United Rentals (URI) Q4 2024 Earnings Transcript

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DATE

Thursday, Jan. 30, 2025 at 8:30 a.m. ET

CALL PARTICIPANTS

- Chief executive officer — Matthew Flannery

- Chief financial officer — Ted Grace

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Full Conference Call Transcript

Matthew Flannery: Thank you operator and good morning everyone. Thanks for joining our call. We are pleased to report our solid fourth quarter results yesterday as the year culminated with record revenue, EBITDA and EPS. We again saw growth across our construction and industrial end markets as well as continued strong demand for used equipment. Our team doubled down on being the best partner of choice for our customers. Our diligence on safety, coupled with unmatched service, technology and operational excellence translated into the results we reported. Importantly, all of this sets the foundation for our future growth.

Today, I'll discuss our fourth quarter results, followed by our expectations for 2025 and finally, recap why we are excited about the H&E acquisition we announced a few weeks ago. Then Ted will discuss the financials in detail before we open up the call for Q&A which we will keep focused on United Rentals as a stand-alone company. Our plan remains to update the investment community on the combined companies after the transaction closes which is still expected by the end of our first quarter. So with that, let's start with the fourth quarter results. Our total revenue grew 9.8% year-over-year to almost $4.1 billion. And within this, rental revenue grew by 9.7% to $3.4 billion, both fourth quarter records.

Fleet productivity increased by 4.3% as reported and 2% ex Yak. Adjusted EBITDA increased to a fourth quarter record of $1.9 billion, translating to a margin of over 46%. And finally, adjusted EPS grew year-over-year to $11.59, another fourth quarter record. Now let's turn to customer activity. We saw growth in both our gen rent and specialty businesses. Specialty rental revenue impressively grew more than 30% year-over-year and even without Yak, a strong 18%. These results were driven by rental revenue across all businesses with a combination of solid same-store sales growth and an additional 15 cold-starts putting us at 72 for the full year.

And as a reminder, these specialty cold-starts are a key element to accelerating our growth in this high-return segment. By vertical, we continue to see similar trends to the rest of last year with non-residential growth helping to fuel construction and industrial growth driven by manufacturing and power. And we saw new projects across data centers, chip manufacturing, sports stadiums and power to name a few. Now turning to the used market which continues to exhibit strong demand. We sold over $850 million of OEC in the quarter which was a record for any quarter in our history.

The depth and health of demand in the used market is allowing us to rotate our existing fleet to ensure we can serve our customers' needs efficiently. This is evident through our full year CapEx of over $3.7 billion. And as a result, we drove free cash flow of nearly $2.1 billion which translated to a very healthy free cash flow margin of over 13%. The combination of our industry-leading profitability, capital efficiency and the flexibility of our business model enables us to generate meaningful free cash flow throughout the cycle and in turn, create long-term shareholder value. To that end, we returned over $1.9 billion to shareholders last year through a combination of share buybacks and our dividend.

And while we paused our share repurchase plan ahead of the H&E closing, I'm pleased to announce we'll be raising our quarterly dividend by 10% year-over-year to $1.79 per share. Now let's turn to 2025 which we expect to be another year of growth, again, led by large project growth. Customer optimism, backlogs and feedback from our field team, combined with the demand we're carrying into the new year, all support our guidance. This was reinforced at our annual management meeting which we held earlier this month in Houston, Texas. Where we discussed how a key element of our culture is the quality of people who work for United Rentals.

And this was on full display in Houston, as over 2,600 team members came together to focus and engage on being the partners of choice for our customers through our differentiated value proposition. Finally, I'd like to reiterate what I said 2 weeks ago when we announced our intent to acquire H&E. We're very excited to combine 2 complementary businesses. The transaction checks all 3 boxes we require when evaluating M&A: Strategic, financial and cultural. Growing the core is a key component of our strategy and I'm really thrilled to have the opportunity to add high-quality capacity, meaning people, fleet and real estate to the United Rentals team.

This will allow us to better serve customer demand over the long term. It will also accelerate our growth, all while generating compelling returns for our shareholders. It's really a win-win outcome. Things remain on track for a first quarter close and there are no further updates to provide you today. In closing and building upon what I just discussed with our latest acquisition announcement, we remain focused on being the best rental company in the industry. Our unique value offering, industry-leading technology and our go-to-market approach, combined with our capital discipline, give me confidence that we're well positioned for both customers and shareholders for the long term.

We continue to progress towards our 2028 aspirational financial goals which we laid out in May of '23 and look forward to delivering on these results as we continue to execute our strategy. With that, I'll hand the call over to Ted and then we'll take your questions. Ted, over to you.

Ted Grace: Thanks, Matt and good morning, everyone. As Matt just shared, we had a strong finish to the year, setting both fourth quarter and full year records for total revenue, rental revenue, EBITDA and EPS which supported the attractive returns and significant free cash flow we also generated in 2024. So with that said, let's jump into the numbers. Fourth quarter rental revenue was a record at $3.42 billion. That's a year-on-year increase of $303 million or 9.7%, supported again by growth from large projects and key verticals. Within rental revenue, OER increased by $177 million or 6.9%.

Breaking this down, growth in our average fleet size contributed 4.1% to OER, while fleet productivity added another 4.3%, partially offset by assumed fleet inflation of 1.5%. Also within rental, ancillary and re-rent grew by 22% and 30% respectively, adding a combined $126 million to revenue driven primarily by strong growth in specialty and hurricane-related work in the quarter. Turning to our used results. As Matt mentioned, we took advantage of a strong market to sell a record amount of fleet in the fourth quarter, generating proceeds of $452 million at an adjusted margin of 48.9% and a recovery rate of 53% on assets that were almost 8 years old on average.

Moving to EBITDA, as I mentioned, adjusted EBITDA was a fourth quarter record at $1.9 billion, translating to an increase of $91 million or 5%. Within this, rental gross profit increased 7% contributing an additional $136 million year-on-year. This was partially offset by used where the ongoing normalization of the market drove a 9% decline in used gross profit dollars translating to a $21 million headwind to adjusted EBITDA in the quarter. SG&A increased by $36 million year-over-year which was in line with revenue growth, so good efficiency there. And finally, the EBITDA contribution from other non-rental lines of businesses increased $12 million, driven largely by strong new equipment sales. Looking at profitability.

Our fourth quarter adjusted EBITDA margin was 46.4%, implying 210 basis points of compression. I'm sure we'll dig into this during Q&A, so I thought it might be helpful to frame some of the key factors here. The combination of used and stronger-than-expected new equipment sales were together about 80 basis points of year-on-year headwinds. Said another way, excluding these 2 factors, our adjusted EBITDA margin would have been down about 130 basis points with flow-through a little better than 33%. Closer to the core and as you just heard me highlight, we had higher growth in ancillary and re-rent revenue that, as you know, come with lower margins.

If we also adjust for these, our EBITDA margin would have been down about 60 basis points with implied flow-through of roughly 40%. While this is modestly below our long-term goal, it reflects our continued investment in key aspects of our strategy, including specialty, technology and capacity to support the long-term growth of our business during what we view as a slower phase of the cycle. And lastly, our adjusted earnings per share was a fourth quarter record at $11.59. Shifting to CapEx; fourth quarter gross rental CapEx was $469 million. Moving to returns and free cash flow.

Our return on invested capital of 13% remained well above our weighted average cost of capital, while full year free cash flow totaled a robust $2.06 billion. Our balance sheet remains very strong with net leverage of 1.8x at the end of December and total liquidity of over $2.8 billion. I'll note, this was after returning a record of over $1.9 billion to shareholders in 2024, including $434 million via dividend and $1.5 billion through repurchases that reduced our share count by over 2.1 million shares. So to wrap up both the quarter and the full year, we were very pleased with the results our team achieved in 2024.

Now let's look forward and talk about our 2025 guidance which I'll remind you, is standalone, meaning it does not include any contribution from H&E. As you've seen from the press release, we anticipate another record year. Total revenue is expected in the range of $15.6 billion to $16.1 billion, implying full year growth of 3.3% at midpoint. Within total revenue, I'll note that our used sales guidance is implied at roughly $1.45 billion or a mid-single-digit year-on-year decline on a percentage basis. This, in turn, implies a little faster growth within our core rental revenue, call it, mid-single digit on a percentage basis.

Within used, I'll add that we expect to sell around $2.8 billion of OEC translating to recovery rate in the low 50s versus the mid-50s in 2024 but in line with pre-pandemic norms. Our adjusted EBITDA range of $7.2 billion to $7.45 billion. At the midpoint, excluding the impact of used, this implies flow-through in the 40s and flattish adjusted EBITDA margins versus as reported flow-through of around 30% and approximately 50 basis points of margin compression at the midpoint of guidance. On the fleet side, our gross CapEx guidance is $3.65 billion to $3.95 billion with net CapEx of $2.2 billion to $2.5 billion.

Within this, we peg our 2025 maintenance CapEx at around $3.3 billion, implying growth CapEx of roughly $500 million at midpoint. And finally, we are guiding to another year of strong free cash flow in the range of $2 billion to $2.2 billion. Turning to capital allocation. One of the benefits of our balance sheet strategy and free cash generation are the flexibility they provide to invest in growth opportunities when they arise. As you know, we intend to capitalize on this through the pending acquisition of H&E where we will invest almost $5 billion at targeted returns well above our cost of capital.

As previously shared, we are pausing our buyback program ahead of H&E and we intend to utilize our free cash flow in 2025 to reduce our leverage from roughly 2.3x on a pro forma basis to a goal of around 2x within 12 months of close. Finally, consistent with our strategy to return excess capital to our shareholders, I am very pleased to reiterate that we are increasing our quarterly dividend by 10% to $1.79 per share, translating to an annualized dividend of $7.16. So with that, let me turn the call over to the operator for Q&A. Operator, please open the line.

Operator: [Operator Instructions] Our first question will come from Steven Fisher with UBS.

Steven Fisher: Congratulations on a nice year. Maybe you could just touch upon the bigger than usual ancillary and re-rent. What's the main activity driving that? Was that sort of more shifting of equipment around that you got fees on? And maybe what's the next -- the expectation for the next few quarters on that, if you could even forecast it? And I suppose the bigger picture question here is on the margin side, what would you have to see in order to get flow-through back into the kind of 50% plus range?

Ted Grace: Sure. I'll start, Steve and then Matt can jump in. So on ancillary and re-rent, I think there are a couple of things. Certainly, the storm-related opportunities were a big part of both, probably more so in re-rent than ancillary, although there was definitely a benefit in ancillary. And then within ancillary, the other thing we've talked about all year is some of the benefits we've had in specialty. So in terms of setting things up, breaking them down and those kinds of services that relate to some of the new businesses we're in, those obviously have seen kind of sharp growth in '24 and that's contributed to that outperformance versus, call it, OER.

Does that help on the first question?

Steven Fisher: Yes.

Ted Grace: On the second question, I think there are a couple of things. I mean certainly, relative growth rates matter. I think I made the comment just a couple of minutes ago that we think we're in the slower growth phase of the cycle. And the reason that's important is it drives relative fixed cost absorption. So as we get through '25 and we do expect to accelerate thereafter, that obviously drives good absorption that helps drive better flow-through. At the same time, in this environment, we've talked about making very intentional investments in things like cold-starts and technology that have been marginal drags. We think those have been excellent investments with great ROI.

That's why we've called them out and been pretty clear that we don't want to forgo those opportunities just for the sake of an arbitrary flow-through goal. So Matt, anything you'd add there?

Matthew Flannery: No, I just -- we still always drive towards holding strong margins and Ted could take you through it. But within this guide, right, ex used sales, we expect to have margins, right, similar to year-over-year comps.

Ted Grace: Yes. And that's a good point. Just I'm not sure you asked it specifically but if you -- in my comments, I made the point that if you back out used, flow through would be in the mid-40s and we've had flat margins which we view is very good performance in this environment. I'll remind people, as much as inflation has subsided, it's certain