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, 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, 2021, as well as two 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 a 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 measures to the most comparable GAAP financial measures. 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.

Mr. Thank you, operator, and good morning, everyone. Thanks for joining our call. I know there's a lot of interest in 2022, but before I go there, I want to take a look back because the foundation for our current outlook can be found in our 2021 performance. I'll start with our strong finish to the year. As you saw yesterday, our record results for the quarter solidly outperformed expectations for growth and profitability. We grew fourth quarter rental revenue by 25 percent year over year and total revenue by over 21 percent. And our adjusted EBITDA was 26 percent higher than a year ago with a margin improvement of 170 basis points. This translated to a solid flow through of 55 percent. These gains kept a full-year performance that was far better than we could have imagined back in January. Our team is firing on all cylinders with strong execution in the field, solid cost control, effective investment in the business, and thoughtful management of our resources, starting with our talent base. In short, it's our people who outperformed expectations, and our numbers reflected that. I want to stay with this theme for a minute and summarize some of the accomplishments for the year. We maintained a strong safety record, finishing with a full-year recordable rate of 0.79, and that was while integrating multiple acquisitions. We also grew our net headcount by 12 percent. Roughly half of that came through M&A. And the $1.4 billion of capital we allocated to acquisitions is generating attractive returns. In fact, our 2021 return on invested capital improved by 140 basis points to end the year at 10.3. We also generated $1.5 billion of free cash flow last year after investing a record $3 billion of rental capex. And we sourced that equipment in the midst of a supply chain disruption. On the ESG front, our company recently earned an upgrade to an A rating by MSCI. We've received similar scores from other ESG rating agencies, reflecting our commitment to our progressive culture. Environmental, social, and governance matters have been drivers of value in our business for more than a decade, and it's gratifying to see that recognized. Now on to 2022. As you can tell from our guidance, we're very confident in our industry's outlook for strong growth this year. A number of key indicators have been moving the needle higher for months. including the broad recovery in construction and industrial demand, the continued strength of the used equipment market, and the economy that's moving in the right direction, despite some lingering challenges. Given these dynamics, it's not surprising that industry sources show a steady increase in confidence among contractors. And our own customer confidence index improved throughout 2021, ending at its highest point at the end of the year. And importantly, The same optimism was echoed by our field leaders last month as we worked through our annual planning process. And we heard it again at our virtual meeting. We had our annual managed meeting virtually two weeks ago, and this meeting is always a great opportunity to get everyone aligned on goals and strategies, and it's clear that our people are fired up for the opportunity. They could see the benefits of the countless improvements that we've made over the past decade, both operationally and also with our customer service. and they know those efficiencies count for a lot as we grow the top line. The biggest signpost pointing to ongoing growth in 2022 is the diversity of the demand that we're seeing in our end markets. In the fourth quarter, we grew rental revenue by double digits across all of our regions, and all verticals showed positive growth as well. And these were solid increases, with rental revenues from non-res construction verticals up 24 percent year over year, and infrastructure up 11%. Industrial also grew 11%, with strong gains in refining, metals and minerals, and power. And it's notable that both non-res and industrial picked up steam in the back half of 21, with year-over-year rental revenue gains in Q4 coming in higher than those of Q3. Our specialty segment had another strong performance, with every line of business growing double-digit year-over-year. The segment as a whole reported a rental revenue gain of 45 percent, including a pro forma growth of 28 percent. This year, we're planning for around 40 cold starts in specialty, following the 30 that we opened this last year. Specialty is key to our competitive differentiation, and given the segment's history of high returns, expansion will continue to be a priority for us. I'm sharing these numbers to underscore the point I made at the start of my comments. that the building blocks for our current outlook were laid in 2021. Our core markets have recovered faster than expected, and the underlying construction and industrial forecasts are positive. The broad-based acceleration of the last 12 months has become the foundation for a new cycle of growth. And for the first time since COVID arrived, we're seeing a sustained improvement in long-term visibility, which gives us some insight into future market conditions. And that's a huge plus for us after two years of uncharted waters. I'll mention a couple of tailwinds on our radar. One, of course, is the infrastructure bill, which will add an additional $550 billion of funding for projects directly in our wheelhouse over the next five years. We've been expanding our infrastructure capabilities for years, and we have a rock-solid value proposition with traction in the right verticals for this bill. We expect to see some benefits as early as 2023. Another tailwind in our future is the relocation of manufacturing operations back to the U.S. Onshoring initially drives demand for construction, followed by the need for our industrial services once they're up and running. The pandemic has caused manufacturers to rethink how they operate, and we've already seen some funding for new projects tied to this trend. Along with the increase in customer demand comes a large responsibility to have equipment available for rent. And I mentioned that we brought in $3 billion of fleet last year when equipment wasn't easy to find, and that was a home run for the company and for our customers. We're continuing to work with our strategic partners to land a similar amount of fleet this year. And finally, before Jessica goes over the numbers, I want to mention an announcement we made yesterday and a milestone that's coming up later this year. The announcement is our share repurchase program. We expect this program to return a billion dollars to shareholders in 2022. And the milestone I mentioned is our anniversary. United Rentals will turn 25 years old this year. And as you know, we've been a growth story from day one. Even so, I don't think there's been a time in our history when our strategy, culture, and financial strength have been more of an advantage than they are right now in this new cycle. We have a highly engaged team. a cohesive customer service network, and industry-leading scale that matches the market opportunity. We built these levers into the business to create shareholder value, and they did their job in 2021. Now, we'll take that to the next level this year and for the foreseeable future. And with that, I'll ask Jess to cover the results, and then we'll go to Q&A. So, Jess, over to you.

Thanks, Matt, and good morning, everyone. Our fourth quarter results exceeded expectations behind better seasonal trends in rental revenue and continued disciplining costs. We delivered record results with our total revenue, rental revenue, and adjusted EBITDA surpassing pre-pandemic levels for both the quarter and the full year. The momentum we carried out of the quarter is reflected in the growth you see in our 2022 guidance. And even as we invested record amounts in CapEx last year, we generated a significant amount of free cash flow at just over $1.5 billion. And we expect to generate even more this year. And more on 22 guidance in a bit, let's dive a little deeper first into the results for the fourth quarter. Rental revenue for the fourth quarter was 2.3 billion, an increase of 458 million or 24.7% year over year. Within rental revenue, OER increased 345 million or 22.1%. Our average fleet size was up 13.3%, or a $207 million tailwind to revenue. Better fleet productivity provided an additional 10.3%, or $161 million. And rounding out the change in OER is the inflation impact of 1.5%, which was a drag of 23 million. Also within rental, ancillary revenues in the quarter were up about $92 million, or 36%. That's primarily due to increased delivery fees and other pass-through charges. Re-rent was up $21 million. Used sales for the quarter were $324 million, which was up $49 million, or about 18% from the fourth quarter last year. The used market continues to be very strong. which supported higher pricing and margin in the fourth quarter. Adjusted used margin was 52.2%, which represents a sequential improvement of 190 basis points and a year-over-year improvement of 970 basis points. Our used proceeds in Q4 recovered a very healthy 60% of the original cost for fleet that averaged over seven years old. Let's move to EBITDA. Adjusted EBITDA for the quarter was just over $1.3 billion, an increase of 26% year-over-year, or $272 million. The dollar change includes a $282 million increase from rentals, and in that, OER contributed $245 million. Ancillary was up $33 million, and re-rent added $4 million. Used sales helped Adjusted EBITDA by $52 million. SG&A was a headwind to adjusted EBITDA of $58 million, in part from the reset of bonus expense that we've discussed on our prior earnings calls. We also had higher commissions on better revenues and higher T&E, which continues to normalize. Other non-rental lines of business were also a headwind of $4 million. Our adjusted EBITDA margin in the quarter was 47.2%. That's up 170 basis points year over year. with a solid flow through of 55%. This reflects, in large part, the strong underlying cost performance in the fourth quarter, which absorbed costs that continue to normalize, inflation headwinds, and the fourth quarter impact of our bonus reset. I'll shift to adjusted EPS, which was $7.39 for the fourth quarter. That's up 47%, or $2.35 versus last year. primarily from higher net income. Looking at CapEx, gross rental CapEx was 690 million, the largest fourth quarter we've ever had. We put that fleet to work supporting the demand we saw in the quarter, which will carry into the start of 2022. Our proceeds from used equipment sales were 324 million, resulting in net CapEx in the fourth quarter of 366 million. That's up $465 million versus the fourth quarter last year. Now turning to ROIC, which was a healthy 10.3% on a trailing 12-month basis. That's up 80 basis points sequentially and 140 basis points year over year. Importantly, our ROIC continues to run comfortably above our weighted average cost of capital. Let's turn to free cash flow and the balance sheet. As I mentioned earlier, we generated over $1.5 billion in free cash flow after investing a record $3 billion in CapEx last year. We deployed that free cash flow to help fund over $1.4 billion in acquisition activity. We've also continued to delever the balance sheet, which is in great shape. Leverage was 2.2 times at the end of the fourth quarter. That's down 20 basis points sequentially and versus the end of 2020. liquidity at the end of the year remains robust at over $2.85 billion that's made up of abl capacity of just over 2.65 billion and availability on our air facility of 57 million we also had $144 million in cash. let's look forward now and talk about our guidance for 2022 which we shared in our press release last night. the headline here. is our plan to deliver a year of strong, profitable growth, servicing our customers in this new cycle. Our total revenue range is supported by solid demand we expect to see broadly across our end markets in 2022, equating to almost 12% year-over-year growth at the midpoint. That will be supported by a significant investment in growth capital included in the growth capex guidance. Our adjusted EBITDA range includes the impact of our remaining diligent on costs as we manage inflation this year. At the midpoint, we'll generate over $5 billion of adjusted EBITDA growing mid-teens year-over-year. Implied margins expand over 100 basis points with flow-through in the mid-50s. We expect to generate another year of significant free cash flow, getting to $1.6 billion at the midpoint. The strength of our cash flow continues to provide significant firepower available to invest in growth while maintaining a healthy balance sheet. It also provides an opportunity to return cash to shareholders. As Matt mentioned, this week our board authorized a new $1 billion share repurchase program, which we intend to complete in 2022. This leaves us plenty of capacity given our leverage targets for M&A. Now let's get to your questions. Operator, would you please open the line?