Construction industry tailwinds should carry United Rentals and the rental industry in general past macro-economic concerns in the foreseeable future, United Rentals CEO Matthew Flannery told a conference call of investors last week. Starting with United Rentals’ third quarter performance, Flannery said the year-over-year increase in rental revenue of 20 percent included fleet productivity at almost 9 percent.
“We grew our EBITDA margin by 240 basis points year over year to 49.9 percent in the quarter as we grew EBITDA dollars faster than revenue to over $1.5 billion,” Flannery said. “That’s a record for us in any quarter, and flow-through was a very solid 63 percent. Importantly, we also delivered another improvement in return on invested capital to a record 12.2 percent. 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.”
Flannery said the company has two levers it can pull to capitalize on strong demand.
“First, we intentionally held back on used equipment sales this year to make sure we had enough capacity for our customers,” Flannery said. “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.”
Flannery also was positive about the company’s investments in fleet that lowers carbon emissions on jobsite.
“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,” Flannery noted. “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.”
A bullish view of macro trends
Looking at a more macro perspective, Flannery said, “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.
Flannery said that if the company was concerned about the economic environment, it would “pivot” to a more conservative position. “Instead, we're investing in the tangible opportunities that we see ahead,” he said. “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 a $550 billion of funding in the U.S. infrastructure bill, which will finally put shells in the ground starting in '23. 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. And 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.”
Flannery said the construction and industrial markets that United Rentals serves had their own tailwinds driving the demand for rental services. “Our customers are building a strong book of business for 2023 and the secular shift towards renting and expanding the market,” Flannery said.
Flannery said looking at United’s markets by vertical, the big multi-year projects in the third quarter continued to be data centers, distribution centers and renewables as well as automotive and ship plants.
United Rentals is continuing its growth plans. It opened 25 cold starts in the specialty segment through September and has 11 more planned by the end of the year. “Cold starts continue to be a valuable growth strategy for specialty with a long-term benefit to our company’s total performance,” Flannery said.
To look at the numbers behind United Rentals’ record-breaking third quarter, go to: https://www.rermag.com/home/article/21253529/united-rentals-rental-revenue-jumps-20-percent-in-third-quarter
