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, please 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, 2022, 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 Ted Grace, 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 this morning. As you saw in our third quarter results, the team continues to raise the bar, as evidenced by the new high watermarks we set across this quarter's revenue, adjusted EBITDA, and returns. As you've heard me say many times, our employees are the key to our results. Their focus on safely supporting our customers is paramount to generating value for our shareholders. And I'm most thankful that our team again delivered a company-wide recordable rate below one. And this goes without saying, but safety is not only a differentiator in the eyes of the customer, but it's also critical that we take care of our most valuable assets, our team. Looking towards the rest of the year, our reaffirmed guidance for 2023 reflects our confidence in the outlook of our business. And as I'll touch more on later, this is driven by both what we hear from the field and the tailwinds we see on the horizon. More generally, we're confident in the strategy that we've developed. The competitive advantages we've created over the last decade position us well to continue to outpace the industry as we drive towards our long-term goals. Now let's dig into the third quarter results. Total revenue rose by 23% year over year to $3.8 billion, a third quarter record. Within this, rental revenue was up 18% with broad-based growth across verticals, regions, and customer segments. Fleet productivity increased 1.5% on a pro forma basis. Adjusted EBITDA increased 22% to a third quarter record of $1.85 billion, translating to a margin of over 49%, while adjusted EPS grew by over 26% to a third quarter record. And finally, our return on investment capital expanded to a new record of 13.7%. So let's dive into a bit more of the details behind these results. Used equipment sales more than doubled year over year, to $366 million as we normalized volumes and rotated out older fleet after holding back in 2022. Rental CapEx was in line with expectations at just over a billion dollars, reflecting a more normal quarterly cadence. And as the supply chain has recovered, our need to pull spend forward should be behind us. And now to AHERN. As we approach the first anniversary of the deal, The integration remains on track and highlight continues to be the quality of the team. And as you know, people are one of the key components we add when we bring companies on board and integrate them into United Rentals. Looking forward, this added capacity combined with my comments on CapEx and supply chains should position us well to serve our customers as we enter 2024. Ahearn's another great example of the strength we have in leveraging our balance sheet as a way to benefit both our customers and our shareholders. Now let's turn to customer activity and demand. Key Vertical saw broad-based growth led by industrial manufacturing, metal and mining, and power. Non-res construction grew 9% year over year. And within this, our customers kicked off new projects across the board, including numerous EV and semiconductor related jobs, solar power facilities, infrastructure projects, data centers, and healthcare. Geographically, we continued to see growth across all GenRent regions and our specialty business delivered another excellent quarter with organic rental revenue up 16% year on year and double digit gains in most regions. Within specialty, We opened 14 cold starts during the quarter, resulting in 39 new specialty location openings this year. Turning to capital allocation, in addition to the investments we've made in growth, we returned $350 million to shareholders through share buybacks and dividends this quarter and remain on track to return over $1.4 billion of cash to shareholders this year. As we look ahead, we feel confident in our outlook. This is supported by the ABC's Contractor Confidence Index, which remains strong across the third quarter, as did its backlog indicator. The Dodge Momentum Index, which advanced sequentially in September. Furthermore, non-res construction spending and non-res construction employment both remain solid. And most importantly, our own Customer Confidence Index continues to reflect optimism while early indications from our field team on their expectations for 24 are also encouraging. Finally, I'd like to acknowledge the team for their efforts in earning our company's recent selection to the 2023 Time Magazine's World Best Companies and the U.S. News & World Report's Best Companies to Work For list. Recognition like this comes as no surprise when you see our employees' dedication and hard work in the field day in and day out. So to wrap up my comments today, Q3 was a strong quarter. We remain very pleased with how the year is playing out. Looking forward, the opportunity ahead of us around large projects is unlike anything in my career, and we're uniquely positioned in the rental industry to win more than our fair share of the $2 trillion-plus of investment we see on the horizon. Not only do we have the scale, technology, and one-stop shop solutions to make us a preferred partner, but we have a history of execution our customers can rely on. We set high expectations for 2023 and I'm proud of the results we're delivering. We feel good about the rest of the year and what's ahead for United Rentals and our investors. And with that, I'll hand the call over to Ted before we open the line to Q&A. Ted, over to you.

Thanks, Matt, and good morning, everyone. As you saw in our third quarter release, our team again delivered strong results that were consistent with our expectations and, importantly, keep us on track for another record year. I'll add that we continue to feel very good about our prospects beyond 2023 based on our strategy and the tailwinds we've discussed extensively. While it remains a little premature to say too much about next year, given where we sit in our planning cycle, I will say that 2024 is shaping up to be another year of growth. Certainly more to come there in January with our focus today on our third quarter performance and the balance of the year. Now, one quick reminder before I jump into the numbers. As usual, the figures I'll be discussing are as reported except where I call them out as pro forma, which is to say the prior period is adjusted to include Ahearn's standalone results from the third quarter of last year. So with all that said, let's get into the numbers. Third quarter rental revenue was a record at over $3.2 billion. That's a year over year increase of $492 million or 18% supported by diverse strength across our end markets as you heard Matt say. Within rental revenue, OER increased by $413 million or 18.5%. An increase in our average fleet size contributed 22.2% to that growth, partially offset by a 2.2% decline in as reported fleet productivity and assumed fleet inflation of one and a half percent. Also within rental, Ancillary revenues were higher by $83 million, or 19.7%, while re-rent declined $4 million. On a pro-forma basis, which as you know is how we look at our results, rental revenue increased by a robust 10.2%, with fleet productivity up 1.5%, reflecting a healthy rate environment that continues to be supported by good industry discipline. Turning to used results, third quarter proceeds roughly doubled to $366 million, Selecting more normalized volumes as we continue to refresh our fleet. The decline in our third quarter adjusted use margin to 55.2% was largely due to expanded channel mix required to drive higher volumes, the impact of some cleanup actions we took on Ahern fleet, and the normalization of supply-demand dynamics. Importantly, we continued to take advantage of a robust use market by driving strong volume growth in our retail sales at attractive pricing. I'll also note that our average fleet age was 51.6 months at the end of the quarter, which is essentially back to pre-pandemic levels. Moving to EBITDA, adjusted EBITDA in the quarter was a record $1.85 billion, reflecting an increase of $329 million, or 22%. The dollar change includes a $264 million increase in rental, within which OER contributed $252 million and ancillary added 19 million, while re-rent declined $7 million year on year. Outside of rental, used sales added about 85 million to adjust EBITDA, while other non-rental lines of businesses contributed another $15 million. While SG&A in the quarter did increase $35 million year on year, as a percentage of sales, it declined 180 basis points to 9.9% of total revenue, reflecting another quarter of very good cost efficiency. Looking at third quarter profitability, our adjusted EBITDA margin decreased 80 basis points on an as-reported basis, but increased 20 basis points on a pro forma basis to 49.1%. This translates to as-reported flow-through of 46% and pro forma flow-through of better than 50%. Notably, if we excluded the impact of used in the quarter, our core flow-through exceeded 53%, and was in line with second quarter results. And finally, adjusted EPS increased 27% to a third quarter record of $11.73. Shifting to CapEx, gross rental CapEx was $1.03 billion versus net rental CapEx of $664 million. The $257 million decline in net rental CapEx largely reflects our return to more normalized use sales levels this year. Year to date, gross rental CapEx through the third quarter has totaled almost $3.1 billion, representing about 90% of our full-year CapEx plan, which is in line with both our expectations and historical year-to-date levels. At this point, it is our sense that the supply chains have largely normalized, which should enable us to return to more typical quarterly cadences going forward and better match the timing of deliveries with seasonal demand. Turning to return on invested capital and free cash flow, ROIC set a new record at 13.7% on a trailing 12-month basis and remains well above our cost of capital, while free cash flow also remains a good story. The quarter came in at $339 million, translating to a trailing 12-month free cash margin of 12.8%, all while continuing to fund robust growth. Moving to the balance sheet, our net leverage ratio at the end of the quarter was flat sequentially at 1.8 times, while our liquidity totaled $2.7 billion, with no long-term note maturities until 2027. Notably, all of this was after returning $1.05 billion to shareholders year-to-date, including $750 million through share repurchases and $305 million via dividends. So let's shift to the guidance we shared last night. We reaffirmed within our ranges for total revenue, EBITDA, and free cash flow, reflecting our continued confidence in delivering a record year. Within this, we raised the midpoint of total revenue by $50 million to a range of $14.1 to $14.3 billion, reflecting cleanup actions being taken to dispose of some older fleet acquired that comes with no margin benefit. Just to avoid any confusion, that is to say the fleet is being sold at the values they are recorded at on our balance sheet. You see this in our implied use sales guidance of $1.5 billion at midpoint, which is an increase of $50 million versus our prior guidance. Adjusted EBITDA guidance is $6.775 billion to $6.875 billion, which maintains the midpoint at $6.825 billion. And finally, I'll point out that we expect to generate free cash flow of $2.3 to $2.5 billion, of which we'll return a little over $1.4 billion to our investors through repurchases and dividends. This equates to more than $20 per share or around a 5% yield on return of capital at current share price levels. So with that, let me turn the call over to the operator. Operator, could you please open the line?