United Rentals, Inc.

Good morning and welcome to the United Rentals Investor Conference call. Please be advised that this call is being recorded. Before we begin, note that the company's press release, comments made on today's call, and responses to your question 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 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, 2019, as well as to subsequent filings with the SEC. You can access these filings on the company's website at www.unitedreynolds.com. Please note... that United 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 Graciano, 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 us. The sequence of today's call will stay the same as prior quarters. I'm going to share my comments, and then Jess will take you through the numbers, and then after that, we'll go to Q&A. But I'm going to skip my usual recap of the financial highlights for a couple of reasons. First, although we had a solid start to the year, with our business performing well until COVID hit, it's not much of a barometer for 2020. Still, from January to mid-March, those first 10 weeks showed promise, and it's possible to take that as a positive sign, when the economy gets back on its feet. Second, we can't predict how COVID-19 will impact specific end markets this year or when those impacts will come and go. So like many companies, we've withdrawn our guidance until we have more clarity. To give you an idea of how quickly things changed, ROEC on rent was running in line with expectations, actually a little bit ahead until mid-March. That's when we felt the impact of COVID-19. From that point, volumes declined about 15% in the three weeks before stabilizing around current levels. One thing we have going for us is a lot of flexibility, which in this environment is priceless. We've been able to keep almost all of our locations open so our people can continue to serve our customers. Our teams know that we're in a tunnel and not a hole, and that there's light on the other side. That's why our contingency planning is focused on both the near term, and a range of potential future states. Since early March, we've been assessing a multitude of scenarios for how the year might play out. Each one uses different assumptions about timing, magnitude, and duration. And our analysis confirms that our liquidity is more than sufficient for even the most challenging end market scenarios. We want to make sure that we not only weather the storm, but also retain the ability to be responsive to the opportunities on the other side. My main goal this morning is to talk about how we're adapting our business to the current reality. Not just our thinking, but also our actions. We're thinking about our COVID defense strategy as five work streams. Employee safety, taking care of our customers, CapEx, OpEx, and our capital structure. Particularly liquidity. I'm going to start with the most important part of our company, our people. It's easy to think of United Rentals as an equipment business, but we never forget that we're a service business. The safety and well-being of our team is always our top priority. And that can be challenging when you operate every day at almost 1,200 locations, but we're getting it done. It takes fortitude and also experience, and we have both. Most of the field leaders have been in the equipment and rental industry for years, and many, like me, for their entire careers. We know that there are two sides to operating as an essential business. There's the responsibility that comes with that designation and also a sense of pride. Our employees are proud of their role in providing critical services to their communities. We're working on projects that are a first for all of us, like a COVID screening area at Children's Medical Center in Dallas and temporary hospitals in Calgary, Seattle, New York, and other areas. It feels unfair to just mention a few because believe me, the pride is everywhere. And on the flip side, there's a natural anxiety that comes from leaving your home and going to work under these circumstances. So a huge thank you to all United Rentals employees for showing true leadership in the face of so much change. I want to give you a taste of some of the many actions we've taken to keep our employees and our customers safe. They include guidelines for social distancing, and disinfecting facilities and equipment, as well as providing millions of dollars of additional protective gear. We've also implemented a contactless drive-through option for customers who want to pick up or drop off equipment at our locations. And our online ordering platform has been a big differentiator here for us. The customer reserves the equipment online and then drives through a special lane at the local branch. We load the equipment while they sit in their truck. And if we're bringing the fleet to the job site, our drivers follow a new safety protocol we call last touch, when the driver disinfects the commonly touched surfaces before leaving, like control panels, door handles, and seatbelts. And I could keep going down the list, and it's a long one, but I'll cut to the chase. These measures are working. And that's critical because it means our team can continue to provide continuity of service for our customers, and they can do it safely. All of our branches in North America and seven out of our 11 European branches are operating. We've had a relatively small number of branches where an employee tested positive for the virus. And when that happens, we have the branch professionally disinfected to make sure it's all safe. And then we follow the CDC guidelines on when and how we can resume operations. And I want to be clear that while COVID is obviously impacting many parts of our economy, including the construction and industrial vertical markets that we serve, our markets remain broadly active. And this holds true across non-residential and residential construction, infrastructure, and industrial production. And there's only a handful of U.S. states and two Canadian provinces, both Ontario and Quebec, that have put meaningful construction restrictions in place. And most of those make exceptions for essential projects like infrastructure or emergency medical capacity. And many of these restrictions that are in place expected lift in early May. Overall, our construction markets are holding up better than our industrial markets, particularly oil and gas, which could be challenged for a while. We've also seen industrial customers put off some plant maintenance and plant turnarounds for now. Eventually, this work will come off pause, and we think that could happen as early as the back half of this year. More broadly, we could start to see an uptick in the third quarter in local economies as shelter in place orders are lifted and activity resumes. But it's certainly slower, and our team is making sure we're in constant communication with our customers. We've been utilized as a trusted resource by customers who have more challenges today than they had a few months ago. And in many cases, we're working with customers to plan for the time when their projects come off hiatus. We're also partnering with our larger accounts to help them get the full benefit of our total control technology. As you've heard us say before, total control improves fleet productivity and reduces costs, whether the equipment's owned by our customer or rented from us. And it's always been a major differentiator, but today its value stands out more than ever. So that covers our first two work streams, employee safety and taking care of the customers. The other three I mentioned are CapEx, OpEx, and liquidity. CapEx is our largest lever to pull, and we're pulling it. For the first quarter, gross rental CapEx was down $50 million year over year, and net rental CapEx was at zero for the quarter, reflecting our focus on improving time utilization. And what this doesn't reflect are any changes we instituted in mid-March to address COVID-19's impact on demand. The effect of those actions will be evident in Q2, with dramatic reductions in the inflow of fleet and the outflow of cash. And this is an example of the flexibility I mentioned earlier. And while our CapEx level will ultimately depend on how our markets track over the balance of the year, I can say that our total spend on rental fleet will be down substantially for 2020. On the operating side, our team is focused on aggressively managing costs. And while a portion of our costs flex naturally with volume, others need to be driven by discrete actions. And we're taking those actions as well. Fortunately, we're a lean, focused organization, and our employees understand the importance of being efficient. Now they're looking even higher and wider for more opportunities. For example, in our specialty segment, our power and HVAC business has historically outsourced all their deliveries. Now, we've pivoted to insource using trucks and drivers from our general rental operations to get this work done. And it's working really well. Our entire team is doing a great job of sharing resources to keep costs down. And as a result, we've been able to insource a ton of work. And that's a theme right now in a lot of areas. We're being disciplined and creative in putting our resources to work across our network. This allows us to reduce costs, conserve capital, and most importantly, retain our labor capacity, which historically has been a very effective driver for growth. Now, I know Jess wants to get into our capital structure, so I'll make just two quick points on that. One is that our business model is a cash generation engine. Even in this current environment, even if this persists through 2020, we expect to generate significant free cash flow this year. And the other point is that our balance sheet is extremely strong. we have almost $3.3 billion of liquidity with no long-term maturities until 2025. We paused our current share repurchase program and we'll continue to be very cautious with fleet purchases and other discretionary uses of capital. And as I mentioned earlier, we've done the analysis and we're confident that we have more than enough liquidity to navigate this crisis and pick up the pace when demand returns. And it will return. The question is, How much and how fast? And no one has those answers right now with any certainty. So let me leave you with a few important things that we do know. COVID-19 is uncharted waters. But our leadership team has been in uncharted waters before. It helps that most of our field and corporate leaders were with the company back in 2008 when the Great Recession was a massive shock to the economy. We were able to come through that crisis intact. And the experience from that helped inform our strategy and our business model. Twelve years later, our company has been reshaped by that experience. We're dramatically stronger today, more diverse, more efficient, and more resilient as an organization. Our revenue diversity is particularly important because our end markets, customers, and the geographies we serve don't all have equal constraints. We can target pockets of demand and help mitigate the drag from more challenged areas. And that's a real strength in this environment. So now you know the view from where we sit. Six weeks into COVID-19, we've battened down the hatches and amped up our partnering with customers. And we understand that things may be challenging for a while, but that's okay. We know how to get through this. Most importantly, we know that the value we preserve now will be the foundation for the value we create in the recovery. So, Jess, over to you to talk about the numbers.

Thanks, Matt, and good morning, everyone. I'll cover the highlights of the first quarter quickly so I can spend a little more time providing some additional comments on our liquidity, the scenario planning we've done, and contingency actions we've taken in response to the current environment. Rental revenue for the first quarter of $1.78 billion declined slightly year over year down 70 basis points, or 12 million. Within rental revenue, OER declined about half a percent, or 8 million, while ancillary and re-rent revenues combined for a decrease of 4 million. The 8 million OER decline included growth in our fleet of 2.2%, which translates into 34 million of additional revenue. That was offset by fleet inflation at 1.5%, which cost us 23 million. and fleet productivity was down 1.2% for a decrease of 19 million, largely reflecting the volume decline we saw in March. We actually had good momentum on fleet productivity to start the year, and it was tracking flat versus prior to year through the end of February. Due sales revenue was up 8% for 16 million year over year due entirely to an increase in retail sales, which is our most profitable channel. That represents $38 million more fleet sold at OEC. Auction sales returned to more normal levels in the quarter, which was about 4% of the total sold. The used market was solid through the quarter, but volume did slow in the back half of March due to COVID-19. Adjusted growth margin on used sales in the quarter was 45.7%. Now, while that's down from 49% in Q1 last year, it's up from 43% in Q4. Retail pricing was down 5% year over year, and that's flat sequentially from Q4. Proceeds as a percentage of OEC was a healthy 53%. Taking a look at EBITDA, adjusted EBITDA for the quarter of 915 million was down 6 million or 70 basis points year over year. And here's the bridge on the change. In rental, The impact on adjusted EBITDA was a drag of $18 million. OER was a headwind of $23 million, offset by $5 million in better ancillary and re-rank combined. Used sales helped adjusted EBITDA by $1 million, and SG&A was better by $11 million, with the majority of that benefit coming from lower third-party professional fees, which are largely discretionary, and lower bonus expense year over year. Our adjusted EBITDA margin was 43.1%, which is down 40 basis points year over year. There were puts and takes in that margin decline, and as I mentioned a minute ago in the bridge, the dollars are small. The flow-through calculation isn't very helpful given the disruption in the quarter, so I'll make a few comments on costs specifically. Operating cost trends were as expected through the end of February. As soon as it was clear to us in early March that our end markets would likely be disrupted, we quickly took action to manage our costs in response. Matt talked about our focus on cost management, and some of the actions we've taken so far have been to reduce overtime, bring delivery and repair in-house to leverage our capacity instead of using third parties, and cancel or delay discretionary spend, mostly in G&A, and that's costs like T&E and professional fees. The actions we took in March had a small impact on Q1, but the benefits will play out over the rest of the year. Broadly, the few I just mentioned represent savings of about 8% of our monthly cash operating expenses. But even before we get to Q&A, I'll tell you that because a good portion of our costs are variable and will flex with volume, it's impossible for us to tell you right now how much these cost actions will in total impact 2020. Safe to say, though, it's a major focus for us. As we aggressively manage costs, we won't cut so deep that we risk not having the capacity we'll need to service customers as the economy opens up. There's a balance there. And we'll continue to prudently invest in the longer term, albeit at a slower pace than we might have been planning earlier this year. Cold starts will slow, as will some of our investments in building out our services businesses. Back to the first quarter results and a comment on adjusted EPS, which was up slightly at $3.35. That compares with $3.31 in Q1 last year. Biggest drivers here are lower interest expense and lower shares outstanding. Let's move to CapEx. Through Q1, we brought in $208 million in gross rental CapEx. Proceeds from sales of used equipment were also $208 million. so there was no change in net rental CapEx at the end of Q1. We've talked with investors consistently about CapEx being the first and most significant action we would take in our contingency plan. Right now, the environment is unclear and difficult to provide a range of where we think we'll land, but I can tell you this year's gross CapEx will be significantly less than what we brought in last year, less than half of that number. And we will continue to focus on selling used fleet in a solid market but we won't fire sale our fleet if that market turns. Turning to free cash flow. We had another robust quarter for free cash flow, generating $608 million if I add back a couple of million dollars in merger and restructuring payments. Year over year, free cash flow is up $25 million. Our tax-adjusted ROIC remains strong, coming in at 10.3% for the first quarter. That continues to meaningfully exceed our weighted average cost of capital, which currently runs south of 8%. Year over year, tax-adjusted ROIC was down 60 basis points due in part to the decline in margin this quarter and the expected drag from our acquisitions. Looking at the balance sheet and our capital structure, I'll add a little more color than normal given the importance of both these days. Our balance sheet is the strongest it's ever been. and we have no long-term debt maturities until 2025. Net debt at March 31st was $11.1 billion, which is down $470 million year-over-year and down $290 million quarter-over-quarter. We continue to earmark free cash flow this year towards paying down our debt. Leverage at March 31st was 2.5 times. That's down 10 basis points to where we ended at December 31st, and down 40 basis points versus the first quarter of 19. Our current $500 million share repurchase program was authorized by the Board in January. Through mid-March, we had purchased $257 million of stock. That included about $175 million of purchases we made in addition to our normal systematic buy given the sudden dislocation we saw in the stock price beginning the third week of February. Now, as soon as the potential severity of the COVID impact on the U.S. and Canada became clearer in March, we decided to stop purchases and we paused the program to preserve liquidity. Speaking of liquidity, it is extremely strong. We finished the first quarter with $3.1 billion in total liquidity. That's made up of ABL capacity of just over $2.5 billion and availability on our AR facility of $62 million. We also have $513 million in cash. As of yesterday, we had total liquidity of 3.3 billion, that's up about 200 million from quarter end. The ABL facility expires in 2024 and is covenant light with a maintenance test that springs on when we're 90% drawn. At the end of the first quarter, we had drawn only a third of the ABL. The 364-day AR facility uses our receivables as collateral. It expires in June in the normal course, and we've already started negotiations to renew that facility. We don't expect any issues in refinancing it later this quarter. One last point on liquidity. Beyond the collateral supporting the ABL and our term loan B, we have approximately $3 billion in excess collateral available to source additional liquidity should we need it. I'll close with a comment on the scenario planning we've done since the start of the pandemic. Of course, no one knows the ultimate impact from the virus or what the economic environment will be after restrictions lift. That's why we've decided to withdraw guidance. It's difficult for us to point to one or two cases at this point as most likely. So we've run numerous cases, each with varying levels of severity and duration, in part to ensure we have adequate liquidity to meet our needs. and we do, even in the most severe scenarios. We also generate significant free cash flow in those scenarios. These cases help us to hone the timing and level of action we'll need to take, and those will vary, too, as we look to maintain a balance between the short-term financial impact in the next quarter or two with longer-term support for the business. We'll continue to tighten these scenarios until our view to the year is clearer and we can update our guidance. And with that, let's move on to your questions. Jonathan, would you open the line?