Q3 2021 United Rentals Inc Earnings Call
Please be advised that this call is being recorded.
We begin 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 actually 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 2020.
As well as to subsequent filings with the S E C.
You can access these filings on the company's website at Www Dot United Rentals Dotcom.
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 Jessica Graziano, Chief Financial Officer, I will now turn the call over to Mr. Flannery. Mr. Flannery you may begin.
Thank you operator, and good morning, everyone. Thanks for joining our call.
We have plenty of positive news to share this morning.
As you saw we delivered a strong quarter with rental revenue and adjusted EBITDA coming in above our expectations supported by solid fleet productivity.
Today, we will get under the Hood of our results you'll see the numbers were driven by a combination of factors both inside and outside the company, including a favorable rating environment that continues to improve and a broad based growth in customer demand.
And that's the predominant theme today not just our growth in key metrics like rental revenue, where we gained 22% year over year, but also the growth we see going forward.
We fully expect our momentum from the third quarter to continue through the fourth quarter and into the coming year.
That's evident in the latest guidance, we provided and as just walks you through the outlook, you'll see that the updates are driven by our expectation of higher core rental results. This year.
Bear in mind that this increase is on top of our July revision, which already accounted for the acquisitions.
That tells you we're looking forward to a strong finish to the year.
Before I get into operations I want to spend a few minutes on our culture.
Because the quality of our organization is key to our strategy.
Clearly our people are executing well through the busy season.
The integration of General Finance is going smoothly and our team members are being supported by our technology.
We also haven't missed a beat on safety.
Our companywide recordable rate remained below one again for the quarter and 11 of our regions worked injury free in September.
Results like this showcase the caliber of our team and the value of our people.
The best in class workplace culture, we've built for more than a decade delivers tangible benefits because we're known as an employer of choice. This is a strong competitive advantage, particularly in tight labor markets.
We've grown our team by almost 2000 employees this year, including 500 employees over and above our acquired people at.
And our turnover rate has remained in line with pre COVID-19 levels.
The other part of our service of course digitally.
And this is something we manage very closely.
We just guided to a third step on rental Capex this year and each time the increase has been warranted by customer needs.
Our customers are optimistic.
They are busy and they continue to see more growth ahead, and it's our job to be ready for that opportunity.
Some of you have asked about the challenges of getting equipment delivered.
It's clearly a tight supply environment, but we've been able to secure additional fleet by leveraging our strong financial footing and our relationships with manufacturers.
The increase in our Capex is also based on our leading indicators, which echo customer sentiment.
Virtually all of the indicators point to strong industry demand, which bodes well for fleet productivity.
The used equipment market is another one of those positive indicators.
In the third quarter pricing in our retail channels was up 7% sequentially and up by double digits year over year.
Use of proceeds where 60% of original cost, which is a new high watermark for us.
You may remember back in the second quarter, we talked about our return to growth.
In fact, we've been able to leverage the gains we made in the first half of the year to accelerate our growth and that was despite a tougher comp in Q3.
Some of that growth came from acquisitions and cold starts, but even with that factored in both segments are running ahead of expectations.
In the third quarter rental revenue on our Gen rent segment was up almost 18% year over year with all regions showing growth.
In addition, all of our specialty businesses grew by double digits.
Our specialty segment as a whole was up 36% year over year with 21% growth in same store rental revenue.
That's higher than the same store growth rate, we reported in the second quarter.
We've also opened 24 specialty locations through September which keeps us on track for the 30 cold starts targeted for the year.
When you pivot to our end markets the picture looks similar broad based growth across a range of verticals.
On the industrial side, we saw widespread growth in rental revenue led by double digit increases from manufacturing chemical processing metals and mining and entertainment.
On the construction side the gains were just as broad led by non risk construction, while we were up 18% year over year.
Within non res demand is becoming increasingly diverse.
Warehouse and data center work remained strong.
And we're also starting to see a recovery in verticals that have been sluggish like hospitality and education.
Okay.
The power vertical continues to be an important one for us with wind and solar projects on the rise across multiple regions.
We're also seeing work build across the entire EV supply chain.
Plant maintenance is another big driver for us and we're seeing that work start up again after being pause for Cowen.
And the most encouraging trend is project diversity.
It's early days, but we're starting to see a healthy mix of new projects like casinos highway work hospitals military bases and more that signals a return to business confidence.
As activity picks up customers have an opportunity to think hard about who they want to do business with.
And you are placing an increasing value on corporate responsibility.
We have a lot of reputation will currency here.
Good corporate citizenship has been a priority at United rentals for years, and our company has a long track record of working with customers to support their ESG goals.
We're proud to be recognized by Newsweek as one of America's most responsible companies for two years running.
Last week, we released our new corporate responsibility report online.
You'll find that it gives you some good insight into our progress in key areas like environmental sustainability and workplace inclusion.
So in summary, we're in a strong position operationally.
Financially and culturally.
In a healthy operating environment.
Customers have projects lined up stretching well into 2022.
The industry remains disciplined and our team is getting equipment out to job sites.
Internally, we're focused on controlling costs and expanding our margins as we lean into growth.
Okay.
We're leveraging our scale to deliver a combination of organic growth targets.
Targeted cold starts and accretive acquisitions, all with long term synergies for value creation.
And in the near term we've.
We reported quarter after quarter of profitable growth.
By tailwind that shell every indication of enduring.
We see a lot of potential for attractive returns.
And it gets better from here.
With that I'll ask Jess to go over the numbers and then we'll take your questions guests over to you.
Thanks, Matt and good morning, everyone our financial performance.
Performance in the third quarter highlighted better than expected rental revenue, which was supported by broad year over year growth across our end markets on the cost side, we delivered solid results while activity was at its highest level of the season and we continue to sell used equipment and a robust market.
As for the rest of the year, we expect seasonal demand will remain strong and when coupled with the third quarter's results. This supports a ways to our guidance for the year in total revenue and adjusted EBITDA and more on guidance in a few minutes, let's start now with the results for the third quarter.
Rental revenue for the third quarter was $2, two 8 billion or an increase of $416 million, that's up just over 22% year over year.
Within rental revenue, we are increased $325 million or 27% and the biggest driver here with fleet productivity, which was up 13, 5% or $212 million.
That's mainly due to stronger fleet absorption on higher volumes.
Our average fleet size was up eight 7% or a $137 million tailwind to revenue.
Rounding out the change in who we are is the normal inflation impact of one, 5%, which cost us $24 million.
Also within rental ancillary revenues in the quarter were up about $71 million or 29% and we rent was up $20 million.
Well our outlook to Oasis sold for the full year remains unchanged. We made the decision to slow down the volume of fleet sold in the third quarter as we maintained capacity for rental demand.
Sales for the quarter were $183 million, which was down $16 million or about 8% from the third quarter last year.
They used market continues to be very strong, which supported higher pricing and margin in the third quarter.
Adjusted used margin was 53% and represents a sequential improvement of 240 basis points and a year over year improvement of 610 basis points.
Our use of proceeds in Q3 recover 60% of the original cost of the fleet sold.
Compared to the third quarter of last year, that's a 900 basis point improvement from selling fleet that averages over seven years old.
Let's move to EBITDA.
Adjusted EBITDA for the quarter with just over 123 billion, an increase of 14% year over year or $152 million.
Dollar change includes a $219 million increase from rental now in that <unk> contributed 200 million ancillary was up $17 million and re rent added $2 million.
Used sales helped adjusted EBITDA by $4 million and other non rental lines of business provided $8 million.
SG&A was a headwind to adjusted EBITDA of $79 million in part from the reset of bonus expense that we discussed on our prior earnings call.
We also had higher commissions on better revenues and higher TNT, which continues to normalize.
Our adjusted EBITDA margin in the quarter was 47, 5% down 190 basis points year over year and flow through as reported was just over 37%.
Impacting margins and flow through in Q3 are few items worth noting.
We mentioned back in June and July that bonus expense would be a drag for the back half of this year with most of the drag in the third quarter.
We also have the impact of general finance, which we've owned all of the third quarter. This year, but of course does not in our comparative results last year.
I'll also remind you that we had $20 million of one time benefits recorded in the third quarter last year that did not repeat.
Adjusting for these items the flow through was about 58% with margins up 130 basis points year over year.
This reflects strong underlying performance in the quarter, particularly when you consider the impact from actions we were taking on costs last year as well as the impact of costs that continue to normalize this year.
I shipped to adjusted EPS, which was $6 58 for the third quarter, that's up $1 18 versus last year, that's from higher net income.
Looking at Capex and free cash flow for the quarter gross rental Capex was $1 1 billion or proceeds from used equipment sales were $183 million, resulting in net capex in the third quarter of $917 million.
$684 million versus the third quarter last year.
Now turning to ROIC, which was a healthy nine 5% on a trailing 12 month basis, which is up 30 basis points, both sequentially and year over year, notably.
Notably our ROIC continues to run comfortably above our weighted average cost of capital.
Let's turn to free cash flow and the balance sheet.
Through September 30, we generated a robust one <unk> 5 billion in free cash flow, which is after considering the sizable increase in capex. So far this year.
We've utilized that free cash flow to help fund over $1 $4 billion in acquisition activity and we've reduced net debt almost $100 million.
Our balance sheet remains in great shape leverage was two four times at the end of the third quarter.
10 basis points sequentially and flat versus the end of the third quarter last year, even as we funded acquisitions this past year.
Liquidity at the end of the third quarter remained strong at over $2 6 billion.
That's made up of ABL capacity of just over $2 2 billion in availability on our AR facility of $68 million. We've also had $320 million in cash.
I'll also mentioned, we refinanced $1 billion of five and seven eights notes earlier in the quarter, our refinancing that debt will save $29 million in cash interest in 2022 and extends our next long term note maturity out to 2027.
As we look out to the end of the year I'll share some color on our revised 2021 guidance.
Given we have a quarter to go we've tightened our full year ranges for total revenue and adjusted EBITDA and importantly have raised our expectations for both.
These updates reflect better than expected third quarter results and the continuing momentum we see in demand and in managing our costs for the fourth quarter.
We've again raised our outlook for gross Capex this year with a $250 million increase at the midpoint.
This means we would land more fleet than normal in the fourth quarter and that supported by by our planning for strong growth in 2022.
We've left the range on Capex, a little wider than we would normally at this time of the year as we continue to work with the Oems to land what we've ordered.
And finally I'll update to free cash flow reflects the impact of these guidance changes, notably the additional capex, we expect to buy.
And even with that increased investment in Capex free cash flow remained strong at over $1 5 billion at the midpoint.
So now let's get to your questions. Operator would you. Please open the lines.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. Thank you for your question has been answered and you'd like to remove yourself from the queue. Please press the pound key.
First question comes from the line of David Raso from Evercore ISI. Your question. Please.
Hi, Thank you a bit of an open ended question answered as you wish the incremental margin framework for thinking about for next year can you give us some thoughts around that.
Follow up with a couple of specifics around that.
Sure David Good morning.
I'll start you know Theres a couple of things I'd say on both sides of the ledger to continue to consider as we get through our planning process for 2022.
I'll start on the benefit side. The first would be that we will have a tailwind from the bonus adjustment that we've mentioned in the last few quarters. So you can assume is that bonus resets next year, that's going to be about a $50 million tailwind that will that will carry into 2022.
The other.
I would say positive as we're considering 22, particularly as we're thinking of it as a strong year is really the benefit that we'll get through revenue right, Andy the volume and the activity that will flow through the top line on the other side I would say is again, we're sharpening our pencil on details for the plan.
We are considering the inflation impact not surprisingly.
We expect that there'll be some continuing cost inflation, particularly in some of the bigger lines for us as you think about labor and delivery in R&M. So we're working through those as we work to get our planned pooled together.
I also have additional costs are going to normalize right that will serve as a bit of a headwind TNT. The most obvious example, as we look at what the normal level of activity and cost activity would be for us.
In discretionary costs that again will continue to normalize and then the other margin impact I'd say really for the first half of the year would be on lapping the acquisitions and the impact that that will have.
<unk> through I would say the end of the second quarter.
I hope that's helpful.
As a framework.
I will just broadly also say, we do expect that margins will be up in 2022, and we do expect that we will be back.
In that normal range of flow through that we target.
Somewhere between 50 and 60%.
To that end the I would assume within fleet productivity right now it's still.
<unk> growing faster than rate.
When would you to which quarter would you expect fleet productivity to be driven more by rate than you.
So as you know David sweeteners quarter, just a sense of because I would think when it is driven by rate more than you.
It could be a positive for the incrementals on the margin.
Yes, certainly David.
Without getting into the as you know I want the details of the individual components.
Our idea of understanding we came into 2021, saying absorption was by far our greatest opportunity coming off that baseline in 'twenty, we'll have a little bit of that baseline.
<unk> in Q1, but after that it will be gone and I will just tell you without getting into the specific quantification certainly absorption was was.
At a real high level this year and if we were able to replicate this level of your next year, we'd be really pleased.
We're not going to get into the details and Cherry pick just because it's a good story and I think the.
The discipline in the industry and the way that we've talked about and categorize the supply demand environment.
We do agree that at some point next year.
This will be positive derived fleet productivity.
Some of the other factors even more so so we're looking forward to that I don't think we'll see these big double digit numbers again, because we had such an absorption tailwind, but we certainly can exceed.
Our inflationary factors that we target at one 5%. So we feel good about that opportunity next year.
One quick question about <unk>.
End of year, it looks like the net debt to EBITDA should ends maybe below 2.2, we haven't been there in a long time just kept me since I was seven to be exact win win.
Cool.
I mean, youre digesting Gen finance, but obviously given the frequency you've done deals before it in batches.
Should we think about the M&A landscape versus alternative uses for that balance sheet strength.
Yes, so as you guys know and suggest I'll spend a little time first and foremost we'll use that robust free cash flow in that and that strong balance sheet to support the growth of the business you can see we've leaned inorganically this year and M&A and I think we can do both in the future, but we don't necessarily target M&A number because it got to go through our <unk>.
Yes. The pipeline is still there we think consolidation is still an opportunity in the industry and so.
Stay tuned it's really more about what makes it through the end of the pipeline and making sure that it meets our criteria strategically culturally and most importantly financially. So we certainly have the dry powder, we want to use it for growth first but we're going to only do smart deals and if that doesn't come through and Jeff has the pleasure dealing with capital allocations in a different way once we.
Net leverage down to the bottom of our range.
Alright, Thank you for the time.
Thanks, David.
Thank you. Our next question comes from line of Steven Fisher from UBS. Your question. Please.
Great. Thanks, good morning.
You talked about the Q4 extra capex investment with an eye to 2022, but where do you stand on the fleet ordering for the 2022 deliveries or things happening earlier those discussions that you generally have been happening earlier than they typically do and what kind of inflation do you think.
There could be next year on that.
Yes.
We actually did start earlier this year I think the Oems did and I think everybody was want to make sure. They got ahead of the head of the ballgame, so a little bit earlier, but where where it usually early anyway. So that wasn't too big an adjustment I would say that when we think about next year I think our Oems to work and our partners are working real hard to continue.
To get that supply chain as smooth as I said, it's good for their business and for us, but this year as you saw we were able to raise capex one was probably a tighter market, but he can so we have plenty of channels to get through and some products. Maybe we went to our second level second tier suppliers, but still good product that our customer success.
So opening up those channels.
You will probably help us next year and we feel really good about where we are with the ability to get the fleet will need to support customer demand and if you want to call letting this natural flow.
Orders that got a little bit delayed this year coming through in Q4 as the hedge that'd be a fair way to look at our loan insurance policy, but most importantly, we're doing it because we feel very good about the demand that's going to be there.
And we've heard from others like low single digit inflation does that kind of the ballpark of what youre thinking as well.
Yes, I don't like to share negotiations online, but to try to be helpful. We usually tell you that 1% to 2% range, it's probably going to be a tick over that when we're all done it'll depend on what comes in and what vendors end up supporting more growth, but it's fair to say, we'll be a little bit higher than that normal 1% to 2%.
Okay, and then as you see this cycle, taking shape what parts of the specialty business do you see offering the most upside for growth here.
It's as boring as it sounds it's really pretty broad across the board.
I would say our fluids business, specifically tank business, maybe has a little more room to absorb but outside of that everybody's.
Including fluid have been growing by double digits as I said and even our most mature specialty businesses are still growing strong. So we've talked about having a lot of headroom that 21% same store growth.
That's embedded within that 36% total growth I think shows that we still have a lot of runway in our specialty business both from organic growth and as we showed this year accretive M&A.
Perfect. Thank you.
Thank you.
Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question. Please.
Yes, hi, good morning, everyone.
Hi, Jerry.
Can you talk about the opportunity for you folks on zero emissions products.
What's the demand.
Well in your customer base.
What are the challenges of servicing that type of equipment compared to conventional products.
Are you able to get the rate that's needed to get done.
Higher pricing point and a lot of that equipment class can you just flush out what the implications are for your business or is that part of your fleet grows.
Sure Jerry Yeah, and I think you touched on something about the rate, which is important and we do segregate. Some of these really new innovative products that are electrified with historically combustible engine, but when you think about our fleet already as it is today over 20% of our fleet is electrified and we think that will grow I think the Oems are doing.
Good job thinking about how they can continue to participate and assist because at the end of the day really then they are going to drive it and once they build that scale it'll be even accept that even broader in the market. Once we get the the economics of scale in line with all that being said.
We are piloting products right now we've been really dealing with this as you saw we went to tier three and tier four and in some markets. It was faster than others. So we've been on the forefront of this and I really am pleased with the participation of the Oems to help drive it forward.
Not a sea change yet, but you really feel that building.
Okay terrific and then on the <unk>.
Mobile storage business I think you folks had highlighted plants.
Double or we've seen that business or over five years or so.
Given the supply chain constraints, how much can you grow what we see in that business.
The near term.
Yes.
I would say, we feel even better about how we how we.
Set our goals when we acquired the business now that we have the team on board and I think we would even be ahead of where we are today. If there wasn't some supply chain issues are certainly container storage payments, specifically, our real tight we all see that every day, but.
The good news is that the customer desire and the ability for us to cross sell is showing really strong early and looking forward to.
Staying on track to that doubling the business with five years, we feel feel very good about that.
Okay. Thanks.
Thank you Jay.
Thank you. Our next question comes from the line of Tim Thein from Citigroup. Your question. Please.
Thank you, Matt maybe just to continue on that along that.
On GSM.
Maybe it's too early but could you just update us in terms of <unk> of <unk>.
Thoughts around the synergy potential and the timing for those as it relates to loss to that acquisition.
Yeah, So just to remind everybody the real synergy here is.
Customer support.
Adding to our full value prop right that one stop shop go to market strategy and not cost synergies, where we are picking up productivity and helping the team is as they adopt our tools.
Seeing better productivity opportunity.
Important synergy is the growth synergies have an access to our.
2000, plus salesforce. So that's what we're focused on not our typical cost synergies so to speak.
I'll just close the loop on that too.
<unk> cost synergies, we're not big in this deal that we had talked about $17 million over a three year period, we feel pretty good about getting those realized in a shorter time, so probably a couple of years and it will be fully realized but again not anything super material for this deal to growth as the opportunity.
Got it Okay, and then Matt just wanted to circle back to your comment earlier on your non res Ram revenues up I think you said, 18%.
If you look at the <unk>.
Spending data from the census Bureau, I think it showed non res spending down a.
Couple of percent.
This trend of rental revenues outgrowing construction is hardly new but.
That number did stand out to me and so I'm just curious maybe any finer points there I'm sure. There's there's all kinds of noises.
Data in a single quarter, but can you maybe just talk through.
What what youre seeing within that obviously, an important vertical for you all right. Thank you.
Yeah, if anything I would characterize it as I did in my remarks is very broad.
Areas that work.
First to really pick up speed right like like data centers technology overall health care logistics, specifically distribution warehousing remained strong and the areas that were lagging are picking up even some that you know where.
We're really dead as a doornail like logic, so where we're seeing this we're seeing activity.
Currently and forecasted that.
In our view with our ears on the street and our customer sentiment doesn't necessarily jive with that non res going down.
Very good thank you.
Thanks, Jeff.
Yeah.
Yeah.
Thank you. Our next question comes from a lot of neat.
Ken <unk> from Keybanc capital markets. Your question. Please.
Hey, good morning, guys.
Good morning.
I have a bit of a bigger picture question for you really just in terms of given where the supply chain of raw material costs are today.
I expect the Oems to drive some pretty significant price increases across the smaller customers.
Smaller competitors versus where you lock in prices so.
If the Oems once you push.
All at double digit pricing or even more on the smaller competitors.
Do you think the smaller players can handle that and two how do you think about the opportunities or the dynamics of the industry going forward.
I think listen I've never will especially coming from the fitness and was one of those smaller with one of the smaller Oems independent 10 years ago.
I wouldn't.
Negate the ability for people to flex and adjust their visitor you've got a good business and you know how to adjust people run their business appropriately and part of that includes driving the right fleet productivity, making sure you're getting paid for your services. Most importantly, giving good service. So I think everybody will find their place.
Do think the bigs will continue to get bigger I think there is opportunity of scale that supports consolidation.
From a from a competitiveness perspective, but there is still a very broad range of business out there. So I don't necessarily feel no I don't think were going to see people.
Taking pain that they can absorb and its one year.
Costs will remedy some of these costs will go back down so.
I think the supply demand discipline will remain and I think that your comments support that I Wouldnt go. The next step further it does it's been out the herd so to speak and not really seeing that right now.
Got it that's helpful.
And then just real quickly my follow up is really on the M&A pipeline, obviously, you're still digesting general finance, but I am curious just how the activity of the pipeline is looking and are there deals out there in the space that still look attractive in this type of tight supply chain environment.
I call attractive in the eyes of the holder right, we've got a pretty high bar.
But I do think there'll be M&A activity in the industry right.
Our debt.
<unk> seen that from our peers and we think Thats a good thing as I'll say again, we think the bigs getting bigger as good as far as the pipeline, it's pretty broad across the board from you know.
Two store mom and Pops.
Everything above so it's it's really an organic kind of moving.
The issue that we just we always worked pipeline, we even worked pipeline during COVID-19 quite frankly, it's just a matter of what thats up getting through on the other side Kevin.
If I try to forecast it for you.
How right I could be anyway other than that we're going to work the pipeline and we're going to only close accretive deal.
Very good thank you.
Thank you Ken.
Thank you. Our next question comes from the line of Rob Wertheimer from Melius Research. Your question. Please.
Hi, Thanks, and good morning, everybody.
Hey, Rob.
Maybe I'll ask you this question before.
Taught me, if it's unfair, but it feels like you've done such a strong job on acquisitions over the past many years and if there is maybe a little bit less.
Relative opportunity in acquisition going forward and I guess the question is.
Do you see growth being tilted more organic over the next three years to five years than it was and then as the organizations for <unk>.
Structure.