Earnings Call: Q4 2014

Jan 22, 2015

Good morning, and welcome to the United Rentals fourth quarter and full year 2014 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, 2014, as well as 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 morning, everyone. I want to thank everybody for joining us on today's call. Let's get started with 2014. It was a great year for us, and we expect another strong year in 2015. Our message today is about progress, discipline, and consistency. These fourth quarter calls tend to frame the year-end as a hard stop, but in reality, our performance is a continuum, and that's especially true this year when we went into 2015 with so much momentum. I'll talk about it in a minute, but first, I want to give you the last 12 months their due because we turned in some outstanding results. Our rates were up 4.5%, in line with our guidance. 2014 was the fourth straight year we moved rates higher, and we still see opportunity for improvement. We had record time utilization of 68.8% for the full year, and our return on invested capital was also a record of 8.8%. Together, they helped drive more than $2.7 billion of adjusted EBITDA on rental revenue growth to outpace the industry growth by nearly two to one. Our free cash flow was a home run for the year. This was due in part to the use of a margin of 48.5%, another indication of the ongoing recovery. We spent $1.7 billion on fleet. As you saw last night, our CapEx plan for 2015 is approximately the same, with even higher expectations for free cash flow. Not only do we meet or beat every target in our outlook, we did it while making fundamental improvements in the way we operate. Take safety for an example. In 2014, we had the fewest number of recordable injuries in our history, and we drove our full-year recordable rate down below 1.0 for the first time. It was the ninth consecutive year of safety improvement for us. Clearly, it is not just a fluke. It is a progressive change for the better in our culture. Specialty Rentals was another great story. We grew our specialty segment very effectively last year with a disciplined mix of M&A, cold starts, new fleet, and cross-selling. Our full-year revenue gain in Specialty, which includes the acquisition of National Pump in April, was approximately 83% at a gross margin of almost 51%. That is nearly 400 basis points higher than the prior year, and our fourth quarter margin for Specialty was up nearly 500 basis points. Company-wide, all but one of our regions had year-over-year rental revenue growth for the quarter, with more than half of the regions showing double-digit growth. We had a very solid increase in key account revenue, up 16% year over year. National accounts, which is a subset of our key accounts, grew by more than 18%. From every perspective, a very strong year. We demanded a lot of ourselves in 2014, and I am happy to say that we outperformed our own expectations. Now let us talk about this year. I am going to start by acknowledging the concern that is out there about the effect of oil prices on our industry. Look, we are not running this business with rose-colored glasses, and we do not plan to be caught by surprise. We have seen rig counts come down. Now we are constantly polling the field, not just to measure upstream oil activity, but also to gauge any knock-on effect. We have done a lot of detailed analysis based on conservative assumptions to identify our exposure. Bill is going to share some of those numbers with you in a moment. I can tell you what they came out. Yes, we think oil prices will reduce demand for certain types of equipment in a handful of areas. But we disagree very strongly with the idea that our growth is at risk. I will give you five good reasons why we feel this way. First, upstream oil and gas accounts for only 6% of our business company-wide. That is a very modest exposure, given our fleet can be utilized other types of customers. Even in the oilfield states or a state like Texas, we have got deep customer relationships outside of oil. Currently, more than 80% of our rental revenue in Texas comes from infrastructure, manufacturing, transportation, commercial building, and a host of other industries. Second, we have strong systems in place for fleet management, including the relocation of equipment and the repurposing of CapEx through used sales. If circumstances change dramatically, we have the flexibility to reduce our CapEx spend for the year. We have done this before when warranted, and we would not hesitate to do it again. Third, we believe that any drag on demand for upstream oil will be mitigated by the positive effect on other industries. Take chemical manufacturing, one of our key sectors. When oil prices decline, manufacturing costs drop, production is stimulated, and consumer purchasing power increases. The current growth rate for the U.S. chemical industry is forecast to accelerate through at least 2016. This is just one of many examples. Fourth, our geography plays to our advantage. Our upstream oil exposure touches just a fraction of our footprint in any meaningful way. Now, keep in mind, we serve 49 states and 10 Canadian provinces. That gives us a lot of room to deploy our assets. The reality is, the field has been asking us for significantly more CapEx than we spend for a few years now, and we've been very disciplined in remaining in that number. If we decide to move fleet due to localized weakness, we have branches that are eager to take it. Fifth, we know how to outperform our end markets as well as our industry. We've shown you that for years. In 2014, our 15% rental revenue growth was more than three times the year-over-year growth in non-res construction through November, thanks in part to secular penetration. It was nearly twice the revenue growth of our industry overall. Not only is there still a lot of runway ahead in the industry upcycle, the macroeconomy is also turning in our favor. Many economists predict the U.S. GDP growth will be in a range of 3%-3.3% for 2015, with lower unemployment, more consumer spending on goods and services, and a return to housing starts. To the degree that any uncertainty still remains in our end markets, that actually works in our favor because we offer an alternative to large capital outlays. So when Global Insight forecasts nearly 8% rental industry growth for North America in 2015, and with more growth to follow in 2016, which they did on Sunday, you can take that as a starting point. But be assured, we have bigger plans. Bottom line, this recovery has already had its share of bumps, and we think oil prices will be another bump. Given our scale and diversification, we do not see this as a roadblock. In fact, we think the bigger picture is that low oil prices could have a significant upside for us over time. More immediately, we will keep moving forward in a better-than-expected fourth quarter by making disciplined investments to capture profitable business. I've already mentioned that our Specialty group is on a fast track. Power and HVAC in particular turned in a standout performance with 27% same-store growth and a 61% increase in revenue overall in 2014. For 2015, we've earmarked $170 million, or about 30% of our growth rental CapEx, to meet the increasing demand for our Specialty fleet. We plan to open at least 16 new branches. This includes cold starts for all of our Specialty lines, Power and HVAC, trench safety, pumps, and tools. Our growth in Specialty also reflects cross-selling to our broader operations, where we're seeing good diversity in large projects. For example, our Central U.S. districts are predicting a big year with a wide range of projects underway or with start dates in the next few months. These include healthcare, education, hydropower, renewables, bioresearch, and transportation, to name a few. Further west, we've got equipment on mega sites like LAS and acute major project work lined up. In the Southeast, we're on mixed-use developments, sports arenas, theme parks, and airports. In the Northeast, our customers in high-growth verticals are hungry to snap up any fleet that comes available. That's typical of many of our regions. Now, I hope I've given you a substantial insight into our thinking on 2015. Our outlook is positive because the facts support it. We like what we see. We like what we hear from our customers. Every indication is that the equipment rental is going to look at a multi-year upcycle with an ongoing recovery in our end markets and a tailwind from secular penetration. We're also agile, and we're well prepared to respond to any changes in our operating environment. We plan to spend $1.7 billion in rental CapEx this year because we believe the demand is there. We can adjust that number either way. We're guiding to at least $6 billion of revenue and approximately $3 billion of adjusted EBITDA because we believe that we can hit these marks. We've done the math, and we're already moving forward on our goals. Now Bill will cover the financial results, and then we'll take your questions. Over to you, Bill. Thanks, Mike, and good morning to everyone. I'll move through the financial results pretty quickly so we can save some time to talk about the oil and gas analysis Mike mentioned and the outlook, which we want to make sure that we hit. Start with revenue. Rental revenue was a pretty strong quarter for us, as Mike mentioned. Total rental revenue increased 16.5%. That's $187 million year-over-year in the quarter. As usual, I'll bridge that 187 number. Re-rent and ancillary continue to be nice contributors to revenue growth for us. Re-rent and ancillary combined were up $26 million year-over-year. The real driver is owned equipment rental revenue growth. That was up 16.3% for the quarter, or $161 million year-over-year. Here are the components of that 161. Rental rate up 4.1%, as you saw, drives about $40 million worth of year-over-year revenue improvement. Volume was up 10.7%, and that drove $106 million worth of year-over-year revenue improvement, and that obviously includes the impact of National Pump's fleet being added to the volume calculation. Our inflation on the fleet was a headwind. It was $18 million detracting from the year-over-year change. The rest, we'll call it mix other, including FX, was a positive $33 million. Within that $33 million, in addition to the volume that Pump brought along, Pump operates at a higher dollar utilization. So they had a positive impact on mix of about $28 million within the 33. I'd also call out the effect of FX in the quarter was pretty significant as a headwind. About $10 million of FX detraction from our year-over-year revenue performance. The other components were a sum of a whole bunch of other nits and gnats in the year-over-year performance. Those were the key drivers of our revenue performance in the quarter for rental revenue. I would also point out that we had a very robust used equipment sales result for the quarter. Used was up 16% over last year. As importantly, the margin was also very good, 48.7% adjusted gross margin on our used equipment sales in the quarter. Certainly helped by our continued focus on driving as much as we can through our retail channel, along with the overall market price environment continues to be pretty solid in the fourth quarter. We also, just to touch on it, had a very good new equipment sales quarter with robust growth in new equipment. On profitability, I will bridge the EBITDA performance year-over-year for us. We had a company record for fourth quarter of $775 million of adjusted EBITDA. Likewise, it was a company record 49.6% margin in the quarter. That was $124 million of increase in adjusted EBITDA and 100 basis point improvement in our margin over fourth quarter of 2013. Here are the components of the $124 million year-over-year improvement. The rental rate improvement that I mentioned earlier for revenue drops through to EBITDA at $39 million. That is just using a 95% flow-through on the rental rate revenue dollars. Volume contributed $74 million worth of year-over-year adjusted EBITDA. Then we had a couple of other positives here. Ancillary re-rent, I mentioned, along with some other small pieces, contributed about $16 million. Used equipment sale, I mentioned the improvement in volume and margin there. That contributed about $14 million of improvement. Then Pump, the Cat class of pumps, because of their mix contribution, contributed about $15 million worth of positive mix impact. Working against those positives, we had fleet inflation. That was about an $11 million headwind. Additional incentive comp. We had very strong incentive comp year and quarter, and our adjustment to the incentive comp there cost us about $10 million over the prior year. Bad debt expense cost us about $8 million. We had a strong bad debt expense result in fourth quarter of 2013. We had a more normalized result in 2014, along with a larger AR balance. So that was the driver there for that $8 million win. Merit increases were about $6 million. All other was the remaining one. So those are the components of our adjusted EBITDA change for year-over-year. If you look down at EPS, we had an adjusted EPS of $2.19 for the quarter, up very nicely from $1.59 the prior year. All in all, a very strong profit picture for the quarter, as Mike mentioned. Real quickly on cash flow. We had a great free cash flow performance in the quarter as well. $557 million of free cash flow, the way we calculate it. But I will remind everyone that that includes merger-related cash payments of about $17 million in the quarter. The way we look at free cash flow in the quarter, excuse me, this is full year. The way we look at free cash flow for the full year is a $574 million result. The real driver there, and it did come in stronger than we expected, the real driver was better EBITDA performance along with really, really strong collections. We've mentioned that before, but our AR collections have been coming in very strong for the last number of months now, and that was a big part of the betterment there in free cash flow. Just real briefly to touch on our share repurchase program. We have been repurchasing shares. We mentioned that we bought back about $102 million of shares under the new $750 million authorization in the month of December. We add to that in the month of January. To date, in January, we spent an extra $125 million. So we are now at $227 million of repurchases against that $750 million repurchase authorization. So that's the latest update for share repurchase. Also, as Mike mentioned, I'll just reiterate, we had very nice improvement in our return on invested capital, 8.8% for the full year, and that's a 130 basis point improvement over the prior year with the fourth quarter sequentially improving by 40 basis points. So we feel very good about the return direction that we have the company pointed in. Now let's talk about oil. As Michael mentioned, we've done a lot of work assessing possible impacts from low oil prices, and we've done it in a variety of different ways. We keep coming up with the same conclusion, which is that we think any reasonable expectation for impact is manageable. Here's one way that we've taken a look at it we think will resonate with folks. If we look at every branch in our company that has oil and gas revenue, we decided that the best way to look at this was to model that oil and gas revenue taking a significant hit. In this case, we said any branch that had oil and gas revenue, upstream oil gas revenue, the upstream portion of their revenue stream, let's assume it takes a 35% hit. In addition, for any branch that has more than a de minimis amount of oil and gas revenue, upstream oil and gas revenue, let's also assume that everything else, all of their other revenue, takes a 15% hit. So they get hit 35% in oil and gas upstream. They get hit 15% for everything else. If you do that and add it up across our company, the aggregate amount of fleet that would be freed up by those kinds of impacts would total about $400 million of average annual fleet. So $400 million relative to an $8 billion-plus fleet, you could say, "Hey, let's dismiss that. That's not significant." But we don't think about it that way. $400 million is certainly a good amount of fleet to move around. Then we further ask ourselves, "Well, what could it mean financially?" And we made some assumptions. So the $400 million is the average annual fleet. Will that kind of an impact happen over the full year? We said no. Let's just evaluate having that impact build over the year and say it's fully in effect at the second half. So the second half is really where that hit would apply. That $400 million annual impact, really in calendar 2015, would only have the effect of about $200 million on a full year basis. We asked ourselves how much of that kind of a downside could we absorb, could we mitigate? While many of us could argue that we could absorb all of that kind of a hit, we decided to be conservative in our downside analysis and assume we could only mitigate half that. The $200 million annual rate, we cut down to about $100 million annual impact that represented real exposure to our company. How much is that $100 million of fleet worth? We assumed a dollar utilization on that that was very high relative to the rest of our company. We used 60% in our analysis. 60% is at least 5 percentage points higher than the dollar utilizations that we reasonably could expect in the second half for even the highest performing regions in our company. 60% on that $100 million annual impact gives you a $60 million revenue impact. If you want to flow that through at 60% EBITDA, it's about a $36 million EBITDA impact. When you look at it in that light, it doesn't scare you, right? It's not the end of the world to say there's a $36 million hole that we've got to figure out a way to fill. As we said, we think that the assumptions are fairly conservative. The good news, as Mike mentioned in his comments, is that we have a sense that there is going to be robust demand in other areas outside of oil and gas, and other product types that we think can help address, even if this, what we believe is a severe downside, plays out. That's the way we're thinking about the risk from oil and gas. If you add the $36 million impact that we just walked through to, or subtract that from what we expect for the full year, we still feel like we can deliver the range of adjusted EBITDA that we've given in our guidance. Speaking of our guidance for 2015, just to reiterate the key points you've already seen, we expect total revenue in the range of $6 billion-$6.2 billion. Within that, rental revenue will be driven by rates at about 3.5% for the year, and time utilization of about 69%, or a 20 basis point improvement over last year. The adjusted EBITDA range of $295 million-$305 million, again, we feel is a range that represents the most likely outcome for the year. We do expect to spend about $1.7 billion of gross rental CapEx and have that net down to about $1.2 billion for the year. Free cash flow will be a very robust result for us this year. Somewhere between $725 million and $775 million is what we expect. Obviously, that's significantly higher than the about $600 million number that we guided to back in our investor day in December. It really reflects the reenactment of bonus depreciation for calendar 2014 that Congress passed and President Obama signed just recently. So put it all together, and it looks like a very robust year for us. We wouldn't say that if we didn't believe that and believe that we had the ability to manage to that. Oil and gas certainly is an exposure for us, but it's an opportunity as well, and we're going to look to take advantage of the opportunities that it presents as we always have. And if we can do that, we feel like we'll be having a good conversation this time next year. So with that ends our prepared comments, and we can open up the call for questions and answers. Operator? Certainly. Ladies and gentlemen, if you do 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. And in the interest of time and fairness to everyone, we do ask that you please refrain yourself from just asking one question and then getting back into the queue. Our first question comes from the line of Ted Grace from Susquehanna. Your question, please. Thanks. Hey, guys. Congratulations on a strong quarter. Thanks, Ted. I was hoping to ask on 2015 margins. I know you give revenue guidance, you give EBITDA guidance, and we can back into kind of what's implied on both a margin and an incremental basis. Bill, maybe if you could walk through qualitatively some of the key headwinds or tailwinds we should just think about influencing where we might come out on that range. So things like mix, fuel costs, incentive comp, lean, inflation, just to help kind of give us some guideposts. Sure. I'll start, but certainly Mike and Matt, please chime in. As we think about top line, a couple of things that swirl in the background in our thinking. Obviously, I walked through our oil and gas risk assessment, but the question is, did we get it right? Could it be worse than that? Conversely, could it be better than that? So those are the things that surround oil and gas performance that may bias the revenue one way or another. I'll leave you to make your own judgment about how much risk you think there is. FX is another factor that we certainly need to be aware of. The Canadian dollar has been weakening pretty consistently. Average Canadian was down last year by about 6% to 7%. Right now, as we said, if it flat lined from where it sits right now at about $0.81 U.S., that'd be another 6% or so year-over-year headwind from the currency going down. So that's a non-trivial amount of revenue that could erode. The guidance we give is total revenue, so you have to be mindful of used and new as well. Our plan for used equipment sales this year is a reduction over what we achieved in 2014. Just looking at the difference between gross CapEx and net rental CapEx, we're guiding to something like $500 million of used sales proceeds. That compares to $549 million in 2014. So that'll be a little bit of an impact to the revenues and maybe keeps the revenue guidance from being higher than it is. Then there are other items that might impact at the adjusted EBITDA line. For example, we had a very robust incentive compensation this year. When we reset the incentive comp targets for 2015, our baseline plan assumes that we hit target and only pay out at target. We paid out nicely above target this year. So that'll impact in a positive way where we might end up on the adjusted EBITDA line. A host of other issues. You mentioned lean. The lean initiatives are still rolling out and building momentum. We finished the quarter, steal a little bit of Matt's thunder here. We finished the year at an annualized run rate of about $30 million of lean impact. That's up from the $23 million that we reported at the end of the third quarter. So that's another factor that's playing through our expectations for 2015. I will start there, and again Mike and Matt, if you guys want to mention anything or if I have forgotten anything, please jump in. Well, I think you captured it, Bill. It is important to note the difference in used sales is really about what has reached its rental useful life in the year, and we do not have as much fleet that we have to sell. So that is why we are guiding lower there. If retail opportunities go over and above that, or we may swing, but I think it is a good target based on what we want to move out to keep our fleet fresh and to the targets we set. Yeah. Yeah, I would only add that everything that Bill and Matt said, spot on. I think that if you look at the projections of the industry at 8% for North America is a little bit higher than what we experienced or what they projected in 2014. So could there be some on rate, could there be opportunities? Could be. We do not know too early. We somewhat tempered it as we went into the oil. But that could be an upside for us going forward. One other point, Ted, is I know where you are going, right? You are looking at the midpoints of revenue and EBITDA and saying, "Hey, flow-through there comes out at a pretty high level, 68-plus percent." That is an artifact of the fact that we are using ranges and the fact that the flow-through calculation is very sensitive. If we were asked point blank, we would still say that we think about flow-through for 2015 being something like 60% with toward the upside because of the net effect of all of the things that I mentioned earlier. So if you are modeling, I would say get your revenue where you want it, do 60%, and then maybe put your thumb on scale a little bit higher to reflect some of the net benefits that we expect to accrue over the course of the year. That is super helpful. The only follow-up I would have is any willingness to quantify kind of what lean expectations are. I know you exited a run rate of 30. You are targeting 100-plus through the program over a few years, but any chance you could just calibrate us on what that tailwind might look like this year? Well, you could do the trends, as Matt said. You could do the trends. We would expect it to follow that trend, right? So we have set internal targets above that for our team. We put even extra emphasis on it this year, but I feel very comfortable that we will keep a steady pace towards that 100 million by the end of 2016. Okay. Congratulations and best of luck this quarter, guys. Thanks. Thanks, Ted. Thank you. Our next question comes from the line of Justin Jordan from Jefferies. Your question, please. Good morning, guys. Morning. Or good afternoon, I should say. Good afternoon. Thank you. I just want to talk about the nice problem of having extra free cash flow and what that might mean in terms of changes or the board's thinking about capital allocation in calendar 2015. Because obviously, relative to guidance you gave on December 4th, essentially, you've increased free cash flow guidance by 25% overnight. Now, I appreciate there's a tax implication here, and it's not really that much a percentage gain. But is that changing how you think about potential Specialty M&A? Is that changing how you think about deleveraging or potentially changing how you think about the amount of stock repurchasing you might do in 2015? Yes. No. Would you like to give a bit more color than that? No, you get one question. I think what I would tell on M&A is that we are always looking at M&A opportunities, and I am flippant, but I do not think it changes how we think about M&A. If we found the right M&A opportunity, then we would go ahead and do that, whether we were at $600 million or $700 million or $775 million of free cash flow. So M&A wouldn't change. I think it is fair to say that as we look at the share repurchase program, if you got more cash flow, and you are on a path to leverage, and we have already said we expect to be toward the low end of the leverage range that we want to operate in by the end of this year, right? We have called 2.6 as the leverage ratio we expect before the increase in free cash flow. I think we would be more inclined to say, "Okay, let's not go crazy and go below the 2.5 kind of leverage ratio this year now that we have got more cash flow coming in." So that may change how we think about the timing of the share repurchase program. And I think that is a sensible way to think about it. So that is all still to be discussed, and certainly, we will talk about it more as we make more decisions. But I would say M&A doesn't change, but everything else we kind of put in the mix and say, "Okay, we got an extra $100 million. What do you want to do with it?" And we will make that call. Thank you. Thank you. Thanks, Justin. Thank you. Our next question comes from the line of Seth Weber from RBC Capital. Your question, please. Hey, good morning, guys. Good morning. I wanted to talk about your CapEx commentary, specifically the comments around flexibility around CapEx, and you kept the $1.7 billion gross number for the year. Should we think about cadence this year being similar to how it has been in the prior years, so 60%-65% in the first half? Or do you hold back some of the spending to wait and see how the markets evolve? That is my first question. As an add-on to that, it sounds like your Specialty Rentals as a percentage of growth capital is down. I think last year it was something like I do not know, 270, 280, something like that, and now it is 170, I think you said. Is that reduction primarily focused on the pump business, or how should we think about your growth capital going towards the specialty category? Thanks. Sure, Seth. I will answer both questions. The first, as far as the cadence, we plan on it to being similar to this year. You know that we have really strong flexibility as far as we do not need to make a decision on what we are going to ship until literally a week before it is going to ship. The second quarter, by April, I think we will get a very good feel of if the second quarter is going to be more or less, and it will all be demand driven. The first quarter is light already, which is good for us, and right now we are restricting inflow of CapEx, obviously in the markets that we think may have a little bit softening in demand in the back half of the year. I really think we'll get a better picture on how much we adjust from our norm, and I would call last year's cadence a new norm, depending on what the demand is and where we're getting our returns and where our customers need our services. That's how we feel about the cadence. As far as the Specialty, we plan on spending over 30% of our growth capital on Specialty. You were talking about more of a gross number when you were referring to last year's number, and a lot of that was, I would say, fleeting up Pump, right? We need that acquisition to grow and fleeting up the many cold starts that we've done in our other Specialty segments, specifically Power and HVAC, even the year before. They were now ready to absorb scale. We really pushed a lot into the cold starts over the last couple of years, and we'll do some more cold starts this year, but not at the scale that we did over the past two years. Okay. Sorry, Matt. Was my math incorrect? I thought your Specialty last year represented half of the growth capital or something like that. This is Mike. You're close on that number. To Matt's point, if you go back to 2013, we had a significant amount of our cold starts that were in the later part of the fourth quarter, that a lot of that CapEx ran into 2014, and then the cold starts that we had through the course of the year, and then feeding all of those as we went through the year. In total numbers, it's down, you're right. But it hasn't changed our view on Specialty. We do reserve the right on pump to understand what impact upstream could or could not have as we go through our cross opportunities. As I mentioned, we will do cold starts with pump to broaden their reach, and that was one of the key aspects of the acquisition, was making sure that, if you recall, 6% of their business was only in our commercial and industrial space. We see that as a significant opportunity. It's kind of more of a tempered look. We'll take a look at it. As I also mentioned, if there's a need for more growth capital, we've got it, and we'll do it. Flexibility is built into our model. Yeah. Okay. Then Matt, have you seen anything, can you make any comments on used equipment pricing? Because I think that's something that people are increasingly nervous about. Well, other than that, it held strong. We enjoyed a real robust fourth quarter from a volume, a little bit more than we even expected in the month of December, and with margins holding flat. Flat at a very high level. We're seeing still a robust used equipment market. Okay. Thank you very much, guys. Sure. Thank you. Okay. Thank you. Our next question comes from the line of David Raso from Evercore ISI. Your question, please. Good morning. Good morning. Hi. On the oil downside scenario, I was just curious, what percent of your entire fleet is captured in what you're considering at-risk territories? Secondarily, just trying to think through rental rates in that scenario, just trying to capture if you feel there's any potential knock-on effect to rates in territories where other equipment might be going into, or essentially just even the rate pressure you may see in those weaker energy-sensitive markets. I'll tackle the rate one first. The about 3.5 guidance that we gave is lower than where we were thinking about rate, call it a month ago or 2 months ago. In that sense we've included some conservatism to reflect the fact that rate could be pressured as that oil and gas dynamic plays out. Yet we still say 3.5. Could it be worse than that? Obviously, it could. But again, we think we've got opportunities to respond and manage it down. I don't remember off the top of my head the first question of what percent of the fleet. Well, if you just do the math, right? We said the 35% upstream would net in about $400 million. So it's over $1 billion, I'd say it's somewhere in $1 billion to $1.2 billion. I don't have the number right handy in front of me. But I think that. Well, actually, Ken, maybe you have it. It's probably $1.2 billion of fleet that we think will be impacted, and those are markets that have oil and gas upstream business today. Okay. I may be oversimplifying it, because not everything in these states are driven by energy. Well, so- But I'm just thinking about 29% of your branches, and all branches aren't the same, I know that, but just going with the data we have, 29% of branches are in what I'd consider at least somewhat energy sensitive states in the oil sands. In your analysis, you're saying kind of roughly half of that's at risk, I guess, right? Because 1.2 of the $8.44 billion of fleet is about 14%. Is that the right way to think of it roughly? Half of the branches in those states and oil sands is sort of at risk. I'm just trying to understand the analysis. Yeah. It's hard to do the analysis based on branches and states, and get anything useful in our opinion. That's why we went to the individual location. Sure. And tried to reason from what business they have that's exposed right here and now. So we didn't do it to go to great levels of detail on how much fleet is at how many branches or in which states. We have that. I don't know that it's something we want to go through in great detail. But just the $400 million impact, I think, really does capture a pretty good view of what the exposure might be. But if you don't believe it, okay, make it a $500 million impact. Let's say we're off by 25%, or even a $600 million impact and say we're off by 50%. The end result doesn't change dramatically, right? It's still a $35, 40, 45, $50 million kind of risk, even with conservative assumptions about how far down it goes and how much we can mitigate. I like our chances with that kind of risk scenario. Sure. I appreciate it. I think the issue is there more territory at risk than solely branches that happen to have upstream oil and gas in their region? It is obviously just a debate right now about contagion beyond just those direct areas. Absolutely. Also on the rates, you have done a great job this cycle on saying, "Look, we are not going to throw capital at the fleet just to grow. We are going to focus on better returns." Should I expect if I am thinking maybe a little more cautiously about the impact and broader contagion, you are going to hold rate before you try to hold utilization? If I had to model some downside sensitivity, should I be taking it more down on utilization, you would argue, or taking it down on rate? I am just trying to get a feel for philosophically, if things got weaker than you are forecasting. Yeah. I am sorry, Matt. I will let you- No, it will depend, right, on what the demand is and what we are seeing. But I would say that we are going to have utilization at the levels that it needs to be at because we can manage that. We can manage how much fleet we put into a market, and how much fleet we remove out of a market. I think we will be very diligent on both rate and time, but time is much more easily manageable. And I think as Bill stated, we built in a little conservatism on the rate because moving the fleet from higher rate areas and your growth fleet into areas that are not your top 10% is going to have some knock down, whether it is a quarter point, a half a point, I do not think we really know yet, but I think we have captured it in our guidance. I guess what I will take from that then is if you feel the utilization is coming under some pressure, while you want to hold rate, you might play with it a bit, but the key is you also have the outlet valve of, well, I am just going to sell fleet. I guess that is the idea. Yes. If used prices hold up, you can manage utilization also by just simply shedding some fleet, and I think that is the key issue of used prices. If they hold up, you can do that relatively profitably, but that is obviously a part of the debate. Yes. We should think of less just trying to move fleet. You also can tap the retail market the best you can on selling used. Sure. Okay. Really appreciate it. I think that's right. Thank you, David. Thanks, David. All right. Thank you. Thank you. Once again, ladies and gentlemen, just as a reminder, please limit yourself to one question and then return to the queue for any follow-ups. Our next question comes to the line of Joe Box from KeyBanc Capital. Hey, guys. Hey, Joe. I have got a question on your construction pipeline on slide 13. I just want to tie that together maybe with your methodology on guidance. So how should we be thinking about the $370 billion pipeline and how you incorporate that into your guidance? Then maybe just to take it one step further, what are your guys on the ground telling you for some of these energy sensitive projects that have already started or maybe are just a few months away from breaking ground? Are they concerned about this or are they thinking everything kind of moves forward as planned? This is Matt, Joe. We do have some key account managers that specifically just call on oil and gas. Obviously, they're hearing the most noise about whether it's future concerns or some job cancellations. But even in that space, the pipeline was so robust that individually they may have opportunity. I think more importantly, the other 90% of our key account managers are extremely encouraged because we've always sent the fleet to the highest return opportunity, and oil and gas was pretty hot for a while. You could argue we may have underserved a lot of other opportunities that will give us very good returns and a little bit more geographically dispersed. I think that what we're hearing on the ground is encouragement and opportunity in markets like the West Coast, even the Northwest, the Southeast, the Mid-Atlantic, where you could see the map that we have on the investor deck on, I think it was slide 14, where you see there's some real great opportunities. That's what we're hearing. That's why we feel very strong about our guidance. Our customers have the demand, and our boots on the ground are seeing it. Okay. I'll respect the one question, so I'll hop back in queue. Thanks. Thanks, Joe. Thanks, Joe. Thank you. Our next question comes on the line of Scott Schneeberger from Oppenheimer. Your question, please. Thanks. Good morning, guys, and nice work on 2014. I'll follow up- Thank you On Joe's question. On slide 14, it's a nice add. It says construction overall. Is that non-res construction? Could you specify? Could you speak to the end markets in those 6 or 7 states where you see the double-digit growth? Thanks. Did you, Seth, want to know about the verticals where the opportunities are in those states, or just the specific states? No, I can see the states on slide 14, the vertical opportunities in those states, and what type of construction specifically. I think Mike covered a little bit of it in his opening remarks. When I say it's broad, it's broad. There is multiple stadiums, multiple car plant expansions, manufacturing. I'd say the single largest vertical would probably be chemical. Chemical plants have shown robust growth, even in the state of Texas, right? We talk a lot about the contagion impact to Texas. We have a very large portion of our business in Texas that's chemical related, and that's forecast to be 26% growth in Texas. We think that there's many verticals that are positive and places that we're going to serve in 2015. It is that broad base, which is why I'm not. Chemical stands out of just how much growth there is, which is why I'm not honing in on the other verticals, because it's very broad. Okay, thanks. Just following up on that, how much of that is forecast, and how much of that do you feel is in hand at this point in the year? Thanks. I don't have the put in place in front of me right now, but you could think about it as the pipeline through the seasons of the year, and certainly there's less start right now, although our time use remains very strong. I would say by mid-summer, you're going to see at least half of that pipeline materialize in rental opportunity. And then it's just a matter of how quick things move from there, and that's standard with the construction cycle that we've been experiencing throughout my career. Great. Thanks. Thank you. Thanks, Seth. Our next question comes from the line of Joe O'Dea, from Vertical Research. Your question, please. Hi, good morning. A question just on the potential risk of accelerated fleet growth across the industry with what is a pretty strong backdrop, and really, your ability to monitor what your competitors are doing, and if there's any particular competitor segment, whether that's by region or size of competitor, that you think would be the largest risk to maybe over-accelerating fleet growth and adding some rental rate price pressure. I'll start. The ability to monitor is pretty good, right? We're everywhere, and we touch, I won't say every customer, but a lot of the market. We've got real-time intelligence on what our competitors are doing, and we feel we have the ability to respond if we think responding is appropriate, and that's one of the advantages of being who we are. In terms of what competitor might be most at risk, we won't name names here. I'll leave you to make your own judgment about that. All we can say is that United Rentals is going to be very conscious about any CapEx decision, whether it's to increase or decrease, and it's going to be driven by what we're taking in from the market. Okay. Thanks a lot. Okay. Thanks, Joe. Thanks, Joe. Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Hey, Jerry. Good morning. Good morning. Can you gentlemen talk about what you're hearing from your refining customers? I think that was one of RSC's bigger industrial end markets, if I remember their disclosures right. We've seen them cut back in CapEx, but I think the equipment's been more on the maintenance side of everyday type work. Is that right? Can you just give us an update for that end market? Certainly. We have heard of some CapEx cutbacks, and I would say probably more severe in the oil sands than anywhere else, and there have been a couple of projects in the Gulf that have canceled. But I would say overall, that pipeline's still robust. And you're accurate. The large amount of on-site relationships that we acquired during the merger with RSC really gives us a strong base to work from. We're not seeing any slowdown to that maintenance at all. As a matter of fact, our industrial region's showing the highest time utilization we have in the company right now and the highest year-over-year growth. And they're primarily on-sites and what I would call downstream oil and gas and chemical plants, and we're just seeing real strong growth there. And I don't think the maintenance is going to take a hit here. I think it's mostly capital spend, which if we really wanted to be rosy, you could say there's an opportunity there for us to get more penetration as capital spend continues to get cut from some of the end markets. Thank you, Matt. Yeah. I was going to just say also on our slide, our customer confidence index, reaching out. Of the 170 key accounts that we reached out to, only 1% saw slower growth in 2015. We spent an awful lot of time in preparation for this call, reaching out to our customers, reaching out to our employees. I know more about oil in the last two weeks than my 35 years in the industry. And I will tell you that we haven't seen any Significant impact. Talking to our customer, steel erectors. Steel erectors, when you take a look at their book of business and bidding, not one of the projects I saw had any relationship to oil at all. They would say it's a record opportunity and year for them coming up on their bidding requirements. That along with, Jerry, the feedback that we're getting from ARA and the Global Insight, which by the way, has been inside this industry for close to 7 years, maybe longer, working with our industry, refining the nuances of their model on how this industry reacts to things. When they come out with 8%, we take that to heart, and that's not soft, that's not easy, and we think that's a good indication of where our industry is going. Okay. Thank you. Matt, just a clarification, if you don't mind, the cancellations that you mentioned, was that ground-up projects that you're referring to, or is that just brownfield type work? The ground-up projects. There were a couple planned. The pipeline that we went through in our Q4 QBRs with our regions, we saw more projects start with a B than I've seen in the last couple of years combined. Candidly, if half those projects cut, I think it'd be a more robust pipeline than we had over the past few years as far as large projects. We have seen maybe 10% of those get cut off the table right now because of the concerns that everybody has. So they'll hold back on some of this new construction, new capital projects. But I still feel that the pipeline, as Mike stated and we've all stated, very robust, and the Global Insight survey just kind of supports what we're hearing from our customers and from our boots on the ground. Thank you. Sure. Thank you. Thank you. Our next question comes from the line of Steven Fisher from UBS. Great. Thanks. Steve. Thanks. Good morning. How would you guys describe your expectations for Canada overall in 2015 relative to the U.S.? I know you just mentioned some oil sands weakness, but just Canada overall. Then how easy is it to reallocate equipment from Canada to the U.S., or would you more envision reallocating amongst the provinces? Thank you. I'll start, and then I'll ask Matt to tie in. As part of the overview with ARA, they're looking at a little over a 3% growth for all of Canada. That combines with the 8.5% they're projecting for the U.S. It would give them just around 8.1% growth for North America. I actually think that Eastern Canada, which, by the way, has been down for the last several years, we'll see some activity there and come forward. The only headwind we would have, as Bill mentioned, is the currency exchange from a revenue. But in the constant dollars, we would expect that to grow. We see the Canadian market grow, and probably less growth on Western Canada than we've experienced in the past. Yeah, I would agree, Mike. We'll just stay in same currency, right? Because that's how I would manage those businesses and judge them. We will see growth in both Western and Eastern Canada regions next year. Like all of our regions, we do zero growth CapEx budgets, so they're going to have to earn their growth as they stack rank against their peers, and they've fared pretty well in the past, and I expect them to fare pretty well in the future, specifically Western Canada. In terms of reallocating equipment between Canada and the U.S., is that something you would envision doing, and how easy is that? When you think about the $1.7 billion of new capital that we spend, that's 20% of 8.4 base, if we start with this year's base. We've historically been able to reshift geographically by utilizing equipment sales and either not replacing in that market or not putting real capital in that market. So we've been able to geographically remix through that. If we had to put trucks under fleet, we could do that, and there are some intricacies to doing it from Western Canada. But if it was really dropping, that's not something that we would do. The costs are minimal compared to the opportunity you'd have by reallocating. But right now, they're running high time utilization, and we're just going to manage the influx into any of these oil and gas markets first, and I think that'll prevent from having to move fleet, but we can react very quickly, whether it's in Canada or somewhere else, to move fleet. Thanks very much. You're welcome. Thank you. All right. And our final question, due to time constraints, comes from the line of Nicole DeBlase from Morgan Stanley. Your question, please. Yeah, thanks for taking my call, guys. Good morning. Morning. Morning. Most of mine have been answered, but just one on utilization. I was kind of surprised to see that you're guiding for flattish utilization in 2015. Is that also conservatism around oil and gas risk, or are we kind of at the high water mark for utilization this cycle? I wouldn't say we're at the high water mark. We still feel we've got opportunities to continue to drive utilization. We've talked in the past, all three of us, probably agreeing that we can get into the 70s if the market holds and if we do the things that we think we can do. The 69% would be up 20 basis points. I guess you could call that flat if you like. But that is tempered somewhat, like the rate discussion, it's tempered somewhat by our concern about oil and gas and about While we think we can mitigate, we don't know that we will be able to mitigate 100% of any oil and gas fall-off, and so we backed off a little bit from where we were a month or two ago in our thoughts about 2015. But we still think that's a very robust performance on utilization. And Matt's comments earlier, utilization is something that we certainly have lots of levers that we can use, right? If it's falling down, you can sell more or you can buy less, and thread the business you do have over a smaller fleet. We think that we can pull all the appropriate levers and deliver that about 69%, and we think that's a step on the way toward better utilization over the next several years. Okay, thanks, Bill. That is really helpful. Then just for my follow-up, thinking about 1Q, as far as what you guys have seen so far quarter to date, should we expect to see normal seasonality this quarter? Yeah, I would say so. We are experiencing very similar metrics than we did to last year when you look at rate and time utilization, maybe up a hair in time for a couple of weeks, but it is early. I think it will fall right in line with our usual pace. Okay, great. That is helpful. Thank you. Thank you. Thanks, Nicole. Thanks. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to management for any further remarks. Thanks, operator. I hope we've gone some distance in bringing clarity to what we see as favorable operating environment in 2015. Be sure to download our Q4 investor presentation and feel free to reach out to Fred Bratman anytime. With that, operator, you can end the call. 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.