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 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 presentation to see the reconciliation from each non-GAAP financial measure the most comparable GAAP financial measure. Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer, and Jessica Grisano, 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'll start with the main takeaways from yesterday's release. In the second quarter, our team executed extremely well in a robust demand environment. And as a result, we delivered very strong performance by any measure. Our rental revenue increased by 26% year over year to a second quarter record of almost $2.5 billion, well above expectations. And adjusted EBITDA grew faster than the top line, up 31% to a record $1.3 billion. We also demonstrated good cost discipline. Our adjusted EBITDA margin expanded 360 basis points to 47.3%. This contributed to a strong flow through of about 65%. And importantly, we delivered a 230 basis point improvement in return on investment capital to a record 11.5%. The three tailwinds we saw at the start of the year continued to fuel our momentum. The macro environment remained favorable, which created more demand in the quarter. And you can see that in our rental revenue growth, which included fleet productivity of better than 11%. In addition, the customer trend toward renting equipment is alive and well. We see this as a secular shift that will continue to move the market from owning equipment to renting it over time. And lastly, we're confident that our growth is outpacing our industry as we continue to take share, both in our core markets and with key customers. One reason we're gaining share is our positioning as a one-stop shop. Customers place a lot of value on being productive, and our combination of scale, job site solutions, superior service, and technology is unique in our industry. Customers also care about safety. And we prioritize safety on and off the job site. And this is another area where our team delivered in Q2 by keeping our recordable rate well below one. And increasingly, customers place a value on sustainability. In May, we announced an initial agreement to purchase over 500 all-electric trucks and vans from Ford, including the F-150 Lightning pickups. This partnership is a good example of how we're continuing to add sustainable solutions to our rental fleet while moving toward greener operations. We're proud of the progress we're making in many different areas of ESG, including environmental stewardship and social impact. Yesterday, we released our 10th Annual Corporate Responsibility Report with comprehensive data covering 2021, along with more recent developments. You can find it on our website if you'd like to download it. Another thing customers strongly care about is reliability. It's high on their list, and we've got a very high bar in response. Our team is trained to deliver a caliber of service that earns the next opportunity. And our employees like that challenge, and they love being a hero to our customers. That's a big part of our culture at United, and it helps with retention and recruitment. Our net headcount at the end of June was 9% higher than a year ago, which is a solid gain in a tight labor market. And I'll repeat something I said before. We're fortunate to have a world-class team standing behind our strategy. It gives us confidence in every target we put out there, and that includes the updated guidance we released yesterday, which raised our outlook for total revenue, adjusted EBITDA, and free cash flow. We have strong visibility through the balance of the year, and the activity we're seeing will create a lot of demand to get equipment on rent. There are plenty of positive signs to support this view. Virtually all of the external indicators are favorable, including the Dodge Momentum Index, the ABI, contractor backlogs, and customer sentiment. And the used equipment market remains robust. In the second quarter, we captured record recovery rates and margins on used sales. I spoke to all of these dynamics coming out of Q1, and they're all still true today. Now I'm going to pivot to look at demand at the ground level. Our generate and specialty segments both performed extremely well in the quarter. All of our regions company-wide delivered double-digit rental revenue growth. In many ways, it's a continuation of what we spoke about in Q1, broad-based activity across regions stemming from a diversified mix of end markets and key verticals. Looking at it by end market, our rental revenue from non-res construction was up 27% year-over-year, and infrastructure was up 15%. And more broadly, almost every vertical showed year-over-year growth in rental revenue. In terms of project types, large data centers are continuing to break ground, along with infrastructure projects and distribution centers. And manufacturing is coming back. The power vertical is also accelerating, and there are more tailwinds in the wings. With infrastructure, for example, the funding is now finalized in Washington, and we expect to start seeing a benefit in 2023 and beyond. With manufacturing, the resurgence of the industrial sector in North America is being driven in part by supply chain challenges in other parts of the world, and that's good for us. It's already evident in certain sectors. Companies are investing hundreds of billions of dollars in megaprojects in the US and Canada to build plants across a variety of verticals, like semiconductors and automotive. These projects will require equipment for years to come, and they play to our competitive advantage with large customers. On the specialty side, the segment had another excellent quarter, led by our power and mobile storage businesses. The segment as a whole grew rental revenue by 39%, including the benefit from general finance. Pro forma specialty was up a strong 29%. We opened 24 cold starts through June in specialty against a revised target of about 45 openings by year end. And that's slightly higher than our original projection of 40 openings this year. So as you can see, 2022 continues to be a landmark year for our company, both financially and operationally. We delivered another record quarter in what we expect to be a record year. Our flow through in the quarter reflects the team's discipline in navigating a challenging cost environment. And we continue to have the benefit of a strong balance sheet, low leverage, and robust cash generation. This gives us the flexibility to act opportunistically on many fronts. This year we expect to make the largest investment in our history in fleet of about three billion dollars. Our suppliers are taking good care of us and our capex spend is tracking the plan. We'll also continue to explore growth through cold starts and acquisitions. We've made seven bolt-on acquisitions this year to date for a total consideration of over 300 million dollars. Lastly, we expect to complete our share repurchase authorization this quarter These are all prudent capital allocations to create long-term shareholder value. And we know that the key to leveraging capital is relentless execution. And that's what you're seeing from us in our results. Now, before I hand it over to Jessica, I'd like to take this opportunity to thank her personally for her many contributions over the past seven years. As you all know, Jess will be leaving us to take on a new opportunity, and Ted has stepped in as we go through the CFO search process. And I know I speak for our entire leadership team when I say it's been a pleasure to work with Jess, and we wish her all the best in her new endeavor. And now, with that, Jess, you've got the floor.

Good morning, everyone, and thank you, Matt, for your kind words. It's definitely bittersweet to be on my last earnings call for United. My time here has been an incredible experience, and not just with our amazing team, United, and our board, but also working so closely with Ted and the investment community. We've accomplished a lot together, so I'm grateful to have this chance to publicly say thank you. As we look to the quarter, I'm especially pleased to be able to report such great results on my last call. Record results, actually. As Matt shared, the strength we've seen in demand across our end markets has exceeded our expectations for the quarter. It also underpins our increased guidance for revenue, adjusted EBITDA, and free cash flow for the full year. And more on that later. Let's start with a closer look at the second quarter. Rental revenue for the second quarter was a record $2.46 billion. That's up $511 million, or 26.2% year over year. Within rental revenue, OER increased $383 million, or about 23%. Our average fleet size increased by 13.6%, which provided a $223 million tailwind to revenue. Fleet productivity was up a very healthy 11.3%, contributing $185 million. And rounding out OER was about a $25 million reduction in rental revenue from fleet inflation, which we estimate to be a 1.5% drag. Also within rental, ancillary revenues in the quarter were higher by about 115 million, or 42%, which is mainly due to increased delivery fees and other pass-through charges. And finally, re-rent was up 13 million in the quarter. Used sales for the quarter were 164 million, a decline of 30 million, or about 15% from the second quarter last year. We continue to manage used sales to help ensure we have adequate capacity to serve the robust demand we're seeing this year. We're focusing those sales in our most profitable retail channel, and together with a strong market overall and better pricing, delivered a healthy 62.2% adjusted used margin for the quarter. That represents sequential improvement of about 440 basis points and year-over-year improvement of just over 1,400 basis points. Let's move to EBITDA. Adjusted EBITDA for the quarter was $1.31 billion, another record for us, and an increase of 31.2% year over year, or $312 million. The dollar change includes a $324 million increase from rental. Now, in that, OER contributed $273 million, and ancillary was up $51 million. Used sales were a tailwind to adjusted EBITDA of $9 million, and other non-rental lines of business provided $10 million. Other income also contributed $10 million of year-on-year benefit, in part due to some of the one-time costs from acquisitions we called out in the second quarter of last year. SG&A was a headwind to adjusted EBITDA of $41 million, driven in large part by higher commissions on higher revenue. And as expected, we saw certain discretionary costs in SG&A continue to normalize. Adjusted EBITDA margin came in very strong at 47.3%, up 360 basis points year-over-year, with excellent flow-through of 64.5%. Excluding the benefit from used sales in the quarter, flow-through would have been a healthy 59%. The strong performance across the core business reflects better-than-expected growth in rental. It also reflects the impact of actions we've taken to pass through cost inflation in certain areas like delivery and fuel. Our team also did a great job managing costs across other areas of the business. Let's shift to adjusted EPS, which was another record for us at $7.86. That's up 68% or $3.66 versus last year. EPS this quarter includes about $0.55 from a one-time tax benefit, but even if we adjust for that benefit, I'm pleased to note our EPS would still have been a record this quarter. Looking at CapEx, gross rental CapEx was a healthy $872 million in the second quarter. Proceeds from used equipment sales were $164 million, resulting in net CapEx of $708 million, which was similar to the second quarter last year. Net capex through the first half of the year of $979 million is up $232 million, or 31%. Now turning to ROIC and free cash flow. ROIC continues to run well above our weighted average cost of capital at a record 11.5% on a trailing 12-month basis. That's up 60 basis points sequentially and 230 basis points year over year. Free cash flow also continues to be very strong as we generated $392 million in the second quarter and just under $1 billion for the first half of the year, all while continuing to invest in high levels of CapEx to grow our business. I'll share a few comments on our balance sheet. As I look back on my time here, I am especially proud of the work our team has done on the balance sheet. It is in fantastic shape. Our leverage ratio at the end of the second quarter remains at the lowest level in our history at 2.0 times. That's flat sequentially and down 50 basis points from the second quarter of 2021. Liquidity at the end of the quarter was a very strong $2.8 billion, with the vast majority of that coming from ABL capacity of just over $2.5 billion. And notably, within the quarter, we took a number of actions to further bolster our positioning, including upsizing and extending both our ABL and AR facilities with improved terms. And I'd be remiss if I didn't also mention that our next long-term note maturity isn't until 2027. The last thing I'll mention on our capital allocation relates to our current $1 billion share repurchase program. We leaned in a bit into the execution acquiring roughly $500 million in shares during the second quarter. Through June 30, we've spent $762 million of the authorization, repurchasing a little more than 3.5% of our fully diluted share count. With $238 million left to purchase, we expect we'll finish this program in the third quarter. Let's look forward 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 $11.4 to $11.7 billion, or an increase of $250 million at the midpoint, implying full-year growth of 18.9%. As I mentioned earlier, this increase is supported by robust demand that we continue to see broadly across our geographies and our end markets. We expect the profitability and flow-through on that higher revenue to remain strong. Our adjusted EBITDA range is now 5.4 to 5.55 billion, up $175 million from the midpoint of our previous guidance. This implies a 200 basis point increase in full-year adjusted EBITDA margin and robust full-year flow-through of about 58%. A range for gross and net capex is unchanged. We still expect to source about $3 billion of gross capex. We also expect the strength of the used equipment market will support used proceeds consistent with our original guidance, even though we'll sell less fleet for the full year than originally planned. And finally, our free cash flow guidance has increased $150 million at the midpoint, as we now look to generate between $1.85 and $2.05 billion That's mainly from higher operating profit we expect to deliver this year. Now, as I pass the baton, I've asked Ted to jump in on Q&A. So let's get to your questions. Operator, please open the line.