Q1 2024 United Rentals Inc Earnings Call
Okay.
Yeah.
Good morning, and welcome to the United Rentals Investor Conference call.
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 31st 2023, as well as to subsequent filings with the SEC.
Can access these filings on the company's website at Www dot United Rentals Dot 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 adjust.
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 take Great Chief Financial Officer I.
Matthew J. Flannery: 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.
Matthew J. Flannery: As you saw yesterday afternoon, 'twenty 'twenty four is off to a strong start and playing out as expected.
Matthew J. Flannery: I am pleased with our results across gross margins and fleet productivity all executed through the lens of putting the customer first and with an unwavering focus on safety.
Matthew J. Flannery: 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.
Matthew J. Flannery: And we're meeting their needs and finding opportunities to deepen our relationships with them.
Matthew J. Flannery: For example, we broadened our product offering to include matting solutions, and we continue to invest in technology to improve the customer experience.
Matthew J. Flannery: Additionally, we are executing on our plan to open more cold starts.
Matthew J. Flannery: And just as critically we're doing all of this while maintaining our focus on operational efficiency.
Matthew J. Flannery: The team continues to demonstrate its commitment to our strategy and we remain confident this will be another year of profitable growth.
Matthew J. Flannery: Today I'll start with a recap of our first quarter results and then discuss our recent acquisition of yeah.
Matthew J. Flannery: Followed by whats driving our optimism for the year.
Matthew J. Flannery: And finally I'll give a very recent example of our one you our culture at work, which in my mind is a true differentiator.
Matthew J. Flannery: So let's start with some of the highlights from the first quarter.
Matthew J. Flannery: Our total revenue grew by 6% year over year to $3 $5 billion, a first quarter record and within that rental revenue grew by 7%.
Matthew J. Flannery: Fleet productivity increased by a healthy 4% and adjusted EBITDA increased to a first quarter record of $1 6 billion.
Matthew J. Flannery: Leading to a margin of 45, 5%.
Matthew J. Flannery: And finally, adjusted EPS grew by 15% and $9 15 Enel.
Matthew J. Flannery: Another first quarter record.
Speaker Change: Now, let's turn to customer activity.
Speaker Change: We continue to see growth across both our gen rent and specialty businesses.
Speaker Change: Within specialty we delivered double digit growth across all lines of business.
Speaker Change: 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 Change: 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.
Speaker Change: In turn we spent $595 million in the quarter on rental Capex and this is consistent with our expectations.
Speaker Change: Yeah.
Speaker Change: As a result free cash flow was $860 million in the quarter.
Speaker Change: Our ability to generate strong free cash flow throughout the cycle, while simultaneously funding growth is a critical differentiator.
Speaker Change: 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.
Speaker Change: Now turning to capital allocation, our number one goal of supporting growth, while also maintaining a strong balance sheet.
Speaker Change: After funding organic growth, including 15 cold starts and completing the <unk> acquisition. We also returned $485 million to shareholders in the quarter via share buybacks and our dividend.
Speaker Change: All while remaining comfortably within our targeted leverage range.
Speaker Change: Speaking of Fiat I want to share some initial thoughts now that we started the integration process.
Speaker Change: This acquisition is a textbook example of our M&A strategy at work.
Speaker Change: Three act, we've added more capabilities for a one stop shop platform.
Speaker Change: Enabling us to be even more responsive to our customers, while also generating attractive returns for our shareholders.
Speaker Change: And for those of you not familiar yeah.
Speaker Change: <unk> provides temporary access roadways and surface protection to any site with uneven or soft surfaces, where you need to safely move and operate heavy equipment.
Speaker Change: And similar to our purchase of general finance in 2020, one Jack as a leader in its market yet still has plenty of room for growth as we bring this capability into our network.
Speaker Change: 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.
Speaker Change: Turning to our updated outlook as we look to the rest of 2024, we remain optimistic about the opportunities for growth.
Speaker Change: Thus far the year is playing out as expected.
Speaker Change: Our updated guidance reflects the addition of yak without underlying expectations unchanged.
Speaker Change: Customer confidence remains strong while our team in the field is focused on the opportunities ahead.
Speaker Change: And while these indicators are tangible examples of what gives us confidence in our ability to deliver on our guidance.
Speaker Change: Team's daily actions, which further bolster our belief that we will continue to deliver strong shareholder value, while supporting our customers and their normal operations in times of emergency.
Speaker Change: A good example of this was our response to the devastating news are the key bridge collapse in Baltimore back on March 26.
Speaker Change: And true United Rentals fashion, we were all hands on deck, helping with the immediate urging emergency response and the ongoing work.
Speaker Change: This support included a broad range of assets, including mobile storage power light towers, portable sanitation and fencing as well as supposed to our aerial and dirt equipment.
Speaker Change: And what's more through the acquisition of <unk>, which had just been completed we're also able to provide the mats needed at the site for the operations.
Speaker Change: This is a perfect example of our differentiated business model.
Speaker Change: Well, 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 Change: It's also a true testament to our culture and the people that work for United Rentals.
Speaker Change: So in summary.
Speaker Change: We're excited by both the immediate opportunities, particularly on large projects and the longer term outlook, we see.
Speaker Change: We've built a resilient company with a well proven strategy.
Speaker Change: <unk> us to continue to drive profitable growth strong free cash flow and compelling shareholder value.
Speaker Change: And with that.
Speaker Change: I'll hand, the call over to Ted.
Speaker Change: We will take your questions Ted over to you.
Ted: Thanks, Pat and good morning, everyone.
Ted: Matt highlighted year's off to a strong start as healthy demand and strong execution supported first quarter records across revenue EBITDA and EPS.
Ted: And with our strategy, we remain focused on allocating capital both rental capex and M&A investments to drive profitable growth, while also returning excess cash to our shareholders.
Ted: This supports the solid earnings growth free cash flow and returns you see embedded in our updated 2020 for guidance.
Ted: So with that let's jump into the numbers first quarter rental revenue was a record $2 93 billion.
Ted: That's a year on year increase of $189 million or.
Ted: Or six 9%.
Ted: <unk> by both the market tailwind as we've been discussing as well as our strong positioning in large projects and key verticals.
Ted: Within rental revenue.
Ted: Our increased by $138 million or six 1%.
Ted: Within this growth in our average fleet size contributed three 6% while fleet productivity added 4%, partially offset by assumed fleet inflation of one 5%.
Ted: Also within rental ancillary and re rent revenues were higher by $51 million or approximately 10, 8%.
Ted: Turning to use results supported by the strong demand Matt highlighted our first quarter results were consistent with expectations use revenue came in at $383 million at a healthy adjusted margin of 53, 3%.
Ted: 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.
Ted: From an OCC recovery perspective, which we view as a key indicator of the health of the US market. Our proceeds equated to a better than 59 cents on the dollar versus 50% to 55 prior to Covid. So another quarter of very solid results there.
Ted: Moving to EBITDA adjusted EBITDA was a first quarter record at $1 $5 9 billion.
Ted: Reflecting an increase of $84 million or five 6%.
Ted: The year on year dollar change includes a $108 million increase from rental.
Ted: Outside of rental use sales and SG&A were headwinds to adjusted EBITDA of about $27 million and $4 million, respectively. While other non rental lines of businesses were a $7 million tailwind.
Ted: Notably SG&A as a percent of sales declined 40 basis points. So I think a new first quarter best at 11, 2%.
Ted: Looking at first quarter profitability, our reported adjusted EBITDA margin was a healthy 45, 5%.
Ted: Due to the use dynamics I just discussed consolidated margins compressed 30 basis points year on year, implying flew through a 42%.
Ted: Excluding used however, our core EBITDA margins increased 70 basis points equating the flow through of 54% a quarter.
Ted: And finally, our adjusted earnings per share increased 15% to a first quarter record of $9 15.
Ted: Shifting to Capex gross rental Capex was $595 million, which was in line with both our expectations and historical seasonality from a percentage of full year perspective.
Ted: 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 million.
Ted: Moving to the balance sheet, our net leverage ratio at the end of the quarter was a very solid one seven times and our total liquidity was just under $3 $6 billion and as a reminder, we continue to have no long term note maturities until 2027, and a very manageable distribution maturities thereafter through 2034.
Ted: Yes.
Ted: Within the quarter I would highlight that we showed $1 $1 billion of 10 year senior unsecured notes to fund the <unk> acquisition and we're very pleased with the market reception.
Ted: The notes priced at a coupon of six and one 8% representing both the lowest coupon in the tightest credit spread to treasuries and the high yield market for all 10 year issuers since August of 2022.
Ted: 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.
Ted: This is driven by number of factors, we view it as further evidence of the credit markets continue to reward the company for its track record of impressive growth strong execution smart capital allocation and prudent balance sheet management.
Ted: Looking forward you saw last night that we raised our full year guidance to include the acquisition of <unk>, which.
Ted: Which is expected to contribute approximately $300 million in total revenue and $140 million of adjusted EBITDA in 2024.
Ted: In terms of the specifics on the updated outlook, we've raised our guidance for total revenue to a range of $14 95 to $15 $4 5 billion.
Ted: Implying full year growth of just over 6% at midpoint.
Ted: Within total revenue I will note that our used sales guidance is unchanged at roughly one $5 billion.
Ted: We raised our adjusted EBITDA range by $140 million to 7.04 to $7 billion to $9 billion.
Ted: On the fleet side, we've raised both our gross and net Capex net capex guidance by $100 million to $3 five to $3 8 billion.
Ted: And two to $2 3 billion respectively.
Speaker Change: And finally.
Ted: We've raised our free cash flow guidance by $50 million to a range of $2.052 billion to $5 billion.
Ted: After funding growth.
Ted: This is enabling us to return over $1 $9 billion to shareholders. This year, which translates to about $29 per share or a current return of capital yield of roughly four 5%.
Speaker Change: So with that let me turn the call over to the operator for Q&A operator, Please open the line.
Speaker Change: At this time, if you would like to ask a question. Please press star and one on your telephone keypad you.
Speaker Change: You may remove yourself at any time by pressing star too.
Speaker Change: Once again, if you would like to ask a question. Please press star one at this time.
Speaker Change: Our first question will come from Steven Fisher with UBS. Please go ahead.
Steven Fisher: Good morning, I just wanted to start off on Capex I know you said it was in line with your expectations, but it seem 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.
Steven Fisher: Weather or project timing or any other factors.
Steven Fisher: 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 or any any changes around that growth capex. Thank you Chris.
Chris: Sure Steve So actually no we don't feel that way about the first quarter 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 that we just upped it for the act deal. It was about 17% of our the midpoint of our guidance. So.
Steve: 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 can expect us to do somewhere between 35% to 40% in Q2 somewhere in the <unk>.
Speaker Change: <unk> in Q3, and then whenever 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 US let's call. It a pre COVID-19 cadence and Thats, how we view that as far as for the rest.
Speaker Change: For the year, we reaffirmed our guidance and actually update considering the opportunity to invest more and grow yeah. So we don't feel at all like we were.
Speaker Change: Boeing to move down our capex pretty much reaffirmed the guidance across the board just with the addition of.
Speaker Change: Of the revenue and the Capex needs.
Speaker Change: Okay terrific and then maybe just one on a vertical.
Speaker Change: No theres been a lot of focus this year about power generation and and you have included that in your positive commentary for you know a number of quarters now I guess I'm just curious given that the the theme around power generation has intensified.
Speaker Change: Im curious if you could give us a sense. If you have any direct color on the types of projects that youre seeing in in this are in your pipeline of power generation in 2024 relative to what you've been seeing in say 2023.
Speaker Change: Well. So first off this is something that we've been building. This focus on this vertical as far back as 2016, so there's anything new for us and it's now over 10% of our business. So this is this is a big segment and a big focus for us, but you can imagine whether it's traditional power T&D work generating weather.
Speaker Change: Rich.
Speaker Change: Alternative power right, we've been playing in this space for a while and then when you tap on top of that the need for all of 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.
Speaker Change: Specifically in the EV space, we think this is Scott.
Speaker Change: Growth well beyond 2024, and this is one of the one of the tailwind that we're focused on so I don't know if you have anything to add no I think you've captured at all Greg.
Speaker Change: Thank you very much.
Speaker Change: Well.
Speaker Change: Thank you and our next question will come from Jerry Revich with Goldman Sachs. Please go ahead.
Speaker Change: Hi, This is clay on for Jerry first question can you update us on your M&A pipeline from here you know, what's the range of capital deployment towards M&A that you expect to deliver you know over the next 12 18 months.
Speaker Change: Sure Clay, so we don't actually set target nor do we even set plans or budgets for M&A right.
Speaker Change: That's just our belief of ours that I think that could force people feel the need to do M&A and we're actually very opportunistic here, but to be clear. We worked the pipeline regularly and we have a robust pipeline, we really have a lean towards things that you just saw us execute on like yes, where we can add new products that we think we could be a better owner of by <unk>.
Speaker Change: Inefficiently growing them when we introduce them into our network, so that would be a real a real gems in the pipeline.
Speaker Change: 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.
Speaker Change: All of our three strategic criteria.
Speaker Change: As well as getting to the financial outlook.
Speaker Change: Output, we are well 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 Change: Thanks, and as a follow up can you talk about the opportunities you see for Yak axis.
Speaker Change: Given the sort of useful life and higher depreciation load at the product what's the base business. We were curious to know what the path is to get that business to your high levels of returns.
Speaker Change: Yes.
Speaker Change: Sure so.
Speaker Change: 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 the steel. So we really like the returns on this business.
Speaker Change: We think we can double the size of this business in the next five 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 integrating it into our network, we will able to grow it significantly and we see this as very similar and the margins are strong the team is really strong and a lot of it.
Speaker Change: Experience in that team so we feel good about it including the returns yes.
Speaker Change: 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 cost of capital.
Speaker Change: That would look similar to what we actually achieved with the general finance deal. If you actually zero into the unit economics of our Mat I think some of the observations you made are right, but even those cash on cash returns at the unit Matt level are very attractive you'd be looking comfortably in the upper teens, and we think there could be opportunities too.
Speaker Change: Either extend the life of the Matt 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 Change: Thanks for the color I'll pass it on.
Speaker Change: Thanks Clay.
Speaker Change: Thank you. Our next question will come from Stanley Elliott with Stifel. Please go ahead.
Stanley Stoker Elliott: Good morning, everybody. Thank you for the question.
Stanley Stoker Elliott: Can you talk a little bit about the <unk>.
Stanley Stoker Elliott: Category class, you've done a nice job of expanding it over the years kind.
Stanley Stoker Elliott: The one stop shop, how much larger is this opportunity for you all.
Stanley Stoker Elliott: And maybe what would be the limiting factor I don't know, if it's real estate or workforce or anything like that.
Speaker Change: So if you are speaking about new categories Stanley.
Stanley Stoker Elliott: In context of Jack Stanley just to be sure. We understand the question yeah more in context of yet, but it would seem like that you know just the number of category class EV had over the past several years be it mobile.
Stanley Stoker Elliott: Mobile solutions or anything along those lines did that just continues to be a kind of a I guess, a big white space for you.
Speaker Change: Yeah, exactly so we view anything thats temporary.
Speaker Change: Project or on a plan 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 cause for obvious competitive reasons, and we don't want to create expectations without having the <unk>.
Stanley Stoker Elliott: Partner, but but that's how we see it even expanding our product line in existing business, whether it be more power in HVA C or chillers are spot coolers in that business or some of the flooring additions that we then towards gen rent business or the pickup trucks that we put into our business. We also.
Stanley Stoker Elliott: Things I might add that we've shared Stanley I mean.
Stanley Stoker Elliott: Mobile storage, we talked about golf doubling that business in five years, we're well on our way that's obviously a huge market. So.
Stanley Stoker Elliott: Even as we were able to do that there's still plenty of white space beyond that to grow the business penetrate existing customers.
Stanley Stoker Elliott: We've talked about.
Speaker Change: Yes, 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 and again, a very strong market from a growth perspective, given the opportunity.
Stanley Stoker Elliott: Within the grid.
Stanley Stoker Elliott: Ross is another example of one that we've built aggressively organically.
Stanley Stoker Elliott: Quickly gone from not in that market to certainly one of the biggest players in the country and there is a tremendous amount of runway ahead of us there. So in each of these verticals I think we continue to think there's a lot of opportunity to.
Stanley Stoker Elliott: To leverage our model and really continue to fund those businesses to fuel growth.
Speaker Change: Perfect and then I guess, just a follow up or second question, rather them could you talk about kind of any anything that you saw from a regional basis, and then I'm curious I know you don't like to talk about weather map, but.
Speaker Change: Did that have any impact on kind of the progression as the quarter went through.
Speaker Change: Yes.
Speaker Change: We haven't had to talk about whether in a while I think maybe even since Harvey.
Speaker Change: Hurricane Harvey but.
Speaker Change: Certainly you you all followed there's 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 yeah.
Speaker Change: Over and above so the year played out as expected in there I wouldn't call out any weather constraints Danny.
Speaker Change: Hey, guys. Thanks, so much and congratulations on a great start.
Speaker Change: Yes.
Speaker Change: As a reminder, if you would like to ask a question. Please press star one at this time our.
Speaker Change: Our next question comes from Ken Newman with Keybanc capital markets. Please go ahead.
Ken Newman: Hey, good morning, guys. Thanks for taking the question.
Ken Newman: Hey, guys first question.
Ken Newman: Thanks.
Ken Newman: My first question is just on the fleet productivity this quarter it was.
Ken Newman: Pretty impressive and strong given the tougher pro forma comp from last year.
Ken Newman: I know that you guys don't quantify the individual movers 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 rates or or utilization just given the tough comp.
Speaker Change: Sure Yeah. So it played out as expected for us quite frankly.
Speaker Change: When we came out in January.
Speaker Change: I went out a little further than I, usually would because we don't like to forecast. These individual metrics and certainly not the golfer all component, but we said we'd have positive fleet productivity each quarter and the year and we still expect that to play out that way when I think about it I'll tell you I won't tell you quantitatively to your point, but qualitatively we talked about if we could.
Speaker Change: Replicate the time utilization that we had in 2023 and do that in 2024, we feel good about that so I would call time U as expected neutral and then we still believe that's constructive rate environment and we're pleased to see that it played out that way and that's a discipline in the industry I think you'll hear that from the rest of our.
Speaker Change: 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 <unk>.
Speaker Change: Improvement in from.
Speaker Change: From the <unk> acquisition, and we will see that as we go forward that will play out a little bit more as we go forward in the rest of the year and well well communicate that each quarter.
Speaker Change: Got it that's very helpful.
Speaker Change: My second question here is just on the Gen rent equipment rental side.
Speaker Change: Seem like you saw a decent step down or moderation in the first quarter just on the equipment rental side.
Speaker Change: There anything specific there that drove that sequential step down or is this more just a function of the fleet kind of returning back to more normalized cadence and seasonality.
Speaker Change: Yes, I mean, we did expect slower growth as you could imagine.
Speaker Change: The Gen rent business versus the specialty business the growth the headroom for specialty was much greater and probably more importantly.
Speaker Change: The specialty business has a great opportunity with large customers and large projects to cross sell into some of those that werent using these products. So we called out specifically.
Speaker Change: 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.
Speaker Change: Talked about in January just just more disbursement than we've had historically 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.
Speaker Change: We got the fleet in the right places and that's why we're able to drive good fleet productivity.
Speaker Change: Understood. Thanks.
Speaker Change: Thanks.
Speaker Change: 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.
Matthew J. Flannery: Thank you operator and to everyone on the call. We appreciate it and I'm glad you could join US today, and just to remind everybody our Q1 investor deck on our site with its latest updates and as always Elizabeth is available to answer your questions. So I look forward to talking to you all in July until then please stay safe.
Speaker Change: Operator, you can now on the call.
Speaker Change: Yeah.
Speaker Change: 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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