United Rentals, Inc.

Welcome to the United Reynolds 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 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, 2019, as well as to subsequent filings with the SDC. You can access these filings on the company's website at www.unitedreynolds.com. Please note that United Reynolds 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 presentation to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. speaking today for United Reynolds 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.

Thanks, Jonathan, and good morning, everyone. Thanks for joining our call. I'll begin with a statement that sums up our position on 2020. We believe we weathered the worst of the economic impact from the pandemic. And while the shape of the recovery remains unclear, the wholesale shutdown of the macro has started to lift. The visibility is still somewhat limited, but near-term indicators suggest that activity in the second half of 2020 may continue to track with seasonal patterns, which is something that we saw in June and July. The COVID response plan we shared with you in April is working. We can point to tangible gains from executing that plan, most notably a strong second quarter performance. More than anything, our results confirm the flexibility and resiliency of our operating model. It's one of the reasons we felt comfortable reintroducing full-year guidance. I want to start with a few metrics from the second quarter, and after that, Jess will take you through the results and the guidance in detail, and then we'll go to Q&A. One highlight of the quarter is OEC on rent. I'm happy to report that rental volumes in all of our geographic regions finished the quarter above the trough they had in April. And for the company as a whole, that low point came on April 9th. From that date through June 30th, fleet on rent showed fairly steady improvement, rebounding by almost 14%. This translates to over a billion dollars of incremental fleet on rent. The biggest takeaways from the quarter have to do with the five work streams we introduced in April. And to remind you, they are ensuring employee safety, supporting the needs of our customers, showing discipline with both our CapEx, and our operating expenditures, and proactively managing our balance sheet. I'll first speak to the cost management. This was very evident in our results. We aggressively flexed our operating expenses to mitigate the revenue loss, resulting in a decline of just 50 basis points and adjusted EBITDA margin. Our margin in the quarter was 46.4%, implying a strong flow-through of about 50%. I see proof of our cost vigilance every day in our spend on things like third-party services and overtime. And while certain costs will return with volume, the team has gone above and beyond to run a lean shift. Turning to CapEx, we're now guiding to a range of 800 to 900 million dollars for 2020. This is significantly lower than the 2.1 billion gross CapEx we spent last year. Our primary focus this year is to serve customers with the fleet that we already own. And when we do make selective investments, they're targeted to specific opportunities. And as a result of this cost and capital discipline, our free cash flow generation in the quarter was a very strong $817 million. This is a year-over-year increase of almost 300 percent. I'm particularly pleased we achieved these numbers without compromising our capacity for the future. This means no branch closures, no COVID-related layoffs. We've thought long and hard about this playbook for years, and it came together quickly in March. We're taking a measured response that serves the near and long-term interests of the company. Jess will have more to say about the financial impacts of the workstreams, but I wanted you to understand just how well our field organization is rising to the challenge. And it was a huge ask of them to provide essential services They're in such a difficult time, and they're doing a great job. Not only did the team embrace the health and safety protocols in our COVID plan, but they did it safely with another recordable rate below one. The work streams also give you a bird's eye view of how we're maintaining our competitive advantages. In short, we're managing the business in a way that leverages our value proposition. Customers see us as a business partner capable of delivering value across all of their needs and under all conditions. And throughout this pandemic, we've been determined to meet this expectation, and I'm happy to say we're succeeding. Now a few comments on the operating environment. It's certainly been a turbulent few months. Industrial activity has deteriorated more than construction, and that's not surprising given the domino effect of COVID on different parts of the industrial economy. For example, as people stayed at home, the decline in demand for gasoline and jet fuel significantly impacted our petrochem customers. And on the construction side, non-res is a very broad category that covers a lot of different market dynamics. And some of the verticals have stayed busy throughout the pandemic, like power and data center builds. And others are obviously more challenged, like retail or hospitality. And now with states reopening, we see the same COVID news you do about areas that are struggling to avoid spikes in the infection rates. And so far, it hasn't had any additional impact on our business. Our focus is on monitoring market conditions that could be triggered by infection rates, like state and provincial construction restrictions. So we'll continue to keep a close eye on that. We're also seeing demand continue for our specialty segment, which is holding up very well. Our strategic investments in specialty are making helpful contributions to the segment revenue this year. Another positive has been the strength of the used equipment market. So far, retail demand has remained solid. We view this as a leading indicator, meaning contractors expect to need equipment for their upcoming projects. And we've been able to leverage that demand to recover more than half of our original investment on equipment that's over seven years old. Big picture. We know that our end markets will recover at different speeds in different areas. Fluctuations like this allow us to leverage our strengths of flexibility, diversification, and scale. We have a deep fleet of fungible assets that we can shift between construction and industrial sectors and across geographies and verticals. Even in this environment, our flexibility helps to mitigate the pressure on revenue. We could also pivot to new opportunities that may arise from COVID. For example, the idea of repurposing large commercial properties has been floated by some construction analysts, and this could create some incremental demands in the construction space. So that gives you some color. Our customers are still working their way out of the tunnel, and it's our job to be the partner that helps them get there. And what we're hearing from our customers is that they have the same feeling we do about 2020, reasonable near-term visibility with current work and backlog, and less visibility in late 20 and 21. In the meantime, we're on course with our plan and making good progress. All things considered, we delivered a strong second quarter with solid fundamentals for profitability. The things that we told you we could control, we did control. And we moved fast in a very volatile environment. The guidance we provided reflects our best estimates on what we can achieve pouring some significant change to the operating environment. The ranges are a bit broader than we typically provide at mid-year, but that's the reality of the times we're operating in. And under any scenario, we expect to generate significant free cash flow this year. And if the economic impacts of COVID linger on, we have additional flexibility and we can leverage in our business model to remain resilient. I'll wrap up with something I talked about last quarter, when I stated that the value we preserve now will be the foundation for the value we create in the future. A big part of that value is our commitment to being first call for customers under all market conditions. We've been putting our best efforts in delivering on that commitment. And our Q2 results show that our best efforts and our business model are more than up to the task. Not only are we preserving value, we're doing it strategically in ways that will drive returns today and in the future. Now with that, I'll hand the call over to Jeff to cover the numbers. Jeff?

Thanks, Matt, and good morning, everyone. I'll cover the highlights of the second quarter, which were, of course, significantly impacted by COVID-19. I'll also share an update to our debt structure and finish with some comments on our 2020 guidance before we move to Q&A. There's a lot to cover, so let's jump in. Dental revenue for the second quarter was $1.64 billion, which is down 318 million or 16.2% year over year. Within rental revenue, OER decreased 264 million or 15.8%. In that, fleet productivity was down 13.6% or 226 million. That's primarily reflecting the decline in volume we experienced during the quarter due to the pandemic. Inflation of about 1.5%. cost us another $26 million, and a 0.7% drop in the average size of the fleet was a $12 million headwind to revenue. Rounding out the decline in rental revenue for the quarter was $46 million in lower ancillary revenues and $8 million in lower re-rent, which together were a 40 basis point headwind to revenue. Let's move to used sales. Used sales revenue was down 10.7% or 21 million year over year, which is almost entirely due to less used fleet sold to OEMs in trade packages. The retail used market remains quite strong. OEC sold at retail was up 17% year over year, despite a slow start at the beginning of the quarter. Used margins in the quarter were healthy as well. Adjusted gross margin on used sales was 46%. Now, while that's down from 49.2% in Q2 last year, it's up 30 basis points sequentially from Q1. Retail pricing was down about 6% off last year's peak, but consistent with what we saw in the first quarter this year. Finally, proceeds as a percentage of OEC were a robust 54%, and that's on fleet sold that was on average over seven years old. Taking a look at EBITDA, Adjusted EBITDA for the quarter was $899 million, down $174 million, or 16.2% year-over-year. And here's the bridge on the dollar change. The impact from rental was a drag of $197 million. OER was a headwind of $179 million, with ancillary and re-rent down a combined $18 million. The used sales impact on EBITDA was a headwind of $16 million. Year over year, SG&A was better by $48 million, with the majority of that benefit coming from lower discretionary costs, including T&E. To a lesser extent, we also had lower commissions and bonus accruals versus Q2 last year. Our adjusted EBITDA margin was a highlight in the quarter, coming in at 46.4%. Now, while that's down 50 basis points year over year, Our margin clearly reflected our commitment to aggressively manage costs, particularly in the early part of the second quarter when volumes were most depressed and restrictions were still in effect. Our focus on costs is also evident in adjusted EBITDA flow-through of 50%. Through the second quarter, we continued to action reduced overtime in-house to reduce the use of third parties and canceled or delayed discretionary spend, mostly in G&A. The second quarter flow-through benefited from the flexibility we have in our business model to respond quickly on cost. Cost control remains a major focus for us, especially for discretionary spending. But a good portion of our costs will continue to flex with volume. For example, spend on delivery is necessary as volume increases through the season, and we need to reposition fleet to service our customers. And those expectations are included in our guidance. Back to the second quarter results and adjusted EPS, which was $3.68 and includes $0.30 of benefit from discrete tax items. That compares with $4.74 in Q2 last year. And the year-over-year decline is primarily due to lower net income from lower revenue in Q2 this year. Let's move to CapEx. Year-to-date, through the end of Q2, we've brought in $353 million in gross rental capex, while proceeds from sales of used equipment have been $384 million, resulting in negative net capex of $31 million. Together, these results reflect our continuing focus on capital discipline. Turning to free cash flow, another highlight through the end of the quarter. We generated over $1.4 billion in the first half of the year, an increase of $643 million. Our ROIC remains strong, coming in at 9.6% for the second quarter. That continues to meaningfully exceed our weighted average cost of capital, which continues to run south of 8%. Year over year, ROIC was down 120 basis points, due in large part to the decline in revenue this year. Looking at the balance sheet and our capital structure, Our balance sheet continues to be the strongest it's ever been. Net debt at June 30 was 10.3 billion, which is down 1.3 billion year over year, and down 800 million quarter over quarter. Leverage at June 30 was just under 2.5 times, which is flat sequentially, and down 3 tenths of a turn versus the second quarter of 2019. Our current $500 million share repurchase program is still on pause. As a reminder, we had purchased $257 million of stock on that program before we paused it in March. Liquidity remains extremely strong. We finished the second quarter with over $3.8 billion in total liquidity. That's made up of ABL capacity of just over $3.6 billion. and availability on our AR facility of $56 million. We also had $127 million in cash. Yesterday, we announced we will redeem our $800 million, 5.5% senior notes due 2025. Our decision to do so includes our views of continuing strength in liquidity given our expectations of free cash flow for the year, which is reflected in our guidance. And speaking of our guidance, I'll close with a few comments. Of course, no one knows the ultimate impact from the pandemic on 2020 or beyond. We continue to run numerous scenarios, each with varying levels of revenue expectations and related actions to arrive at adjusted EBITDOT, taking into consideration the six months behind us and the visibility we have to the rest of the year. Our guidance represents what we think of as our most likely range of possibilities. And to be clear, this guidance does not contemplate a shutdown of the economy like we experienced earlier in the year. Our CapEx guidance has been refined as we balance our fleet mix in response to customer demand and continue to focus on fleet productivity and better fleet absorption. Finally, and notably, our free cash flow update is a clear indicator of the strength and resiliency of our business model. as we plan to generate over $2 billion in free cash flow this year, paying down debt with the vast majority of it. And with that, let's move on to your questions. Jonathan, would you please open the line?