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 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, actually 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 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 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 our call. We have plenty of positive news to share this morning. As you saw, we delivered a strong quarter with rental revenue and adjusted EBITDA coming in above our expectations, supported by solid fleet productivity. Today, we'll get under the hood of our results. You'll see the numbers were driven by a combination of factors both inside and outside the company, including a favorable operating environment that continues to improve and a broad-based growth in customer demand. And that's the predominant theme today, not just our growth in key metrics like rental revenue, where we gain 22% year over year, but also the growth we see going forward. We fully expect our momentum from the third quarter to continue through the fourth quarter and into the coming year. That's evident in the latest guidance we provided. And as Jess walks you through the outlook, you'll see that the updates are driven by our expectation of higher core rental results this year. Bear in mind that this increase is on top of our July revision, which already accounted for the acquisitions. That tells you we're looking forward to a strong finish to the year. Before I get into operations, I want to spend a few minutes on our culture, because the quality of our organization is key to our strategy. Clearly, our people are executing well through the busy season. The integration of general finance is going smoothly, and our team members are being supported by our technology. We also haven't missed a beat on safety. Our company-wide recordable rate remained below one again for the quarter, and 11 of our regions worked injury-free in September. Results like this showcase the caliber of our team and the value of our people. The best-in-class workplace culture we've built for more than a decade delivers tangible benefits because we're known as an employer of choice. This is a strong competitive advantage, particularly in tight labor markets. We've grown our team by almost 2,000 employees this year, including 500 employees over and above our acquired people, and our turnover rate has remained in line with pre-COVID levels. The other part of our service, of course, is fleet, and this is something we manage very closely. We just got into our third step up in rental capex this year, and each time the increase has been warranted by customer needs. Our customers are optimistic, they're busy, and they continue to see more growth ahead. And it's our job to be ready for that opportunity. Some of you have asked about the challenges of getting equipment delivered. It's clearly a tight supply environment, but we've been able to secure additional fleet by leveraging our strong financial footing and our relationships with manufacturers. The increase in our capex is also based on our leading indicators, which echo customer sentiment. Virtually all of the indicators point to strong industry demand, which bodes well for fleet productivity. The used equipment market is another one of those positive indicators. In the third quarter, pricing in our retail channels was up 7% sequentially and up by double digits year over year. Used proceeds were 60% of original costs. which is a new high watermark for us. You may remember back in the second quarter, we talked about our return to growth. In fact, we've been able to leverage the gains we made in the first half of the year to accelerate our growth, and that was despite a tougher Comping Q3. Some of that growth came from acquisitions and cold starts, but even with that factored in, both segments are running ahead of expectations. In the third quarter, Rental revenue on our GenRent segment was up almost 18% year-over-year, with all regions showing growth. In addition, all of our specialty businesses grew by double digits. Our specialty segment as a whole was up 36% year-over-year, with 21% growth in same-store rental revenue. And that's higher than the same-store growth rate we reported in the second quarter. We've also opened 24 specialty locations through September, which keeps us on track for the 30 cold starts targeted for the year. When you pivot to our end markets, the picture looks similar. Broad-based growth across a range of verticals. On the industrial side, we saw widespread growth in rental revenue, led by double-digit increases from manufacturing, chemical processing, metals and mining, and entertainment. On the construction side, the gains were just as broad. led by non-res construction, where we were up 18 percent year over year. Within non-res, demand is becoming increasingly diverse. Warehouse and data center work remains strong, and we're also starting to see a recovery in verticals that have been sluggish, like hospitality and education. The power vertical continues to be an important one for us, with wind and solar projects on the rise across multiple regions. We're also seeing work build across the entire EV supply chain. Plant maintenance is another big driver for us. We're seeing that work start up again after being paused for COVID. And the most encouraging trend is project diversity. It's early days, but we're starting to see a healthy mix of new projects like casinos, highway work, hospitals, military bases, and more. That signals a return to business confidence. As activity picks up, customers have an opportunity to think hard about who they want to do business with, and they're placing an increasing value on corporate responsibility. We have a lot of reputational currency here. Good corporate citizenship has been a priority at United Rentals for years, and our company has a long track record of working with customers to support their ESG goals. We're proud to be recognized by Newsweek as one of America's most responsible companies for two years running. Last week, we released our new corporate responsibility report online, and you'll find that it gives you some good insights into our progress in key areas like environmental sustainability and workplace inclusion. So in summary, we're in a strong position operationally, financially, and culturally in a healthy operating environment. Customers have projects lined up stretching well into 2022 The industry remains disciplined, and our team is getting equipment out to job sites. Internally, we're focused on controlling costs and expanding our margins as we lean into growth. We're leveraging our scale to deliver a combination of organic growth, targeted cold starts, and accretive acquisitions, all with long-term synergies for value creation. And in the near term, We've reported quarter after quarter of profitable growth driven by tailwinds that show every indication of enduring. We see a lot of potential for attractive returns, and it gets better from here. With that, I'll ask Jess to go over the numbers, and then we'll take your questions. Jess, over to you.

Thanks, Matt, and good morning, everyone. Our financial performance in the third quarter highlighted better than expected rental revenue, which was supported by broad year-over-year growth across our end markets. On the cost side, we delivered solid results while activity was at its highest level of the season. And we continue to sell used equipment in a robust market. As for the rest of the year, we expect seasonal demand will remain strong. And when coupled with the third quarter's results, this supports a raise to our guidance for the year in total revenue and adjusted EBITDA. And more on guidance in a few minutes. Let's start now with the results for the third quarter. Rental revenue for the third quarter was $2.28 billion, or an increase of $416 million. That's up just over 22% year over year. Within rental revenue, OER increased $325 million, or 20.7%. The biggest driver here was fleet productivity, which was up 13.5%, or $212 million. That's mainly due to stronger fleet absorption on higher volumes. Our average fleet size was up 8.7%, or a $137 million tailwind to revenue. Rounding out the change in OER is the normal inflation impact of 1.5%, which cost us $24 million. Also within rental, ancillary revenues in the quarter were up about $71 million, or 29%, and re-rent was up $20 million. While our outlook to OEC sold for the full year remains unchanged, we made the decision to slow down the volume of fleet sold in the third quarter as we maintained capacity for rental demand. Used sales for the quarter were 183 million, which was down 16 million, or about 8% from the third quarter last year. The used market continues to be very strong, which supported higher pricing and margin in the third quarter. Adjusted used margin was 50.3% and represents a sequential improvement of 240 basis points and a year-over-year improvement of 610 basis points. Our used proceeds in Q3 recovered 60% of the original cost of the fleet sold. Compared to the third quarter of last year, that's a 900 basis point improvement from selling fleet that averages over seven years old. Let's move to EBITDA. Adjusted EBITDA for the quarter was just over $1.23 billion, an increase of 14% year-over-year, or $152 million. The dollar change includes a $219 million increase from rental. Now, in that, OER contributed $200 million, ancillary was up $70 million, and re-rent added $2 million. Used sales helped adjusted EBITDA by $4 million, and other non-rental lines of business provided $8 million. SG&A was a headwind to adjusted EBITDA of $79 million, in part from the reset of bonus expense that we've discussed on our prior earnings call. We also had higher commissions on better revenues and higher T&E, which continues to normalize. Our adjusted EBITDA margin in the quarter was 47.5%, down 190 basis points year over year, and flow-through, as reported, was just over 37%. Impacting margins and flow through in Q3 are few items worth noting. We mentioned back in July that bonus expense would be a drag for the back half of this year, with most of the drag in the third quarter. We also have the impact of general finance, which we've owned all of the third quarter this year, but of course is not in our comparative results last year. I'll also remind you that we had $20 million of one-time benefits recorded in the third quarter last year that did not repeat. Adjusting for these items, the flow through was about 58%, with margins up 130 basis points year over year. This reflects strong underlying performance in the quarter, particularly when you consider the impact from actions we were taking on costs last year, as well as the impact of costs that continue to normalize this year. I'll shift to adjusted EPS, which was $6.58 for the third quarter. That's up $1.18 versus last year, and that's from higher net income. Looking at CapEx and free cash flow, for the quarter, gross rental CapEx was $1.1 billion. Our proceeds from used equipment sales were $183 million, resulting in net CapEx in the third quarter of $917 million. That's up $684 million versus the third quarter last year. Now turning to ROIC. which was a healthy 9.5% on a trailing 12-month basis, which is up 30 basis points, both sequentially and year over year. Notably, our ROIC continues to run comfortably above our weighted average cost of capital. Let's turn to free cash flow and the balance sheet. Through September 30, we generated a robust $1.25 billion in free cash flow, which is after considering the sizable increase in CapEx so far this year. We've utilized that free cash flow to help fund over $1.4 billion in acquisition activity, and we've reduced net debt almost $100 million. Our balance sheet remains in great shape. Leverage was 2.4 times at the end of the third quarter. That's down 10 basis points sequentially and flat versus the end of the third quarter last year, even as we funded acquisitions this past year. Liquidity at the end of the third quarter remained strong at over $2.6 billion. That's made up of ABL capacity of just over 2.2 billion and availability on our AR facility of 68 million. We've also had $320 million in cash. I'll also mention we refinanced a billion dollars of five and seven-eighths notes earlier in the quarter. And refinancing that debt will save $29 million in cash interest in 2022 and extends our next long-term note maturity out to 2027. As we look out to the end of the year, I'll share some color on our revised 2021 guidance. Given we have a quarter to go, we've tightened our full-year ranges per total revenue and adjusted EBITDA and, importantly, have raised our expectations for both. These updates reflect better than expected third quarter results and the continuing momentum we see in demand and in managing our costs for the fourth quarter. We've again raised our outlook for growth capex this year with a $250 million increase at the midpoint. This means we would land more fleet than normal in the fourth quarter, and that's supported by our planning for strong growth in 2022. We've left the range on CapEx a little wider than we would normally at this time of the year as we continue to work with the OEMs to land what we've ordered. And finally, our update to free cash flow reflects the impact of these guidance changes, notably the additional CapEx we expect to buy. And even with that increased investment in CapEx, free cash flow remains strong at over $1.5 billion at the midpoint. So now let's get to your questions. Operator, would you please open the line?