Earnings Call: Q4 2018

Jan 24, 2019

Good afternoon, and welcome to the United Rentals Investor Conference Call. Please be advised that this call is being recorded. Before we begin, note that the company's press release, comments made on today's call, and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control and, consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the company's press release. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31, 2018, as well as to subsequent filings with the SEC. You can access these filings on the company's website at www.ur.com. 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, circumstances, and changes in expectation. You should also note that the company's press release, investor presentation, and today's call include references to free cash flow, adjusted EPS, EBITDA, and adjusted EBITDA, each of which is a non-GAAP term. Please refer to the back of the company's recent investor presentation to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer. Jessica Graziano, Chief Financial Officer, and Matt Flannery, President and Chief Operating Officer. I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin. Good afternoon, everyone, and thanks for joining us. As you saw yesterday, we delivered a strong fourth quarter performance to cap another record year. Our results underscore two key dynamics that were fundamentally important to our narrative in 2018, and again in 2019. First, that our industry continues to benefit from a positive operating environment. Second, that we're positioned to leverage demand through a combination of scale, technology, and other sustainable competitive advantages. We take all these factors into account when we strategize about growth and profitability. In our fourth quarter results, you saw proof that our strategy is working. In a few minutes, Matt will talk about our strategy and our operating landscape, and Jessica will cover the numbers, but I'd like to touch on the highlights of the quarter up front. As reported, our adjusted EBITDA was 18% higher than a year ago on a 20% increase on total revenue. This reflects both M&A and organic growth. Volume increased by almost 17%, and rates increased by 2.2%, two indicators of a healthy marketplace. Our time utilization decreased by 120 basis points to 68.8%, reflecting the impacts of BakerCorp and BlueLine, as well as the tough comp from the prior year hurricanes. Looking at the 12 months of 2018, our free cash flow is very strong at more than $1.3 billion, and our return on invested capital was a robust 11%. Both of these were company records. So a lot of momentum going into 2019 and a broad-based market activity to support a positive forecast. On the subject of the macro, as you might imagine, we get asked about it a lot. Obviously there's some uncertainty out there on things like interest rates and tariffs, and you can see that in the stock market. But we have an industry's biggest ear to the ground, and from everything that we're seeing and hearing, there's no discernible impact on our business. All signs indicate another solid year of growth. In addition, we have a long history of outperforming both the equipment rental industry and the construction marketplace. We did that again in 2018 when the U.S. rental industry is widely expected to report expansion in the mid-single digits. By contrast, our revenue grew by almost 11% on a pro forma basis. Importantly, we have a robust capital structure that gives us significant flexibility in navigating any market conditions. For all these reasons, we have confidence in the 2019 guidance that we reaffirmed yesterday. Looking forward, we remain focused on balancing growth, margins, and returns, and free cash flow and ensuring that our entire company operates with this goal. This includes aligning the acquisitions we've integrated over the past two years. We bought quality operations with great teams who can thrive in our ecosystem. Now we're identifying ways to optimize the operations as part of United Rentals. In some ways, 2019 will be business as usual for us, bearing in mind that we're in the business of constantly moving forward. We'll continue to explore new technologies, leverage our assets, and invest in better ways to serve our customers. These initiatives are all part of the narrative at our annual management meeting two weeks ago. We had almost 2,000 leaders with us in Minneapolis, including many managers who recently came on board. It really drove home the fact that United Rentals is a very different company than we were a decade ago. Not just larger in size, but with a more resilient business model and a strategy that points us firmly toward the future. Before I hand it over to Matt, I want to mention the succession plan that we announced on January 8th. This is a result of a comprehensive planning process that our board engaged over a number of years. As you know, Matt has been appointed our next CEO, effective May 8th at our annual shareholder meeting. At that time, I expect to replace Jenne Britell as non-executive chairman and Bobby Griffin as lead independent director. I want to take this opportunity to express my deep gratitude to Jenne as one of the architects of our transformation. She's also been a role model for our employees and an inspiration for me personally. Succession planning can be a complex process in a company of our size, but the board got it absolutely right. There's a lot of continuity with our transition. Matt's been immersed in our strategy for the past decade, and he knows where the opportunities lie. I look forward to collaborating with him in my role as chairman come May. Matt, it's over to you. Thanks, Mike. I appreciate the kind words, but more importantly, your help in preparing me for this opportunity. I couldn't be more proud to take on the CEO role. I look forward to leading the company with the support of our board, Mike, and the 19,000 dedicated employees, and continuing on the strategic course that's taken us from an early focus of building scale to a culture of profitable growth. Before I talk about our operations, I want to summarize the three key themes I introduced on Investor Day. Number one, that we've built a machine with a large capacity for growth. Our base is already diversified by customers, geographies, end markets, and products, but we want to explore more verticals and deepen our penetration in traditional markets. Number two is operational excellence, where we've created a platform that turns our volume into growth and returns. This is a critical lever for us. Number three is fleet management. We have more than $14 billion of fleet, which represents a huge opportunity to manage these assets for optimal profitability while continuing to broaden our offering for customers. All three of these areas require continued investment, and this is where our scale and our strategy converge. Scale is synergistic. It gets us efficiency and productivity, and it also allows us to generate the cash that we need to advance our strategy. Our specialty segment's a compelling example of this. We planted the seeds of our specialty segment about 10 years ago when we first began to diversify our business. Over time, it's become a core part of our strategy. In 2018, you saw us acquire BakerCorp and extend both the depth and reach of our fluid solutions business. We also did some smaller deals in site services, and we opened 30 additional specialty cold starts with another 27 planned for 2019. Combined, our Trench, Power and Fluid Solutions business generated 40% more revenue in 2018, and importantly, almost half of that came from same-store growth. When we build out our specialty footprint, we're also creating cross-selling opportunities for our gen rent business. In the fourth quarter, with a record 323 specialty locations, our company-wide revenue from cross-selling grew by 27%. This is an example of how our connected network of locations, combined with a broad fleet offering, creates a major competitive advantage for us. We're able to take fungible assets and move them from geography to geography or end market to end market to help drive returns. Assets are important, but our number one priority is, and always will be, our people. Our people know they're a competitive differentiator for us, and they're very proud of that. We want to make sure they stay engaged and stay safe. In 2018, our recordable rate was below one for the fifth consecutive year, and 92% of our branches remained injury-free for the full 12 months. That's pretty incredible. Kudos to the team. Now shifting to market opportunity. The majority of our strategies focus on expanding our core business. We still have a lot of headroom to drive profitable growth. Importantly, our core end market demand continues to grow. Our branches and our customer surveys continue to report that our customers are busy and they're optimistic. In addition, virtually every external indicator for construction and industrial is positive. To give you a sense of what we've seen in the fourth quarter, all of our regions increased rental revenue year-over-year, and all of our verticals are up as well. The oil and gas sector remains strong despite some underlying volatility, and both the U.S. and Canada are showing solid activity. Canada's out of its slump from a couple of years ago, and in 2018 they drove double-digit revenue growth nationally for the quarter. Company-wide, our revenue from non-res construction was up 11% in the quarter. This is important because this is our largest end market, and it's encouraging to see how broad-based that demand is. We beefed up our presence across many of our trade areas in the past 12 months with the acquisitions of BlueLine, BakerCorp, and WesternOne. These branch integrations will be essentially complete by the end of the first quarter, and we expect the combinations to continue to drive benefits throughout the year. We're very pleased with the timing of our M&A path over the last two years. It's given us substantially more firepower in a growth environment. As Mike mentioned, we have a long history of outperforming the equipment rental industry and the construction marketplace. Our value proposition is much more durable and diverse today than it was when we started this journey 10 years ago. We looked at every potential investment through the same lens. Is it sustainable and is it profitable? Because the ultimate goal is to compete at that level that sustains superior financial returns. Technology measures up to that goal. We believe there is an enormous amount of shareholder value to be realized by taking the lead in shaping the job sites of the future. The strides we're making in process innovation and the digital experience are driving up productivity for our field employees and our customers. While our size is a meaningful advantage, we're also defined by other attributes that position us as an industry leader, such as our commitment to safety, investments in technology, our range of solutions, and the caliber of our people. That strategy that created these differentiators has been driving us forward for over a decade, and now we have an opportunity to do more for our customers and our investors than any other time in our history. I'll ask Jessica to go over the numbers, and then we'll take your questions. Jess, over to you. Thanks, Matt, and good afternoon, everyone. As a reminder, the numbers I'll be reviewing are as reported, except for a few cases where I'll call them out as pro forma. The pro forma numbers include the BakerCorp and BlueLine acquisitions as if we owned them a year ago. Let's begin with rental revenue. Rental revenue for the fourth quarter was $1.99 billion, which is up almost 21%, or $343 million year-over-year. If we break that down further, OER grew 19%, or an increase of $266 million. That growth came mostly from higher volume, which was up just under 17%, or $239 million. Another 2.2%, or about $31 million, came from rate improvements. The impact from inflation on our replacement CapEx was a headwind of about 1.5%, or $21 million. That leaves the impact of mix and other, which was a benefit of 1.3%, or a healthy $17 million, coming primarily from the growth of our specialty business. The other components of rental revenue were re-rent and ancillary, which increased by a combined $77 million. Both benefited from increased volume as well as the additions of BakerCorp and BlueLine Rental. I will note that rental revenue on a pro forma basis was strong, up 8.5% year over year, and that included a 2.4% improvement in rates. Taking a look at used sales. Used sales revenue was up 8.1%, or $14 million year over year. Adjusted gross margin on used sales was 51%, down from 58%. That reflects the impact of selling older, fully depreciated NES equipment in 2017. To be clear, the used equipment market remains very strong. Our sales as a percentage of OEC was 59%, which is 500 basis points higher than last year. That came primarily from a strong pricing environment and to a lesser extent, from the blend of equipment sold. Moving to EBITDA. Adjusted EBITDA for the quarter was $1.117 billion, an increase of $170 million, or 18%. Adjusted EBITDA margin was 48.4%, or 90 basis points lower than Q4 of 2017, largely due to the impact of BakerCorp and BlueLine Rental. Excluding them, adjusted EBITDA margin improved 20 basis points year over year to a robust 49.5%. Here is the bridge on the changes. Higher volume in the quarter added $160 million of adjusted EBITDA. Better rates and ancillary revenues each increased another $30 million. Other lines of business contributed $6 million to adjusted EBITDA in the quarter, and incentive comp was better by four. These benefits were partially offset by a few headwinds. The impact of fleet inflation on EBITDA was about $17 million. Merit increases cost us $7 million and lower used sales margin cost us six. That leaves a headwind of about $30 million, which comes primarily from the impact of carrying fixed costs for BakerCorp and BlueLine Rental that were not there in the fourth quarter of 2017. This is partially offset by that positive revenue mix I mentioned earlier. EBITDA flow-through for the quarter was 44%. As we have mentioned, the acquisitions are a drag on the flow-through calculation. So if we exclude the impacts from BakerCorp and BlueLine Rental, our flow-through for the quarter was 53%. Taking that one step further, if you exclude the impact of used sales to isolate the core business, our flow-through in the quarter came in right around 60%. So a good performance across the business with operating costs coming in as expected. As for adjusted EPS, it was $4.85 in the quarter, compared with $11.37 in Q4 of 2017, which included $8.03 from tax reform. If we adjust for tax reform in both periods, adjusted EPS increased 19% in the fourth quarter, primarily from better operating performance across the business, including the contribution of our recent acquisitions. Let us move to CapEx. For the full year, gross CapEx was $2.1 billion, which was at the high end of our guidance for 2018 and reflects fleet we have deployed in response to continued strength we see in the market. Even with that significant level of CapEx spend, free cash flow for the year was a record, coming in at $1.33 billion, if we exclude the impact from payments we made for merger and restructuring. So we are pleased to deliver another year of significant free cash flow. As we manage the business to balance growth and returns, we are also pleased to deliver a strong performance for ROIC, which was 11% in the quarter, a record for us. If I adjust for tax reform, ROIC increased 20 basis points year-over-year to 10.8%. That represents over a 200 basis point spread above our weighted average cost of capital. Looking at the balance sheet, net debt at December 31st was $11.7 billion. That's an increase of about $2.6 billion year-over-year related to the financing of BlueLine and BakerCorp. Our total liquidity at year-end was $1.4 billion, comprised mainly of ABL capacity. Quick update on our share repurchase program. As I mentioned at Investor Day, we restarted our $1.25 billion program after taking a short pause to assess the BlueLine integration. We were back in the market in December, and by year-end, we had repurchased $420 million worth of shares on that program. On the subject of BlueLine, Matt mentioned the integration, but I'd like to add a little more color. We had two months of BlueLine contribution in the fourth quarter. Results for those two months were in line with what we communicated in our third quarter call. As far as synergies go, we're on track to get our full run rate of $45 million, and we'll likely get there sooner than we originally communicated. We had $3 million of these synergies realized in Q4. So overall, it was a quarter and a year of excellent results in a favorable macro, providing solid positioning for 2019. As a matter of fact, based on numerous conversations I had during our annual management meeting earlier this month, overwhelming sentiment from our managers was positive. They all feel good about what should be a strong 2019. You saw us reaffirm the guidance we issued in December, so I won't go through the details, but it's worth pointing out that our 2019 CapEx guidance includes replacement CapEx of $1.65 billion, adjusted for inflation. So at the midpoint, that implies about $575 million in growth CapEx. Before we move to Q&A, I want to take a few minutes to introduce some upcoming changes in our quarterly discussion of rental revenue. As you know, we have been providing rental rates and time utilization as discrete metrics. But as we discussed during our Investor Day in December, our business strategy has evolved, and we need to evolve the way we talk about the business as well. Specifically, rate and time are just two of the many levers we manage daily as we focus on profitable growth. What really matters is the interplay of decisions made across rental rates, time utilization, and mix that come together to produce revenue as efficiently and as profitably as possible. So after numerous conversations with analysts and investors, we're introducing the metric of fleet productivity. This measure is meant to provide greater insight into how we optimize rental revenue by balancing rate, time, and mix decisions with market dynamics. Now let me be clear, rate and time remain important KPIs for us, but we've realized our reporting these metrics in isolation doesn't accurately convey how we're balancing these levers to impact our revenue performance, and ultimately, our growth and returns. By combining these discrete levers into one metric, fleet productivity provides a more comprehensive view of the combined impact from decisions we make across the field. Starting now, we'll provide quarterly year-over-year rental rate and time utilization in parallel with fleet productivity. This will give investors the opportunity to get familiar with the metric through mid-year. At that point, we plan to phase out quarterly rate and time and continue to disclose our quarterly fleet productivity results. We'll continue to characterize the impact rate and time has on our results, but it'll be more qualitative rather than quantitative. Finally, as a part of the change to our communication strategy, going forward, we will no longer provide monthly results on rate and time. Two other quick notes on how we'll speak to rental revenue, and specifically our owned equipment revenue going forward. We'll describe these changes to OER by continuing to call out the impact of inflation on the fleet as a headwind. Second, starting with Q1, we'll provide the impact of the net change in OEC. That'll give you a window into our rental CapEx decisions in the quarter. Now I'm going to stop here and open the call for questions. Operator? Certainly. Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of Ross Gilardi from Bank of America Merrill Lynch. Your question please. Hey, Ross. Hi, Ross. Thank you. Hi, everybody. Michael, congratulations and thanks for everything, and best of luck in the chairmanship. Thank you. Appreciate it. Just had a few questions. First, could you guys just talk a little bit more about the macro? It sounds like you are still seeing a lot of strength out there, fairly broad-based. So maybe you could give a little more granularity, what regions and end markets are the relative out-performers versus the laggards, and what really gives you any true visibility into what is to come in 2019? Yeah, Ross, let me start out and then Matt can chime in and give you more of the details specifically on the regions. So when you took a look at, our results speak for themselves, and it was very broad-based. Both geography-wise and vertical end markets all showed growth, which is a telltale sign. Our customer survey, our confidence surveys remain very encouraging. We recently completed our annual bottoms-up budget process, which factors into that real-time data. All the external data points across both our construction and industrial end markets continue to show a positive growth component. Whether it be construction activity and construction put in place, the ABI, employment data, backlogs, industrial activity, ISM, PMI, the Chicago Fed National Activity Index, manufacturing surveys. Very broad. As far as the level of detail on the regions, Matt? Sure. Ross, this is Matt. I think Mike covered it, but additionally, when we see the results being broad, not just the customer confidence index, which is in addition to all the macro data that everybody has access to. As Mike spoke about in his opening remarks, we have 1,200 locations with their ears to the ground. This is their job. So they are in customers' offices. They are looking at backlogs. So the data, the anecdotal, the local intelligence all point to a strong 2019, and, once again, it is very broad. So there is no hot pockets that anybody is relying on to drive growth. Okay. Thanks very much, guys. I wanted to ask, just talk a little bit about margins. It is very clear a lot of investors still view your company as incredibly cyclical and the same company it was 10-15 years ago and value the stock that way. If you look at the last five years for a supposedly cyclical business, your rental gross margins have been 42%-43% for five years in a row, and that is through a pretty challenging industrial recession. Same holds true for EBITDA margins. I think you have been at 48%, 49% for the last five years. So the key part of the message here, that your margins are a heck of a lot more stable than people realize. Can you comment on that? Can you actually take margins higher from here? You are more or less assuming looks like 48% again for EBITDA in 2019. Right. Hey, Ross. Good afternoon. It's Jess. Yes, we definitely believe that those margins are not only stable, but that we can actually grow them. As we've talked about flow-through, just even as we look at 2019, we've talked about the acquisitions being a bit of a drag. But as those acquisitions continue to be integrated and we focus on the growth, the overall flow-through of 60% across the core business, just even mathematically means that we believe there's opportunity to grow margins going forward. Okay, thanks. Then just lastly. When does specialty rental gross margins inflect positively again? I think they've been down for a few quarters, and in the fourth quarter at least, they don't look that different from the gen rent margins. We realize some of that might be Baker and M&A. But when do we see a positive inflection in specialty gross margins? I can't pinpoint one specific quarter for you, Ross. But as we've talked about, Baker is a drag on those margins. As we continue to integrate that business, you will see the inflection as we anticipate growing those margins in the future. Okay. Thank you. Thank you. Our next question comes from the line of David Raso from Evercore ISI. Your question, please. Hi, David. Hi. Good morning. Hey, Jess, you just mentioned kind of core incrementals for next year at 60%. Yep. Or at least you said framework-wise, you think of the core at 60. Yes. Unless I am doing the numbers wrong, if I think of just the incremental, not the full year, the incremental business in 2019 from BlueLine and BakerCorp, it seems to be implying the incremental is more like low 50s. I am trying to add some of the savings that you spoke of on top of the core margins of both BakerCorp and BlueLine. I am just trying to understand, is that lower 50 number a reflection like what happened in the fourth quarter? We are assuming lower margins on the used equipment. I am just trying to understand, is that maybe conservatism in the guide or something I am missing about the incrementals at a core basis? Yeah. Hi, David. I think the first caution I would give is on the midpoint, right? Obviously, if we use the midpoint that is going to connote a specific number. If we look at the contribution that we are expecting for the acquisitions in 2019 and we also add in the synergies that we expect, what we expect to realize within the year, excluding those, we are still plus or minus closer to 60%. Okay across the core. Okay. I mean, I think we We can take it offline, just because I would think you are getting what incremental sales of about $875 million from BlueLine and Baker combined, just the incremental. I am just using a core about 40 on BlueLine, add $20 million of savings. Right, 28 on Baker at 12.5 of savings. I am just coming out with the core business seems a little bit light. I just get, I am not trying to characterize it as pessimistic, conservative, just a framework. Am I missing something on the numbers? We can take it offline. You are still going with the idea your guide midpoint implies core incrementals at 60? At closer to 60. That is right. Yeah. Yes. Okay. My second question, as you know in the slides, you are targeting at year-end, the leverage down to the low end of your range, right? The 2.5. Yes. 2.5, that is right. Yep. How should I think about, again, this is obviously conjecture looking out a year, but for what it's worth, some of the construction spend forecasts that you put in your slides show 2020 is a slower growth year for U.S. construction spending, but still positive. So when I think about CapEx needs in 2020, I would think they're, at a minimum, no greater than this year necessarily. What do we do with cash flow as just a base framework? Again, just look, we have to model past one year. If you're at the low end of your leverage at the end of 2019, you're going to generate. We can talk offline about all the puts and takes of cash interest and cash tax changes. Yeah. How should we think about the model going forward with, all right, we're at the low end of the range on leverage at the end of 2019. How do we think about deploying 2020 cash flow? Well, obviously we haven't locked in on a plan for 2020, so I don't want to speculate on this call, right? But we're always coming back to our capital allocation strategy and what we believe is appropriate for the business given where the business is at that time, right? So, we're very comfortable with where the leverage range is right now at 2.5x-3.5x. We know that we'll be at the closer end of that range should 2019 play out the way we think it will right now. We have discussions with our board formally through the year about whether or not there should be any change to our direction on the way we approach our strategy. So, there's no change to talk through right now. But we obviously will have those discussions with our board as the year plays out. Yeah. I would just add. Yeah. Go ahead. Go ahead, David. Sorry. No, please. No, that's you. Go ahead. I want to ask you a question, Matt. With Matt, obviously Michael still being there as a non-exec chair, but if you want to add your two cents on, you've seen the reaction to the share repo. The stock is still, from a historical perspective with this cash flow yield, still very low. How do we think about the stock is still viewed in this manner? Is there a toggle here between look, there's obviously some scale logical consolidation thoughts, but maybe the right thing to do, and you've seen the reaction of late, maybe to just keep buying back your shares. I'm just trying to get maybe the transition of CEO your two cents on the tape here of how do you think about at this valuation versus a consolidation angle. I think the prioritization of what we do with our free cash flow remains the same, right? It's been a big part of the strategy. It'd be a little disingenuous for there to be a major pivot. If there was, I should've spoke up sooner, during my current role. But I think that the prioritization certainly influenced by what we think the end market looks like in the next 12-18 months, and that's how we've made our decisions for 2019. We'll go through that same process, but organic growth, primary. Looking for any opportunities, whether they be tuck-ins. I don't know at this point if I'll say too many transformational M&A, but looking at M&A, it's got a higher threshold, right? At certain points in the market. And then how do we do the combination of paying down debt? If our leverage is already in a good spot, then we look at how do we return cash to shareholders. That, as Jess appropriately said, is something that we go through our board. But I wouldn't look for a major shift in strategy. If we do develop strategy, we'll certainly, as always, communicate. I appreciate. A little bit of an unfair question, but just given obviously some of the management changes and the recent repo announcement, I thought I'd just give you the platform to answer it as you wish. So I appreciate the answer. Thank you. Thank you. Thanks, David. Thanks, David. Thank you. Our next question comes from the line. Rob Wertheimer from Melius. Your question please. Hey, good morning everyone. Good morning. My question is going to be on customer retention or expansion and acquisitions. It's one we've gotten from investors recently. It's just as you look at the acquisitions you've done in recent years, including BlueLine, you have the opportunity to gain loyalty through better execution, maybe through some of the IT things you talked about your Investor Day on benchmarking, providing more value to people. And you have the opportunity to lose customers as they maybe dual source versus what they had then. Would you comment on just your trend on customer retention through the acquisitions you've done in recent times? Thanks. As you know, Rob, we've done, what, nine acquisitions in the last two years, and we model each one of these out to justify the spend. And within that is customer retention, cross-sell goals. How can we take our value prop on this base of customers that we acquire and make it accretive? How can we be a better owner of the business? We've been very pleased with our ability to do that. I think that one of the primary reasons is the breadth and depth of our offering. There's nobody else that could own these businesses that we buy that has that opportunity, that muscle to flex. And I think it's been a big secret to our success and something that we're really focused on. It starts with retention of the employees and retention of the capacity that you acquired as well, and those are our two biggest focuses in the first days, not even weeks, days of an integration. Or how do we make sure we maintain the relationships, the capacity that we bought, and leverage it into growth. And you hit on the head of that manifests itself in customer retention and customer cross-sell. So we feel real good about it. It's a huge focus for us. Perfect. And then just any early look on how BlueLine is going with respect to that and operational improvements? Thanks. Sure. We're really pleased with the BlueLine integration for the first couple of months here. As I mentioned in the script, most of the structural decisions have been made, and if they haven't been executed already, they will be by the end of Q1. And then the next phase, as we get into the seasonal strength of our build, is when we'll really see how we leverage those additional relationships, sell more value into those customers that came with the BlueLine team. And we're looking forward to that. We'd love to buy every company in April when we get into the seasonal build, because we won't really be able to take advantage of that scale we bought until April when the seasonality kicks in. So looking ahead to that, looking forward to it. Perfect. Thanks, Matt. Thank you. Our next question comes from the line of Joe O'Dea from Vertical Research Partners. Your question please. Hey, Joe. Hi, Joe. Hi. First, Matt, I just want to go back to an earlier comment you made on acquisitions. You think about how active the company has been over the past couple of years. Just to kind of gauge what your appetite is at this point and how that kind of carves out between what you talked about in terms of transformational versus bolt-on, and just how you're generally approaching the M&A opportunities. Sure. Well, if you think about that in the last 24 months, we've bought three of the top 10 in the gen rent space. You'd have to imagine at this point, we're looking at opportunistic tuck-ins and certainly anything that broadens our offering, such as you saw with BakerCorp. Anything in the specialty space is something we'd be more focused on. But it has to still meet the three strategic levers that we've always talked about, right? The three points of entry. I would say that the financial bar has to be higher right now. We've got a lot on our plate. We're doing a great job absorbing it, but we still have opportunity to grow off this new platform. So that raises the bar a little bit on M&A as far as what has to be done. But we're still willing to look at tuck-ins, look at opportunities to broaden our penetration and our offering. So I would just say a higher bar. Got it. A second one just on fleet productivity and any details on how you kind of evaluate that internally. I would think, generally, a target at a minimum to offset inflationary pressures. But when we think about all the factors involved, just trying to get comfortable with what the right kind of bogey is or how you think about whether you're meeting targets there or missing. I will ask Jess to take you through some of this as well, but when I think about it qualitatively, it is real important to explain. I think Jess did a great job in her opening remarks, but remind everybody why we are doing this. It is because the other metrics that we were given on their own, out of context, do not show what we are really doing in the field every day. I have often given the example of a 60-foot boom versus a light tower. If we rent ten 60-foot booms last year, and I rent five this year, at the same rate, it just shows up as a zero impact to rate. The volume does not change, nothing changes. I will use light towers as a high return example of a category. If I double my light tower volume, but at the same rate as I did the previous year, shows no impact to rate. Actually, the mix of those two, 60-foot booms usually have higher time utilization. Light towers have lower. We would have a negative impact on time utilization, yet the business decision would bring us more profitability. That is captured in mix. That is really, just to put it in a simplistic operational view, why we are introducing the new metric. All that value that we created in that fleet shift gets hidden in the metrics that people were focused on. We had to look in the mirror and say, "How can we put together a more comprehensive view of the benefit of that decision?" Dale foreshadowed a little bit at Investor Day, if you remember, a couple slides. The team has done a lot of work on that since then, and that is why we are introducing this fleet productivity metric. We think it really captures the overall view of the decisions that are made in the field day in and day out. Jess, I do not know if you have anything to add. Sure. What I would add to that is, as we think about fleet productivity, it is going to help from a communications perspective in giving insight to how we are managing across those levers that we talked about, right? The math behind it is that it is really aggregation of change in rate and change in time and change in mix. Throughout the field, we are still going to be focused on each of those levers and how we can use them to continue to focus on profitable growth, and then ultimately decisions that, with those levers, are going to optimize returns. Right? But in bringing them together into a fleet productivity metric, it allows for us to communicate how those three levers have kind of played against each other, right? The interplay across the three of them. When you think about it from a consolidated perspective, what that also does is it helps us to make sure that our capital decisions, that change in the OEC that you will see as a separate component of how we talk about rental revenue, it will help us to make sure that we are optimizing our decisions specific to what is arguably one of the most important decisions we make in the business, which is how much capital we are going to buy and sell. Rob, I will take this opportunity to remind everybody. To be clear, I am sorry, Joe. To be clear, this is very much impacted by our focus on managing rate and time. There is no change in that philosophy, just more comprehensive, and I want to share that with everyone. It would be a big mistake if somebody mistook that we are getting away from managing rate. It is still a great lever for us. Thank you. Thank you. Our next question comes from the line of Steven Fisher from UBS. Your question, please. Thanks. Good afternoon. Good afternoon. Hi, Steven. Hi. It's good to hear that the macro is broadly positive, but there's still some investor concern about the private non-res side of construction being a little bit softer as we go forward here. So in the event that we were to see that decline a little bit, Matt, could you maybe rank for us what some of the most top few impactful initiatives would be that would drive some growth ahead of what that market would be it cold starts, cross-selling, verticals expansion, or anything else? And if you could kind of quantify what you think the revenue impact of those top two or three could be, that would be helpful. First of all the impacts are embedded within the guidance that we gave. I won't get into parsing out what participation each one has numerically, but I would just say our overall portfolio, our continued focus on cross-sell, our continued headroom in the end markets that we serve organically, even more so in specialty. Then last would be any opportunities to add products and services. We're building out our on-site services platform right now. That's a great growth opportunity. It also further provides service to our customers as a one-stop shop. That kind of cross-selling has been the secret sauce to our success, and it's a differentiator because not everyone can do it. As a matter of fact, most can't as broadly as we can. That's how we look at the levers, and Steven, I think that's the way I would characterize it. Okay. Thank you. Then just to follow up on Joe's question there about fleet productivity, just wondering how we should think about the pace of fleet productivity that's embedded in your 2019 guidance. Is it expected to be in sort of this low single-digit growth range? How lumpy might it be quarter to quarter? Is there sort of just kind of a general range that we should be thinking about? Yeah. Hey, Steven, this is Jess. We're not going to guide to that number. That's going to be more of an output each quarter as to what's happened in the aggregate across the rate time and mix. I definitely don't want to try and put a number out there. Just as folks are going through the information we've put in the investor presentation, I will just note that the as-reported fleet productivity will continue to be impacted by our acquisitions. They will be a drag on what the total productivity number is. Let me give you an example. You'll see in our investor presentation that the productivity on an as-reported basis is 1.5. That's got a little bit of a drag from the acquisitions. On a pro forma basis, that number is 3.9. We'll give context to fleet productivity going forward when we give the quarter. But at this point, we're not going to guide to it. I think that's one of the reasons why we're going to continue to give the quarterly rate and time for the first half of 2019. It'll help people get to reconcile how they thought about the business, how we're continuing to focus on the overall returns. But also it'll help some of the M&A noise flow through the numbers, and we'll get a little bit more stable because you could look at the history here on slide 36 and why we called out the M&A. It does make the numbers a little bit choppy for a couple of quarters. Then we integrate it into our network, we get the improved productivity, and then we bought somebody else. So we think this will stabilize a little bit and be helpful going forward. Perfect. Thanks a lot. Thanks, Steven. Thank you. Our next question comes from the line of Seth Weber from RBC Capital Markets. Your question, please. Hey, Seth. Hey, Seth. Hey. Afternoon, everybody. How are you? Good. Great. Jess, I just wanted to go back to some of the EBITDA pull-through questions. Is there anything that we should be thinking about that will weigh against the core number, whether it's higher incentive comp or mix that you're anticipating being an incremental headwind that could weigh against that 60% core number for 2019? Hey, Seth. No, honestly, there's nothing that I would call out that has any kind of a significant effect year-over-year within 2019. Nothing outside of the impact of the acquisitions on total flow-through. That 60% or something close to that 60% across the core doesn't have anything that needs any kind of call-out. Okay, thanks. Maybe just a question on CapEx. The $2.2 billion-ish that you're talking about from a gross CapEx level for this year, is it possible, maybe this is a question for Matt or Dale if he's on. Just kind of how much of that is committed at this point? How much flexibility you have to change that number if you see market conditions changing versus what you're thinking today? Sure, Seth. We do have a lot of flexibility. Depending on the vendor, we have 30 or 40 days cancellation policies. We've also got a lot of pre-buys out there. The pipeline is built for U.S. to be able to be responsive in the peak seasons of Q2 and Q3. As we see the seasonal build of Q2, Q1's kind of locked in. There's nothing in Q1 that would make U.S. change our view to be overly optimistic or overly pessimistic, to be frank. As we get into the build of April, May, and into June, we'll either pull CapEx forward or delay some CapEx. Those are the levers that we use. We've got great relationships with our partners to be able to do this, and it's part of why you keep hearing U.S. talk about flexibility. If we start to move towards the top end of our range that we've guided, and we see the demand for the next 12 months continues to be robust, we'll pull some forward. As we get into Q4, as we did this year, we'll continue to fund. If the opposite is true, we have that flexibility to respond. We're really comfortable within that spend bucket that we can be very responsive even within, let's say, 70% that we pre-slot for. Those are pre-slots to reserve, not necessarily commitments to buy. Okay, so that's a fair number. Is that a kind of a similar number to where we were at the same point last year? A 70% number is pretty normal for you guys sitting here at the end of January, then? Yeah, of our planned number. This was something that we finished before the new year, so our process hasn't changed. Right. Okay. The cadence for spending should be pretty normal- Yeah quarter to quarter? Yeah. Okay. All righty. Thank you very much, guys. Appreciate it. Thanks. Thanks, Seth. Thank you. Our next question comes from the line of Steven Ramsey from Thompson Research. Your question, please. Hey, everybody. Also wanted to think about the CapEx topic. I guess in flexing CapEx, is there a scenario or likelihood that you would pull back gen rent CapEx and maintain or grow the specialty side? Or to kind of ask it another way, thinking longer term, do you expect specialty to be more or less resilient from a cyclical standpoint? Just as a note, about a third of our growth CapEx this year will go towards specialty. We pretty much fund the specialty growth, not just for the cold starts, but that continued organic growth that the team is driving over and above their 20%, 23% average of the company today. That is how we continue to fund that robust growth because it is a great business decision for us on many levels, strategically and financially. As far as pulling back the gen rent CapEx, that would be a separate discussion on seeing if we were having opportunity or challenges in the gen rent business market by market. That is the way we manage it. We review it regularly. But it is important to understand these are all mostly the same customer base, so they are very connected, and strength of one helps strength of the other. I think that is just important to note. Even though we report them separately, we have really intertwined these businesses together as one United Rentals value prop. Gotcha. Then thinking about, I know your upstream exposure is not large. But it was not that large in the last downturn. So, you talked about that market continuing to perform well. But if the choppiness does turn into you guys or even others pulling fleet out of those markets and creating an oversupply situation like a few years ago, how do you think that impacts you guys now, given where your fleet mix is and being just a bigger company in general? Just to clarify a data point for you, in case you did not have it. So we have about 5% exposure to upstream oil and gas, which is primarily where everybody is worried about, and I believe what you are asking about. That is less than half of what it was last time, back in 2014, 2015. I also think the industry does not have as much exposure for a couple of reasons. First of all, the end market is not trading at that premium that it was then. So your trade-off of how much fleet you are going to put in that end market versus other opportunities is not outweighed in pricing and returns. It is more like the rest of the business. And I also think to give that industry kudos, I think they have done a better job of driving productivity in their exploration, in their drilling. They are getting more pull per pad. There's all kinds of innovation going on in that space where they don't need the equipment that they needed for each, I'll just say, barrel of pull in the past. I think they've lowered their cost to pull in some of the more mature. I think the industry's in the same position, so we're not worried about an oversupply. If something did collapse, which we're not seeing, we saw 5% growth in Q4 and 4% sequential growth on our upstream oil and gas in Q4. The momentum is still positive, but we're not getting overly weighted in that category, and I think the industry is also very conscious of that. Excellent. Thank you. Thank you. Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question, please. Yes. Hi, good afternoon. Mike and Matt, congratulations and best wishes in your new roles. Thank you. Over the course of your tenure in your prior positions, the company's profitability and free cash flow profile has meaningfully improved. I am wondering if you folks can talk about, in your new roles, what are the strategic signposts, if you will, of what you expect the company to look like if we are having this conversation in five plus years? What do you hope to accomplish with the business from here? I appreciate we are coming from the Analyst Day just a little while ago, but it was before the formal announcement. So I am wondering if you could just step through a few talking points on that front. I will tongue in cheek a little bit here. I think I would love to say Mike is going to expect more now that he is Chairman, but frankly, he did that when he was CEO as well. So he was always driving us forward. But I think the company that we created and the trajectory of the strategy has the momentum to carry us forward. We are constantly looking at new opportunities. I think you see, just in our guidance here in 2019, in the near term, we think there is more headroom in our existing space. But we are looking at new opportunities, whether they are adjacencies, whether there is opportunities to expand in different products and services for our same customer base, or just a continued secular penetration that we think is still there for an industry that is maybe 50% penetration right now. We don't think that our strategy needs to change. It needs to evolve and enhance, and our investments in productivity and technology that we've made internally, we think we could turn outward now and help drive better performance, better productivity for our customers. That's one of the areas that we're focused on. Our scale gives us that opportunity to invest and innovate in technology, and that I would call out as a primary focus, if I was going to call out any single one. Jerry, I would only add that Matt got that completely right. The company over time, our Cap structure is solid, and we are a cash generator, and we are focused on returns. But as Matt mentioned, how can we help and facilitate productivity and safety in the workplace? And that's what we'll turn to. And Matt and team will work with the board in developing that strategy, and we're very excited about it. Okay. And separately on the fleet productivity metric, just as we all try to get calibrated on that metric versus the rest of the rental industry metrics that we've been using, can you just talk about why dollar utilization was down year-over-year, but fleet productivity, which also captures rental rates and utilization, was up a few hundred basis points on a pro forma basis. Can you just help us bridge that and maybe flesh out what makes improvement entailed, whether it's specialty or otherwise, just to help us better understand the transition? Sure, Jerry. First off, the dollar use on a pro forma basis, which is probably the more appropriate way to look at it, was up 30 basis points. The 80 basis points was dragged down, obviously, by some of the lower dollar utilization assets from BakerCorp and other acquisitions. By the way, high return assets as well, long-lived assets. So if anybody thinks that balance was very, what's the right word, it was an important one for us making the decision of that acquisition. Also, it's additional products and services for our customers. But to answer your question more directly, we feel that this fleet productivity measure is just going to be an accurate filter to look at the business through. We get that folks are going to need to be recalibrated. That is intentional because we do need to be recalibrated. The specialty mix and that continuing growing specialty mix and evolution of our offerings has changed our company. It has made us more resilient. It has made us more diverse, and we feel very strongly it has made us more profitable. That is why we were able to report record returns. That is the way we are looking at it, and we will continue to be as helpful as we can to help the investment community through the transition and the evolution with us. Hey, Jerry, it is Jess. I would just like to add one thing. We know that as folks are calibrating themselves to the new metric, there is obviously the math behind how fleet productivity comes together. What we will do after the call is we will actually add a cheat sheet to our investor presentation that walks through the math behind how we used to reconcile OER in total rental revenue and how the new bridge to rental revenue will look like using fleet productivity as a component of OER. So everybody can look for that cheat sheet to be up very soon after this call is over. Okay. I appreciate it, Jess. The short answer is specialty mix is what is driving that gap, though? I just want to make sure I am drawing that conclusion right from your comments. Yeah. Sure. Mostly. But as I gave you the other conversation, we look at mix within our gen rent offerings. We look at mix within same categories. So it is not just specialty. Specialty, as it grows larger than a company average, has therefore a larger impact. But it is not just specialty. It is a strategic decision throughout our portfolio. Okay. I appreciate it. Thank you. Thank you. Thanks, Jerry. Thank you. This does conclude the question and answer session of today's program. I would like to hand the program back to Mr. Mike O'Neill for any further remarks. Thanks, everyone, for joining us this afternoon. Our fourth quarter deck is available to download along with the presentation from our Investor Day. As Jessica mentioned, we will be updating our new metric. That will be out there as well. Any questions, please feel free to reach out to Ted Grace, our Head of IR, if you have any additional questions. We look forward to reporting and talking to you again after the first quarter. I want to thank everybody. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.