United Rentals, Inc.

Good morning and 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 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 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 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 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 us. I'll start with some observations that will frame out our discussion about the quarter, as well as our customers and our markets. What we saw in the third quarter was a continuing recovery, albeit at a moderate pace. Our end markets are improving, and for the first quarter since COVID hit, the trends were in line with normal seasonality. That said, volumes were still down year over year. Near term, we have good visibility. Market activity looks positive and customer sentiment is trending up. Longer term, we expect that future events, including a potential vaccine, are likely to have a significant impact on demand. I'm pleased that we delivered strong results in this environment. We have our arms around the things we can control, and we're showing discipline and agility in our daily operations. You saw that in our numbers where we outperformed our own expectations for the third quarter. And we did it safely. It's a different world out there right now. And every time our employees interact with each other or with customers or a supplier, their behavior is guided by our safety protocols. And those protocols help the team turn in another safe quarter with a recordable rate below one. And that was a hard-fought win. When you factor in the fires in California or the storms in the Gulf or just simply the daily challenges of COVID. So kudos to the team for their effort. In a few minutes, Jess will take you through our results, but first I'll touch on a few highlights. Number one is margin. Rental revenue was about 13% below third quarter last year, but we made the most of it by controlling our operating costs. I give the team full credit for that because it's their discipline in the field that helps preserve our margin. And as volumes in the quarter went up, SG&A as a percent of revenue went down. so clearly we're being vigilant with controlling our variable costs. Another highlight for the quarter is our free cash flow. We generated over $2 billion of free cash flow year-to-date through September, and our ability to produce significant cash in a downturn is a key strength of our business model. The return to normal seasonality isn't enough to offset the impact of the pandemic, but it's definitely in the right direction. and it gives us a good line of sight on the fourth quarter. And based on that current visibility and our third quarter performance, we've updated our 2020 full-year guidance to reflect higher targets for revenue, EBITDA, CapEx, and free cash flow. Looking at our operating environment, the recovery in North America has been fairly broad-based, and customer sentiment continues to trend up. We see business confidence improving in our own customer surveys as well as many external indicators. Used equipment sales are another helpful indicator of demand. Our third quarter revenue from used sales was essentially flat with last year, and used pricing held up as well. So demand's holding steady, and in fact, we sold 35% more fleet through the retail channel in the quarter compared with third quarter last year. And that tells us that contractors are buying fleet they feel confident they can put to work. We're also encouraged by the industry's discipline on supply, which you can see in available third-party data. And we applaud this because a disciplined approach will serve everyone's interest as a recovery gains team. In July, I noted that rental volumes in all of our geographic regions finished the second quarter above the trough for fleet on rent we saw in April. And in the third quarter, we continued to gain ground, with rental revenue increasing sequentially in 15 of our 16 regions. And that one outlier region was essentially flat. The standout verticals so far have been the ones we've been talking about, power, biotech, and pharmaceuticals. And we see solid activity from warehousing and distribution, data centers, hospitals, and other facilities in the healthcare and technology sectors. And there were some verticals that were a little less pronounced, but still on a positive path. Food and beverage is an example of a vertical that's edged back to historical levels. And by contrast, as I'm sure you know, all segments of oil and gas remain depressed, led by upstream. Looking specifically at construction, non-res markets as a whole showed mild improvement, while retail, hospitality, and entertainment remain largely on pause. The individual verticals within non-REDs are still a mixed bag, but our core markets all have solid long-term fundamentals. And there's also a broad range of new projects starting up across our operating landscape. And this was true in our second and third quarters, and we're seeing the same thing this quarter. And this activity spans multiple markets, including manufacturing, automotive, and road and bridge work as examples, as well as the other positive verticals I mentioned earlier. And the team's doing a great job of getting in the door with these projects at an early stage. One side note worth mentioning is the possible shift to an onshoring strategy by North American manufacturers. This year was highlighted the vulnerability of the supply chains, and onshoring could be a way to reduce this risk. And if that trend pans out, it could benefit two areas where our companies often first call with customers, in industrial construction and plant-making. Also, we're worried about our specialty segment, which continues to be resilient overall. Our power and HVAC business in particular had another strong performance in the quarter. And all of our specialty offerings are poised to capture incremental demand, and we're continuing to make strategic investments in the growth of this segment. Through September, we've opened a total of 13 new specialty locations, and we're on track with our plan for 15 openings for this year. I want to take a minute to talk about how we look at strategic investments, because capital discipline is more critical now than it's ever been. I've already mentioned that we're controlling our costs to benefit our margins, and we've reduced our full-year CapEx significantly, but we haven't gone full stop on investing in the business. We're taking the long view. We're managing our capital to support our customers and to drive long-term returns for our investors. The ongoing expansion of our specialty network is one good example of that. And as you saw in our guidance, we allocated some cutbacks for fleet to address targeted areas of demand. Throughout all the disruption this year, we kept our eye on the big picture, and we're making sound decisions with the benefit of a robust balance sheet. I'll sum it up by saying all the things we've been doing right this year, we're still doing right. And that's the plan. Execute well under all market conditions. And with COVID, that means first and foremost protecting our people, serving our customers, running a tight ship, and doing all of this without limiting our capacity for growth. The strong third quarter results we reported show that the plan is working. And now we have higher expectations for the fourth quarter than we did three months ago, in large part because we have more visibility into the near term. And we'll see how that plays out as we move into 2021. I'm going to close with some things that I can say with absolute certainty in what's been a very uncertain year. As I look around our company, I'm proud of the way our team has stayed together and is working safely. And I'm glad that our operations have been able to remain open to serve our customers because communities rely on these projects. And I'm pleased that we continue to be responsive to all of our stakeholders. And finally, I'm confident that we have the right strategy in place to leverage our competitive advantages and convert our revenue into attractive returns. Every economic environment, weak or strong, has its opportunities. And this one's no different. We know how to use our strengths to make the most of any market conditions. When we did that on the downside of this pandemic, and we'll do it on the upside as well. So with that, I'll hand the call over to Jess, and then we'll take your questions. Jess, over to you.

Thanks, Matt, and good morning, everyone. As Matt mentioned, we're pleased with our results in Q3, notably rental revenue that tracked to seasonal trends as expected, and the cost management our team delivered across the business, which was better than expected. We've generated significant free cash flow to date and continue to strengthen our balance sheet. And I'll speak to both in a bit and also provide some comments on our updated guidance for the full year. Let's start with rental revenue for the quarter. Rental revenue for the third quarter was $1.86 billion, which is down $286 million, or 13.3% year over year. Within rental revenue, OER decreased $259 million, or 14.1%. In that, a 4.6% drop in the average size of the fleet was an $84 million headwind to revenue. Inflation of 1.5% cost us another $27 million. And fleet productivity was down 8%, or $148 million on lower volumes. I'll note that fleet productivity did improve by a healthy 560 basis points from Q2, which is mainly from better fleet absorption. Rounding out the decline in rental revenue for the quarter was $27 million in lower ancillary and re-rent revenues, or an 80 basis point headwind. Let's move to used sales. Used sales revenue was basically flat year over year at $199 million. The retail market continues to be quite strong for us, and we sold significantly more fleet through this channel through Q3 last year, with OEC sold up 35%. Used margins in the quarter were healthy as well. Adjusted gross margin on used sales was 44.2% versus 46% in Q3 last year. That change reflects softer year-over-year pricing, partially offset by improved channel mix. Importantly, cash proceeds as a percentage of original cost was a robust 51.4% on fleets sold that was on average seven years old. taking a look at EBITDA. Adjusted EBITDA for the quarter was $1.081 billion, down $126 million, or 10.4% year over year. Here's the bridge on the dollar change. The impact from rental was a drag of $162 million. OER was a headwind of $168 million, offset by a combined $6 million of tailwind from ancillary and re-rent. Used sales were a headwind to EBITDA of $3 million, and other lines of business together were a drag of $6 million. Year over year, SG&A was a benefit to EBITDA in the quarter by $45 million, with the majority of that benefit coming from lower discretionary costs, including T&E and professional fees, as well as lower bonus expense. Our adjusted EBITDA margin was very strong, coming in at 49.4%, up 90 basis points year over year. This reflects our continued commitment to aggressively manage costs. It was also benefited by certain one-time items contributing about $20 million to the quarter, including an insurance gain resulting from a flood event settled in Q3. Adjusting for the non-recurring benefits, adjusted EBITDA margin was flat despite a 12% decline in total revenue year over year. Flow through, as reported, was approximately 42%. Again, adjusting for those one-time benefits, the resulting flow through of just under 49% evidenced the flexibility we have in our business model to respond quickly on costs. Through the third quarter, we continued to bring delivery and repair in-house to reduce the use of third parties. As a result, our overtime increased versus Q2, but continued to be down versus Q3 last year. And we continue to avoid discretionary spend where possible, mostly in G&A. A quick comment on adjusted EPS, which was $5.40. That compares with $5.96 in Q3 last year. The year-over-year decline is primarily due to lower net income from lower revenue. Let's move to CapEx. For the quarter, rental CapEx declined 49% to $432 million. bringing our year-to-date spend to $785 million in gross rental CapEx. Year-to-date proceeds from sales of used equipment were $583 million, resulting in net CapEx of $202 million. That's 85% lower than net CapEx at September 30 last year and reflects our continuing focus on capital discipline and fleet absorption given current rental volumes. ROIC remains strong, coming in at 9.2% for the third quarter. Now, that continues to meaningfully exceed our weighted average cost of capital, which currently runs about 7%. Year over year, ROIC was down 150 basis points, driven by the decline in revenue, turning to free cash flow, which through the end of September is a record for us. We have generated over $2 billion of free cash flow year to date, an increase of over $900 million year over year. With the majority of our cash flow dedicated to debt reduction this year, our balance sheet continues to be the strongest it's ever been. Net debt was down $1.5 billion to $9.9 billion at September 30. Leverage was 2.4 times, down from 2.6 times at the end of 2019. Liquidity remains extremely strong. we finished the third quarter with over $3.4 billion in total liquidity. That's made up of ABL capacity of just under $3.1 billion and availability on our AR facility of $165 million. We also had $174 million in cash. On October 15th, we used the ABL to redeem our $750 million four and five-eighths senior notes due 2025. Our decision to do so included our views of continuing strength in liquidity and extends our next maturity on long-term notes out to 2026. Total liquidity as of yesterday, October 28th, was over $2.8 billion, and we expect that to increase to the end of the year, consistent with our free cash flow guide. Speaking of guidance, I'll close with a few comments. We've tightened and raised the bottom of our total revenue range As our visibility increases and we expect to see a normal seasonal trend in demand in Q4, we also expect used sales will remain solid. We've tightened our adjusted EBITDA range and have raised our expectations for the full year, in part from the strength of Q3's results. Our gross CapEx guidance of between $900 and $950 million is higher than our prior guidance as we manage fleet mix in support of customer projects. And finally, our free cash flow update continues to signal the strength and resiliency of our business model as we plan to generate over $2.2 billion in free cash flow this year and, in turn, plan to use the majority of it to reduce our debt. And with that, let's move on to your questions. Operator, would you please open the line?