United Rentals Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2024

There are 16 speakers on the call.

Operator

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.

Operator

For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10 ks for the year ended December 31, 2023, 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.

Operator

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.

Speaker 1

Thank you, operator, and good morning, everyone. Thanks for joining our call. As you saw yesterday afternoon, 2024 continues to play out as we expected. We were pleased with our 3rd quarter results, which continued to reflect growth across both our construction and industrial end markets. Our updated guidance reaffirms our expectations for another year of profitable growth, which we were able to deliver thanks to our more than 27,000 team members.

Speaker 1

Their hard work enables us to support our customers with world class service and innovative solutions, all while keeping safety as priority number 1. As you've heard me talk about before, we continue to double down on being the partner of choice for our customers. We're helping them solve for their goals across safety, productivity and sustainability through our compelling value proposition. Importantly, not only does our business model enable us to best serve our customers, but it also generates strong shareholder value. Today, I'll discuss our Q3 results, our expectations for the rest of this year and share some examples of how we continue to innovate and rapidly respond to customer needs.

Speaker 1

And then Ted will discuss the financial details before we open up the call for Q and A. So let's start with the Q3 results. Our total revenue grew by 6% year over year to almost $4,000,000,000 And within this, rental revenue grew by over 7% to $3,500,000,000 both 3rd quarter records. Late productivity increased by 3.5%, supported by our focus on capital efficiency and continued industry discipline. Adjusted EBITDA increased to a 3rd quarter record of $1,900,000,000 translating to a margin of almost 48%.

Speaker 1

And adjusted EPS grew year over year to $11.80 another 3rd quarter record. Now let's turn to customer activity. We saw growth in both our GenRent and Specialty businesses. Specialty rental revenue grew an impressive 24% year over year and a strong 15% even if you exclude the benefits of the AK acquisition. Our cross selling efforts helped fuel growth across all of our product offerings.

Speaker 1

And furthermore, we added 15 cold starts in the quarter, putting us at 57 year to date. By vertical, 3rd quarter trends were similar to the Q2. We saw growth in both construction, led by non res, and our industrial end markets with particular strength in manufacturing. It will come as no surprise that we again had multiple new projects in the quarter across data centers, airports, healthcare and battery manufacturing to name a few. Now turning to the used market, which remains healthy.

Speaker 1

As Ted will elaborate on, we sold a 3rd quarter record amount of OEC, which speaks to the strength of demand, while our margins primarily reflected the ongoing normalization of the market. And as we replace this equipment by additional fleet to meet our customer needs, we spent almost $1,300,000,000 on CapEx in the 3rd quarter. We continue to see opportunity to put fleet on rent and our full year guidance reflects a tightened CapEx range with the midpoint unchanged. Year to date free cash flow is over $1,200,000,000 We're on track to hit our full year goal, which translates to a free cash flow margin in the mid teens. Our industry leading profit margins, focus on capital efficiency and flexible business model translate to strong free cash generation and ultimately provide us the ability to create long term value for our shareholders.

Speaker 1

And finally, capital allocation. We returned nearly $500,000,000 to shareholders in the quarter via share buybacks and our dividend. Our balance sheet is in excellent shape and we're on track to return nearly $2,000,000,000 this year. As we wrap up 2024, we're focused on continued execution and delivering another year of records across revenue, adjusted EBITDA and earnings. Our updated guidance, which maintains the midpoint for revenue, EBITDA and rental CapEx, reflects just that.

Speaker 1

We have good momentum heading into 2025, which is setting up to be another year of growth based on what we see and sense today. The tailwinds for a multitude of large complex projects are still in the early innings, and we believe we're uniquely positioned as the partner of choice with our customers. And to support these initiatives, we continue to make investments in optimizing operations for both ourselves and our customers. For example, we're investing in our next generation telematics products, which help customers gain new insights into their own operations and allows our technicians to prioritize their workflow and best manage our fleet. Elsewhere on the innovation front, we recently announced a great example of a customer supporting technology.

Speaker 1

Our ProBox on Demand is a Bluetooth enabled automated tool tracking system,

Speaker 2

which ensures workers have the right tools where and when they need them and tracks tools in real time to significantly reduce worksite loss.

Speaker 1

Both of these examples demonstrate our culture of innovation and continuous improvement. But taking care of our people and helping our communities are also key elements of our culture. And I was very pleased with how quickly our team reacted in the aftermath of the devastating damage caused by both hurricanes Helene and Milton. In both instances, we were immediate to respond, putting our proven United Rentals playbook to work and providing our customers with the support needed to start the cleanup and rebuild process. So to wrap things up, 2024 remains on track with 2025 setting up to be another year of growth, which we'll discuss in greater detail in January.

Speaker 1

We continue to deepen our relationships as we partner with our customers, not only providing them the equipment they require, but also helping them solve their other challenges. The combination of our competitive advantages and flexible business model, coupled with our focus on profitable growth, strong free cash flow and smart capital allocation positions us to drive long term and sustainable shareholder value. And with that, I'll hand the call over to Ted before we take your questions. Ted, over to you.

Speaker 2

Thanks, Matt, and good morning, everyone. As Matt just highlighted, the year continues to play out as expected with 3rd quarter records achieved in total revenue, rental revenue, EBITDA and EPS. Looking ahead, our reaffirmed guidance at the midpoint across all metrics reflects our continued confidence in delivering another year of solid growth, strong profitability, healthy returns and significant free cash flow. As importantly, we remain focused on prudently allocating capital to help maximize shareholder value. So with that said, let's jump into the numbers.

Speaker 2

3rd quarter rental revenue was a record $3,463,000,000 That's a year on year increase of $239,000,000 or 7.4 percent, supported again by growth from large projects and key verticals. Within rental revenue, OER increased by $153,000,000 or 5.8%. Growth in our average fleet size contributed 3.8% to OER, while fleet productivity added 3.5%, partially offset by assumed fleet inflation of 1.5%. Also within rental, ancillary and re rent revenues were higher by $86,000,000 or 15%, resulting primarily from strong growth in our specialty businesses. Turning to our used results.

Speaker 2

We sold a record amount of fleet in the 3rd quarter generating proceeds of $321,000,000 in a strong demand environment. While we continue to see a normalization of used pricing, our adjusted margin and recovery rate both remained high by historical standards at 49.5% 54% respectively. It's also worth noting that our recovery rate was impacted by the age of fleet we sold in the quarter, which increased roughly 4 months year on year to 95 months on average. Moving to EBITDA. Adjusted EBITDA was a 3rd quarter record at just over $1,900,000,000 translating to an increase of $54,000,000 or 2.9 percent.

Speaker 2

Within this, rental contributed $132,000,000 year on year. Outside of rental, used sales were a $43,000,000 headwind to adjusted EBITDA, driven by the ongoing normalization of the used market. SG and A increased by $40,000,000 year on year, primarily reflecting a larger business, including the addition of Yacht and some discrete items in the quarter. And finally, the EBITDA contribution from other non rental lines of businesses increased $5,000,000 year on year. Looking at 3rd quarter profitability, our adjusted EBITDA margin was 47.7%, implying about 140 basis points of compression.

Speaker 2

Excluding the impact of use, however, our margin was down about 1 percentage point, reflecting the impact of the investments we've talked about making this year, normal variability in costs and the impact of roughly $15,000,000 of discrete items in the quarter. Converting this to flow through, our incrementals would go from about 24% on an as reported basis to 36% ex used and into the low 40s excluding the $15,000,000 of discrete items I just mentioned. And finally, our adjusted earnings per share was a 3rd quarter record of $11.80 Shifting to CapEx. Gross rental CapEx was $1,300,000,000 which was in line with expectations and within the range of historical seasonality. Moving to returns and free cash flow.

Speaker 2

Our return on invested capital of 13.2% remained well above our weighted average cost of capital, while year to date free cash flow totaled over $1,200,000,000 Our balance sheet remains very strong with net leverage of 1.8 times at the end of September and total liquidity of almost $2,900,000,000 I'll note this was after returning a record of over $1,400,000,000 to shareholders year to date, including $326,000,000 via dividends and $1,100,000,000 through repurchases that have reduced our share count by almost 1,700,000 year to date. Now let's shift to the updated guidance we shared last night, which reflects our continued confidence in delivering another year of strong results. As previously mentioned, we are maintaining the midpoints for all metrics and narrowing the ranges for total revenue, EBITDA and gross and net CapEx as we normally do at this point of the year. In terms of specifics, for total revenue, we've narrowed our guidance to range of $15,100,000,000 to $15,300,000,000 implying total revenue full year growth of just over 6% at midpoint. Within this, I'll note that our used sale revenue guidance is unchanged at roughly $1,500,000,000 of proceeds on OEC sales that we now expect closer to $2,600,000,000 On adjusted EBITDA, we've narrowed the range to $7,115,000,000 to $7,215,000,000 Our range for gross CapEx is narrowed to $3,550,000,000 to $3,750,000,000 and our net CapEx is narrowed to $2,050,000,000 to $2,250,000,000 We're still on pace to return a record $1,900,000,000 to shareholders this year, which translates to almost $30 per share or a current return of capital yield of about 3.6%.

Speaker 2

So with that, let me turn the call over to the operator for Q and A. Operator, please open the

Speaker 3

We'll take our first question from David Raso with Evercore ISI. Please go ahead. Your line is open.

Speaker 4

Hi, good morning. Thanks for the time. You made a comment, Matt, about good momentum into 2025, another year of growth. Can you give us, at least how you're thinking about that between specialty and gen rent growth and also fleet productivity versus fleet growth? I'm not looking for exact numbers, but just how do you think about the different contributors?

Speaker 4

And then I have a second question.

Speaker 1

Sure, David. So when we think about how next year is playing out, and I'll just talk about this qualitatively because we haven't even finished our planning process and that will inform what we actually think our growth will be. But we're going to have a little bit of carryover in fleet, right, that we feel confident that we'll put to work. And on the demand perspective, there's still a good pipeline of large projects. The wildcard as we get deep into with our customers and our field leaders, what's that local market going to do and we talked about that a lot this year.

Speaker 1

Our assumption of interest rates starting to show some give and possibly more coming. We think at least the emotional part of that step has been heard from our customers. So people are starting to feel a little more confident. What kind of activity that actually turns into is the part that we don't have any quantitative way of filling that out, but we're going to figure out from our customers and our field leaders and then we'll add that growth. But when you think about the ending fleet having a little bit of growth to it, we'll continue to strive to drive fleet productivity.

Speaker 1

I'm not going to put a number out there or forecast it, but our goal is to always drive revenue growth more than fleet growth, which is all fleet productivity measures. So we'll continue to do that. And we think specialty certainly has more headwind. I mean, we've been, I don't know since when, but we've been 8, probably 8 years plus of specialty growing over 20% each year. And we continue to think that they have that kind of opportunity.

Speaker 1

And the tailwinds that we talk about in the mega projects, infrastructure and the like really plays to our one stop shop full value offering that also helps specialty drive more growth. So that's the way we think about it with what kind of growth and what kind of growth CapEx we'll put in. We'll talk about that in January after we're done with our planning process.

Speaker 4

And also you mentioned the strength of the balance sheet, the cash flow, as you're aware, right, the sizable acquisition in the mobile modular space recently broke apart. So I'll just give you the platform here if you want to comment at all on the attractiveness of that space. Obviously, you became a player with GenFinance. If you can just touch on that and of course any other M and A landscape comments would be appreciated. Thank you.

Speaker 1

Sure, David. On the first part, we're very pleased with the acquisition we did with General Finance. We talked about when we bought that doubling the size of that business in 5 years. We're probably ahead of schedule on that, but certainly on track. We feel really good about that.

Speaker 1

And for that space, we like the idea of growing off of that platform a lot and we're accomplishing that. We don't necessarily need to be the biggest provider in that space overall. We just need to

Speaker 2

be the biggest with our customers. And

Speaker 1

that's the way we look at a lot of our And that's the way we look at a lot of our adjacent product

Speaker 5

lines.

Speaker 1

So, pleased there. And as far as M and A, we continue to look at the pipeline, right. We've got a competency of integration and cross selling that's unique and something that really plays well with our customers and within our organization. But the bar is high, right? So it's not always easy to get the right dance partner.

Speaker 1

We can get the strategic fit. We can get cultural fit and the last part is financial and our bar is high there. I think one of the reasons we're good integrators is because we're smart buyers. So we continue to work the pipeline and when something's imminent, we'll let you all know.

Speaker 4

All right. Thank you.

Speaker 6

Thanks, David.

Speaker 3

We'll take our next question from Michael Feniger with Bank of America. Please go ahead. Your line is open.

Speaker 7

Yes, guys. Thanks for taking my question. I just was curious, Matt, when we think of 2025, just the puts and takes, like the last few years, rate has been a good guy as we've been in a backdrop of higher inflation. You guys were clearly able to pass that along. The industry was able to.

Speaker 7

As we approach 2025, Matt, just if equipment pricing is softening, can you guys still drive rate in that environment, even if we're in a more deflationary environment? Just love to get your view on that.

Speaker 1

Yes. So absolutely, we can continue to drive rate. That's about what's your value to the customer and you got to try to offset inflation. Even if equipment pricing stayed flat to down this year for the next batch we buy, we still have to absorb the inflation that we've been paying for the last couple of years on the fleet, which was significant. But additionally, there's been fluid inflation throughout the business, right?

Speaker 1

And we're going to continue to give our employees raises. We continue to have cost inflation that we've been absorbing throughout the last couple of years. So the need to continue to drive rate is certainly there. And probably more importantly, the discipline in the industry is there. So everybody's in the same boat where we have inflation that we've got absorbed.

Speaker 1

And I think the industry is creating good value and giving a good output for the customer, which is the most important part of allowing yourself to get price increase.

Speaker 7

Fair enough. And Matt, if you could just follow-up my last question. Just how are you feeling with your fleet age, your fleet mix, if we are in another environment where there's a little bit more megas versus local, a little bit more specialty versus gen rent. Just curious if you could comment of where you feel like your fleet's in position to still be able to have a growth year next year with where the age is today? Thank you.

Speaker 1

Yes. Our fleet is a little over 50 months, I believe, right now. It's the lowest it's been pre COVID and that's even absorbing some longer lived assets that we bought in the last 5, 7 years, right, with general finance and tanks. And so we feel really good about where it is. There's plenty of headroom, if we ever had to lean on that, but that's not our expectation, but we're in real good position.

Speaker 1

Like I said, we're back to pre COVID fleet age. Thanks, Mike.

Speaker 3

We'll take our next question from Tim Thein with Raymond James. Please go

Speaker 8

ahead. Thank you. Good morning. Maybe just Matt on the topic of fleet productivity. I'm curious is I think the expectation coming into the year was to maybe hold serve on time.

Speaker 8

I'm just curious as we're 9 plus months into the year, how you're trending relative to that initial objective?

Speaker 1

Yes. As we've said, we'd be really pleased if we were able to repeat the kind of time utilization that we achieved in 2023. And I'm pleased to say that's what the team is doing. So when we talk about the components of fleet productivity qualitatively, rate is still a good guide and let's call time neutral, which is a good achievement. When we're talking about just to put it in perspective, I've said this previously, these are time utilizations back to better than 2019 levels, back to pre COVID levels.

Speaker 1

So we're pleased with that. And then the last part is mix, which that's the variant part. That's the part that is an output of tens of thousands of transactions a month. And just to remind everybody within that mix is any inflation that we've paid for the fleet that's over and above the 1.5% peg. And we've talked earlier this year that that looks more to be like 2.5% to 3% this year.

Speaker 1

So when we think about that fleet productivity even ex YAC at 1.9% absorbing that extra inflation, we're really pleased with the execution of the team. Got it. Okay. And that's

Speaker 8

safe to assume, obviously, given how you layer in fleet that inflation even in mildly if it were to play out where 1 year's equipment purchases is layered in with 7, 8 years. So that would still remain that fleet inflation dynamic, Matt, we should still think about that as a headwind in 2025, correct?

Speaker 1

Yes. Oh, yes. Yes, it's going to that tail is going to last a little bit in a couple more years.

Speaker 8

Yes, yes. Understood. Okay. And then just on going back to the thoughts around capital in 2025. You just brought in what 30% -ish or close to 30% more fleet in the 3rd quarter year over year and with fleet productivity just call it 2% ex YAC.

Speaker 8

Are you and obviously you'll typically de fleet a bit in the Q4. Is the if these trends kind of persist, would you maybe would next year maybe lean a little bit lighter in terms of how you layer in that CapEx in terms of the first half? I know it's early days, but just thinking about kind of the timing of how you may think about landing fleet in 2025. Any thoughts on that?

Speaker 1

Yes. Without having done the work, I would just make the assumption of a similar cadence at this point. But we'll talk about that a little more in January after we figure finish the budgeting process. But I don't think we're going to be that far off the cadence that we typically run. We're back to a more normalized cadence as a supply chain is just about fully repaired.

Speaker 1

I mean, there's just a handful of items that maybe have longer lead times than we'd like, but the supply chain, our partners have done a good job getting their business back in line and their suppliers back in line. So we're in pretty good shape and I think we'll return to a more normalized cadence, which similar to what you saw this year.

Speaker 9

Okay. Thank you.

Speaker 1

Thanks, Tim.

Speaker 3

We'll take our next question from Jerry Revich with Goldman Sachs. Please go ahead.

Speaker 10

Clay, on for Jerry. You've talked about pockets of soft demand in some of the markets, particularly the local markets. How much more to optimize productivity?

Speaker 1

You broke up a little bit. Could you repeat that question, please?

Speaker 10

Yes. So just on this regarding the pockets of soft demand in some of the local markets, just curious how much more fleet you are moving geographically today versus last year to optimize productivity? Thanks.

Speaker 1

Yes. We have a very dense network, right? And we're covered just about all of U. S. And Canada.

Speaker 1

So we're not having any exorbitant costs or any extra efforts to have to move things more than maybe a state to state at the most. We're not doing coast to coast movements or anything like that. We were asked that question in Q2. And fortunately, with our business model of fungible assets, we're able to move stuff within districts. So really nothing to call out there.

Speaker 10

Thanks. And then obviously really strong growth on the specialty side. Can you rank order

Speaker 1

I didn't catch it all again, Clay. I think they were asking us to rank order our specialty growth.

Speaker 10

Yes. Well, just some color on what's the stronger areas within specialty. Sorry about that.

Speaker 2

Sure. I mean, we don't get too granular here, but certainly we've talked about power being a very strong region for us and that has continued to be the case. Frankly, there's growth across all segments of specialty. They each have different variances. Some are less mature and we're building out.

Speaker 2

So you're kind of building off smaller numbers, so you can have stronger growth rates as a result, but they all performed quite well in the quarter and have year to date and that's really what you've seen in those numbers.

Speaker 5

Thanks. Thank you.

Speaker 3

We'll take our next question from Robert Wertheimer with Melius Research. Please go ahead. Your line is open.

Speaker 1

Thanks. Good morning, everybody. Good morning, Rob.

Speaker 11

So my question is going to be on cost. So the question is on cost. And I know it's not the highest growth revenue quarter. I think we talked about that last quarter where a little ish costs show up. And I don't imagine you're managing your strategy for quarterly SG and A number anyway.

Speaker 11

So the cost of the question is really around the IT investments that you've made. Are you doing anything different there? Do you have a sense of is there a payback? Are you thinking about a payback in the next year? I mean what's interesting about that spend there and what are

Speaker 12

you trying to do? Thank you.

Speaker 2

Yes. Good question, Rob. So as we've talked about all year, we are making, call it additional investments in various aspects of technology. We do each and every year. This year, there's probably a couple of new programs we've talked about.

Speaker 2

Some of it would relate to call it AI related stuff. Some of it will relate to the advanced telematics packages that we're rolling out, all of which we think both make the company more efficient and improve the customer experience. I'm not sure we've dimensionalized them. And one of the reasons we've called them out is just to bring up the fact that in the current environment, we're growing kind of in the single digits, not in the double digits as we had in prior years. It does have a relative impact on flow through.

Speaker 2

So as we've talked about kind of margin performance in 2024, flow through performance in 2024, that along with the cold starts are really the 2 underlying things that kind of bridge people to where we are and expect to be this year versus maybe where they would have thought we would be in a otherwise different environment. So but the investments, they're across a broad range of things. Certainly on the fleet side, sourcing, purchasing, there's a lot of things we're doing there that we think are exciting that we think we're very confident have very attractive ROI. You certainly get into proof of concepts and then pilots and then you prove it out and then you get ready to roll it out and then you've got change management. So there's a lot of considerations that take time to implement an example like that.

Speaker 2

Certainly, we've got other examples across the business in aspects of HR, for example, But there's a whole host of them that we think are really exciting, inventory management, R and M. I think we've talked about a few different examples. So they are all in varying stages and certainly some will prove to be very attractive returns and some will prove to be not as attractive and those are ones we probably won't move forward with. But at the same time, we've talked about augmenting our current capabilities internally with third parties And it's quite a process. I think you're probably well aware of this, Rob.

Speaker 2

But as you start embracing some of this technology, you've got to kind of go through your data, you've got to clean it up, you've got to reorganize it, restructure it so that you can lever it in these new models. And that's certainly part of the foundational work that we've been focused on in the last year, that then puts us in a position to really get even more value out of the data. Matt, I don't know if you'd add anything? No.

Speaker 1

And I think Rob said it right this We're not managing for a specific flow through number. We're not going to put long term investments aside, because maybe the growth is a little bit slower. So I think that's what you have the way your question was phrased and that's the right way to think about

Speaker 12

That's fantastic. Thank you.

Speaker 1

Thanks, Rob.

Speaker 3

We'll take our next question from Jamie Cook with Truist Securities. Please go ahead.

Speaker 13

Hey, good morning. I guess just piggybacking on Rob's questions, I'm just trying to think through the path for potentially improved profit pull through or incremental margins next year. Ted, it sounds like it's highly reliant to some of you guys getting back to double digit growth in order to achieve that. Or I'm wondering if with improved visibility because of mega, more mix towards specialty, maybe some of these technology investments paying off. Is there a path, I mean, not to get to your targeted 50% incremental margin, but at least a path towards improved incremental margins 2025 over 2024?

Speaker 13

Thank you.

Speaker 2

Yes. I'll certainly touch on that, Jamie. I mean, I don't want to get ahead of ourselves. We'll obviously give that guidance in January. But it's dependent on a lot of things, right?

Speaker 2

So certainly growth is one we've talked about this year. And then the call it the investments you're making and or other elements of cost. So as you think about 25, certainly there could be additional tech investments conceivably, right? I don't want to forecast that at this point. The cold starts have been a drag.

Speaker 2

We've talked about the impact that has as you start a branch and it's fully burdened from a cost perspective and yet it doesn't really have revenue and it scales in over probably 2 years. So you think about this year, we're at 57 cold starts. So we've already exceeded the total we did in 2023. As we go through our 2025 plan, we'll figure out what the game plan will be there. Certainly, used is one of those other elements that you've got to be mindful when you think about flow through.

Speaker 2

But when we kind of synthesize the whole thing back to the core margins and profitability, we've been really pleased with how 2024 has played out.

Speaker 13

Thank you.

Speaker 1

Thanks, Jim.

Speaker 3

We'll take our next question from Ken Newman with KeyBanc Capital Markets. Please go ahead. Your line is open.

Speaker 6

Hey, good morning, guys.

Speaker 5

Good morning.

Speaker 10

So Matt, just I wanted to touch back on

Speaker 5

the local accounts. Correct me if I'm wrong, but you do sound slightly more optimistic about the demand there in terms of stabilization. Is it is the expectation there the demand is stable from 3Q to 4Q? Or just any color there on the local accounts specifically?

Speaker 1

Yes. I would say the optimistic view would be supported by our customer confidence index, number 1. So they remained positive. And as I had said about the interest rate, there's an emotional portion of that. The fact that that's finally pivoted has got people thinking about what are we going to fund?

Speaker 1

What kind of projects are going to come back? And the real question is, when does that emotion sentiment and in future cuts turn into shovel ready work? We don't know that. The great news is we don't need to know that, right. So we have a business model where we can react quickly.

Speaker 1

So we'll talk, like I said earlier, to our customers and our field team to put this plan together. And a big part of our internal investigation will be what does a local market look like for us next year. And as we build that plan, we may be right to the upside, we may be wrong to the downside. But the supply chain is back intact and our flexible business model, I feel very comfortable, let us to react to whatever the reality is. The truth is there's no quantitative way to measure how fast these cuts will turn into revenue.

Speaker 1

But we do are optimistic because of what we hear from our customers.

Speaker 5

Right. That makes sense. Just here for my follow-up, Ted, obviously, you've got a couple of moving pieces here in terms of the margin improvement, whether that's mix out of specialty. You did touch on a little bit from disaster recovery and hurricanes. I know it's kind of still early days, but I'm curious if you can help us quantify what's embedded into the implied 4Q margin at the midpoint at this point from hurricanes specifically?

Speaker 2

It's really nothing. I mean there's been no change to the guidance. So we'll see kind of what the net impact of these two events is. But certainly, as it relates to our guidance, there is no change.

Speaker 1

Yes. I mean, the impact of the storms, although devastating to the folks there, and we certainly are going to help out in any way we can, both our employees and the communities and customers that we work and live in. But at the scale of our business, I mean, we're talking small numbers here in the big scheme of things and probably more 25 event if there is some significant rebuild. But even within that, we're talking small numbers in the big scale of things. Got it.

Speaker 1

Thanks.

Speaker 3

We'll take our next question from Kyle LeMentes with Citigroup. Please go ahead. Your line is open.

Speaker 14

Thanks guys. It would be great if we could hear a little bit more color on just what you're seeing in some of the industrial end markets, maybe if I know you called out manufacturing, sounds like that's industrial end markets, maybe if I know you called out manufacturing, sounds like that's been strong, but anything else that's perhaps been weak this year? I know we've heard from some other companies that industrial MRO hasn't exactly been that strong this year. So maybe, that starts to improve into next year as you get some improvement in PMIs. Just anything noteworthy on the industrial side of things to call out that could maybe improve a little bit next year?

Speaker 2

So on our side, the one thing we've called out year to date and it was again true in Q3 was some of the headwinds we've got in petrochem. And it's really across the board. So upstream has kind of mirrored what's happened with the U. S. Land rig count.

Speaker 2

We'll see what happens with investment upstream investment in North America next year, but that has continued to be a headwind. Midstream has kind of followed on, not a surprise there. If you're not completing wells, there's no need to tie them back. And then when you think about refining and chemical processing, those also year to date have been down a bit. So that to us is more likely timing.

Speaker 2

Certainly, if you look at things like gasoline demand, diesel demand, jet fuel demand, very strong. It's our sense that a lot of refineries are postponing work to the degree they can to take advantage of the margins they're earning. So that to us is more of a timing issue. And certainly on the chemical processing side, it would seem to be similar to refining. Other than that, industrial manufacturing has continued to be very strong for us.

Speaker 14

That's helpful. Thanks. And then certainly the revenue contribution from ancillary and re rent has been a nice tailwind for this year and sounds like it's been driven by specialty. So just how should we be thinking about that into next year? Should we assume continued growth in ancillary re rents just given expected expecting specialty growth as well next year?

Speaker 2

Yes. I mean time will tell. If you look at that, I think it was up 15% in the quarter. So it certainly outpaced rental revenue. Part of that is YAC, the contribution they have.

Speaker 2

So as we anniversary YAC, you won't have that component as a tailwind with an ancillary. But otherwise, certainly the growth we've had in specialty is also contributing to it, whether it's setup, breakdown, fueling those sorts of things we do for customers. So the thing to just remember is we will anniversary the impact Yac has it, but has on it. But yes, it should certainly correlate to some of that specialty growth.

Speaker 14

That's helpful. Thanks guys.

Speaker 1

Thanks, Kyle.

Speaker 3

We'll take our next question from Angel Castillo with Morgan Stanley. Please go ahead.

Speaker 5

Good

Speaker 6

Just wanted to go back to your comment about some of the discrete investments that you're making, particularly on the sourcing side that you mentioned. Just curious if you could unpack that a little bit more as to like what exactly you're doing on the sourcing? And in particular, I was hoping you could provide some color as well as it pertains to the equipment type that you need perhaps between small and local markets versus what is needed in the kind of mega projects and any differences there and how that impacts your fleet management, your sourcing and CapEx?

Speaker 2

Sure. I'll take the first part of that and I think Matt will take the second part. On the sourcing side, there are 2 ways we think about sourcing. One is the way we manage fleet across our own network. And so certainly we're leveraging technology, new aspects of technology and data analytics to more efficiently move fleet to improve the customer experience to make sure that that equipment availability is there, but also to reduce costs.

Speaker 2

And there are a couple of different ways that we think we can do that. But ultimately, you come back to kind of predictive analytics and the idea of trying to forecast where fleet is and where it needs to go across multiple iterations. So you're thinking multiple steps. We think that's an area where there's a lot of opportunity for us to leverage technology. Certainly, it can help with more efficient purchasing internally the way we think about planning not so much as it relates to the acquisition of fleet, but the way we think about managing fleet internally.

Speaker 2

So I think we've always done a very good job there and this we think can make us a little better. I think those were the first that was the first part. The second part was on fleet by project size. Yes.

Speaker 1

Yes. So we don't expect to have any kind of large change or swing in any category. One of the things that's key to our business model and you guys hear me talk about it plenty is the fungibility assets. We don't get into niche items that are just for one specific vertical. That's the exception, not the rule here.

Speaker 1

And we think that's important because with our broad coverage and our broad customer needs, it's important that we can move assets from 1 vertical to the other vertical in case one slows down, like we talked about oil and gas and one picks up like we talked about infrastructure. And if we got too specialized, we think it'd be a lot harder to have the resiliency that we have by different end markets.

Speaker 6

That's helpful. Thank you. And then maybe just if you could talk about the trends that you're seeing kind of in new equipment prices and supply, You talked about inflation a little bit earlier in the call, but maybe to the extent that trends you're seeing there and then if you could comment on just the discipline on rental rates that you're seeing from the independents across particularly your local markets?

Speaker 1

Yes. So first on the supply side, as I said earlier, we're real pleased with our vendors, how hard they've worked to get their supply chain, which was severely disrupted in line. As far as pricing, as I said before, we won't talk about our partnerships and the pricing and negotiate on public forum. But I think our vendors do realize the price increases they had to push on over the past couple of years. And I think they value the steadiness and of our demand and of our commitment to them.

Speaker 1

So we feel good about our position there. And to the second part, as far as what was the

Speaker 2

second part of the question, Angel? Discipline.

Speaker 1

Yes. So as far as the pricing, I mean, you see it in any data you look at, you see it, you hear it from our public peers. I mean the industry has grown up and we've been talking about this for a while. And I'm just really pleased that people realize, you can't just keep absorbing inflation and absorbing these costs. You're just going to hurt your business.

Speaker 1

So and I think the value that rental brings overall, certainly, we feel like we lead the way, but I think the industry overall gives better output, better value to the market. We're much more reliable channel, much more flexible and responsive channel. So I think that's part of the reasons why people are able to keep that

Speaker 5

discipline. Very helpful. Thank you. Yes.

Speaker 3

We'll take our next question from Neil Tyler with Redburn Atlantic. Please go ahead. Your line is open.

Speaker 15

Yes, thanks. Good morning, Matt, Tate. One that's really I want to come back to the cold starts and the pace of openings there. And I wonder if we think about that in the context of what you said compared to 2023, what drives your sort of planning outlook for how many and where to land those starts? And how should we think about the cold starts, particularly when I think about specialty and specialty branches within that number?

Speaker 15

How should we think about where we are in, say, a sort of 5 year view on that journey? Are you sort of trying to put a lot of branches in place in order to capture future growth? Or do you think this is a sort of more measured cadence over the next few years? If you could just sort of talk a little bit around that, that would be very helpful. Thank you.

Speaker 1

So sure, Neil. We don't have multiyear goals nor do we put it out. In the beginning of each year, we'll go through the planning process. We'll see who wants to fund what cold starts and who wants to fund organic growth in many different ways. And then we'll go through it and we'll communicate that in January.

Speaker 1

But just when you think about it, we still have white space, some products that are more mature, maybe not as much in geographic expansion as opposed to penetration. But in others, we have a lot of new product lines that we've added over the last couple of years, whether that's our reliable on-site business, our acquisition of YAC and still quite frankly, the general finance team, where in mobile storage, we still have white space to fill in. So that's most of what it is. It's new products and or deeper geographic penetration and we communicate that each year. We think there's plenty of headroom in specialty overall as a team.

Speaker 1

And quite frankly, one of our most mature in power still showing tremendous growth and they're just doing it by penetration versus cold starts. So we continue to see a lot of opportunity with our specialty business. We think we've built a unique value proposition for large projects, large plants and large customers throughout the U. S. And Canada.

Speaker 1

And I won't give you a forecast of future cold starts other than to say there's lots of headroom for us there.

Speaker 15

Okay, great. Thanks. That's helpful. I was really just trying to sort of trying to think about the margin impact that's taken place this year and whether that's something we need to think about as an ongoing. But I guess to some extent it is.

Speaker 15

Can I follow-up with perhaps picking up on your comment about power and the penetration there? Could you perhaps help us understand what's driving that additional penetration, some of the market trends that you're picking up on?

Speaker 1

Well, I think power overall is a growth space, right, as an end market vertical. And that's not just for our power business, but also for the industry as a whole, right, and our gen rent products as well. But within our power business, which is power HVAC, we've got a lot of additional products that we've added in. We've got a lot of penetration that's through deeper product offering to existing customers and allowing us to get into new verticals because of some of the products that we've added. So that's really the team is very innovative, very creative and very growth minded, and I think they've done a great job deepening existing products and broadening with new products and a lot of that in the HVAC part of the business, right?

Speaker 1

So that's about going any further than that, I want to get into competitive opportunities, but we're really pleased with the headroom there.

Speaker 15

No, I understand. That's helpful. Thank you. Thank you very much.

Speaker 1

Thanks, Neil.

Speaker 3

And we'll take our next question from Stephen Volkmann with Jefferies. Please go ahead. Your line is open.

Speaker 2

Steve, you there?

Speaker 3

Steve, you may need to check the mute function on your phone.

Speaker 2

We move on? Guessing, Steve.

Speaker 3

We will take our next question then from Scott Schneeberger with Oppenheimer. Please go ahead. Your line is open.

Speaker 9

Thanks very much. Good morning, guys. I have 2 kind of end of the call questions, one for Matt and then one for Ted. I'll ask them both upfront. Matt, on M and A, is there a long term initiative to grow specialty within the portfolio mix.

Speaker 9

As you come into the New Year, you've done digesting Yaks. How are you thinking about gen rent versus specialty rent acquisitions? I know part of your answer will be whatever is ripe and looks the best at the time, best cultural financial fit. But are you looking at that mix when you make these considerations? Is that heavy consideration?

Speaker 9

And then also you made a comment on it was on David's first question up at the beginning of the call about not needing to be number 1 in the specialty category. I just was curious if you could elaborate on what you mentioned. You cited Gen Finance as a good building platform, but just curious if you could elaborate on what you meant. And then Ted for you, real quick, new sales were up a lot in the quarter, I think the biggest quarter in maybe 3, 4 years. Just curious if there's anything there, unique mega projects a big sale or is that a trend or is that a unique event?

Speaker 9

Thanks guys. Appreciate allowing the time.

Speaker 1

Thanks, Kyle. I'm glad I wrote those down. You've been testing my memory here. But as I go through the M and A prioritization, which is how I heard your first question, It's wherever we're going to need more value for the customer, whether that's in a new product offering, which is mostly specialty and we love, we would highly prioritize any kind of brand new offering to the business where we could take a reasonably good sized platform and then grow upon it through our very, very strong network like platform and then grow upon it through our very, very strong network like we did with YAC, like we did with General Finance. So I wouldn't call it that it's because it's GenRent or specialty, just like anything additional.

Speaker 1

If we found a new GenRent product line that we didn't carry, we would feel the same way. And then when I think about Gen Ren, it's more like where do we need more capacity? Where do we need more density? Where we need more of an offering? And when we have that opportunity, we certainly are very comfortable integrating in our GenRent business as we've done, as you can see our history very thoroughly.

Speaker 1

There's not as much white space geographically, but certainly a lot of opportunity to add more capacity to serve more of the marketplace. When I talked about not being number 1, just for clarity, I want us to be number 1 with our customers. So let's use an example, for ROS, our Reliable On-site. We don't need to have porta johns at every wedding or every soccer field. But when you go into a major project or you go into a plant, we're going to make sure we're there to support our customer a full one stop shop value.

Speaker 1

So we want to be number 1 with our customers and those products. I use general finance as an example. We don't need to have modular classrooms in every school, right? That's not the business we're after. What we do need to do is make sure if our customers want a modular building or a storage container on a site for their needs, we want to be the number 1 in that space.

Speaker 1

So that's what I mean when I talk about that. Not every product line do we need to be the largest in the industry, we need to be largest in our industry. So that's the way we look at that. And then Ted, I think new sales.

Speaker 2

Yes, That's an easy one, Scott. So Yac had an impact there. I think Yac had new sales of something like $16,000,000 So while you see that number up 48% nominally, I think if you back that out, we were up about 15%, which is kind of probably a little more in line with what you would have expected.

Speaker 9

Great. Thanks for the call guys.

Speaker 1

Thanks Scott.

Speaker 3

And there are no further questions in queue at this time. I will turn the call to Matt Flannery for any additional or closing remarks.

Speaker 1

Great. Thanks, operator, and thanks to everyone on the call. We appreciate your time, and I'm glad you could join us today. Our Q3 investor deck has the latest updates, so please take a look at that when you get a chance. And as always, Elizabeth is available to answer your questions.

Speaker 1

So until we speak again in January, stay safe, have a great holiday season, and we'll talk to you soon. Operator, you can end the call.

Speaker 3

This does conclude today's program. Thank you for your participation and you may now disconnect.

Powered by Quartr
Earnings Conference Call
United Rentals Q3 2024
00:00 / 00:00