Earnings Call: Q4 2015

Jan 28, 2016

Good morning, and welcome to the United Rentals fourth quarter and full year 2015 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 earnings 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, 2015, 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, or changes in expectations. You should also note that the company's earnings 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. Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer, William Plummer, Chief Financial Officer, and Matt Flannery, Chief Operating Officer. I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin. Well, thanks, operator, and welcome and good afternoon, everybody. I want to thank you for joining us on today's call. These first quarter calls are always about the future than the past, and today is no different. I want to start with a recap of 2015 for two reasons. First, it was a solid year for us with some excellent results, and as I'll discuss, that says a lot about how we're managing the business. Second, we saw some trends emerge in 2015 that are likely to impact the current year. I'll start with the operating environment. It offered some challenges, although the underlying foundation of the recovery remained positive. We capitalized on some broad-based opportunities, such as the continued rebound in commercial construction, and we saw lively demand from sectors such as hospitality, renewables, and public works. At the same time, we dealt with a significant drag for upstream oil and gas and its knock-on effect, a weak Canadian dollar, and fleet growth in the industry, which according to Rouse, is outpacing demand. Nonetheless, for the full year of 2015, we delivered a record amount of adjusted EBITDA of $2.8 billion and a margin of 48.7%, which is the highest in our company's history. Our free cash flow came in at $919 million after CapEx, which was also a record. These numbers tell a good story. They show how we can be flexible and adjust our tactics while delivering value for investors. As we look to 2016, the headwinds are still with us. There are also some evident macro constraints, such as pressure on industrial activity, the Canadian economy, as well as some unknowns. Underneath these dynamics, the non-residential construction markets are continuing to recover. That's a key point. The equipment rental industry is continuing to grow. That's why if you ask me where we stand on our operating environment, there's really two answers to that. One has to do with the short term, meaning 2016, and the other is longer term relating to the rental cycle. Short term, our stance is to be cautious on CapEx and proactive about pursuing profitable growth opportunities in areas such as specialty services. I'll talk more about specialty in a minute. For the company as a whole, we think that our 2016 revenue could range from roughly $100 million to $200 million on either side of last year's performance. This includes a significant negative impact from FX, as Bill will discuss in a moment. It takes into consideration the continuing drag from the Canadian economy on our performance. Canada is a commodity-driven country with economic issues that go deeper than Alberta and the oil sands. Real GDP growth in Canada this year is projected to be less than 1%. As the largest rental company in Canada, we're going to feel some pain, and it could be significant. We'll do what we can do to mitigate the impact on rates and utilization through fleet management. Now with rates, for the company overall, we're projecting a year-over-year decline of 1%-2%. We've moved rates higher for five straight years, and we've maintained a premium price for our services. Sometimes that can make our rates more vulnerable to pressure in the short term. But rate integrity is the best long-term strategy for value creation. With utilization, we're guiding to approximately 68%, which would be an increase of 70 basis points. We see improvement coming from our disciplined management of CapEx and OEC under rent, the continued recovery in non-residential construction spending, secular penetration, and the absorption of fleet excess in the industry. What our outlook doesn't show is timing. That's a big part of our 2016 plan. We're going to be very careful about the rollout of our CapEx. In the first quarter, we expect to spend less than half of the CapEx we spent in last year's first quarter. The CapEx that we do spend will be focused on growth sectors and key customers. From there, we'll test the waters. Our full year plan is for approximately $1.2 billion of gross CapEx, and we have the flexibility to move that number up or down based on the data that we see from our operations. Now turning to the longer term. Beyond the current market uncertainty, we agree with the industry forecasters that there are multiple years of growth ahead for equipment rental in North America. The latest projection from Global Insight is about 6% annual growth in construction and industrial rentals through at least 2017. Now we're seeing levels of customer activity to support this view. That point can't be lost when revenue flattens out for reasons I mentioned earlier. So it's important to note that our actual market activity is solid and, in many cases, trending upward. Our customers are, on a whole, optimistic. I'll give you a few examples. Our Southeast region had a strong finish to the year. The activity is coming from a mix of sectors, including automotive plants, infrastructure, and amusement parks. On the West Coast, commercial construction is going strong, along with renewables. Our Pacific West region has won some business on a number of solar projects. More universally, we are on large multi-year construction projects in industries ranging from ag business to biotech to hotels and to sports arenas. The real standouts continue to be our specialty services of trench safety and power and HVAC. For the full year, combined, these services increased our rental revenue by 21%, and a healthy 16% of that revenue increase came from same store. We will continue to invest in fleet and cold starts for these specialty operations as well as our pump business. We have been expanding our pump footprint in new geographies and diversifying our customer base beyond upstream oil and gas, and we expect to realize some benefits from these actions in 2016. Specialty services are an important part of our game plan for value creation. When I speak to investors one on one, I often caution against thinking of specialty as a standalone business. It is true these are high-margin operations in their own right, but their greater value lies in the holistic view of the company, and specifically in cross-selling. We cross-sell our specialty services to national accounts to create stickier customer relationships, compete more effectively on major contracts, and earn a larger share of their wallet. In 2015, we generated 22% more revenue from cross-selling versus the prior year, and we believe there is significant more financial benefit to be realized. This is just one area of the business that we are operating more effectively. In 2015, we also performed at a record safety level. We became a more technology-enabled company. We are even better at change management, and we are continuing to invest in improving our rental process and service capabilities. Our employees are incredibly engaged in our company's future. All these are important attributes that matter to customers. Finally, I want to make a comment about our liquidity. We generated over $900 million of free cash flow in 2015, and we do expect to create about the same or more in 2016. We plan to utilize this cash flow to buy back shares and pay down debt this year. These are the most prudent uses of our cash at this time. In closing, I want to emphasize that while 2016 contains some unknowns, we are absolutely certain about our ability to manage through any volatility. 2015 did not always go according to our plan, but it was very profitable for us. We executed on our strategy. We showed discipline as an organization. This year, we also showcased our resilience and flexibility we have in adapting to change in order to drive returns. These qualities will serve us well in 2016 when we expect to deal with some ongoing challenges. They will serve us equally well in the longer term as we benefit from a rental cycle that has still years of growth ahead. With that, I will shift this over to Bill for the financial results, and then after that, we will take your questions. It is over to you, Bill. Thanks, Mike, and good afternoon, everyone, from me as well. I'll try to add some more color to the key metrics that you've all seen, starting with the revenue picture. Rental revenue, in particular. Rental revenue was down 3.2% in the quarter this year versus last year. That's about $42 million of revenue decline. The pieces of that really start with re-rent and ancillary. Those two combined were a little better than flat, so call it up half a million dollars, the net of those two components. The real driver in the change in the quarter was OER growth. Within that, rental rate down 1.8%. That was about a $21 million decline versus last year. Our volume increase of 0.2% accounted for about $3 million of improved revenue year over year. That's a plus year over year. Inflation. CapEx inflation cost us about $19 million, a little more than $19 million versus last year. Everything else, mix and all other components aggregated to a decline of about $6 million year over year. So those are the key pieces of that $42 million rental revenue drop in the quarter and explains the 3.2% decline from last year. One other operating measure within that year over year rental revenue performance was time utilization. 68.2% for the quarter was down 2.4 percentage points for the quarter. I'll point out that does include the impact of Canadian currency translation of the fleet on rent in the volume component. Speaking of Canadian currency, the impact in the quarter for the currency was very significant. Canadian dollar cost us $22 million versus where we would've been had it stayed flat. So a pretty significant impact in revenue growth for the quarter. Just one real quick note on the full year rental revenue, $4 billion, 949, up 2.7% last year. I'll note that also included the impact of the currency headwind. Currency in the full year period cost us $78 million versus unchanged currency. So a very significant impact in the full year as well. In fact, if you excluded that, our growth rate would've been as high as 4.3% for full year rental revenue as opposed to the 2.7% that we reported. On used equipment, we generated $157 million of used proceeds in the quarter. That's basically flat with the prior year. The adjusted gross margin came in at 46.5%. That margin is down from the prior year by about 2%, but it's still very strong relative to the margin that we've achieved in our long history. I think that reflects the fact that we've been very focused on driving as much of our used equipment sales activity through our retail channel as we could. In the quarter, retail accounted for 77% of the proceeds that we realized. That's the highest share through the retail channel that we've achieved in a number of years, probably going back to before the last downturn. So we feel good about the overall used equipment result that we drove in the quarter and in the year, and look for the used equipment market to continue with robust pricing and momentum here in the near term as well. On the profitability front, starting with adjusted EBITDA, it was $744 million in the quarter, and came in at a margin of 48.9%. That's a $31 million decline or a 70 basis point decline in the margin. The $31 million versus last year is made up as follows. Rental rates cost us about $20 million in EBITDA, whereas volume was a positive of about $2 million over last year. CapEx inflation was about a $14 million reduction versus last year, and that used sales margin in dollar terms cost us about $5 million versus the last year. Our usual merit increase impact of about $6 million of reduction in EBITDA came through in the quarter. Then we had the biggest positive in the quarter year-over-year, as we talked about throughout the year, was our reduced incentive compensation accruals. That was a benefit of about $19 million. Bad debt expense was about $2 million of headwind versus the prior year. And everything else aggregated to a $5 million headwind versus the prior year. Those are the key components of the $31 million of EBITDA change in the year. I will also point out that spread throughout a number of those lines was the impact of currency. It all aggregated to about $8 million of headwind from currency on a year-over-year basis to bring us to that quarterly number. For the full year, just real briefly, our adjusted EBITDA of $2.832 billion was an increase of 4.2%, and that included an unfavorable currency impact of $29.3 million for the full year. Again, currency with a pretty significant impact. On flow-through, adjusted EBITDA flow-through for the company finished the year at 86.4%, but I'll point out that includes the impact of the lower incentive accruals. That was a benefit, as well as the impact of the currency change year-over-year, which actually sounds bizarre, but it also was a benefit to flow through as well, just given the separate impacts on revenue and EBITDA. If you exclude both currency and incentive comp, the flow-through calculates out to 65% for the company. And that's broadly consistent with the roughly 60% that we guided to for 2015. Moving to EPS. Adjusted EPS in the quarter was $2.19. And that was essentially flat with the prior year. I will point out, however, that on a year-over-year basis, currency was at play in the adjusted EPS number. It cost us about $0.02 in adjusted EPS. We also had a significant tax law change that was finalized in the fourth quarter in the state of Connecticut. Lots of detail around that, but when you net out the impact of that tax law change, it cost us about $0.06 versus last year. Then I'd also point to the mix shift between the U.S. and Canada. Canada took a smaller share of our income in the fourth quarter, and actually indeed over the full year in 2015. So if that mix shift had not happened, we would've been better by $0.02 as well in the adjusted EPS number. So keep those three things in mind as you think about the quarter EPS. Same with the full year. $8.02 adjusted EPS for the full year. That was an increase of 16% last year. But again, that was impacted by the currency impact, which in the full year was about $0.08 of headwind. Also, the Connecticut tax law change, a portion of which was accounted for in the second quarter tax rate, and the remainder was finalized in the fourth quarter. If you aggregate those impacts in the year, that was about $0.12 of headwind, and the shift in mix between U.S. and Canada cost us about $0.13 for the full year. On free cash flow, great story here in 2015. $919 million, which compares to $557 million in 2014. Obviously, the lower rental CapEx was a big part of the positive impact year-over-year, but also the higher profitability contributed as well. Our cash taxes also had an impact. They were lower cash taxes paid, and favorable working capital effects were also at play during the year for that $900 million or $919 million of free cash flow. Rental CapEx, as you've seen already, gross rental CapEx reduced in the quarter by $109 million, and that brought the full year total to $1.534 billion, somewhat below the $1.6 billion that we had been guiding to. That rental CapEx was about the billion-dollar number for the full year. On the liquidity front, $1.1 billion of liquidity at the end of the quarter. That included ABL capacity just over $870 million and cash on the balance sheet of about $180 million there. We're well-positioned on liquidity as we typically are. Just a quick note on our share repurchase programs. We completed during the quarter the $750 million repurchase program that we were operating under previously. We bought out the remaining $10 million of that program in the quarter. We also began purchases under the new billion-dollar authorization, and in fact, completed $111 million against that authorization during the quarter as well. A total of $122 million of repurchases in the quarter, and it put us on a path to executing the new billion-dollar program over the course of the next 18 months. We started it in November of last year, and we expect to complete it by the end of April in 2017. As I pointed out in a prior quarter, we do need to be mindful as we execute the program of our limitations on share repurchases, in particular, the restricted payments limitations and our debt covenants. However, when you aggregate those RP baskets available to us, plus the available cash that's held at the holding company, we have about $500 million worth of available capacity at the end of December in order to execute share repurchases. We feel that we're well positioned to be able to manage the program on a prudent, timely basis as we go through the year. Return on invested capital in the year, just to touch that real briefly, was 8.8%, and that number was essentially flat compared to 2014. Let me finish just by addressing our outlook really briefly. You've all seen the numbers that we put out. I'd just point out that, as Michael Kneeland mentioned, we have a somewhat wider range around the midpoint of our guidance for revenue, EBITDA, and indeed, we've instituted a range for our view on rental rates. That wider range represents truly our view of the uncertainty that we're managing through right here and now. We put the wider range there to give us a little bit more flexibility in responding to whatever the environment hands to us as we go throughout 2016. In particular, the range on rental rate. The -1% rental rate, top end of that range reflects our carryover. Our carryover from 2015 is essentially 1%. As we go through 2016, in order to achieve the 1% decline, the top end of the range would require us to have some slight increases during the peak season on a monthly sequential basis, which we think is a reasonable outlook. To get to the 2% would require essentially flat monthly sequentials during the peak season. The time utilization improvement, 70 basis points, is also, we believe, very reasonable given the approach that we're taking to our management of the CapEx spend. $1.2 billion of gross capital netting down to about $700 million after used proceeds, we think, again, is a great way for us to approach the environment that we're managing through right now. If we do that, then we'll net out to that $900 million to $1 billion of free cash flow that you see in our guidance very comfortably. Those are the key things that I wanted to offer as prepared comments. Before I ask the operator to open the call for Q&A, I'll just reiterate some of the comments that Michael made. Caution and flexibility are two of the key watch words as we think about 2016, and we're going to make sure that we continue to evaluate the environment very carefully and make decisions about what to do in response in a very prudent way. I think you can count on that and certainly look forward to talking to all of you as we go forward throughout the year in managing the business. With that, I'll ask the operator to open the call for questions and answers. Operator? Certainly. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Also, we ask that in the interest of time and fairness, we ask that you please limit yourself to one question and then reenter the queue for any follow-ups. Our first question comes from the line of Nicole DeBlase from Morgan Stanley. Your question, please. Yeah, thanks. Good morning, guys. Morning, Nicole, or is it afternoon? Oh, yeah. Oh, you're right, it is afternoon. Good afternoon. I am going to ask a question about free cash flow allocation. I think you guys said that you have $500 million available from the buyback, for the buyback into 2016, but generating $900 million to $1 billion in free cash flow. I am just curious about the potential for debt paydown, what you guys are looking at for 2016. Sure, Nicole. I think it is fair to say that we are thinking any free cash flow in excess of the share repurchase program that we have talked about will go to debt paydown. We have still got the view that the share repurchase program we want to execute over the 18-month period. That averages out to something like $165 million a quarter or so. That would eat up about $700 million of free cash flow if we did it on that pace. The remainder of the free cash flow, we would use to pay down debt. That is our baseline view of the best use of the cash flow, given our outlook for the market and the opportunities that are in front of us. Okay, thanks. I'll follow the rules and pass it on. Thanks, Nicole. Thank you. Our next question comes from the line of David Raso from Evercore ISI Group. Your question, please. Hi, good afternoon. Hey. My question relates to free cash flow beyond 2016. We all can have our own views of the length of the cycle, but thinking about your maintenance CapEx levels, it appears the 2016 CapEx is getting down toward maintenance levels already, and then we have cash taxes going up in 2017 as well. Can you help us a little bit with that lever that we usually have the pull if things do go awry economically in 2017 or 2018? Usually have a pretty good lever on pulling the CapEx down. Given we are already down to maintenance levels, can you just walk us through where we could see CapEx get cut beyond 2016 if case the need arises? I am just trying to understand the dynamics there. Yeah. So maybe I will start and Mike and Matt, you guys can chime in. The maintenance level for maintaining fleet size and age is probably in that $1.1 billion kind of area these days. That certainly is one view of maintenance, and one view of where we could go to if things are softening up. But I would argue that there is no need to replace the units that we have if our view became that we truly were headed for a downturn. I would argue that we could be even more aggressive than that and be a sub $1 billion in total CapEx if a downturn started to develop. How far below $1 billion? I think we would have to discuss that in more depth before we gave an answer to that. But could we carve another couple hundred, $300 million out of the $1.2 billion that we are spending this year? Yeah, I think so. All right. That is- Without too much trouble. David, I would just say that $200 million of that growth capital is really going to the or the growth capital we have is going to our specialty business. If things were to turn south as you described, we would obviously pare that back. As Bill mentioned, it is not unusual for us to ratchet back even the maintenance CapEx going forward if we had to. All right. That is helpful. I know it is relatively early in a quarter, but can you give us a bit of an update, and if you said it earlier, I apologize, I missed it, but how the year started when it comes to sequential trends. I mean, usually January is not a strong rate month, but just given the way the year ended, how are rates trending sequentially and year over year relative to the full year guidance? We will not characterize it with a number, but I would say that rates are trending as we expected. By the way, I would say the same thing for OEC on rent in the early part of the year here. Even including the impact of currency, OEC on rent is trending at what we expected. That is consistent with the rates ending up in the range of guidance that we have given. That is as far as we will go on that one right here and now. Okay, I appreciate it. Thank you. Thank you, David. Thank you. Our next question comes from the line of Ted Grace from Susquehanna. Your question, please. Good afternoon, gentlemen. Hey, Ted. Hey, Ted. Bill, maybe as a follow-on to that last comment to David Raso, I was wondering if you could just decompose kind of rate dynamics in the fourth quarter and broadly on 2015, then relate them to expectations on 2016. Just wondering if you can talk about rate in Canada versus the U.S., talk about rate in kind of more heavily exposed energy markets versus non, and then construction versus industrial, just so we can get a sense for what that interplay was last year and how we should think about those dynamics in the current year. Sure, and guys, help me out. I will start here. So regards how rates finished out 2015, I think it is fair to characterize it as they finished weaker than we expected. We have given the sequential months there at -10 basis points for October, -50 November, and -50 in December as well. You remember we had told you that we expected seasonal to maybe slightly, well, seasonal declines in that fourth quarter. I think it came a little weaker than what we thought. Canada was certainly a part of that. As a result, the carryover that we brought into 2016 starts at a lower point. We are watching very carefully how rates develop from here. To our point earlier, that is going to be the watch word for the entire year. Canada, I do not know if you guys want to handle the Canada notion, but Canada did have a fairly sharp decline in the fourth quarter, sharper than we expected when we talked to you at the third quarter call. We are watching that very carefully and thinking very aggressively about what do we do in response? What are the drivers? Is it something that we can address? If not, what can we do in response? So that is how we are thinking about Canada and honestly thinking about the whole business as we come early into the year. Matt, Michael, you guys want to add anything? No, Ted, I think Bill captured it well. I would just add, the team up in Western Canada is really fighting it hard, specifically in Alberta, and they are continuing to take the actions necessary to adjust their fleet appropriately. They cannot outrun the macro environment there, and we are going to adjust appropriately, and then that will give some growth capital to the lower 48. Maybe that is a little different. If you look at rates being down 180 basis points in the fourth quarter. Can you just talk to dispersion on a relative basis then? What did Canada do versus call it Texas and the Gulf Coast or the stronger regions like the West and the South? I think what people are really trying to understand is if you look at down 10, down 50 by the monthly progression, how broad based was the sequential degradations? Ted, I think you could say it was spotty, and you could imagine the places where they had more challenges. If you think of the relative rate we've enjoyed in the past, western Canada and anywhere where we were doing shale drilling was the highest relative rate. So in markets where that was dramatically impacted, mostly in western Canada and any other single end market, you saw large rate declines. We saw rate declines in western Canada in Q4 of over 6%. That would be the highest that you would see. But as you can imagine, losing your highest rate business in Texas or in North Dakota or in western Pennsylvania, Ohio, right, up in the Marcellus Shale, those were the ones that had the bigger declines. Then you had positives in markets on the coast where non-res was really carrying the ball for us, and they were able to do well on some of the projects Mike referenced in his opening remarks. Okay. That's really helpful. I appreciate the color, and we'll jump back in queue. Good luck this quarter, guys. Hey, thanks. Thanks, Ted. Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question, please. Jerry. Hey, good afternoon. This is actually Brandon Jaffe on behalf of Jerry. Can you please provide some commentary on what you're seeing out of your industrial customers? Are you seeing any difference in activity from refiners, manufacturers, or chemicals companies? Well, I go ahead, Bill. No, please. Brandon, this is Matt. I think that we are still seeing growth and solid, steady business from our chemical and also in our downstream oil and gas customers. But we are also seeing pressure from those that have a more significant holdings in any kind of exploratory or upstream oil. I think that is predictable. But when you look at what we count in our industrial, you have to recall in our industrial and other, we also put in our infrastructure, and we see some growth opportunities there. We see some growth opportunities in manufacturing. Above all that, and I know you specifically asked about industrial, but we continue to see growth opportunities in non-res. You will see Global Insight say the industrial has got 5% growth opportunity, and you will see reports that we are in an industrial recession. I would say we are experiencing somewhere in the middle of that pack, and that is what we are seeing in our business and what we are hearing from our customers. Yeah, I would only add that if you take a look at our investor deck, it has industrial outlook for the U.S. and outlook for Canada. It is really a story of two different worlds. But they are going to grow, and it is not so much capital projects, there is also maintenance. That is why they go to a spending, and look how the industrial is forecasted for 2016. Great. Thank you. Thank you. Our next question comes from the line of Joe O'Dea from Vertical Research. Your question, please. Hi, good afternoon. Just trying to understand a little bit more in terms of how things unfolded over the quarter. I think as of a quarter ago, you were anticipating a quarter of a point to a third of a point of carryover headwind, and now that is a full point. In terms of the experience you had with customers, you talked about no surprise where the weak areas are. But was it really just a function of customers coming back and pushing for those price concessions? Or was it more a matter of increased competition that whereas we had expected a lot of fleet would have been moved, but still excess supply and you still see that competition pushing rates down? Joe, this is Matt. I would say that the concession part of the equation happened earlier in the year and mostly in upstream, and western Canada. Not really any concessions outside of that. But I think the growth opportunity from an OEC on rent perspective tempered any kind of rate improvement that we would get. We certainly had to partner up and defend some strong relationships here and there in our national account base. But I wouldn't point to it as a concession-driven situation. The fact of the one point carryover is really a function of what Bill stated, what Q4 sequentials look like. When you have 0.5 negative in both November and December, that made the full year carryover of a full point negative. So when you look at our range of one to two. We'd have to be flat for the full year of 2016 to achieve that one. That's what we're driving towards. If there's more there, we'll take whatever opportunities we can get. Mike said it earlier, the rate discipline is a key lever for the industry as well as for us. Yeah. I would only add two things. One of which is, in the fourth quarter is where we saw a significant drop-off in Canada, that impacted our carryover as well. That's number one. Number two, to answer your question, last year we talked about the supply and demand imbalance, and with oil, then the fleet additions coming in. It's not unusual to see some pricing pressure. As we went through the fourth and first quarter, I've always told a lot of investors that this is going to be the challenge. This is the challenge that we have simply because we don't have oil like we've had over the last five years. So it's more seasonal trend, more non-res trend. What gives me a lot of comfort is I'm seeing the trend where the absorption's coming through in the fourth quarter with Rouse and some of the data points they had. The other one is the declines we're seeing in OEMs on their book of business tells me that we think this is prudent decision making. Okay. Thanks very much. Thanks, Joe. Yeah. Thank you. Our next question comes from the line of Seth Weber from RBC. Your question, please. Seth. Hey. Good afternoon, everybody. Seth. Just want to follow up on a couple earlier questions. I think the first one on potential levers to pull. I think you guys, you're at $40 million or $50 million through your efficiency program so far. Are there actual measures that you could take from a cost-cutting perspective other than cutting fleet? Branch closures, any other more on the expense initiative side that you guys have considered? I haven't really heard any talk about that so far. Sure, Seth. We certainly are looking at opportunities to help address any shortfall should it develop as we go through the year. We have taken some actions. You saw in the quarter that we took a restructuring charge in the quarter as we restructured some of our organization in the last couple of months. We are looking for other opportunities that might make sense should the environment deteriorate from where we are. Those actions come across a wide variety of our operation, right? We have our usual lean initiatives that we have been talking about for a couple of years now. Those initiatives really resulted in a run rate of savings at the end of the year of about $53 million. We still are targeting getting that run rate up to $100 million by the end of this year. There are lots of other actions that we are going to continue to look at. Right here and now, we do not have a notion of branch closures. Right here and now, we do not have a notion of large headcount reductions. But those are questions that we are going to continue to evaluate as we go forward. We think that is the prudent way to get at it. In the meantime, there are some specific things that we are already doing that we think we can double down on to help drive that run rate of cost saves higher and to help realize some of those cost saves in the current year. So those are the things that we are focused on right here and now. We will continue to evaluate to see what other actions we might need to add to the list that we already have. Yeah. The other thing I would add to that is this is a very seasoned team. We have done this before. If need be, we have got the experience. Not only through economic downturns, but also in achieving synergies during your mergers. So I have high respect for the team and what they are capable of doing. As Bill mentioned, we are not thinking about it now, but we are more than capable of making adjustments as they come. Okay. Thanks. That is helpful. Then just circling back on the oil discussion. Can you update us on what you think your direct oil exposure is today, and whether you think you need to continue to move fleet around? I think you had a target of $200 million for 2015. Is there an estimate for 2016, or do you feel like that we are kind of near the bottom on the oil and gas, the weakness? Are you starting to anniversary that soon? Yeah. Seth, this is Matt. We had talked about at the end of the third quarter as far as fleet movement, that we were down to about $30 million-$35 million of seasonal items, and we pointed to heat and light towers. I would say other than the heat being a little bit light, we still may have another $10 million-$12 million of excess heat right now in the oil and gas that we haven't repositioned because the demand hasn't been there. We're pretty much through the oil and gas movement. The exposure now in the upstream is down to 4%, down from 6% a year and a half ago when we started tracking this. So our exposure's certainly less, and if we end up getting a little bit more of a dip than where the baseline is today I certainly don't think it's anything that we'd have to call out in a large fleet movement. It would be like any other end market that ebbed and flowed that we had to move fleet out of. Yeah. The only thing I would add to that is the fact that, look, we expect continued weakness in oil and gas, particularly in upstream. More importantly Canada, as in my opening comments, I think the issues there will likely persist with a very meek GDP growth they're going to have for 2016. Sure. Okay. Thank you very much, guys. Thanks, Seth. Thanks, Seth. Thank you. Our next question comes from the line of Steven Fisher from UBS. Your question, please. Great. Thanks. Good afternoon. Good afternoon. It sounds like you guys are still pretty committed to buying back stock at these levels, which I understand simply because the stock is down, and as you told Nicole, that you still believe you have very good opportunities ahead of you. But I guess, how are you weighing the possibility to reduce debt as the cycle moves on? As a follow-on, what would you have to see in order to start being more aggressive in paying down debt? Yeah. We are, as I said in my prepared comments, we are still on the pace that we talked about for the share repurchase, and we think that's appropriate given our baseline view that says that this cycle still has room to run. We believe there will be growth in construction in 2016. We believe that there's likely growth in construction in 2017. On that basis, we think that the cash flow is going to remain robust, and we can still execute that share repurchase, pay down some debt, and end up in a better place. What would have to be true in order to change that point of view is, I think we would have to come to a different conclusion about how long the cycle has to run. I realize that there is a reasonable position that says, "Hey, Bill, 2016 and 2017 are not looking good right now, so you should change your view right now." We haven't gotten to that point. The good news is that we've got the capability. We're executing the program on a steady pace over time, and we've got the capability to pull it back if we do change our view based on the experience that we have in the marketplace. If the first several months of the year come in weaker than we expect right now, then we're going to have to rethink that approach to the share repurchase and debt pay down. That's how we're approaching it. This is part of the notion of flexibility. We set up a point of view. We establish a plan based on that point of view, but then we keep our head on a swivel, as they say, and keep asking ourselves, "Is it still right?" At the point where we can convince ourselves that it's not, then it's time to do something different, and that might include paying down more debt and buying back less shares. Yeah, I would just add that capital allocation for us is very important. It's also a board discussion that we have quite frequently. Bill's right, how we see the world. I guess the point I would make is we're approaching the world this year cautiously with our capital, with our CapEx, and we'll kind of see how things unfold, and we'll make adjustments and changes if need be. But right here and now we frequently spend at least either monthly or at least once a quarter with the various industry experts, Scott with Global Insight, McGraw Hill, and other industry experts to try to gauge the marketplace and try to understand what they see. That forms our decision. It's part of our decision process. So it sounds like, just to paraphrase that you believe that debt reduction is really the downturn tool, and capital discipline is really your upcycle tool for not letting the debt get too far, the leverage get too out of control. Is that the way to sort of paraphrase it? Yeah, I think that's fair. Obviously, the capital control and the cash flow it drives links to the amount of cash flow that's available for debt reduction or share repurchase. We have to manage and balance all of that as we go forward. I think it's a high-class problem to have to be able to say, "Oh, we're buying back shares, and we're paying down some debt." But maybe the mix isn't right. It's great to be in a position where you can do both. That's the approach that we've been taking and we've been talking to you about for a number of years. So that's a great position to be in. Now we just got to come to a view about what's the right mix. We have a view that says $700 million, $250 million, to use the midpoint of the cash flow, is the view that we want to manage to right here and now. Let's go forward and see if anything comes along to convince us that that's not the right view. Okay. Thank you. Thank you. Thank you. Thank you. Our next question comes from the line of Robert Wertheimer from Barclays. Your question, please. Afternoon. If I can do a twofer, is there any flexibility to move fleet from Canada to the U.S., or do you just underspend if that market sort of semi-structurally declines? Then second, just to ask the question maybe that a bunch of us, a little more bluntly, have you been able to benchmark more on a branch-by-branch basis against major competitors to see if you have any competitive issues versus just mix issues that you've been talking about for a long time on rate and utilization? Thanks. Thanks, Robert. This is Matt. We are absolutely going to move fleet out of Canada. The first lever that we pull, as we discussed before, is to sell any excess fleet that's outside of its rental useful life, and we're being very aggressive doing that as we speak right now here in the first quarter. The next lever would be to go through our normal retail channels and target, and maybe would be some special values, and to move some of that fleet. Then the third lever would be to move it. There's some more complexity about moving it out of Canada than there would be if it was internal, but not enough that we can't get over through most of our assets. I think the first two levers are going to be enough to adjust the fleet to where it needs to be. But if we have to go further, we're capable of doing it. We absolutely are doing it today. Your question around what kind of metrics, down to the granular level of a branch, on where we stand amongst our peers is something that we utilize Rouse for. It is not by branch, it is by market. It is a rear-view mirror of 90 days. But it is a useful tool that we use to help judge us in our process. We did not have that years ago. It is relatively new. It represents about 40% of the market or somewhere around there. We push that down, all the way down to the district level, which is kind of how they measure their markets. The outcome, you feel confident. You talked about it, I understand that at a high level. You feel confident that you are at a district level, let us say, or regional level, that it is more mixed than competitive slippage? When you say competitive- I know you are saying you are better than Rouse overall. I get that. I guess I am just thinking of larger competitors. It only measures you against your peer group. Yeah. It doesn't give you specific people. It's a very general measurement. It's the best measurement we have, because we all report electronically. There are electronic feeds nightly to the Rouse report. Look, on balance, we're doing very well. Are there opportunities? Absolutely. Those are things that we pick up on, that helps the way in which we manage to become a better company. That's why we subscribe to it, and we're actually utilizing it as a tool. Thank you. Great. Yep. Thanks, Rob. Thank you. Our next question comes from the line of Scott Schneeberger from Oppenheimer. Your question, please. Hey, Scott. Hey, guys. Good afternoon. I am going to go a little bit off here, a question on rent versus buy. On your three biggest general rent categories, aerial, earthmoving, and reach forklifts, where would you say we are in the rent versus buy percentage? Also if you would address it in your specialty category as well. Thanks. That is a loaded question, but I would tell you that from an aerial perspective, and Matt, correct me, it is probably in the high 90s goes to the rental channel. There is not a real distribution network to speak of. With regards to earthmoving, I think it is probably and there are reports out there, so I may get it a little bit wrong, but it is somewhere either 50/50 or 60/40 or one way or the other. But earthmoving is predominantly still owned, in comparison to a lot of the rental assets. With regards to our specialty, think of specialty as not just the product, it is really the solution. We are trying to solve problems of whether it be pump, how much fluid, what kind of distance, what type of fluid, what is the velocity do you need, and how often does it need to be reoccurring? The same goes for power. There are various sizes. And then also with HVAC, whether it is industrial cooling or whether it is something that you are doing for just air conditioning. Each one is more of a solution than it is just the asset. Yeah. I think Mike hit it very well. Would you add with trench? The only one he didn't touch on would be, we have really got secular penetration against non-compliance, which is a great end market to sell into to grow that pie. I agree wholeheartedly. Hey, Scott. I interpret, I heard your question as being what the guys answered, but I also heard your question as being, has the rent versus buy decision dynamic changed in any fundamental way? My view would be, no, it hasn't. There is still, I think, a pretty powerful argument for rental versus purchase across all of those cat classes that you mentioned. We believe that that is going to continue to be the case going forward. Yeah. Yep. On that point, the OEMs, we are seeing their distribution network add more to the rental fleet. Rentals become more of a viable channel. All right. Thanks, guys, for all the color. Yep. Thank you. You got it, Scott. Thank you. Due to time constraints, our next question is our final question from the line of Ross Gilardi from Bank of America Merrill Lynch. Your question, please. Yeah. Thanks, guys. Good afternoon. Thanks for squeezing me in. Look, Michael, I just want to ask, your number one competitor seems pretty insistent out there publicly that things are great in the rental space, and that nothing is even remotely changed outside of the oil and gas space. They are clearly taking a much different stance on capital spending than United Rentals. I am just wondering, is that one of the reasons why the pricing environment still hasn't really firmed up, or is the pressure on rate coming from elsewhere? How willing are you to cede market share to them if they continue to keep their foot on the accelerator? Yeah. Well, look, everyone's got different strategies. We have ours about value creation, and that's what we are going to stick to. I have mentioned about the fleet imbalance. That's data that comes out of Rouse in comparison to the growth of the industry. We compete in different markets as well. We have more of an industrial, non-construction related than others. We also have a more geographic footprint, like I mentioned in Canada, which also has an impact. I think that each one has their own strategy, but the industry has its own challenges, and I can only speak to what we are going to do and how we are going to approach it. But in terms of the pricing pressure that is out there, do you think it's coming from Sunbelt, or is it coming from the smaller players who are the ones that are really saddled with more of the overcapacity right now? Ross, this is Matt. I wouldn't speak individually to any one competitor, because we don't have visibility to what their baseline is and what their price levels are. All I would say is when you look at the Rouse data, which is industry average, so instead of just looking at 6% or 7% of the market, looking at a third to 40% of the market, it's very clear that there was too much fleet early on. Time utilization was impacted, and you can make the inference that it impacts rate growth in each individual market. As far as the smaller regional players, if you are in some of the markets where we are seeing great growth on the coast, I am sure we have small regional players that are seeing great growth as well. So it's really spotty as far as where you are on the map. I think that's why you'll hear different versions of what people are enjoying. I got it. Thanks, guys. Thank you. Thanks, Ross. Thank you. This does conclude the question and answer session of today's program. I would like to hand the program back to Mr. Michael Kneeland and Fred for their remarks. Great. Well, thank you all for coming and joining us. We actually shifted to an hour later to accommodate everybody. I hope we have given you visibility in 2016 and the flexibility we have to address any changes in our operating environment. As always, please be sure you download and update our investor presentations. It is rich with a lot of material. We also have a new corporate responsibility report on our website, and always feel free to reach out to Fred here in Stamford anytime to set up a call or a potential visit. Operator, I thought you can now end the call. Thank you. Thank you. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.