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 subsequent filings with the SEC. You can access these filings on the company's website at www.sec.gov. 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, EBITDAs and adjusted EBITDAs. 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. I want to frame my comments today around one word, demand. 2022 is shaping up to be a year of record demand for our services. This is the driving force behind the strong first quarter results we reported, and it underpins our decision to update our guidance. As you saw yesterday, we now expect our total revenue adjusted EBITDA, and free cash flow to be above our original outlook. This reflects the positive impact of the new cycle we talked about in January, and we're excited to continue that conversation today. I'll start with some highlights in the quarter. It became clear that this was not typical seasonality. Our rental revenue tends to be down from Q4 to Q1 as winter sets in, and that's true for the industry as well. But this year, we saw only about half of that normal decline. And as you may recall, we brought in more fleet than usual at the end of last year, and that capacity helped us to capitalize on demand and deliver strong results in key metrics. Our first quarter rental revenue and adjusted EBITDA both increased by 31% year-over-year to record levels. And we improved our adjusted EBITDA margin by 270 basis points to 45%. And this gave us a strong flow through a 57% for the quarter. And we also drove a 200 basis point improvement in return on invested capital to 10.9%. And while the numbers speak for themselves, it's the drivers behind the numbers that we want to focus on today. First, the underlying macroeconomic growth, which continues to move in the right direction. Also, the sustained rebound in many of our end markets coming out of COVID. And lastly, rental penetration in the construction and industrial sectors. We expect all three tailwinds to continue for the foreseeable future. We're also confident that we're gaining share with key customers as we leverage our ability to solve their problems. This is the best way to further differentiate United Rentals in the customer's eyes. And importantly, we see runway here as well. And there's a future tailwind emerging from the infrastructure legislation. We're starting to have conversations with customers about federal projects that should kick off in 2023. And it's a diverse mix with projects for road and bridge work, water control, harbors and ports, and also on the power grid. I also want to call attention to something that may not be so apparent on the surface, which is just how good our team is at managing growth. When demand ramps up in our business, It requires a tremendous amount of operating discipline, especially with customer service. We're very fortunate to have a world-class team standing behind our strategy. There's tangible value to this. We set the company up to be opportunistic, and our people excel at execution. I'll give you some quick examples. The first quarter gave us a big lever for growth, with demand running above seasonality. We had the right people, and the right fleet in place to pull that lever. And as a result, we achieved a 13% year-over-year increase in fleet productivity with strong incremental flow through to the bottom line. The team also excelled at safety, keeping our recordable rate below one for the quarter while safely onboarding and training over 1,400 new employees. On the ESG front, we made headway on a number of initiatives. For example, in March, we added power bank systems to our fleet. These lithium battery packs have zero emissions and replace some of the diesel fuel used by generators. The OEMs are beginning to move faster with R&D, which should make hybrid and electrical solutions more viable on job sites. And we welcome that because we're firmly committed to a sustainable future that makes sense for our customers. So stay tuned for more updates on that going forward. To flesh out the backdrop for everything I just described, our operating environment is in many ways the same positive broad-based outlook we shared with you in January, but with an extra layer of visibility. Our line of sight for the balance of 22 has improved based on what we saw in Q1, including the number of projects underway, the solid backlogs, and the level of customer bid activity. Not surprisingly, our customer confidence index improved as well. and the underlying data supports it. All of our regions had significant double-digit increase in rental revenue. In fact, year-over-year growth in the first quarter outpaced the growth we saw in Q4. Another positive indicator is the continued strength of the pricing environment for used equipment. When we made a strategic decision to sell less equipment in the quarter relative to our initial plans to make sure we could take care of the customers and the robust demand we were seeing. But when you look at what we did sell, ROEC recovery levels improved from the fourth quarter, and our use margin set a new record. More broadly, the data on construction starts and backlogs, the ABI and the Dodge Momentum Index all remain positive. In fact, it's hard to find a leading construction indicator that isn't flashing green right now. We factored all of this into our guidance, along with some projected headwinds like inflation. We're not immune to the challenges in the macro, but we mitigated the impact of inflation in Q1, and we're confident that we'll continue to manage through any challenges successfully. So that's the big picture. I'll round it out with some details at the market level. In the first quarter, our rental revenue from non-res construction was up 28% year over year, and infrastructure was up 17%. Industrial also trended up with 13% year over year growth. And that 13% growth is encouraging because industrial was on its way to recovery before the pandemic hit. Once the supply chains are sorted out, we expect that industrial-like infrastructure will be another sizable runway for us beyond 2022. Our specialty segment had another excellent quarter, led by our power business. Every specialty line delivered double-digit year-over-year growth in rental revenue, and the segment as a whole grew almost 48% including the benefit from general finance. It's been 11 months since we completed that acquisition, and the mobile storage and modular office business has clicked right into place. We've given these specialty businesses more resources, and they're cross-selling ahead of schedule. This has all the hallmarks of a home run for our customers. When we said at the time we closed that deal that we wanted the double size of that business in five years, well, 11 months in, We're firmly on track to make that happen. Additionally in specialty, we opened 13 cold starts in the first quarter towards our target of about 40 cold starts this year. So to sum it up, I conveyed the scope of the market opportunity going forward and our competitive positioning to capture that growth. The prevailing trends that matter to our business are market driven and our markets are healthy. why we've been bullish about this year from day one and why we raised our guidance when demand continued to track above our initial forecast 2022 is off to a very strong start with all the makings of a year of record results now jess will go over those results and then we'll go to q a jess over to you thanks matt and good morning everyone i'll build on matt's comments by saying we are very pleased

to have delivered record first quarter results across virtually every financial metric. That momentum carrying into the second quarter, along with strong customer confidence and our increasing visibility, supports the raise to our 2022 guidance for revenue, adjusted EBITDA, and free cash flow. I'll share more on our updated guidance in a bit. Let's start with a closer look at the results for the first quarter. Rental revenue for the first quarter was a record $2.18 billion. That's up $508 million or 30.5% year-over-year. Within rental revenue, OER increased $392 million or about 28%. Our average fleet size was up 16.4%, which provided a $231 million tailwind to revenue. Fleet productivity was better by a healthy 13%, contributing $183 million, and fleet inflation of 1.5% was a drag on revenue of $22 million and rounds out the change in OER. Also within rental, ancillary revenues in the quarter were higher by about $99 million, or 43%, which is mainly due to increased recovery of delivery fees and other pass-through charges. Rerent was up $17 million. Use sales for the quarter were $211 million, a decline of $56 million, or about 21% from the first quarter last year. We've decided to sell less fleet so far this year, mainly to support the robust rental demand we've seen through the first quarter that we expect will continue into our busy season. The market for our used equipment continued to be very strong, supported primarily through better pricing and a higher percentage of fleet sold through our most profitable retail channel. Adjusted use margin was 57.8%, which represents sequential improvement of almost 560 basis points and year-over-year improvement of just over 1,500 basis points. Let's move to EBITDA. Adjusted EBITDA for the quarter was $1.14 billion, another record for us, and an increase of 30.5% year-over-year, or $266 million. The dollar change includes a $317 million increase from rental. In that, OER contributed $278 million. Ancillary was up $37 million, and re-rent added $2 million. Used sales helped adjusted EBITDA by $8 million, while other non-rental lines of business provided $11 million. SG&A was a headwind to adjusted EBITDA of $70 million, driven in part by higher commissions on higher revenue. And as expected, we saw certain discretionary costs continue to normalize. Also coming in as expected were adjusted EBITDA margin and flow-through for the first quarter. Adjusted EBITDA margin was a solid 45.1%, up 270 basis points year over year, with a strong flow through of 57%. This reflects in large part excellent cost discipline across the business as we manage inflation, including in areas like delivery and fuel. Increased fleet productivity and higher used margins also help to offset not just inflation pressures, but the impact of normalizing costs like overtime and T&E. I'll shift to adjusted EPS, which was a company best of $5.73 for the first quarter. That's up 66%, or $2.28 versus last year, primarily from higher net income. Looking at CapEx. Gross rental capex was $482 million in Q1, which is higher than a typical first quarter, and followed the fourth quarter last year, where we brought in a record amount of fleet. To Matt's earlier point, we've managed our fleet levels to service robust customer demand. So while our fleet levels grew sequentially in what is typically our slowest time of the year, we've put that additional fleet to work, supporting the 13% increase in fleet productivity I mentioned earlier. Our proceeds from used equipment sales were $211 million, resulting in net CapEx in the first quarter of $271 million. That's up $243 million versus the first quarter last year. Now turning to ROIC, which was a healthy 10.9% on a trailing 12-month basis. That's up 60 basis points sequentially and 200 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. We generated $572 million in free cash flow in the first quarter after investing a record amount in CapEx. We've continued to delever the balance sheet, which is rock solid. Leverage was 2.0 times at the end of the first quarter, down 20 basis points sequentially, and 30 basis points from first quarter 2021. I'll note that our leverage is currently at the lowest level in our history. Liquidity at the end of the quarter was a very strong $3 billion. That's made up of ABL capacity of just over 2.9 billion and cash of $101 million. A quick note on our share repurchase program, we spent $262 million through March 31st on our current $1 billion program, having bought back just over 800,000 shares. We still expect to finish that program this year. Let's look forward now and talk about our updated guidance for 2022, which we shared in our press release last night. Total revenue is now expected in the range of $11.1 to $11.5 billion. or an increase of $450 million. Matt shared a number of insights on the demand environment, and that is what underlies this raise. Broad demand we are seeing across the geographies in which we operate and the end markets we serve. We have confidence that we can capitalize on that strength in our end markets and flow that through to the bottom line. That will come largely from a combination of better fleet productivity and a continued focus on costs as we manage inflation in our business. As a result, we have raised our adjusted EBITDA range to be $5.2 to $5.4 billion, up $250 million from our previous guidance. At the midpoint, we will increase EBITDA margin by 150 basis points and deliver strong flow through for the year. of about 56%. Our range for gross and net capex is unchanged. We still expect to source $3 billion of gross capex at the midpoint. Similar to our actions in the first quarter, for the full year, we expect to sell less fleet than planned, given the demand opportunity. However, we expect proceeds on those sales will remain consistent with our original guidance, considering the current strength in our used market. That leaves our net capex guide unchanged as well. And finally, our free cash flow guidance has increased $200 million as we now look to generate between 1.7 and 1.9 billion. That increase is mainly due to higher operating profit expected for our business this year. Now let's get to your questions. Operator, would you please open the line?