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 to subsequent filings with the SEC. You can access these filings on the company's website at www.unitedrentals.com. Please note that United Reynolds has no obligation and makes no commitment to update or publicly revise any revisions to forward-looking statements in order to reflect in 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 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.

Thank you, Operator, and hello, everyone. Thanks for joining us this morning. Three months ago, we said that 2021 was shaping up to be a great year for United Rentals, and that's still very much the case. Our operating environment continues to recover. Our customers are increasingly optimistic about their prospects, and our company is continuing to lean into growth from a position of strength as a premium provider and our industry's largest one-stop shop. We're the supply leader in a demand environment. and we've leveraged that to deliver another consecutive quarter with strong results. The big themes of the second quarter are strong growth in line with our expectations and robust free cash flow, even after the step-up in our CapEx. Positive industry indicators, including a strong used equipment market where pricing was up 7% year-over-year. The expansion of our go-to-market platform through M&A and cold starts. This is time to the broad-based recovery in demand and our focus on operational discipline as we manage the increase in both volume and capacity while driving fleet productivity of nearly 18%. Another key takeaway is our safety performance, and I'm very proud of the team for holding the line on safety with another recordable rate below one, while at the same time managing a robust busy season and onboarding our acquired locations. This includes general finance, which we acquired at the end of May. As you know, this was both a strategic and a financial move designed to build on our strengths. The acquisition expanded our growth capacity and gave us a leading position in the rental market for mobile storage and office solutions. The integration is going well, and while we still have more work to do, we're moving steadily through our playbook. As you saw in our release, We raised our outlook to include the expected impact of general finance and other M&A we closed since the first quarter. It also includes some additional investments we plan to make in CapEx that will serve us beyond 2021. This outlook follows the higher guidance we issued in April when we raised every range compared to our initial guidance. So as you can see, we're tenacious about pursuing profitable growth, and the investments we're making will still have a positive impact on our immediate performance as well as future years. And before Jeff gets into the numbers, I want to spend a few minutes on our operating landscape. Almost all of the challenges of 2020 have righted themselves. We have a better line of sight, and so do our customers. When we surveyed our customers at the end of June, the results showed that over 60% of our customers expect to grow their business over the coming 12 months, which is a post-pandemic high. And notably, only 3% saw a decline coming over the same period. Customer optimism is a great barometer, and the trends we see in the field support their view. 2021 is a pivotal year for us. It confirms our return to growth, including our 19% rental revenue growth in the second quarter. I'll point to some of the drivers of that growth, starting with geography. The rebound in our end markets continues to be broadly positive with all geographic regions reporting year-over-year growth in rental revenue. Our specialty segment generated another strong performance with rental revenue topping 25 percent year-over-year, including same-store growth of over 19 percent. And importantly, we grew each major line of business by double digits, which underscores the broadness of the demand. For years now, our investment in building out our specialty network has been a key to our strategic positioning. These services differentiate our offering to customers and add resilience to our results throughout cycles. This is true of cold starts as well as M&A. This year, we've opened 19 new specialty branches in the first six months, which puts us well on our way to our goal of 30 by year end. We're also investing in growth in our general rental segment, where the big drivers are non-res construction and plant maintenance. Both areas are continuing to gain traction, and most of our end markets are trending up. Verticals like chemical processing, food and beverage, metals and mining, and healthcare are all showing solid growth. And while the energy sector remains a laggard, it was up year over year for the first time in eight quarters. We also have customers in verticals that are less mainstream, like entertainment, where demand for our equipment on movie sets and events more than doubled in the quarter. And while it's a relatively small part of the revenue, it's a good sign to see it come back. I also want to give you some color on project types. There are two takeaways, the diversity of the projects in Q2 and the fact that each region contributed to growth in its own way. The recovery has taken root across geographies and verticals on both coasts with solid activity and heavy manufacturing, corporate campuses, schools, and transmission lines. In this quarter, we're also seeing project starts in power, transit, and technology. These job sites are using our general equipment and our trench safety and power solutions. And fluid solutions are seeing a rebound in chemical processing and sewer bypass work, as well as mining. These are just a few of the favorable dynamics in a very promising up cycle. And I want to put that in context. 2020 was about the temporary loss of market opportunity. particularly in the second quarter. Now, the pendulum is swinging back, and 2021 is about locking in that opportunity within the framework of our strategy. Our team is managing that extremely well. One proof point is our financial performance and the confidence we have in our guidance. Another is our willingness to lean into growth today to create outsized value tomorrow, and it's about more than capex and cold starts. We're constantly exploring new ways to capture growth by testing new products in the field, developing new sales pipelines, and forging digital connections with customers. And finally, the most important proof point is the quality of our team. You can see that reflected on our safety record and our strong culture. Here's the thing to remember about 2021. This is still the early innings of the recovery. We're committed to capitalize on more and more demand as the opportunity unfolds. And we see a long runway ahead to drive growth, create value, and deliver shareholder returns. Well, I'll stop here and ask Jess to go through the numbers, and then we'll take your questions. Over to you, Jess.

Thanks, Matt, and good morning, everyone. When we increased our 2021 guidance back in April, we expected a strong second quarter supported by the momentum we were seeing to start the year. We're pleased to see that play out as anticipated with the second quarter results. And importantly, we're also pleased to see the momentum accelerate in our core business and support another raise to our guidance for the year. We've also added the impact from our acquisitions, notably the general finance deal. And I'll give a little bit more color on our guidance in a few minutes, but let's start now with the results for the second quarter. Rental revenue for the second quarter was $1.95 billion. That's an increase of $309 million, or 19%. If I exclude the impact of acquisitions on that number, rental revenue from the core business grew a healthy 16% year over year. Within rental revenue, OER increased $231 million, or 16.5%. The biggest driver in that change was fleet productivity, which was up 17.8%, or $250 million. That's primarily due to stronger fleet absorption on higher volumes, in part as we count the COVID-impacted second quarter last year. Our average fleet size was up 0.2%, or a $3 million tailwind to revenue, and rounding out OER, the inflation impact of 1.5% cost us $22 million. Also within rental, ancillary revenues in the quarter were up about $65 million, or 31%, and re-rent was up $13 million. And we'll talk more about the increase in ancillary revenues in a moment. Used equipment sales came in at $194 million. That's an increase of $18 million or about 10%. Pricing at retail in the quarter increased over 7% versus last year and supported robust adjusted used margins of 47.9%. That represents a sequential improvement of 520 basis points and is 190 basis points higher than the second quarter of 2020. Used sales proceeds for the quarter represented a strong recovery of about 59% of the original cost of fleet that was on average over seven years old. Let's move to EBITDA. Adjusted EBITDA for the quarter was $999 million, an increase of 11% year-over-year, or $100 million. That included $13 million of one-time costs for acquisition activity. The dollar change includes a $141 million increase from rentals. In that, OER was up $125 million, ancillary contributed $10 million, and re-rent added $6 million. Used sales were a tailwind to adjusted EBITDA of $12 million, and other non-rental lines of business provided $6 million. The impact of SG&A in adjusted EBITDA was a headwind for the quarter of $59 million, which came mostly from the resetting of bonus expense. We also had higher commissions on better revenue performance and higher discretionary expenses, like T&E, that continued to normalize. Our adjusted EBITDA margin in the quarter was 43.7%, down 270 basis points year over year, and flow through, as reported, was about 29%. Let's take a closer look at margin and flow through this quarter. Importantly, You'll recall that our COVID response last year included a swift and significant pullback in certain operating and discretionary costs. That was especially pronounced in the second quarter and is impacting flow through this year as activity continues to ramp and costs continue to normalize. We expect this will play through the rest of the year, notably in the third quarter. Specific to the second quarter, we've shared in previous calls that one of the costs that will reset this year is bonus expense. from the low levels incurred last year. As a result, we had an expected drag in flow through in the second quarter as we reset and now true up this year's expense. Flow through and margins were also impacted, as anticipated, by acquisition activity, including the one-time costs I mentioned earlier. I also mentioned higher ancillary revenue in the second quarter, which represents, in part, the recovery of higher delivery costs. Delivery has been an area where we've seen the most inflation pressure, including higher costs for fuel and third-party hauling. And while recovering a portion of that increase in ancillary protected gross profit dollars, it impacted flow-through and margin this quarter as a pass-through. And we expect to see that play out over the next couple of quarters as well. Adjusting for these few items, the implied flow-through for the second quarter was about 46%, with implied margins flat versus last year. With our expenses normalizing, that reflects the cost performance across the Corps that came in as expected. I'll shift to adjusted EPS, which was $4.66 for the second quarter, including a 13 cent drag from one-time costs. That's up 98 cents versus last year, primarily on higher net income. Looking at CapEx and free cash flow, for the quarter, gross rental CapEx was a robust $913 million. Our proceeds from used equipment sales were $194 million, resulting in net CapEx in the second quarter of $719 million. That's up $750 million versus the second quarter last year. Even as we've invested in significantly higher CapEx spending so far this year, our free cash flow remains very strong at just under $1.2 billion generated through June 30th. Now turning to Royke. which was a healthy 9.2% on a trailing 12-month basis. Notably, our ROIC continues to run comfortably above our weighted average cost of capital. Our balance sheet remains rock solid. Year over year, net debt is down 4%, or about $454 million. That's after funding over $1.4 billion of acquisition activity this year with the ABL. Leverage was 2.5 times at the end of the second quarter. That's flat to where we were at the end of the second quarter of 2020, and an increase of 20 basis points from the end of the first quarter this year, mainly due to the acquisition of General Finance in May. A look at our liquidity, which is very strong. We finished the quarter with over $2.8 billion in total liquidity. That's made up of ABL capacity of just under $2.4 billion and availability on our AR facility of $106 million. We also had $336 million in cash. Looking forward, I'll share some color on our revised 2021 guidance. We've raised our full year guidance ranges at the midpoint by $350 million in total revenue and $100 million in adjusted EBITDA as we now expect stronger double digit growth for the core business in the back half of the year. Our current guidance also includes the impact of acquisition activity since our last update, predominantly to include general finance. That increase for acquisitions reflects $250 million in total revenue and $60 million in adjusted EBITDA, which includes $15 million of expected full-year one-time costs. Additional CapEx investment will help support higher demand. To that end, we raised our gross CapEx guidance by $300 million, a good portion of which reflects fleet we're purchasing from Acme List. While the fleet will provide some contribution in 2021 and is assumed in our guidance, we expect to see the full benefit next year. Finally, our update to free cash flow reflects the additional CapEx we'll buy, as well as the puts and takes from the changes I mentioned. It remains a robust $1.7 billion at the midpoint. And we'll continue to earmark our free cash flow this year towards debt reduction to enhance the firepower we have to grow our business. Now let's get to your questions. Jonathan, would you please open the line?