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, 2020, as well as the subsequent filings with the SEC. You can access these filings on the company's website at www.unitedrentals.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 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 these reconciliations from each non-GAAP financial measure to the most comparable GAAP financial measure. Speaking today for UnitedReynolds is Matt Flannery, President and Chief Executive Officer, 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 today. As you saw yesterday, we reported a really strong performance out of the gate in 21 in what's shaping up to be a great year. We knew we had built good momentum in Q4 and that the economy was moving in the right direction, but the first quarter was still uncertain as we entered the year. Well, not anymore. Both our operating conditions and our performance have improved faster than we expected. We gained back a lot of the ground on rental revenue, narrowing the decline from 2020, and importantly, We exited the quarter up year over year in March. Our customers are also optimistic. They're gaining more visibility and they're turning to us for the equipment they need. Just a few months into the year, we've absorbed almost all of the excess fleet we had in 2020. This was evident in the sequential improvement in our fleet productivity that we reported. And we took advantage of a healthy used equipment market. driving record retail sales to generate almost 30% more proceeds in a quarter than we did a year ago. None of this would be possible without our greatest asset, our employees, and their willingness to take on the challenges as well as the opportunities presented to them. Our people know how much I respect them for their commitment, and our customers feel the same way. And I'm proud to report that Team United delivered $873 million today of adjusted EBITDA in the first quarter, and they did it safely, turning in another quarterly recordable rate below one. Given all these factors, we feel confident in raising guidance across the board. This includes a new revenue range that starts above the top end of the previous guidance. We feel equally comfortable leaning into M&A, as evidenced by our recent acquisition of Franklin Equipment and our agreement to acquire General Finance which we expect to close mid-year. We feel the time is right to allocate capital to attractive deals like these that meet our M&A criteria for a strong strategic, financial, and cultural fit. With Franklin, we added 20 stores to our general rental footprint in the central and southeast regions. And the Franklin team is already on board, and I'll take this opportunity to officially welcome them to Team United. General Finance is a market leader in mobile storage and modular office rentals. These services complement our current specialty and general rent offerings, and we're excited about the opportunity to unlock additional growth while solving more of our customers' needs with these new products. We'll be entering these markets with a strong presence, an established footprint, and a talented team with solid customer relationships, many of them new to our company. It's a textbook example of one plus one equaling more than two. If you weren't able to join our earlier call on general finance, we'll be happy to take your questions during Q&A. Now let's pivot to demand where we have more good news to share. The rebound we're seeing in our end markets is broadly positive. This is true of our general rental business and even more so in our specialty segment. Specialty had another robust performance led by our power and HVAC business. Rental revenue for specialty moved past the inflection point and was positive year over year for the full quarter. We're continuing to invest in growing our specialty network with six cold starts year to date and another 24 planned this year. Now I'll drill down to our customers and our end markets. Customer sentiment continues to trend up in our surveys as a majority of our customers expect to see growth over the next 12 months. And importantly, the percent of customers who feel this way has climbed back to pre-pandemic levels. And we think there are a few reasons for this. For one thing, our customers have a significant amount of work in hand. And they can also see that our project activity is continuing to recover. The vaccines are rolling out, restrictions are easing in most markets, and the weather is turning warmer. Three positive dynamics converging right before our busy seasons. Also, we're seeing the return of activity in the manufacturing sector after more than a year of industrial recession. And the construction verticals that have been most resilient throughout COVID are still going strong. Areas that we've discussed like technology and data centers, power, healthcare, and warehousing and distribution. And with infrastructure, our customers are encouraged that it's back on the table in Washington. Most of the infrastructure categories in the administration's current proposal are directly in our wheelhouse, things like bridges, airport, and clean energy. We'll see how the process goes, but almost any infrastructure spending will benefit us in the long term, both directly and indirectly. Now, there are some markets that are taking longer to recover, like energy. Most parts of the energy complex, including downstream, remain sluggish. And additionally, retail, office, and lodging are largely in limbo. So while we're firing on all cylinders at United, there are pockets of the economy that are still catching up. And this means more opportunity for us down the road. I'll sum up my comments with this perspective. 2021 is shaping up to be a promising year. And our performance says a lot about our willingness to lean into that promise, whether it's with CapEx, M&A, cold starts, or other strategic investments in the business. Our balance sheet and cash flow give us the ability to keep every option on the table. Throughout last year, we made the decision to retain capacity by keeping our branch network and our team intact. And now that the economic indicators are flashing green, our strategy is paying off by driving value for our people, our customers, and our shareholders. And with that, I'll ask Jess to take you through the numbers and then we'll go to Q&A. Over to you, Jess.

Thanks, Matt. And good morning, everyone. The strong start to the year is reflected in our first quarter results as rental revenue and used sales exceeded expectations and costs were on track. That strength carries through to our revised guidance and more on that in a few minutes. Let's start now with the results for the first quarter. Rental revenue for the first quarter was $1.67 billion, which was lower by $116 million, or 6.5% year over year. Within rental revenue, OER decreased $117 million, or 7.7%. In that, a 5.7% decline in the average size of the fleet was an $87 million headwind to revenue. Inflation of 1.5% cost us another $24 million, and fleet productivity was down 50 basis points, or a $6 million impact. Sequentially, fleet productivity improved by a healthy 330 basis points, recovering a bit faster than we expected. Finishing the bridge on rental revenue this quarter is $1 million in higher ancillary and re-rent revenues. As I mentioned earlier, used equipment sales were stronger than expected in the quarter, coming in at $267 million. That's an increase of $59 million, or about 28% year-over-year, led by a 49% increase in retail sales. The end market for used equipment remains strong, and while pricing was down year-over-year, it's up for the second straight quarter with margins solid at almost 43%. Notably, these results in used reflect our selling over seven-year-old fleet at around half its original cost. Let's move to EBITDA. Adjusted EBITDA for the quarter was just under $873 million, a decline of $42 million or 4.6% year-over-year. The dollar change includes an $84 million decrease from rental. In that, OER was down $86 million, while ancillary and re-rent together were an offset of $2 million. New sales were a tailwind to adjusted EBITDA of $19 million, which offset a $2 million headwind from other non-rental lines of business. And SG&A was a benefit in the quarter of $25 million. Similar to the last couple of quarters, the majority of that SG&A benefit came from lower discretionary costs, mainly T&E. Our adjusted EBITDA margin in the quarter was 42.4%, down 70 basis points year over year, and flow-through, as reported, was about 62%. I'll mention two items to consider in those numbers. First, as I mentioned in our January call, we'll have a drag in bonus expense during 2021 as we reset to our plan's target. That reset started in the first quarter. Second, used sales made up a greater portion of our revenue this quarter, which was a revenue mix headwind. Adjusting for those two results is an implied decremental flow through for the quarter of about 37%. Across the core business, the first quarter's cost performance played out as we expected and reflects our continued discipline as we respond to increasing demand and as our costs continue to normalize. I'll shift to adjusted EPS, which was $3.45. That's up 10 cents versus Q1 last year, primarily on lower interest expense and a lower share count. Quick note on CapEx. For the quarter, gross rental capex was 295 million. Our proceeds from used equipment sales were 267 million, resulting in net capex in Q1 of 28 million. Now turning to ROIC, which remains strong at 8.9%. As we look back over what's obviously been a challenging 12 months, one of the things that we're most pleased with is the ROIC we've generated, which has consistently run above our weighted average cost of capital through what was the trough of the down cycle. Free cash flow was also strong at $725 million for the quarter. This represents an increase of $119 million versus the first quarter of 2020, or about a 20% increase. As we look at the balance sheet, net debt is down 21% year over year without having reduced our balance by about $2.3 billion over those 12 months. Leverage continues to move down and was 2.3 times at the end of the first quarter. That compares with 2.5 times at the end of the first quarter last year. Liquidity remains extremely strong. We finished the quarter with over $3.7 billion in total liquidity. That's made up of ABL capacity of just under $3.2 billion and availability on our AR facility of $276 million. We also had $278 million in cash. And since Matt mentioned our acquisitions earlier, I'll take a second here to note that we expect to fund the general finance deal later this quarter with the ABL. Let's shift to our revised 2021 guidance, which we included in our press release last night. This update does not include any impact from general finance. If we close as expected in June, we'll update our guidance likely on our Q2 call in July to reflect the impact of that business. What is included in this update is mainly three things. First, the impact of higher rental revenue. Second, increased used sales capitalizing on a stronger than expected retail market. And third, the contribution of our Franklin equipment acquisition, which we estimate at about $90 million of revenue and $30 million of adjusted EBITDA for the remainder of the year. We've revised our current view to rental revenue given the start to the year and how we expect things to play out from here. The increase in our guidance reflects a range of possibilities where the growth opportunity over the remainder of the year largely follows normal seasonality, albeit from a higher starting point. As you can see at midpoint, our updated guidance implies strong double-digit growth over the remaining nine months of the year. A quick note on the guidance change in EBITDA and what hasn't changed in this revision. which is our continuing to manage costs tightly, even as activity ramps more than forecasted. Our revised range on adjusted EBITDA considers that cost performance across the core business and reflects the impact of higher used sales and the Franklin acquisition with margins and flow through in line with our prior guidance. As certain of our costs continue to normalize from low levels in 2020, bonus expense remains the headwind we've discussed previously. and at midpoint is about a 60 basis point drag in margin year over year. Finally, the increase in free cash flow reflects the puts and takes from the changes I mentioned and remains robust at a midpoint of $1.8 billion. Now let's get to your questions. Operator, would you please open the line?