United Rentals, Inc. (URI) Earnings Call Transcript

Hello, and welcome to the H&E Acquisition Call. Please be advised that this call is being recorded. Before we begin, please note that the tender offer has not yet commenced and none of the comments made on today's call is an offer to purchase or a solicitation of an offer to sell securities or a recommendation to buy, sell or hold securities. Once the tender offer is commenced, United Rentals and H&E will make certain filings with the SEC. The filings will contain important information that should be read and considered carefully before any decision is made with respect to the tender offer. The filings will be available at no charge on the SEC's website and on the websites of United Rentals and H&E. In addition, note that comments made on today's call and responses to your questions contain forward-looking statements. The transaction being discussed today is subject to a variety of risks and uncertainties, which should be considered carefully. A summary of these uncertainties is included in the safe harbor statement contained in the investor presentation and press release related to the transaction. 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 or changes in expectations. You should also note that today's call may include references to non-GAAP terms such as adjusted EBITDA. Please refer to the back of the investor presentation to see the reconciliation from H&E's adjusted EBITDA to net income. Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer; and Ted Grace, Chief Financial Officer. Today for H&E is Brad Barber, Chief Executive Officer of H&E. I will now turn the call over to Mr. Flannery. Mr. Flannery, you may begin.

Thank you, operator, and good morning, everyone. Thank you all for joining us on such short notice as we discuss today's announcement to acquire H&E in more detail. And I have Ted here with me to review the transaction and to answer any questions you might have and we have Brad Barber, the CEO of H&E on the line with us as well. So I'll start with a few high-level remarks, and then Ted will discuss the financials behind the transaction. Brad will say a few words, and then we'll move on to Q&A, which we want to keep solely focused on this transaction. Hopefully, by now, you've had a chance to review both the press release and the investor presentation, which laid out the compelling strategic and financial rationale for the deal. The opportunity to acquire H&E, a company we've long expected, checks all three boxes we require when evaluating M&A, strategic, financial and cultural. Beyond adding important capacity that will support our long-term growth potential. The deal provides compelling returns for our shareholders. And as you've heard me say many times, growing the core is a key component of our strategy. And H&E will help us accelerate our growth more quickly than we could achieve organically. Their footprint, customer base and fleet are complementary to ours in many ways. The addition of H&E not only enhances our core competencies in the construction and industrial sectors, but it also expands our capacity in key geographies. Importantly, H&E's historically GenRent focus will provide us the opportunity to drive cross-selling of our Specialty offering, therefore, providing significant revenue 1synergies. As you've heard me discuss before, offering a one-stop shop across both GenRent and Specialty is attractive to customers and the key aspect of our value proposition. Financially, we'll generate significant free cash flow from the deal in year 1. While the transaction should also be accretive to our earnings, revenue and EBITDA as we put our M&A playbook to work and leverage approximately $130 million of cost synergies. Additionally, we intend to quickly deleverage the balance sheet towards the midpoint of our current targeted leverage range. As such, we're pausing our share repurchases consistent with what we've historically done with other large deals. And finally, and just as importantly, culturally, we both share the same priorities. H&E is a well-known rental provider that's been around for many years. And over that time, I have no doubt that many of you have spent time with their team and visited their branches and appreciate the compatibility of these two companies. And this is a key aspect of long-term value creation as we strive towards the same goal of supporting customers to drive profitable growth. Safety in serving the customer are key tenets of H&E's DNA just as they are for United. And these seasoned operators will be an asset to our combined customer base, and we look very forward to welcoming the H&E team to the United Rentals family. In conclusion, we're very excited about this deal and the opportunity to add roughly 160 new locations in over 30 states and most importantly, welcoming 2,900 new employees to team United. Large M&A is one of our core competencies, and this is another example of where we think we can help the business grow profitably and create more shareholder value. Ted, over to you.

Thanks, Matt, and good morning, everyone. As Matt just said, we're really excited about this combination. He just walked through the two most important strategic considerations. First, augmenting our ability to be the partner of choice for our customers; and secondly, providing important capacity to support our long-term growth goals. So I'll focus my comments on the financial highlights. As you saw in our press release, we've agreed to pay $92 per share for H&E. This translates to an aggregate purchase price of about $4.8 billion, including $1.4 billion of net debt. Nominally, this translates to 6.9x LTM adjusted EBITDA of $696 million as of September. Adjusted for the $130 million of cost synergies and $54 million of present value tax benefits, however, this translates to an adjusted multiple of 5.8x LTM adjusted EBITDA. Beyond the cost synergies, we also expect to realize other value streams, including cross-selling revenue benefits which we currently estimate at $120 million by year 3 and fleet purchasing benefits. But the latter won't really impact EBITDA, our estimated 5% purchasing advantage will benefit rental CapEx, capital intensity and free cash flow. Most importantly, looking at the deal from a risk-adjusted return perspective, we think this is a very attractive opportunity to put roughly $5 billion of capital to work to benefit our shareholders. Looking at cash-on-cash returns, which, as you know, is our preferred method for evaluating acquisitions. Our base model points to an IRR of better than 15% and an NPV of about $1.1 billion. From an IRR perspective, I'll note this is well above our cost of capital and consistent with the other large GenRent deals we've done, including BlueLine, Neff and NES. As we also highlighted in the press release, we expect the deal to be accretive to both EPS and free cash flow in year 1. On a related note, our note -- sorry, our plan is to issue stand-alone guidance later this month and then update guidance after we close, which is currently expected to be in late Q1. A few other points I'll make quickly. On the funding side, while we have a committed bridge facility that ensures sufficient liquidity to close the deal, our plan is to fund the deal through a pretty straightforward combination of new debts and ABL capacity. Looking at the balance sheet. Our pro forma leverage ratio will be about 2.3x, which is to say comfortably within our targeted range of 1.5 to 2.5x. That said, our intent is to focus on deleveraging after we close. Consistent with prior deals, we will be pausing our share repurchase plan, rechanneling cash with the goal of reducing our leverage to around 2x within 12 months of closing. Importantly, this will not impact our dividend or our dividend policy which we continue to view as a critical part of our capital allocation strategy. Combined, these steps reflect our continued commitment to a smart and disciplined capital allocation strategy that we believe will continue to unlock value for our shareholders. Finally, on the mechanical side of things, I'll mention that we expect to launch our tender for H&E shares within 10 business days. We are targeting a close by the end of Q1 2025, and we plan to report our fourth quarter results on January 29th and host our call on January 30. So with that, let me hand the call over to Brad, after which we'll go to Q&A. Brad?

Thank you, Ted. Good morning all. Matt and Ted, I want to thank you both for offering me the opportunity to join you on this morning's call. On behalf of our outstanding employee base here at H&E and our investors, this is an exciting time. And we look forward to seeing this win-win opportunity through the finalization of the acquisition. So at this point, I'm going to turn it back to you guys, and I guess we'll open up to Q&A. But thank you again so much for having us, and welcome to H&E team to your organization.

Great. Thanks, Brad. Operator, you can now open it up to Q&A.

[Operator Instructions] Our first question will come from David Raso with Evercore ISI.

I mean the deal, I think, pretty clearly has solid merits financially for URI. But I'm curious how you see the mix of H&E's customers, their end markets how that maybe changes your, let's call it, medium-term organic growth profile. The spirit of the question, of course, is we're still seeing relatively solid trends in mega projects, national account-driven business. But there's more uncertainty around general construction trends just given the rising interest rates. So I'm just curious how this combination you think impacts your organic growth profile over the medium term? And I'd also be curious how maybe it impacts your thoughts on CapEx?

Great. Thanks, David. So when we think about H&E, right, we're talking about a quality company here. So whenever we do an overlapping deal and specifically in GenRent, where we have a pretty robust footprint, you're really adding capacity. Well, this is quality capacity. So when we're thinking about the three ways in which you get capacity of people, fleet and facilities, we're very, very pleased and happy to be able to get this opportunity. That capacity is going to not just only fill the customer base at H&E serving, but these are very fungible assets that are like in brand and a very consistent fleet profile with what we purchased. And it's a little bit on the younger side compared to the rest of the industry. So we view this as an opportunity to continue to serve the customers in H&E serving as well as have capacity to continue to serve our customer base. And there's not as much differentiation here as one would think. I mean, sometimes people homogenized the local market. I'll let Brad speak to it, but they're not out there serving a man in a truck or Harry homeowner on the weekend. They're serving the largest mechanical contract to steel erectors that are in our industry. We may have a little bit heavier national account base. Certainly, we should because of our footprint and the breadth of our offering, but not terribly different in the way we go to market from that perspective. So we feel good about this opportunity. From a CapEx perspective, it really depends on as we go through the execution of the actual integration. We always model in some revenue attrition. Whether that revenue attrition hits the 15% that we model, or we do a little bit better or a little bit worse, will depend on how our CapEx use has changed. But the reason I say that is when you think about attrition, and this is for customers that generally want to have two choices, purchasing methodology. Because these assets are fungible, we'll use that fleet to either spur more growth, to our base business or to replace CapEx we would have spent otherwise. So that's the way we see the interplay here, David.

Okay. And lastly, can you just give us a little color on how the deal came together? And maybe any thoughts on any potential impediments to the deal closing thoughts on Hart-Scott-Rodino or go-shop here, however you want to describe any potential impediments to the deal closing? I noticed you said you expected to close by the end of the first quarter.

Yes. So certainly, this will need to get regulatory approvals and all that. And we have experience here, and we feel really good about our process and we'll be filing that jointly, right? Both companies need to file that later this week. So that part of the step. The go-shop is just clear, good governance from H&E's Board. So that's just something that we'll have to get through. We think we put a very compelling offer here on the table and a good win-win situation. So we'll let that play out, but not something we're overly concerned about. From how this came about, we've obviously known of each other, these companies for quite some time. These are two really strong brands in the space. We've got together probably in earnest talking about this back in Q3 of '24. And it's just progressed as we've gone along, and it's been great to deal with Brad and John and their team and putting this deal together. And I think we've really created a win-win situation here.

Our next question will come from Rob Wertheimer with Melius Research.

Matt, I wonder if you could talk just a bit about your thoughts on the cross-sell, the Specialty into the H&E customer base. Just how -- for one, just on your forecast of revenue synergies, which is not, I guess, in your multiple calculation. How penetrated that assumption gets? I don't actually know if it takes you 1, 2, 3, 5 years to sort of educated customer base and get sales and everything crossing over. So how far does that assumption go versus your current mix? And then I assume there's already -- and you talked about this in the attrition, there's probably some Specialty business you're selling into H&E customers now. Were you able to calculate how big a deal that is complete white space? And maybe just talk to the opportunity.

Yes. So on the latter part of that, the way we model it, just for clarity, is that $120 million isn't the total opportunity that we would see if we did a customer profile and what lookalike customers spend in Specialty. And when we get under the hood, we'll refine it even more when we get to look more at customer data, obviously, we don't want to gun down. We don't want to get ahead of any kind of regulatory approval. So we're very cautious and smart there. But we've done this quite a few times. So this is very similar to what we've done in previous deals. But the way that this goes about is you can imagine that, that's only a portion of the look-alike model opportunity for this customer set. We don't need 100% penetration on the opportunity. I don't know, Ted, we haven't shared what percentage, but.

I think, it's -- it gets factored down considerably in risk adjustment.

Yes, less than half, certainly. So we won't go any further net. So that's the way it's modeled but then specifically about how we see this opportunity and like most GenRent deals. H&E does have some Specialty business. I don't want to discount that, but it's less than 5% of their total fleet offerings that they have. They have a little bit of trench in power and a little bit of pump. So this is really when you think about our broader offering and the depth of our offering and the scale of our offering, this is a great opportunity as it has been in other GenRent deals.

Our next question will come from Jerry Revich with Goldman Sachs.

Congratulations. I'm wondering if I can ask the planned integration plan here, given just the high margin and dollar utilization profile of this business, how different is the integration plan versus the last couple of general rental deals that you folks laid out? And can you touch on how much your local density would improve for the base URI business just by laying on the complementary pieces of this business?

Yes. Thanks, Jerry. So as we talked about in my prepared remarks, right? This is a very complementary business to ours, and they're in key geographies. So we think end markets that we want to grow more than we want to have to be able to feed more customer demand and this is very complementary to that, not just from the fleet profile from what the customers expect but even when this is getting to your integration question, when we start putting the teams together, right? The mechanics from both sides are going to be very familiar with this fleet. This is really going to help. We'll just add a little bit of some of our technology and processes that we've been able to invest in over the years that might help further integrate and drive more productivity and efficiencies out of the shops. But overall, this integration is really going to be very smooth from a quality go-to-market perspective, this is a quality shop. This is an organization that sells strong value, strong customer service and values their employees. So we think from an integration perspective, this will be a little bit easier from a people and customer go-to-market integration than some of the previous.

Super. And then separately, Ted, on the balance sheet, you mentioned obviously pausing the stock buyback program. How does this impact the way you're thinking about additional M&A if additional opportunities come up, would you take the leverage ratio higher. Can you talk about how this impacts the potential for additional M&A at all?

Yes. Thanks for the question, Jerry. So certainly, our focus in the immediate term is going to be getting that leverage down. So I would say from the standpoint of large-scale M&A or larger scale M&A, probably reasonable to assume that we put anything on pause, get to that integration, get the balance sheet back closer to that neutral position in the midpoint of the range we talk about. Could there be smaller opportunities on the Specialty side, for example, conceivably. But here again, we've gone out of our way to demonstrate this discipline on the balance sheet side, and I think people should be calibrated to expect that here.

Yes. And this isn't just a leverage question, right? This is a big deal. This is a big integration, and we want to make sure we're focused on doing a great job with it. To serve our customers and to serve employees from both organizations. So that will be a big focus for us operationally.

Our next question will come from Steven Fisher with UBS.

Congratulations. I think Matt, you mentioned about the deal helping you become the -- or be the partner of choice for your customers, and we already assume that -- or viewed United Rentals as the key partner of choice for their customers. So were there things that you found that customers have been asking that just kind of revealed some holes that you had in your business that you think can now be filled through this transaction?

Yes, Steve, I wouldn't say holes, but it'd be dismissive to frankly, everybody else in the industry, but certainly to a 60-year-old quality company like this, that they don't have relationships and a strong history with customers that we can now get access to and leverage, right, our one-stop shop offering. So we see that as a real value, but also the capacity that I spoke to a few times here, and the quality of this capacity just to help serve more demand that's in the end markets, we feel really good about.

Okay. Fair enough. And then is there a certain sort of level of market activity or framing for either industrial production or non-res construction that you've assumed for the next couple of years that really make the synergies and the metrics works as you've laid them out?

So certainly, we've modeled this a lot of different ways. We've got multiple scenarios. It's one of the ways we really think about risk-adjusted returns on invested capital. We don't get into the details. I think Matt alluded to the fact that we've put a stake in the ground about 25%. We do feel it's a growth year, I would say, based on everything we see in sense today, if we didn't have comfort with where things were, you probably wouldn't see us underwrite this transaction. So we won't get into front running '25 guidance. And obviously, we don't get into multiyear framing of the outlook, but we continue to be positive. Our customers continue to be positive when we look at key indicators. We think those also continue to flash green. So easier to say that qualitatively than answer it quantitatively, Steve, but we can dig into any of that.

Great. Congrats all.

Our next question will come from Tami Zakaria with JPMorgan.

I have one question about the footprint. So could you comment on the footprint of H&E as it relates to URI's existing branches? And is there any significant overlap that you may have to close or merge some locations? And how does this change your pre-acquisition plan of cold starts that you had for the next few years? [Technical Difficulty]

And Mr. Flannery, do you have this muted? And Mr. Flannery and team are you still with us? It looks like we have lost our speakers. Please stand by while I reconnect. Again, this is your operator. Please remain on the line while we get our speakers back on the call. Thank you. Please standby. Excuse me everyone, we do ask that please remain on the line, as we gather our speakers, please remain on the line.

Hello? Operator, can you guys hear us? This is Matt Flannery.

Yes, sir, we can hear you loud and clear.