9 takeaways from United Rentals’ full-year ‘23 report
29 January 2024
United Rentals announced results for Q4 and year-end 2023, revealing a 13.5% fourth-quarter increase to the tune of $3.1 billion. Its specialty division, which includes trench safety equipment, power & HVAC and mobile storage equipment, increased by 14.6% to $830 million. Here, we take a look at the details, which reflect a positive view for the year to come.
United Rentals released its fourth-quarter and full-year results for 2023 in a conference call last week, previewing what the company expects will be a year of record growth in 2024. This is thanks not only to expansion of its speciality division, but also to an influx of mega projects, both leading to a healthy increase in CapEx spending this year.
Here’s a rundown of some of the noteworthy points to come from United’s latest financial report:
1. Record-breaking fourth quarter in 2023
Highlights from the fourth quarter include revenue growth of 13% year over year to $3.7 billion, a fourth-quarter record. Fourth-quarter rental revenue was also a record at $3.12 billion, reflecting a year-over-year increase of $372 million or 13.5%.
Fleet productivity increased by 2.4%, reflecting a healthy rate environment that continues to be supported by good industry discipline, said Ted Grace, chief financial officer at United Rentals.
On a pro forma basis, adjusted EBITA increased almost 10% to a fourth-quarter record of over $1.8 billion, translating to a healthy margin of 48%.
2. CapEx to normalize and grow
For the full year, rental CapEx of $3.5 billion was in line with guidance, according to the report. “With the supply chain largely recovered, we now expect the quarterly cadence of our CapEx spend to be more closely matched to historical patterns,” said Matthew Flannery, CEO of United Rentals.
“2023 free cash flow exceeded $2.3 billion,” he noted. “We view our ability to generate strong free cash flow throughout the cycle as a hallmark of the company and a testament to both the profitability and flexibility of our business model.”
United’s CapEx guidance is $3.4 billion to $3.7 billion, with net CapEx of $1.9 billion to $2.2 billion.
“We are guiding to another strong year of free cash flow in the range of $2 billion to $2.2 billion,” Flannery said.
Regarding planned fleet growth of 4% to 5% in 2024, Flannery said, “We’re thinking about $2.5 billion in sales of original equipment cost and maybe almost $3 billion to replace that, depending on what we buy.
“We have cold starts that we are going to support in specialty, so we’ll continue to invest in the business there,” noted Grace. “A lot of the major projects bolster up some of our our products.
“We feel really good about the positioning we have and while we’re talking about CapEx, we expect it to be a little more normalized from what you’ve seen the last couple of years, as our partners have repaired their supply chain and are at about 90%.”
3. Interest rates affecting local market
With steadily increasing interest rates over the past couple of years, United expects moderately slowing growth in local markets.
“When we think about what the impacts could be of the Fed easing rates, we’ve seen slower growth in the local market business,” Grace said. “We’re very pleased that it’s still growth and as we said, pretty broad-based growth in Q4, as we exited the year, but it’s not double-digit growth. We feel this transition of that local market pipeline of business starting to be built out and funded, as interest rates lower, that’s that’s our future growth as we go forward.
“We’re very pleased that the tailwinds that we’ve been trumpeting throughout ‘23 as a way to hedge against some of that slower growth in the local market has allowed us to come out with ‘24 being a growth year,” he said. “The majority of our customers surveyed in our customer confidence index, continue to feel positive.”
Grace added. “I don’t want to paint a picture that there’s negative growth or that we have problems in the local market. It’s just not what it’s been for the last couple of years. And we do think it’ll ramp back up. Once the Fed takes its actions, the pipeline will take a little while to fill, but we don’t have the ability to forecast how long it will take.”
4. Fleet age at pre-Covid levels
Grace said United’s fleet age is currently just over 52 months. “We feel really good about where the fleet age is,” he said. “When you adjust for tanks, mobile storage, some of the longer-life assets that we’ve mixed into the fleet, we’re back to pre-Covid levels. So we’re we’re back to a healthy level of fleet age.
Grace went on to say this will improve further in 2024.
“The easiest way to think about this mathematically is we’re going to buy $3.5 billion of CapEx. Mid-year convention would say that six months on average, we’re going to sell $2.5 billion of fleet that you can assume is 90 months old, on average. You can see how that would imply we’re going to re-age down further. So again, we’re back to pre-Covid levels in the upper 40s, adjusting for those acquisitions, and it’s going get a little better.”
5. Manufacturing and industrial markets continue to be strong
The manufacturing and industrial verticals were very strong for United Rentals in 2023 and this year appears to show a continuation of that growth.
“I think it’ll continue to be strong and I think it’ll carry a good part of the growth this year, specifically a big part of the mega projects, when you’re thinking about the plants we talked about and the onshoring of manufacturing,” Grace said. “We saw it play through all the way in Q4, where that was our largest-growing vertical that we track - industrial manufacturing.
“We feel really good about the industrial end markets, outside of oil and gas,” he said. “We think it’s going to continue to be another strong year in the industrial environment.”
6. Mega projects are a solid tailwind
Despite some market skepticism over what potential mega projects will bring to construction going forward, United Rentals maintains its bullish perspective.
“There’s not any skepticism from our perspective,” Grace said. “We have more visibility to this, because of the planning that’s required, frankly, than we do the local market business. So we actually feel really solid about our prospects on the large projects. And I think most of our peers that can participate in those do as well.
“Projects that are ongoing right now are some of the largest projects we’ve ever been on... this is a multi-year tailwind. We’re not seeing cancellations at all in the major projects.”
Grace noted there’s a lot of LNG (liquified natural gas) work coming, and no matter which way the US presidential election goes, projects asspciated with the infrastructure bill are not at risk.
“That had bipartisan support, and more importantly, we really need it as a country. The [Inflation Reduction ACT] has got a longer tail to it, and hasn’t even manifested yet. But the tailwinds that we’ve been discussing are showing up in our business today, and we expect it to continue for multiple years.”
7. Used equipment sales to be higher than normal
United is forecasting higher-than-normal used equipment sales in 2024.
“Replacement that we see is right in line with where it should be,” Grace said. “In terms of channel mix, we’d expect it to go back to normal distribution this year... something like two thirds going through retail, 20 ish going to trade packages, low doubles in broker and that would leave auction in mid-single digit. If you compare that to ‘23, the big difference was we used auction to clear out some of that Ahern inventory.”
When using recovery rate as percentage of original equipment cost (OEC), the number is coming down off historical highs, but still above the mid 50s.
“We don’t think we’re going all the way back to the mid 50s, nor is that implied in this guidance,” Grace said. “We still think we’re somewhere in between the low 70s, where things peaked, up to the historical mid 50s is where we think they will level out.”
8. Optimism for rental rates
United has stated its optimism for rental rates in 2024, stating factors including fundamental changes in the way the industry works.
“We see a growth environment, first and foremost,” said Flannery of the coming year. “But the industry has shown discipline; whether you want to say that discipline is caused by robust demand, or the need, because of rising equipment prices, but it’s also due to information. There’s so much more information in this latest cycle that we’re in versus previously. People always want to go back to pre-’09 and what happened there, but it’s a different industry now. It’s a different world, but it’s definitely a more mature industry.”
He added, “I can’t even imagine how anyone would consider that going negative on pricing would even be a reasonable thesis, or financially feasible.”
9. 2024 will be another record year
Flannery concluded by sharing his optimism for this year.
“We are building the best business to serve our customers,” he stated. “Our scale, go-to-market approach, technology, and one-stop-shop offering across general and specialty are unmatched.
“Our team puts customers at the center of everything we do, giving me confidence that we’re well positioned to continue to outpace the industry and capitalize on the opportunities ahead of us. We expect 2024 to be another record year for our company and longer term, we continue to march toward our 2028 aspirational goals ... I’m so proud of all our teammates who will help us deliver these results.”