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 the 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 in today's call include references to non-GAAP terms such as free cash flow, adjusted EPS, EBITDA, and adjusted EBITDA. Please refer back to the company's recent investor presentations to see the reconciliation for 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 Ted Grace, Interim Chief Financial Officer. I will now turn the call over to Mr. Flannery. Mr. Flannery, you may begin.

Thanks, Operator, and good morning, everyone. Thanks for joining our call. Well, the teams made my job pretty easy today. We reported another strong quarter in a positive operating environment in a record year. That's a great trifecta. And I know it sounds familiar because that's how the year's been going. This quarter was especially gratifying. We delivered year over year increase in rental revenue of 20% with fleet productivity of almost 9%. Our people were definitely on top of that opportunity. We achieved good operating leverage in our business by working efficiently, and that's not easy to maintain during peak demand, especially in the current cost environment. So I applaud the team for meeting our customers' needs while staying mindful of profitability, and most of all, for doing it safely. Our recordable rate for both the third quarter and year-to-date were well below one, and that's with about 10% more headcount in the quarter versus last year. Against this backdrop, we grew our EBITDA margin by 240 basis points year-over-year to 49.9% in the quarter, as we grew EBITDA dollars faster than revenue to over $1.5 billion. That's a record for us in any quarter, and flow-through was a very solid 63%. Importantly, we also delivered another improvement in return on invested capital to a record 12.2%. Given these results and the momentum we're seeing, We raised our full year 2022 guidance for total revenue and adjusted EBITDA, as well as rental capex. I want to elaborate on the capex point before I move to our customers and our end markets. Our industry has continued to show good discipline in terms of supply and demand, which creates a healthy environment for attractive returns. We have two levers we can pull to capitalize on this demand. First, We intentionally held back on used equipment sales this year to make sure we had enough capacity for our customers. And even though we sold less fleet in the quarter on an OEC basis versus our original plan, our revenue from used sales in Q3 was essentially flat year over year, supported by very strong pricing. And secondly, we had the opportunity to pull forward some capex into the current quarter to ensure that we're set up for a strong start to 2023. Our updated guidance includes an increase of rental CapEx of about $350 million at the midpoint. And we think this is prudent as our OEM partners continue to work through supply chain challenges. So that's how we're thinking about CapEx at United Rentals. And on a related note, we're continuing to invest some of the CapEx in fleet that lowers carbon emissions on job sites in line with our ESG initiatives. We recently announced an agreement to purchase all electric ride-on dumpsters from JCB making us the first equipment rental provider to offer this product in our fleet. And on the innovation front, we just launched a sustainability tool in our total control platform that tracks greenhouse gas emissions data. This technology is an industry first, and it's a good example of how we differentiate our company as a partner beyond the transaction. And in this case, we're helping customers reach their own sustainability goals. Investments like these continue to add value to our offering and keep us growing faster than the industry. Now I'll turn to the macro. While there are portions of the economy that are clearly slowing, in our industry, customer activity is still on the upswing, and demand for our equipment rental continues to be very strong. Customer sentiment and key industry indicators remain positive. And we know this outlook may seem at odds with some views on the broader economy. And if we saw cause for concern in our markets, we'd be standing here talking about it. We'd also be using the flexibility built into our model to pivot to a more conservative stance. Instead, we're investing in the tangible opportunities that we see ahead. Here are a few of the unique dynamics that should help our industry continue to outpace the macro in virtually any economic cycle. One is the $550 billion of funding in the U.S. infrastructure bill, which will finally put shovels in the ground starting in 2023. This should trigger at least five years of opportunity. There's another $440 billion of federal tax incentives in the Inflation Reduction Act for clean energy and plant upgrades. We think these will have a five to 10 year impact. And in the manufacturing sector, there are multiple tailwinds that will play out on different timelines. This year alone, hundreds of billions of dollars of new investment in manufacturing have been announced. Investments are already underway in automotive electrification, microchip factories, and the broader trend towards onshoring. And there's also more focus on energy production to serve markets in North America and Europe. Many of these tailwinds are new to the construction and industrial sectors, and in combination, they're a major opportunity for our industry. Looking specifically at our business, the quarter played out even better than we anticipated. Both of our segments and every one of our regions grew rental revenue year over year by double digits. Rental revenue from non-res construction was up 24%, infrastructure was up 11%, and industrial was up 13%. And these are all consistent with the trends we've seen in recent quarters. Demand for specialty was strong across the segment, with rental revenue up 23% year-over-year as a whole, led by our mobile storage and fluid solutions businesses. Our greenfield plans for specialty are moving forward, with 25 cold starts open through September, and another 11 planned by year end. Cold starts continue to be a valuable growth strategy for specialty, with a long-term benefit to our company's total performance. Looking at our markets by vertical, the big multi-year projects in Q3 continue to be data centers, distribution centers, and renewables, as well as the automotive and chip plants that I mentioned earlier. These projects span multiple regions, and most of them are megaprojects. where our customer base, our technology, and our position as a one-stop shop give us a major competitive advantage. Contractors are managing to source the labor and the materials they need, but at the same time, they're dealing with cost inflation, so they need to squeeze more productivity out of every dollar. And we have the digital solutions to help our customers get more utilization from the equipment they rent and own. Worksites are evolving into connected environments, and we're positioned as a leader in that space, And our customers assign real value to the data that we provide. And lastly, I want to mention the new share repurchase authorization we announced yesterday. This program will return $1.25 billion of excess capital to our investors by the end of 2023. And we're proud to make this additional commitment to supporting shareholder value. So in conclusion, our 25th year in business is also shaping up to be a record year of financial performance. We've got a great team in place, and we'll continue to explore every avenue for growth and returns. The construction and industrial sectors we serve have their own tailwinds driving the historic demand for our services. Our customers are building a strong book of business for 2023, and the secular shift toward renting is expanding the market. In this environment, we'll continue to be good stewards of United Rentals. We'll focus on profitable growth, as we have all year, and we'll remain flexible to act in the best interests of our shareholders. And with that, Ted, it's over to you. Thanks, Matt. Good morning, everybody. As you saw in the results we reported last night, the team did a great job delivering across the board. We continue to take advantage of the market by supporting our customers with the fleet they need, driving healthy productivity, and converting that growth to our bottom line. This performance, combined with our updated outlook for the remainder of the year, is reflected in our new guidance, which I'll touch on later. But first, let's dive into the quarter. Rental revenue was a record $2.73 billion. That's up $455 million, or 20% year over year, with strong contribution from both general rental and specialty. Within rental revenue, OER increased by $341 million, or 18%. Our average fleet size increased by 10.6%, which provided a $201 million benefit to revenue, while fleet productivity increased a healthy 8.9%, adding $168 million. This was partially offset by our usual fleet inflation of about a point and a half, or roughly $28 million. Also within rental, ancillary revenues were higher by $103 million, or 32%. This was due mainly to increased delivery fees and other pass-through charges. And finally, re-rent increased $11 million. Outside of rental, third quarter used sales were essentially flat at $181 million as we intentionally held onto fleet to ensure we could support stronger than expected rental demand in our peak season. The vast majority of these sales were in the high margin retail channel. This, together with improved pricing, helped deliver a very healthy 64.6% adjusted used margin for the quarter and record proceeds as a percent of OEC of 83%. Let's move to EBITDA. Adjusted EBITDA for the quarter was $1.52 billion, another record and an increase of $288 million, or 23.4% year on year. The dollar change includes a $288 million increase from rental, within which OER contributed $245 million, ancillary contributed $37 million, and re-rent contributed $6 million. Outside of rental, used sales added about $25 million to adjusted EBITDA, while other non-rental lines of businesses contributed another $3 million. SG&A increased $28 million, primarily due to higher commissions related to volume and the normalization of certain discretionary costs. As a percent of revenue, however, SG&A showed good leverage declining 90 basis points to 11.7% of sales. Looking at third quarter profitability, our adjusted EBITDA margin increased 240 basis points to 49.9%, implying very healthy flow-through of around 63%. Excluding the benefit of used sales, flow-through was a still solid 58% supported by robust rental growth, good fleet productivity, and vigilant cost management. And finally, third quarter adjusted EPS was a record at $9.27. That's an increase of $2.69 per share, or almost 41% year-on-year. Turning to CapEx, third quarter gross rental CapEx of $1.1 billion and net rental CapEx of $921 million were both in line with year-ago levels. Now let's look at return on invested capital and free cash flow. As Matt mentioned, ROIC was another highlight in the quarter at a record 12.2% on a trailing 12-month basis. That's up to 70 basis points sequentially and an increase of 270 basis points year on year. Pre-cash flow also continues to be very strong, with $176 million generated in the quarter, reflecting normal seasonality, and over $1.1 billion generated through the first nine months of the year, all while continuing to fund growth. Moving to the balance sheet. Our leverage ratio declined 10 basis points sequentially and 50 basis points year-on-year to 1.9 times its lowest level in our history. Additionally, our liquidity at the end of the quarter was a very robust $2.8 billion with no long-term note maturities until 2027. Combined with our cash generation, this provides us with tremendous strength and flexibility to run the company and support shareholder value in any environment. Now let's look forward and talk about our updated guidance for the year. Total revenue is now expected in the range of $11.5 to $11.7 billion, or an increase of $50 million at midpoint and implying full year growth of better than 19%. This increase is supported by the momentum we've seen across our business, particularly within rental revenue that we expect to carry into next year. Within total revenue, I'll note that we've reduced our used sales guidance by $50 million to $1 billion. As part of this change, we now expect to sell between $1.3 and $1.4 billion of OEC. As evident in our updated guidance, we remain focused on efficiently converting that additional rental revenue to the bottom line. Our adjusted EBITDA range is now $5.5 to $5.6 billion. which at midpoint is $75 million above the midpoint of our prior guidance. This implies a roughly 240 basis point increase in full year adjusted EBITDA margins and flow through of about 60%. As Matt highlighted, we have also revised our outlook for gross capex by $350 million as we land delayed orders placed earlier in the year in select high demand CAAT classes. In total, we now expect gross capex of between $3.25 and $3.45 billion. With these changes, we still expect to generate a very healthy $1.6 to $1.8 billion of free cash flow, translating to a free cash margin of around 15%. Now, before we go to Q&A, I'll finish with a few comments on our new share repurchase authorizations. We view the $1.25 billion program as an indication of our confidence in our business, the strength of our balance sheet, and the durability of our cash generation. And we're proud of the fact that we've already returned $5 billion of excess capital to our investors since 2012 to support shareholder value, while simultaneously getting our balance sheet to its strongest position in our 25 years. So with that, we'll turn to Q&A. Operator, could you please open the line?

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