Earnings Call: Q4 2016

Mar 1, 2017

Summary

FY adjusted EBITDA was $536 million, within guidance, despite O&G weakness and standalone costs. 2017 guidance calls for $550 million–$590 million adjusted EBITDA, with revenue growth above the assumed 3.5% market expansion.

Good morning, and welcome to the Herc Holdings, Inc. fourth quarter and full year 2016 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Elizabeth Higashi, Vice President, Investor Relations. Please go ahead. Thank you, and good morning. I'd like to welcome everyone to our fourth quarter and full year earnings conference call. You should have seen the release that went out this morning, along with the slides, which are also available on our website. This morning, I'm joined by Larry Silber, our President and Chief Executive Officer, and Barb Brasier, our Senior Vice President and Chief Financial Officer. They will discuss the quarter and full year preliminary financial results, as well as the industry outlook and our guidance. The prepared remarks will be followed by an open Q&A, which will also include Bruce Dressel, Senior Vice President and Chief Operating Officer. Before I turn the call over to Larry and Barb, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today, and therefore involve risks and uncertainties. I would caution you that our actual results could differ materially from the forward-looking statements made on this call. Please refer to slides 3 through 6 of the presentation for our complete safe harbor statement. The company's risk factors, including additional information about risks and uncertainties that could impact our business, are described in our safe harbor statement. Additional information about our risk factors is included in our second quarter 2016 10-Q filing. This morning, we also filed a Form 12b-25 with the Securities and Exchange Commission, extending the filing deadline for our 2016 annual report on Form 10-K for 15 days. That filing contains additional risk factor information. You can access a copy of the second quarter 10-Q and the Form 12b-25 by visiting the investors section of our website at ir.hercrentals.com or through the SEC's website at sec.gov. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials, which were furnished to the SEC with our Form 8-K this morning, and again, are posted on the investors section of our website at ir.hercrentals.com. Finally, a replay of this call can be accessed via dial-in or through a webcast on our website. Replay instructions were included in our release this morning. We have not given permission for any other recording of this call and do not approve or sanction any transcribing of the call. This concludes my comments, and I'll turn the call over to Larry. Good morning, everyone, and welcome to our fourth quarter call. I'm pleased that you're able to join us this morning. Today, we reported preliminary results for the fourth quarter and full year and extended the filing date of our 10-K for 15 days. Barb will provide further detail when she takes over. While we don't expect any material changes in the financial results from what we are reporting today, until we file the 10-K with the SEC, you should consider these results as preliminary. Now, please turn to slide seven. 2016 was a critical milestone year in our ongoing transformation. While our business transformation began several months ago, we're focused on executing our strategy and driving improvements in our operating performance. From a revenue perspective, diversifying our fleet mix to higher dollar utilization equipment categories is driving improvement in our customer diversification and our revenue mix, as well as our ability to increase new account growth. Our urban strategy is achieving above-market growth, driven by a combination of the diversification of our fleet and the clustering of locations to serve a broad market area with multiple locations and array of equipment and services. Local revenues, which generally correspond to higher dollar utilization, grew at a faster pace than national accounts in the fourth quarter and represented 53% of total rental revenues. Operationally, we have successfully improved our fleet availability through the implementation of our Herc Rentals operating model, which we continue to roll out across our branch network. By consolidating our vendors, which create stronger supplier relationships and better terms, we've been able to reduce equipment, parts, and service costs while offering top-tier brands to our customers that meet their expectations for gear that is reliable, safe, efficient, and effective. We continue to invest in enhanced technologies to further improve our customer support programs, which I'll discuss a bit later. Now please turn to slide eight, which summarizes the key metrics for the fourth quarter and full year. We reported $357 million in equipment rental revenue in the fourth quarter and about $1.35 billion for the full year. The most important takeaway on this slide is that equipment rental revenue in key markets, which represented 84% of our business in the fourth quarter, rose 6.2% overall, 1.3% compared to the same period in 2015. Pricing in key markets increased 1.5% in the quarter over the prior year, supported by solid performance in renewals of national accounts and growth in local revenues. Pricing increased about one-half of 1% overall for the quarter. We experienced strong growth in the U.S., particularly in the Southeast and West as well. Major urban locations led the way, which demonstrates that our urban strategy is delivering our desired results. Our Canadian and central U.S. regions continue to be impacted by weakness in O&G, and certain locations that underperform the market. We implemented performance improvement plans for these locations and expect better results in the coming months. Despite all the positives, we posted a net loss for the quarter and year. Barb will go into more detail on the elements that contributed to the loss, but suffice it to say that upstream O&G headwinds, costs related to the spinoff and standalone costs, and increases in interest expense and depreciation negatively impacted us this year. However, I'm pleased to note that we achieved an adjusted EBITDA of $536 million, solidly within the guidance range we provided for 2016. Adjusted EBITDA margin was 36% in the fourth quarter, and for the full year, it was 34.5%, both lower than prior year, reflecting lower O&G markets and the investments for growth in new locations and additional people. Please go to slide 9. We started our transformation with an infusion of new leadership, featuring decades of experience in the equipment rental industry to drive necessary operational improvements across our business. In addition, in anticipation of our separation, we appointed seasoned and highly regarded executives with demonstrated success across a broad spectrum of industries to lead and direct critical public company functions and activities. The new leadership team rapidly coalesced around three operating priorities: expanding and diversifying our revenues, improving our operating efficiencies, and enhancing the customer experience. I'll discuss a few of our key accomplishments during the fourth quarter and year under each of these three initiatives over the next few slides. Excuse me. Please turn to slide 10, which discusses our progress in expanding and diversifying our revenues. During the quarter, we continued to expand the salesforce.com as part of our initiatives to optimize sales territories to enhance sales effectiveness. We now have approximately 625 sales professionals, about 100 more than we had this time a year ago. We continued to successfully diversify our fleet to attract square footage under roof customers with equipment such as floor care and aerial equipment used in office buildings for maintenance. We made good headway in shifting urban fleet to higher dollar utilization equipment categories in our core brands by expanding our ProSolutions and ProContractor gear. ProSolutions serves the climate, remediation, and pump and power markets. We are also investing in renovation programs in targeted urban locations to create customer-friendly showrooms that showcase our ProContractor equipment, which includes the type of smaller tools and gear that local contractors might need. We plan to have half of our total locations renovated by year-end 2017. We are currently working on several new locations, including one in the Bronx, New York, and another in Houston, Texas, and are targeting additions in fast-growing urban centers. In the fourth quarter, local revenue represented 53% of total revenue, compared with about 50% at the start of 2016. Local revenue has been growing faster than national, which has been impacted by our upstream O&G customers. We also continue to improve our ancillary revenues, which grew 15% in the fourth quarter and 17% for the year as new programs successfully drove revenue growth. While this is a small percentage of rental revenue, about $0.90 of every dollar increase falls right through to the bottom line. Please turn to slide 11. We continue to diversify our fleet to maximize dollar utilization. For example, in Aerial, we reduced booms and increased scissors, and in Earthmoving, we increased compact equipment and reduced heavy equipment. We also broke out several new segments to provide more detail on our fleet composition. We have methodically rotated and sold fleet to accelerate the diversification of the fleet overall. At the end of December 31, 2016, our fleet at original equipment cost was $3.56 billion. We reduced our heavy Earthmoving equipment in 2016 and have been replacing it with compact equipment, which has broader applications for our customers. In Aerial, we are reducing our boom fleet in favor of more scissor lifts. In material handling, we are focusing on improving our fleet of industrial equipment. We have also made progress in growing our ProSolutions and ProContractor fleet, which together grew from about 16% in 2015 to 18% of our total fleet in 2016. We are excited about how we have repositioned the fleet so far and believe we have the right strategy and CapEx budget to continue to make great headway. Please turn to slide 12, where we have summarized our key operating accomplishments. We continue to drive improvements in fleet available rent, reducing our FUR to 15.3% during the month of December, compared to 15.9% in the prior year. We have also successfully consolidated our vendors, which has enabled us to reduce fleet, parts, and service costs. Our CRM system, salesforce.com, continues to drive the right behaviors and provides a platform for sharing knowledge and best practices, which in turn enhances our sales force effectiveness. 2016 was a great year of improvement in our safety metrics, and we are pleased with the progress we are making and the commitment of our employees to make safety a number one priority. We have implemented a new safety management system to track and analyze leading and lagging indicators to help us further develop key safety strategies and initiatives. In 2016, we supported 45,000 hours of safety training of our staff and reached new corporate-wide levels of safety achievement. Now, please turn to slide 13. We are committed to building a customer-first culture. As part of that commitment, we now have approximately 30 locations that support our ProSolutions Centers of Excellence, focused on assisting customers in climate control and restoration and remediation. We also continue to upgrade our branch locations to showcase our ProContractor tools line and make it easier for customers to get the gear they need. To date, we have 37 new branch showrooms and expect to have about half of all of our locations updated by year-end. As we mentioned earlier, our focus on investing in premium brands addresses our customers' preference and expectations for gear that is reliable, safe, efficient, and effective. At the same time, we've added more solutions experts to our team to help our customers achieve the best results for their projects. More and more customers are coming to us for our insight, technical know-how, responsiveness, and the full commitment to their success. Our technology enhancements, which are critical to enabling superior customer experiences, are also progressing. Enhancements to ProControl, which is our next-generation telematics system, were rolled out in December 2016. The advanced telematics system tracks equipment and provides real-time utilization and other data that helps our customers manage their rental fleet more effectively. For example, ProControl includes features like geofencing, which allows customers to set operating area parameters and alerts when the equipment moves out of a designated area and provides customizable dashboards and other applications for our customers to get a quick view of the metrics important to their business. Upgrades to our mobile app are also making rentals easier for customer use and support efficiency and effectiveness. Continuing upgrades and improvements on our website are also enhancing customer solutions and functions. For example, in the fourth quarter, we introduced a chat feature that connects customers directly with our customer care team to help answer their questions. We're committed to staying on the leading edge of technology and mobility to provide our customers with the tools to drive their efficiency and effectiveness. Now please turn to slide 14. Key industry metrics remain positive, and the impact of President Trump's campaign commitments to reduce corporate taxes and increase infrastructure spending have had a positive impact on the long-term projections for non-residential construction. Longer term, the continuing overall shift from ownership to rental is expected to drive growth in the equipment rental industry over time. We believe that these factors will continue to fuel revenue growth and extend the current market cycle. Now, please turn to slide 15, and I'd like to introduce Barb Brasier, our CFO, who will discuss our quarterly financial results in more detail. Thank you, and good morning, everyone. As Larry mentioned, we are pleased with the operational progress we are making. In 2016, as we transformed our business and transformed to a standalone company, we delivered full-year adjusted EBITDA of $536 million, solidly within our guidance range for the year. Before I begin a discussion of our preliminary fourth quarter and full-year financial results, I'd like to comment on the reason we extended the filing date for our Form 10-K. Typically, a new public company is not required to report on the effectiveness of its internal control over financial reporting in its first year-end report. However, due to the structure of the spin-off, we are required to assess and report on the company's internal controls as of December 31, 2016. Based on our own risk assessment and lower materiality levels as a standalone company. A significant number of business processes controls had to be established, documented, and tested for the first time. As a result, we were not able to complete this assessment by March 1, the deadline for filing the Form 10-K. We expect to finalize our financial report and assessment of internal controls, and file our Form 10-K within the 15 days allowed by the SEC. You can refer to our filing for additional information. Although we have not finalized our assessment of the effectiveness of the company's internal controls, we believe that we will conclude that the company did not maintain effective internal controls as of December 31, 2016. Because material weaknesses that existed at the time of the spin-off were not fully remediated, and because we identified new material weaknesses relating to ineffective controls over revenue recognition, and the ineffective design of controls over certain IT systems that are relevant to the company's financial statements. We may identify other material weaknesses in our internal controls as we complete our assessment. While material weaknesses create a reasonable possibility that a misstatement in financial reporting may go undetected, after review and analysis, no restatement of, or other material adjustments or revisions to previously issued financial statements, or to the results reported in this press release, are currently expected to be required. However, because we haven't finalized our financial statements, the financial results we will discuss on this call are preliminary and unaudited, and subject to change as they are finalized. Now, let me review the details of the quarter, starting with slide 17. In 2016, our key markets delivered strong revenue and EBITDA growth. Key markets are those outside of upstream O&G. However, our overall reported results show year-over-year decline, as our strong operating performance in key markets was masked by declines in our upstream O&G markets, spin-off and standalone company costs, and the absence of results from our business in France and Spain, which was divested in October of 2015. As I walk through our key financial metrics, I'm going to focus on the major elements of the year-over-year changes so that you can better track the performance of our ongoing business. Please turn to slide 18. We reported equipment rental revenue for the fourth quarter of 2016 of $357 million, a decline of about 1% from the prior year's quarter. Excluding the impact of the divestiture in foreign currency, rental revenue increased slightly in the fourth quarter, and also for the full year. Fourth quarter rental revenue in key markets increased 6.2%, excluding divested foreign operations and currency, and represented about 84% of rental revenue in the quarter. This increase is attributable to three factors. One, our urban strategy gained traction. Two, ProSolutions reported strong year-over-year gains. And three, our core business continued to do well. Revenue growth in key markets more than offset the declines in O&G markets for both the fourth quarter and full year. Fourth quarter rental revenue from upstream O&G markets was down $13 million. But we saw the decline lessen compared with previous quarters as we lapped prior year declines. We continued to realize strong pricing gains in the fourth quarter, with an increase of 1.5% in key markets and one-half of 1% overall. While our focus is rental revenue, I'd also like to explain the change in total revenues for the quarter. Please turn to slide 19. Total revenues for the fourth quarter were $405 million compared with $422 million in 2015, a decline of 4%. In addition to the impact of the 2015 divestiture, sales of revenue-earning equipment declined year-over-year for the fourth quarter and full year due to the high volume of fleet disposals from upstream O&G regions in 2015, which was not repeated in 2016. Sales of new equipment were also lower as a result of our tactical focus on higher-margin rental activities. Slide 20 bridges the change in net income from 2015 to 2016. Our net loss in the fourth quarter of 2016 was $14 million compared to net income of $78 million in 2015. The 2015 net income figure includes $50 million gain from the sale of our operations in France and Spain and the impact of currency. Please note that the category labeled France and Spain and currency translation on this slide includes interest expense, depreciation, and losses on sales of revenue-earning equipment attributable to the divested operation. Interest expense for the fourth quarter was $32 million, an increase of $27 million compared with the previous year, reflecting our interest expense as a standalone company. Fleet depreciation increased $11 million in the fourth quarter as a result of fleet growth and depreciation adjustments in select lines of equipment. As we have stated before, in the normal course of business, we regularly review our depreciation rates by equipment category and make adjustments to certain categories as necessary. Our objective is to depreciate the equipment to its expected residual value over its holding period, thereby minimizing gain or loss at the time of disposal. We also incurred an increase in spin-off costs of about $5 million in the fourth quarter over the prior year. Spin-off costs were nearly $12 million in the quarter and are included in our SG&A expense line. The spin-off costs were comprised primarily of IT and professional expenses. Remember, during the first half of 2016, when we were a division of Hertz, certain costs, such as corporate staff salaries, were categorized as spin-off costs. Since July 1, 2016, those costs are no longer considered spin-off costs as they represent our ongoing standalone company costs. We will continue to incur spin-off costs in 2017, and we estimate that 2017 spin-off costs will be approximately one-half of the $49 million that we spent in 2016. Losses from the sale of revenue-earning equipment diminished in the second half of the year as we began to return to our normal channel mix and reduced sales to auction houses. We incurred income tax expense in 2016 despite the pre-tax loss, primarily because of state tax expense related to the spin-off and permanent differences related to non-deductible items and transaction costs resulting from the spin-off. Cash taxes associated with the spin-off were minimal, and we will benefit going forward from U.S. federal net operating loss carryforwards of approximately $220 million. Please turn to slide 21. Adjusted EBITDA for the fourth quarter was $146 million, a decline of about $18 million from 2015, due primarily to declines in contribution from our operations in upstream oil and gas markets and incremental standalone company costs. We were pleased with the net positive EBITDA contribution from key markets, particularly in light of the investments we made in our branches and our people. Please turn to slide 22. Our net fleet capital expenditures on a cash flow basis were $353 million in 2016. We spent $468 million on the acquisition of revenue-earning equipment during the year, making progress in shifting fleet into higher dollar utilization categories. For example, we increased our investment in ProContractor and ProSolutions equipment by 13% in 2016 compared with the prior year. These categories now represent 18% of our fleet as of December 31, 2016, representing steady progress toward our target of 25%-30% of total OEC. We received proceeds from disposals of $115 million on equipment with an original equipment cost of about $313 million. Our disposals reflect normal fleet rotations and our decision to sell low-performing fleet sooner than anticipated. Net fleet capital expenditures declined nearly $100 million year-over-year. In 2015, we had purchased more revenue-earning equipment as part of our strategy to refresh the fleet and invest in higher quality equipment. In that same year, we also sold more equipment to reduce fleet in upstream oil and gas markets. We believe we have right-sized the fleet in line with our long-term strategy. As of December 31, 2016, our fleet at original equipment cost, or OEC, based on ARA guidelines, was approximately $3.56 billion. Average OEC for 2016 increased 3.4% from 2015. Utilization in the fourth quarter of 2016 was 35.1%, reflecting a seasonal decline from the third quarter and continued headwinds from oil and gas. Please note, there is a typo in our press release. This 35.1% figure for dollar utilization is correct. Please turn to slide 23. Total debt was $2.2 billion as of December 31, 2016, largely unchanged from the end of the third quarter. We maintained ample liquidity during the quarter. Availability under our asset-based revolving credit facility, plus cash on hand totaled $829 million as of December 31, 2016. Our free cash flow for 2016 was $51 million, driven by strong net cash flow from operations of $450 million. A reconciliation of free cash flow is in the appendix of this deck. In addition, as permitted under the terms of the indenture, we recently gave notice to our bondholders of our intent to redeem 10% of our outstanding senior notes. We will fund this redemption from our ABL. In summary, our operating cash flow and ample liquidity provide us the financial flexibility to fund our strategic growth, serve our customers, and create value for our shareholders. Now I will turn it back to Larry. Thanks, Barb, and now please turn to slide 24. I'll close by giving you a look into 2017. Our guidance assumes that the North American equipment rental industry will grow at 3.5% in 2017, and that our revenue growth will exceed that of the overall market as our strategic initiatives take hold. Our adjusted EBITDA guidance for 2017 is a range of $550 million-$590 million, and our guidance for net fleet CapEx on a cash flow basis is in the range of $275 million-$325 million. Please turn to slide 25. Before we begin the Q&A discussion, I want to recap the reasons we remain confident that we're on track to achieve our long-term operational and financial targets. We're excited about our traction in new products. We're making progress with our ProSolutions and ProContractor tool gear. Our acceleration in branch performance in urban markets is just beginning, but it's proof that the business model works. We're improving operating efficiencies at the branch level and continuing to improve further. We are tracking improvements in sales force effectiveness through training and productivity tools, and expect those results to accelerate as the average tenure of our sales organization increases. Our ancillary revenues are increasing, as you can see from the 15% increase in the fourth quarter. As mentioned, although it's a small portion of our revenue, don't forget that most of the gain in ancillary revenue falls straight through to the bottom line. And we're continuing our focus and commitment to drive safety as our number one priority throughout the organization. These and other investments we're making across our operations will continue to shape our future as a customer-focused, operationally excellent, and financially strong business serving diverse customers and markets with products and services that represent the best our industry can offer. We continue to have great confidence in our business strategy, and I look forward to sharing our progress. I'm especially pleased by the dedication and commitment of the Herc Rentals team members who have embraced the challenge of transforming our business while maintaining an unwavering focus on serving our customers. With the best people in the industry, whose enthusiasm and energy are building the best equipment rental company in the market, we continue to advance every day toward our vision to be the supplier, employer, and ultimately the investment of choice in our industry. And now we look forward to your questions. Operator, please open the lines. We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Joe Box of KeyBanc. Please go ahead. Hey, good morning, everyone. Can you hear me okay? Sure can, Joe. Good morning. Thanks. I know you guys don't want to give a time utilization number, but I'm wondering if you can just give us a directional sense for what either time utilization or even fleet on rent did sequentially within some of your O&G markets. You're talking just about O&G or are you talking in general? No. I guess you could talk in terms of just general locations, but I am more curious with regards to your O&G locations, the 16%. Well, look, generally, as we reduced fleet in O&G markets, our utilization obviously improved. We've been focused on making sure that we have the right gear in those markets to respond to the customers that we want to do business with. But Bruce may want to give some more color, particularly around the O&G markets. Good morning, Joe. I would characterize it as they've stabilized, and there's areas of opportunity to become more productive with the fleet we have in those areas, and just the overall investment that we've made over the last 24 months in the business. Is it fair then to assume that that stabilization means that fleet on rent within those markets is flattish sequentially in Q4 from Q3? Yes. That could be one way to characterize it, yes. Okay. Thank you. Then maybe changing gears. Barb, it's not exactly clear to me on the accounting side. Is this purely a timing issue just to get the controls put in place, and that should be locked down in the next 15 days? Or is this you guys flagging a potential kind of question mark around revenue recognition, which could mean either IT changes or some additional costs going forward just to kind of put better controls in place? No, Joe, to be very clear, this is timing only. We just need a little more time to wrap up our assessment of our internal controls and to complete our audit. It's just timing only. To be clear, we don't have any accounting issues. Regarding the remediation, we've been working and will continue to work on implementing the people and the process changes that we need to remediate the weaknesses. Yes, a portion of our remediation efforts is linked to some technology and system changes. We have to move off of the new Hertz infrastructure, so these system changes will take time to implement. Basically, we're not going to declare victory on a remediation until we're sure that our controls are ingrained in our processes, our people are fully trained and knowledgeable, and that the processes are repeatable and sustainable over time. I guess then, why come out and basically say that there's ineffective controls over revenue recognition, and there could be a misstatement somewhere in the past results? Joe, we are required to state when we have material weaknesses. That is information that needs to be publicly disclosed, so we are putting it out now. We wanted to make it clear that because we do have material weaknesses over our internal controls, we wanted to make it clear that no restatements or adjustments have been needed in our financial statements and none are expected to be required. Got it. Thanks for the clarification. I will turn it over. The next question comes from Nick Coppola of Thompson Research Group. Please go ahead. Hi. Good morning. Good morning, Nick. How are you? Good. Wanted to ask about the potential for infrastructure investment under the Trump administration here, and how you'd expect that to benefit you at Herc. Any color around that? Yeah, sure. Let me sort of give you my feedback on that. Look, we're all, I think, positively excited about the prospects of a trillion-dollar investment in infrastructure over time. But quite frankly, we don't see anything really developing in the near term. It's probably a second half of 2018 and later type of activity. So we expect that as long as those investments in infrastructure projects are around the type of things that we participate in versus if the government decides to build more interstate highways, we probably won't participate heavily in that type of activity as versus repairing of bridges, tunnels, waterway structures, railroads, airports, things in large urban areas that will have a greater impact on us because that's where our strategy is focused around. A rising tide will raise all ships in this type of activity, and we expect to participate in that when and if that activity happens. But we haven't factored any of that into our forecast for 2017, and we don't expect to really see anything significant come out of this until maybe the back half of '18. Okay. That's helpful. Can you talk about the competitive environment in terms of price and your expectations on your ability to drive rate improvement through 2017? Well, look, generally, we don't comment, A, on price or B, on our competitors. But I think we've had a lot of good tailwind in our pricing environment and our ability to achieve pricing improvements in our business through 2016. Maybe I'll let Bruce comment a little more on what he's seeing. Yeah. Hi, good morning. I would say that we've got this great tailwind coming into 2017. You see the pricing improvements we've achieved. Even though we're not giving guidance on that, we feel comfortable there's no reason why we shouldn't be able to continue and to get pricing performance. Okay. Thanks for taking my questions. Thank you. The next question comes from Neil Frohnapple of Longbow Research. Please go ahead. Hi, good morning. Hi, Neil. How are you? Doing well. Just to follow up to Joe's question on the delay in filing the 10-K. Will there be any additional costs in the first quarter related to this, that you previously hadn't anticipated that we should consider for modeling purposes? I think what you should know is that our SG&A includes all of our spin costs and standalone public company costs, including expected costs to remediate, and they are fully incorporated into our guidance. Got it. Could you also talk about what's embedded in the EBITDA guidance from a loss on sales of rental equipment perspective? Should we expect this to be less of a drag in 2017 than the $31 million impact in 2016 and potentially get that back to breakeven? As I said before, to be clear, our depreciation policy and our objective is to depreciate our gear to its expected residual value over the holding period, thereby minimizing gain or loss at the time of the disposal. So yes, our expectation is always minimal gain or loss on used equipment sales. Okay. One final one, if I could squeeze it in. Since we're already through two-thirds of the first quarter, is there anything you can share on trends year to date? Look, I think, as we've given guidance for the year, and I think our guidance reflects our general optimism about the business and what we've seen in the back half of 2016. I think our guidance reflects what we expect to see in the business. Great. Thanks, Larry. The next question comes from Justin Jordan of Jefferies. Please go ahead. Hi. I just want to follow up on Neil's question, just on the depreciation. If you guys are expecting the loss and disposals to drop from 31 to around zero, are you changing the depreciation policies? Therefore, can you just elaborate on what you're doing in terms of the change in policies, please? Sure. We are not changing our policies at all. The losses that occurred in 2016 were a reflection of a higher percentage of our disposals going through the auction channel and lower residuals that we received. Okay, so that is part of the business improvement, the path forward, measures that you have outlined in prior quarters. Yes. In the fourth quarter, we did see our disposal channel start to return to their normal mix as we sold less in the auctions channel. Got it. Okay. Yeah, if you remember in 2015 and early 2016, we still had a fair amount of fleet coming out of the O&G markets that we had to reduce. With that kind of volume, we had to put a good portion of that through auction channels and not through our more traditional wholesale and retail channels. As we normalize that over time, that's where the change is. Thank you. Just obviously putting that to one side, if we think about, let's say, potential growth in rental revenues in 2017, in a traditionally industry periods with a mixture of volume growth and maybe some rate growth, maybe thinking about a 60% pull-through of marginal rental revenues EBITDA. Given the sort of on top of that self-help measures that you've got going on in the next several years, hopefully. What sort of pull-through should we be thinking about for modeling purposes in 2017, 2018? Yeah, I think you should. About 60% is a good number to assume. Okay, great. Thank you. Just one specifically, you talk about consolidating procurement within the quarter. Can you share with us some sort of magnitude of the, whether it's in percentage terms or in dollar terms, the savings that you've achieved from consolidating procurement and how we should think about that in 2017, 2018? Yeah, look, I think as we've stated in the past, as we've consolidated our vendor base, focused on premium gear and put processes in place, we've been able to achieve. Obviously, the first year, there was some low-hanging fruit, in that 10%-15% range of improvement in acquisition cost. That'll diminish as we go into 2017 and 2018. As we've sort of wrung out most of the differences between us and our industry peers. We'll continue to look for operational improvements in terms of cost around consolidating our supply base in the other areas around service parts, maintenance parts, oils and things like that, which will show some incremental improvements. Probably not to the same, definitely not to the same levels that we wrung out in the first 12 to 18 months. Okay. Just one final thing for me. Your CapEx guidance of the $275 million to $325 million. That midpoint is about, what, a 15% decline in 2017 over 2016? You just kind of explain just what's going on there? Yeah, this is Bruce. If you look at the investment we've made over the last 24 months, we've got a bit of a tailwind from that to make that investment a bit more productive. As we continue to transform the fleet, we feel highly confident and comfortable with the amount of CapEx that we've guided and spent. We also have ample liquidity, if and when we see additional opportunity to increase this if needed. Sure. But I guess, should we be thinking about OEC disposals being broadly similar year-over-year, and that would imply that perhaps the OEC at December 2017 will be broadly flat year-over-year from where it ended at December 2016? No, I think you will still see some growth, but maybe not at the same pace that you saw 2016 over 2015. Got it. Thank you. The next question comes from Jerry Revich of Goldman Sachs. Please go ahead. Hi, good morning, everyone. Good morning, Jerry. How are you? Doing well, thanks. How are you? Great. I am wondering if you could talk about the 100 basis point or so decline in dollar utilization in the quarter within the context of pricing moving higher on a year-over-year basis. I guess that would suggest that time utilization was down year-over-year. Is that right? Is that driven by mix or are there other factors that are driving that dynamic? Yeah, this is Bruce again. Still we are seeing some drag effect from the O&G market, upstream O&G market. Then, we have a little bit of productivity gains that we can get as we rotate through the fleet, bring in this new product mix, train our people, diversify the customer base. But the main drag has been the effect of oil and gas, and we hope to kind of lap those comps here in the first quarter. Okay. Just to circle up on the CapEx discussion, lots of reason for optimism based on auction values into February, and you folks laid out your expectations for industry growth in 2017. I'm wondering within that context, why wouldn't CapEx and fleet growth targets be higher for you folks in 2017 versus 2016? Is it to make sure that you're rolling out the process at a pace that you're comfortable with, or are there other factors that are driving the relatively muted CapEx outlook versus some of the qualitative end market comments you made earlier on the call? Well, I think that we feel comfortable with the amount of CapEx, like I said, that we have built into our plan, which rolls up into the guidance we've given you. We have the liquidity if needed and if and when we see the opportunity. If you just look back through the cycle, we're in a year that seven, eight years ago, there wasn't large spend made in this business, so there's not a large amount of rotation CapEx. So that's reduced year-over-year. As we kind of rifle approach where we want this CapEx to go to drive dollar utilization and to drive a bit better absorption of the fleet, and drive up the yield overall, we feel comfortable about it. All right. Thank you. Thank you. The next question comes from John Healy of North Coast Research. Please go ahead. Thank you. Larry, I wanted to ask just kind of about the other assets in your business, primarily the people in the salesforce. I know that's been a big area of focus in kind of adaptation over the last kind of 18 months or so. Can you talk to what you're doing in terms of investing into the headcount for this year? Then maybe kind of talk to where those investments are going. Are they going into kind of the general rent business? Are they going into kind of the contractor side of things or maybe the urban side? Just kind of more perspective on what's going on with the folks that are driving the revenue, not just the equipment that's going out on rent. Yeah, sure. Glad to. Look, as we talked in a couple of prior periods, we've had a significant upgrade, top grading, and improvement in our sales organization. On a net basis, we've probably increased the sales organization by about 100 people. We've optimized our territories included in that with people focused more on geographic territories rather than on account basis. We've also added a significant number of people as we build out and develop our specialty solutions business. We've added a significant number of people to that organization as well with technical know-how, expertise around application selling, and the ability to provide greater value-added services to our customers. So that's where a lot of the investments are going. We're spending an awful lot of time and resources this year on sales training, sales effectiveness training as we're getting these new salespeople past that first 12 to 18-month curve and improving their performance and their effectiveness in the field. A fair amount of dollars and resources are going, in addition to sales training, to safety training and improving the safety environment in our business. We believe that that's something that's critical in our operations and something that'll be critical to our customer base. So that's where we're seeing the training out on the front end. Then remember, as we stand up this company as a separate independent public company, we have a fair amount of new talent coming into the back office end of the business. And we're providing a fair amount of training to those groups of people in the technical areas that are required to run the back office of the business. Bruce might have a little more color around the sales organization. I think the takeaway on this would be it's completely aligned with our strategy. The capital investment in human talent is being made in the urban markets. It's being made heavily in our ProSolutions business. If you remember what Larry Silber just spoke about, we've added approximately 100 salespeople in the last 12 months. I think you'll find that the need will be lessened into 2017, so we won't add at that same pace. This is more of a year of professionalizing our sales force and getting greater efficiency out of them in these large urban markets. Operator- Great. Thank you. Can we take the next question? Thanks. Okay, that next question will be from Brian Sponheimer of Gabelli. Please go ahead. Hi, Larry. Hi, Barb. Hi, Brian. How are you? A couple questions. As we think about CapEx over the course of the next five years, given you like where the fleet is this probably a good level to think about from a net fleet CapEx perspective over the next five years? Look, I think at this point, it's too early to tell. From our perspective, looking out beyond this year, while we have a five-year plan for our business that we've shared with you, I think there are some things around CapEx that we're going to have to be mindful of relative to the cycles that have happened in the past and what we can do with our fleet, whether it's possible aging and/or replacement of some fleet. But there were some pretty heavy cycles, if you go back seven or eight years ago, that'll affect the CapEx investments going forward. Okay. That's fair. Anecdotally in the quarter, what are your upstream O&G customers saying about their expectations for 2017? This is Bruce. As we said, we're lessening our focus on the upstream O&G business overall. I would tell you that there is, especially in the U.S., the lower 48, there's a sense of optimism throughout the Texas, Oklahoma area, and we are seeing some green shoots through that area. Okay. With the understanding that this is being somewhat de-emphasized, is there still sufficient equipment in those markets should activity pick up substantially where you could see an immediate benefit? I would tell you that we have some slack in our fleet in that area, and there is some opportunity there as the business starts to accelerate. But we will be, Brian, more selective as we go forward on the customers and the accounts that we're willing to put our CapEx and our fleet in than what had been the case in the past. And we'll make sure that those are the customers that are going to be our good long-term customers in those markets. Yeah, and not to pile on here, but I would tell you we're being extremely disciplined about not allowing fleet to flow back to those markets that we had moved out and relocated throughout the urban markets. So we're not going to get addicted back into that market as we've had so much success and traction in the urban markets that we moved that product into. Very fair. And just last one. We're thinking about potential tax reform and some discussion over equipment that gets imported into the U.S. Have you done any studies as to where your own equipment that you purchase is assembled and whether or not that can end up actually being a benefit given that you source most of your equipment from U.S. manufacturers that assemble here? Yeah, look, as we focused on our fleet and consolidation of vendors, we focused on premium brand gear that's primarily made in the U.S. and Canada. There are certainly some brands of products that may come in from Western Europe or Japan. But for the most part, most of our gear is primarily either made or assembled in the U.S. and Canada. Great. Well, best of luck for a great 2017. Thanks so much. Appreciate it. This concludes our question and answer session. I would like to turn the conference back over to Elizabeth Higashi for any closing remarks. Thank you, everyone. Of course, I'll be available to take your questions. Send me an email, and we'll try to set up a time. Thanks so much for participating. We look forward to talking to you further. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.