given the shorter useful life and higher depreciation load of the product versus the base business? We were curious what the path is to get the business to URI levels of returns? Thanks.

Speaker 2

Sure. So as you can imagine before we pay for the deal, we did a lot of modeling and sensitivity modeling and we feel really good about the opportunity. And one of the opportunities might actually be lengthening the life of the asset. It doesn't really take a lot for it to have a meaningful impact, but that's not even required for us to comfortably clear our hurdle rates on this deal. So we really like the returns on this business.

Speaker 2

We think we can double the size of this business in the next 5 years. So this is very much like what we did in mobile storage with the general finance deal. When we took a leader in that space and integrated it into our network, we were able to grow it significantly. And we see this as very similar. And the margins are strong.

Speaker 2

The team is really strong, got a lot of experience on that team. So we feel good about it, including the returns.

Speaker 1

Yes. The thing I might add there, Clay, is if you look at the deal holistically, we think it's very attractive returns on a cash on cash basis, as Matt mentioned, well above our hurdle rate and of capital, that would look similar to what we actually achieved with the general finance deal. If you actually zero into the unit economics of a mat, I think some of the observations you made are right. But even those cash on cash returns at the unit mat level are very attractive. You'd be looking comfortably in the upper teens.

Speaker 1

And we think there could be opportunities to either extend the life of the mat or do some other things that could improve them beyond that. So when we compare that to the rest of the fleet, it fits in very nice from a portfolio perspective.

Speaker 4

Thanks for the color. I'll pass it on.

Speaker 2

Thanks Clay.

Operator

Thank you. Our next question will come from Stanley Elliott with Stifel. Please go ahead.

Speaker 5

Good morning, everybody. Thank you guys for the question. Can you talk a little bit about the category class? You've done a nice job of expanding it over the years, kind of the one stop shop. How much larger is this opportunity for you all?

Speaker 5

And maybe what would be the limiting factor? I don't know if it's real estate or workforce or anything like that?

Speaker 2

So if you're speaking about new categories, Stanley, was

Speaker 1

that in context of YAC, Stanley, just to be sure we understand the question?

Speaker 5

Yes. More in context of YAC, but it would seem like that just the number of category classes you've had over the past several years be it mobile solutions or anything along those lines, that just continues to be a kind of I guess a big white space for you?

Speaker 2

Yes, exactly. So we view anything that's temporary on a project or on a plant as a potential right away for us, right. So anything that doesn't stay with the fixed plant is by definition an opportunity for us to serve the customer. And we've continued to expand upon that. So we don't talk about publicly what those other products could be because for obvious competitive reasons and we don't want to create expectations without having the right partner.

Speaker 2

But that's how we see it. Even expanding our product line in existing business, whether it be more power in HVAC or chillers or spot coolers in that business or some of the flooring additions that we've been to our general rent business or the pickup trucks that we put into our business. We also expand the offering to whatever the customer needs. And that's really our focus on this towards this one stop shop value prop that we offer is continue and expand those problems that we can solve for our customers.

Speaker 1

I guess things I might add that we've shared, Stanley. I mean, mobile storage, we talked about a goal of doubling that business in 5 years. We're well on our way. That's obviously a huge market. So even as assuming we're able to do that, there's still plenty of white space beyond that to grow the business, penetrate existing customers.

Speaker 1

And obviously, we've talked about the opportunity to expand the footprint of that business. That should be similar. I think we set a goal for doubling that business. They overlapped in about half the country for us. So there's a lot of white space there.

Speaker 1

And again, a very strong market from a growth perspective given the opportunity within the grid. ROS is another example of one that we've built aggressively organically. We've quickly gone from not in that market to leverage our model and really to leverage our model and really continue to fund those businesses to fuel

Speaker 5

growth. Perfect. And then I guess just a follow-up or second question rather. Could you talk about kind of anything you saw from a regional basis? And I'm curious, I know you don't like to talk about weather map, but did that have any impact on the kind of the progression as the quarter went through?

Speaker 2

Yes. Knock on wood, we haven't had to talk about weather in a while. I think maybe since Harvey, hurricane Harvey. But we've certainly you all follow there are some markets that were more impacted than others, but it's not something that we call out. This is the great part of the diversification of our business both by product and geography is there's really nothing that we would call out and as an impact and that's why we're very pleased that we're able to reaffirm our guidance just with the addition of YAC over and above.

Speaker 2

So the year played out as expected and I wouldn't call out any weather constraints, Stanley.

Speaker 5

Perfect guys. Thanks so much and congratulations on the great start.

Speaker 2

Thanks.

Operator

Our next question comes from Ken Newman with KeyBanc Capital Markets. Please go ahead.

Speaker 6

Hey, good morning guys. Thanks for taking the question. Hey, guys. My first question is just on the fleet productivity this quarter. It was pretty impressive and strong, just given the tougher pro form a comp from last year.

Speaker 6

I know that you guys don't quantify the individual movers in that metric anymore, but just curious if there's any way to help us understand if there was a big move in one of those drivers, whether it's mix or rate or utilization, just given the tough comp?

Speaker 2

Sure. So it played out as expected for us quite frankly. When we came out in January, I went out a little further than I usually would because we don't like to forecast these individual metrics and certainly not the overall component. But we said we'd have positive fleet productivity each quarter in the year. And we still expect that to play out that way.

Speaker 2

When I think about I'll tell you I won't tell you quantitatively to your point, but qualitatively we talked about if we could replicate the time utilization that we had in 2023 and do that in 2024, we'd feel good about that. So I would call time mute as expected neutral. And then we still believe that's a constructive rate environment and we're pleased to see that played out that way and that the discipline in the industry, I think you'll hear that from the rest of our public companies in the space as well, that rate will help overcome any inflationary issues that we have. And then specifically in this quarter, we had a small little improvement in from the ACK acquisition and we'll see that as we go forward. That'll play out a little bit more as we go forward in the rest of the year and we'll communicate that each quarter.

Speaker 6

Got it. That's very helpful. My second question here is just on the gen rent equipment rental side. It just seemed like you saw a decent step down or moderation in the Q1 just on the equipment rental side. Was there anything specific there that drove that step down or is this more just a function of the fleet kind of returning back to more normalized cadence and seasonality?

Speaker 2

Yes. I mean, we did expect slower growth. As you could imagine, the generant business versus the specialty business, the growth the headroom for specialty was much greater. And probably more importantly, the specialty business has a great specifically the double digit growth in every one of our specialty segment product lines, which was great. And then the gen rent side, I would just say as expected that we talked about in January, just more disbursement than we've had historically.

Speaker 2

The good news is we've put the fleet in the places that we needed it, where the opportunity was the best. And a lot of those are driven by some large projects as well. And we're going to make sure that we win with those customers. Those are choices that we make. And we got the fleet in the right places and that's why we're able to drive good fleet productivity.

Speaker 6

Understood. Thanks.

Speaker 2

Thanks.

Operator

Thank you. And with no further questions in queue, I would like to turn the call back to Matt Flannery for any additional or closing remarks.

Speaker 2

Thank you, operator, and to everyone on the call. We appreciate it. I'm glad you could join us today. And just to remind everybody, our Q1 Investor deck is on our site with its latest updates. And as always, Elizabeth is available to answer your questions.

Speaker 2

So I look forward to talking to you all in July. Until then, please stay safe. Operator, you can now end the call.

Operator

Thank you. This does conclude the United Rentals First Quarter 2024 Earnings Call. You may disconnect your line at this time and have a wonderful day.

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United Rentals Q1 2024
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