Earnings Call: Q1 2019

Apr 18, 2019

Good morning, and welcome to the United Rentals Investor Conference Call. Please be advised that this call is being recorded. Before we begin, note that the company's press release, comments made on today's call, and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the company's press release. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31, 2018, as well as to subsequent filings with the SEC. You can access these filings on the company's website at www.ur.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances, or changes in expectations. You should also note that the company's press release, investor presentation, and today's call include references to free cash flow, adjusted EPS, EBITDA, and adjusted EBITDA, each of which is a non-GAAP term. Please refer to the back of the company's recent investor presentations to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer, Jessica Graziano, Chief Financial Officer, and Matt Flannery, President and Chief Operating Officer. I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin. Well, good morning, everyone, and thanks for joining us. I have some comments to share with you on the quarter, but first, I want to speak about the upcoming leadership transition. As you know, this is my last earnings call with you, and when we report our second quarter results, Matt will be standing here as CEO, and I'll be behind the scenes as Chairman. It's an honor for me to take the reins from Jenne Britell, who's been instrumental in our company's transformation. The changes take effect following our annual meeting on May 8, and I look forward to collaborating with Matt on a different level in my new role. Matt and I have navigated our strategy together for years, and he's been a terrific partner. We'll be continuing the productive relationship between the board and the executive team that has served our company so well for over a decade. Turning to the quarter. Overall, our performance was very positive. We owe some of that, our momentum, to the operating environment. Our end markets are still growing, and demand is broad-based across our geographies and verticals. You saw us express our continued confidence in the cycle yesterday when we reaffirmed our guidance. But it's more than external. We're a very different company today than we were a decade ago. We have a far more resilient business model. We're more agile and innovative with stronger differentiation and more ways to create value for our customers and shareholders. You can see this in the growth that we've achieved, the improvements we made in margins and returns, and the free cash flow we've generated throughout this cycle. Ultimately, you can see it in our return on capital. None of this happened by accident. It's the direct result of the strategy we adopted in 2008 and our focus on execution since that time. Finally, I'd like to thank our employees for the incredible job they've done in helping us transform United Rentals. We had a vision for what this company could become, and our people made it a reality. On a personal note, I want to thank you, the investment community, for your attention to United Rentals during the years I've served as CEO. There's always been a lot of respect on both sides, and I'm pleased that I'll step down following a record year of growth and another year of growth well underway. I'll hand the call over to Matt, who will talk strategy and operations, and then Jessica will cover the numbers. After that, we'll take your questions. For the last time, Matt, over to you. Thanks, Mike, and good morning, everyone. Before I begin, I want to take this opportunity on behalf of the company to thank Mike for many years of tremendous leadership, hard work, and his selflessness. Personally, for his mentorship and the confidence he's shown in me throughout my career. Mike's always been willing to challenge the status quo and to think in new directions, and always went to push and pull those of us around him, quite frankly, even when we didn't like it. The roles are changing, Mike, but I'm counting on the continued collaboration, and I'm very much looking forward to the next chapter of our lives together. Let's talk about the quarter. As you know from the numbers, the year's off to a strong start. We delivered solid growth and good margins as well as strong free cash flow. You've seen it in the results that we reported last night. For the quarter, total revenue was up 22% and adjusted EBITDA was up 18%. As a result, EPS improved by 15% from a year ago. This performance was underpinned by our focus on operational discipline, and it allowed the team to achieve solid flow-through and a year-over-year improvement in fleet productivity was up 2.2% on a pro forma basis. Jess will go through the details, but bear in mind, we had multiple integrations to deal with, headwinds from the weather in Q1, and yet the team still became more efficient in capturing revenue. On the topic of integrations, let me take a moment to give you an update. The BlueLine integration's on track, and we'll be leveraging those additional resources in our busy season. The same is true on a smaller scale of WesternOne in Canada and with Thompson Pump, whose rental business we bought in January. Most of the structural integration work on these deals is behind us, and we are looking forward to the seasonal ramp-up in Q2. We have entered 2019 not just as a larger solutions provider, but as a more diverse one as well, equipped to serve new types of customers and end markets. This aligns well with our strategy and the outlook for the full year. Our branches have the best view of market activity, and the teams are enthusiastic. After some Q1 delays due to weather, projects are starting up at a good clip, and most importantly, our customers are optimistic. Here is an overview of Q1. We saw meaningful growth in all three of our construction verticals of non-residential, infrastructure, and residential. In the industrial sector, all 12 of the verticals we track pointed to market strength, with five of those verticals generating double-digit revenue growth for the quarter. Geographically, we grew revenue in both the U.S. and Canada year-over-year, with all of our regions showing strong demand. Our specialty operations continue to be a big part of our growth strategy. In the first quarter, our Trench, Power and Fluid Solutions segment grew rental revenue by 44%. This reflects our two acquisitions in Fluid Solutions, but also 14% organic growth. When we bought BakerCorp back in July, we gained tank and filtration expertise. This strengthened our ability to provide fluid solutions to our customers, and with Thompson Pump, we gained a leading position in turnkey sewer bypass solutions and well point dewatering. In addition, we opened eight specialty cold starts in the first quarter against a planned 27 for the year. Our specialty footprint currently stands at a record 341 locations and growing. I want to take a moment to talk about safety. It is our most important differentiator because it protects our most important assets, our people. It matters to our customers. We have just completed two years of acquisition activity with one integration after another. So it makes me particularly proud when I see a safety performance like the one we just achieved. For the first quarter, Team United had a total recordable rate of just 0.71. A year ago, that rate was 0.98, which is a really good result for any industry. So we were good before, and now we are even better. To top it off, two of our regions ended the quarter with a recordable rate of zero. Someday, I hope to be telling you that the entire company came in at zero because that is our goal. So here is how I will sum it up. The cycle is still in our favor, and we are looking at another year of solid growth. Most important, our people, our processes, and our strategy are all aligned with the customer opportunity. You have heard us talk about balancing growth, margins, returns, and free cash flow. That is our mantra. But before we do any of those things, we have to first perform for our customers. We have to do it well enough to earn their next revenue opportunity each and every day. This unrelenting focus on the customer is at the heart of Mike's legacy as CEO. His understanding of what it takes to build an enduring company set a high bar for us and our industry. Back in 2009, he had us taking the lead with innovation and rental specialization, and we were engaging our employees in good citizenship and encouraging them to have an ownership mentality. I know I speak for the entire team when I say we're excited to build on Mike's legacy for all of our stakeholders. We're eager to take on the opportunities of 2019 and the years ahead. Now I'll ask Jess to go over the numbers, and then we'll take your questions. Jess, over to you. Thanks, Matt, and good morning, everyone. Before I jump into the numbers, on a high level, let me reiterate what Matt said. We've delivered a solid quarter, and we are positioned well moving into the busy season. Our team did a great job remaining focused on safety and on our customers as we continued to work through multiple integrations. As a result of all that acquisition activity, the majority of the year-over-year variances in the as-reported numbers will be from adding these businesses. While I walk you through as-reported results, I'll pivot at times to speak to our performance on a pro forma basis, which includes BlueLine and Baker, since that's a better reflection of how we're managing the business. I'll begin with rental revenue, where I'll also pivot to discuss the quarter in the context of fleet productivity. Last quarter, you'll recall that we said we will be providing rate, time u, and mix detail consistent with our previous methodology for a couple of quarters to provide transition to fleet productivity. You can see all that detail as well as calculations supporting fleet productivity on pages 36 through 40 of our investor presentation that's posted on our website, www.ur.com. Let's get started. Rental revenue on an as-reported basis grew 23%, or $336 million, to just shy of $1.8 billion. The increase is primarily related to the impact of both BlueLine and Baker. I'll note here that the growth in rental revenue on a pro forma basis was a strong 7.2% for the quarter. As reported, OER growth contributed about 21% or $265 million. From a fleet productivity perspective, the change is comprised of growth in our fleet of 23.7% or about $300 million of additional revenue. We have the usual headwind of fleet inflation at 1.5% or $19 million, and fleet productivity on an as-reported basis was also an expected headwind, down 1.3% or $16 million with lower time utilization and mix from adding BlueLine and Baker being partially offset by positive rate. As you consider the quarter's revenue results, I think it's more helpful to consider fleet productivity on a pro forma basis, which was up 2.2% year-over-year. That came from both strong rate and mix, offset partially by softer time use. We focused on profitable growth while balancing these metrics for the quarter. When you add the expected integration dynamics with some unexpected weather impacts, we're pleased with the productivity we generated. Rounding out rental revenue was a combined 2.1% increase on an as-reported basis from ancillary and re-rent, with ancillary adding $61 million and re-rent adding $10 million. Again, both were better, primarily as a result of adding BlueLine and Baker, but also due to better volume across the core business. Taking a look at used sales. Used sales revenue was up just over 6% or $11 million year-over-year. Adjusted gross margin on used sales was 49%. That is down from 54% and reflects the tough comp of having sold older, fully depreciated NES equipment in the first quarter of 2018. As we look closer at the used sales environment, it remains strong. Our sales as a percentage of OEC was 54%, which was 140 basis points higher than last year, with our used pricing at retail up about 5% versus Q1-18. Used sales also benefited from the blend of equipment that we sold in the quarter. Moving to EBITDA. Adjusted EBITDA for the quarter was $921 million, an increase of $141 million or 18% versus prior year. Our adjusted EBITDA margin was 43.5%, a 150 basis point decline year-over-year, due largely to the impact of bringing in BlueLine and Baker. Importantly, on a pro forma basis, our adjusted EBITDA margin improved 30 basis points. I will walk you through the bridge on the as-reported changes in EBITDA. The improvement in OER added $167 million, ancillary contributed $19 million, and re-rent provided about $1 million. Used sales were a headwind of about $3 million, and SG&A expenses also a headwind of about $52 million. 40 million of that SG&A change comes from the BlueLine and Baker cost base, net of synergies. The remaining $12 million includes volume and inflationary increases, such as higher commissions, merit, and professional fees. That leaves about $9 million of benefit in adjusted EBITDA for the quarter, primarily coming from better performance across our other lines of business. Adjusted EBITDA flow-through for the quarter was approximately 37%. That is as reported and largely impacted by the acquisitions, so I will isolate where the core business came in for the quarter. On a pro forma basis, adjusting for BlueLine and Baker, flow-through was about 48%. Add to that the impact of WesternOne and Thompson Pump, which together added about $35 million in revenue and $10 million in EBITDA for the quarter, and you get to 57% flow-through. When we adjust for the impact of new and used sales and reflect the benefit of synergies from the acquisitions, that leaves you with a flow-through of about 52% for the core business. That was as expected for the quarter and points to a really good start to the year on cost performance. As for adjusted EPS, $3.31 in the quarter compared with $2.87 in Q1 of 2018, an increase of 15%, and that is primarily from better operating performance across the business, including the contributions of the recent acquisitions. Let us move to CapEx and free cash flow. For the quarter, gross rental CapEx was $257 million. That is about 12% of our full-year guidance at midpoint and in line with our 2019 plan. Free cash flow in the quarter, very strong, up 11% to $583 million. Just to be clear, that number excludes about $8 million in merger and restructuring payments. Our ROIC for the quarter, also strong, 10.9%, which meaningfully exceeded our estimated weighted average cost of capital. Year-over-year, our tax-adjusted ROIC was down slightly 10 basis points, and that slight decline is primarily impacted by the expected timing drag from the acquisitions. That is going to moderate as we get their operations more fully integrated and synergies from the deals fully realized. Let us take a look at the balance sheet. Net debt at March 31st was $11.6 billion. That is an increase of about $2.7 billion year-over-year related to the financing of the BlueLine and Baker deals. Net debt was down about $150 million quarter-over-quarter. Our total liquidity at March 31st was a robust $2.25 billion, and that is comprised mainly of ABL capacity. Leverage at the end of the quarter was 2.9 times on an as-reported basis. As a reminder, you have heard us say that we expect our leverage by the end of the year to be about 2.5 times, or the low end of our range. Finally, here is a quick update on the share repurchase program. We purchased $210 million of stock in the first quarter on our current $1.25 billion program, which puts us at $630 million purchased to date. We still expect to complete this program by year-end, and I will note that our diluted share count at the end of the first quarter was down about 6% year-over-year. As you have heard us say this morning, we delivered solid growth and good margins, as well as robust free cash flow. The operating environment is healthy, and our customer confidence measures remain positive. Our end markets are still growing, and demand is broad-based across our geographies and verticals. This strong start to the year positions us well as we move into the busier part of the year. We are tracking to plan and remain confident about 2019 as we reaffirmed our guidance. Now let us move on to your questions. Operator, would you please open the line? 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 would like to remove yourself from the queue, please press the pound key. Our first question comes from the line of David Raso from Evercore ISI. Your question please. Hey, David. Hi, thank you. Hi, David. Morning. Good morning. One operational question and one more about the balance sheet. In light of having to absorb that much fleet from the acquisitions, you got hit with weather a little bit during the quarter. If you think about the way the rates played out for the quarter, with that fleet utilization as challenged as it was, how is that coloring how you're looking out for the rest of the year? I'm just curious if you had known the fleet utilization was coming in at down 1.8 for the quarter as reported, how was that versus your expectations, and how'd you respond on rate? How is that coloring your thought looking at the rest of the year on rate and fleet productivity? I'm just curious to get an update three months later, how the first quarter is coloring your view on the rest of the year operationally. Hey, David, this is Matt. I think you bring up a great point, and I am going to talk about the 1.5%, the 150 bips pro forma, because that is how we think about the business. When I think about either one of those, the time utilization performance was much more. First of all, most of it was expected as we bought the BlueLine fleet in November. Normally, we would not bring in that much capacity in November as we are getting into the down season. We expected most of that. But the weather did amplify it a little bit. If it was demand based or if it was a concern that way, then I think that rate performance would have been even tougher. But I look at it as the team did a very good job of not letting the temporary time utilization drag from the acquisition impact or influence losing any discipline on rate. We are very pleased with that outcome. As you know, we do not forecast rate and time externally, but we internally have goals and markers, and I think the team did a good job of offsetting that extra time ute that was created by the weather drag with great discipline from a rate perspective. We are very pleased with that. Because we are all trying to figure out, we have to still assume some kind of rate, some kind of ute to get to a fleet productivity number. As the comps get a little harder on rate for the rest of the year, especially if you double stack the comps, just trying to understand if we will make our own assumptions about rate. Obviously, the time utilization sounds like something as you absorb the fleet, we get into seasonally stronger periods. You would think that the utilization drag year-over-year diminishes. Can you help us a little bit trying to think through fleet productivity when it comes to mix? Maybe this starts a trend in how you talk about the business. Can you help us a bit when we think about mix the rest of the year, how it could influence fleet productivity and the overall numbers? Can you just give us some examples or how the business is playing out, how you can at least position a better mix? Yeah. So obviously two of the big drivers in mix are rate and time. I'm sorry, not just in mix, it's in fleet productivity. But when you think about that mix component, sometimes it's just additive, but there are other times where it's actually influencing the other metrics. For example, if we grow specialty products more than we expected, that's going to be a drag on the time, but we'll get a positive offset to it on mix. So it's just hard for us to forecast. That's why we don't. These are all outputs. I would say that, as Jess said in her opening comments, we're off to a strong start of the year. We're on target, and for everything that's embedded within our guidance, and if you want to go on the margins of time a little bit worse, rate a little bit better, that's fair. But how that plays out into mix is really going to depend on what assets we end up growing with the remainder of our capital guide for the rest of the year, and what the customers need and how that changes. I'm not trying to be avoidant. It's just truly, those are all outputs from what we expect. The good news is we expect fleet productivity to be strong because the demand is strong, and that's the correlation I draw. When we look at the data that not necessarily that everybody sees anymore, we've seen 31 consecutive months of positive balance of supply and demand. That, with the overall market expectations that we have of strong end markets, we think will result in strong performance as we've guided. That's part of the question. I'm just trying to figure if something's changed in the last three months that's maybe changing your capital allocation, be it where you're looking to put more capital to work, even shifting fleet around the country geographically. Just trying to get a feel for how things could change a little bit from three months ago. But you're saying it doesn't seem like there's a notable change in how you think about mix and how that influences fleet productivity the rest of the year. That's all I'm trying to get a feel. Yeah, no. More specialty versus gen rent or vice versa. No, there's no change. To be frank, we said this many times, Q1's way too early and too small a sample set to have any change on a full year, either positive or negative. We feel that way today. We're happy to be on track, but absolutely no change to the way we're looking at it and what we've got embedded in our guidance in all of our metrics that we give. My other question about the balance sheet, the way you're targeting the end of the year at 2.5 turns. We can debate macro 2020 or not, but if we just assumed for a second it was still a decent year, it does appear it wouldn't be challenging if you applied most of the cash flow next year to deleveraging and you grow the EBITDA a little bit. It's pretty easy to see how you can get down to a 2 turn leverage. Given your midpoint of the target is still 3, can you give us some milestones to think about as the year plays out in discussions with the board, coming to a conclusion if that's still the appropriate target? Because at that stage, you're getting to be a bigger company. One turn in leverage is almost going to be like a $5 billion number. I'm not even sure the acquisition candidates out there you could add up to anywhere near $5 billion. Just trying to get some understanding, how do we think about milestones, discussing this with the board, things that we should be on the lookout for? All right. Hey, David, it's Jess. Yeah, it's a great question and a conversation that's very topical for us as a management team and also with our board. Let me say here that just in all the conversations that we also have with investors, we appreciate and we consider the feedback that we get from investors as well. As you noted, we expect we're going to finish 2019 at 2.5 times, and we feel really good about that considering the focus this year is going to include absorbing all that acquisition activity. As we look beyond that to 2020, and to your point, we can debate the macro, but as we look beyond that right now, it's really premature for us to make a call on how that could change our capital allocation strategy specifically. Between now and then, though, we will have a formal conversation with our board as part of our annual review of capital allocation. While there's no news to share right now, of course, obviously, if something happens, we'll share it. What I will say, even though it's not new news, it's good news. The balance sheet right now is in a really good place. Our debt maturity schedule's pushed out significantly. We're generating meaningful cash flow. So, the focus is going to continue to think about a capital allocation strategy that's going to be kind of both balanced and dynamic for us going forward. All right. I appreciate it. Thank you. Thanks. Thank you. Our next question comes from the line of Ross Gilardi from Bank of America Merrill Lynch. Your question, please. Hey, good morning, everybody. Hey. I just wanted to ask about, Matt, your comment that industry demand growth has exceeded supply growth for 31 consecutive months. If you could just give us a little bit of flavor as to whether or not that gap has been widening or narrowing over, say, relative to the last six months. I realize it's probably volatile month to month, but maybe on some type of take on a trailing average versus where we were, say, mid-year last year. Yeah, it's been really consistent really for the past four to six quarters, I'd say. As you acknowledged, in a month, you may have 10 bips here, 10 bips there, up and down. But when you plot it across the last year plus, it's been really consistent and strong, right? It's at a good level, and I think you're seeing that in the results. And I think it says a lot, just not about us, but about the industry's discipline, which we're very pleased with. Matt, just further on that demand versus supply comparison, can you give us some directional view on where industry supply growth is running right now on a run rate basis? I don't have the granularity of that data. But once again, I would just say the amount of equipment that's being absorbed versus the amount of equipment that's being purchased is in really good balance right now. So the spread is healthy. I think that's why you're seeing us and our peers report the results we're reporting, and I think it's really a positive sign, all underpinned by the demand environment, which has really been very broad as we've discussed over multiple quarters. Got it. Okay. Jessica, maybe just to follow up on the comments that you were just making before on capital allocation. Clearly the company is going through a lot of discussion, and you're talking to the board, and you got the AGM coming up and so forth. Can you give us any type sense of timing as to when you might get back to the market on any potential changes if there are any? Hi, this is Michael. Obviously, leverage and capital allocation is critically important for both the management team and the board of directors. Something that we actually spend a lot of time on thinking about, including getting investor input, as Jessica mentioned, about how to maximize our potential and to benefit our shareholders. Obviously, it's something that we are going through at the moment and be forthcoming in our upcoming board meetings. But obviously, there's nothing to announce today, but be assured that if something were, we would be definitely proactive in coming forward and making an announcement. So it's very much on our radar, and something that we'll tackle as a board with the management. Got it. Thanks again. Thank you, Michael, and best wishes on becoming Chairman of United Rentals and look forward to seeing you at all the events hopefully. Thank you. Take care. Thank you. Thanks, Ross. Ross. Thank you. Our next question comes from the line of Rob Wertheimer from Melius Research. Your question, please. Yeah. Hi, I had a question just on specialty, and it is, I guess, using Baker as a platform. Can you talk a bit about how your operational improvement, your toolkits, all the things you do to make businesses better have gone at Baker? Are they working just as well, or given that that is a little bit of an extension, is there less real improvement that you have bought? Then maybe if you could talk about cross-selling as well in that context. Sure, Rob, this is Matt. So in the scheme of things, it is still early, but I will say in the past seven, eight months, there has been a lot of work done. It is really not just Baker that the Fluid Solutions team is dealing with. They are dealing with Thompson as well. So what they are really working on is the consolidation of offering, not necessarily even stores, but the consolidation of offering to become a true Fluid Solutions provider. As I mentioned in my opening remarks, Thompson has added to that with some more expertise in sewer bypass and well point dewatering. So I would say the biggest change that we are seeing is the ability to enhance the go-to-market strategy. So we think that is going to be received very well by the end markets. As far as the tactical integration pieces, the team's been ahead of that, and as I said, most of that's underway. Now it's the go-to-market strategy. How do we get the customers to understand this new, and in many ways, unique provider in that space is really the strategic reason of why we did these deals and the opportunity ahead. We feel good about it. It's on target, but we think there's a lot more room on the customer-facing side to change the game. If you look at what you can bring to acquisitions, obviously in the core, general lines, you're exceptionally good at it. Do you feel like the value that you can bring in different fields within specialty or as you expand out in specialty is just as large, or does the end market have to be more attractive to sort of make the math work out evenly between the two options? We think the opportunity is large, right? So one of our core competencies is to take the relationships, the right of way, the goodwill that we have as a strong provider for our customers and expand on it. That's really has been a big part of the growth of our specialty business. As far as where and what is both opportunistic and strategically we have to make that build versus buy decisions every time that we look at a deal. But I think it's safe to say whether it's additional products or services in specialty or in other adjacencies of the business, there's a lot of growth opportunity for us and something strategically that we continue to evaluate. I'll stop there, except to say, once again, congratulations to all of you and to you, Michael, for a wonderful tenure. Thanks, Rob. Thanks, Ross. Thank you. Our next question comes from the line of Joe O'Dea from Vertical Research. Your question, please. Hi, good morning. Hi, Joe. First question just on CapEx. I think you touched the amount that you spent in the first quarter. It was a little bit lighter than what you'd normally do. I think if we go back over time, you normally spend at least 50% of the full-year CapEx, usually closer to 60% in the first half of the year, which would suggest something like $1 billion in 2Q. I wanted to get a sense of whether or not that's kind of a reasonable target or whether the spend plans for the year might shade toward the lower half of guidance. Sure, Joe. To be clear, the Q1 CapEx was a shade lighter than what you'd see standard, but that was really planned, and it was because of the BlueLine acquisition. As you can imagine, with working that extra capacity, which was very heavily aerial weighted, we didn't buy as much aerial in Q1 as we may have in past years because we had the extra capacity. That's just smart fleet management. Your number in Q2 is not far off the pace, and whether we go above or below that number, it will be directly correlated to how fast we move that extra fleet through the network. Overall, we have no changes to the full-year CapEx guidance. Within that range that we've given in CapEx this year, you could think about the faster we move the BlueLine fleet through, right? Then we'll be on the higher end of the range, and the slower we move it through, it'll be on the lower end of the range. It's really going to be responsive. We think that's how we always look at CapEx and no change to the full-year plan. The toggle there is really more around replacement spend and growth spend that presumably is still kind of in line with initial expectations. Yeah, that's fair. We're definitely in line with initial expectation. Nothing's changed from that perspective. The end markets are still there for the opportunities, and frankly, as specialty continues to show really strong growth, if there is extra capacity, that doesn't mean that they won't try to take more of the new CapEx because they have been very effective at turning it into growth and profitability. Perfect. Then just moving on to BlueLine and Baker. Two quick questions. One, if you could just talk about the cost synergy target for 2019 and how much of that was achieved in the first quarter. And two, if you could talk about BlueLine rate harmonization. Obviously, the timing of acquiring that maybe shifts a little bit of the opportunity set more into Q2, Q3 2019 for some of that harmonization, but just to understand what that looks like. Hey, Joe. Good morning. It's Jess. So what we have realized in synergies in the first quarter is about $16 million total between BlueLine and Baker together. And when we look at it on full year 2019, we're looking at something like $45 million incremental total. That's helpful. On the rates side? As far as the rates, as I said about really much of the integration and as you saw in the numbers Jessica Graziano just gave you as far as the synergies, most of the structural work's done, meaning territory realignment, customer harmonization. At this point, whether it's a Baker or a United legacy or a BlueLine legacy customer, we've got them all in our rate zones. We've got them all through our methodology of how we move suggested rates and opportunities and rate management through our sales teams. They're all one right now. It's probably structurally underway. As far as where the opportunity is, I think you've seen a little bit of it. You look at the pro forma versus the as-reported rate improvement. It was a little bit higher in the pro forma. That's a tip to the hat that the team's already started, and we think we'll see that kind of pace continue through the back half of the year when you look at pro forma versus as reported. Got it. Thank you. Michael, congrats to you and best of luck moving forward. Thank you. Appreciate it. Thank you. Our next question comes from the line of Seth Weber from RBC Capital Markets. Your question please. Hey, good morning, guys. Hey, Seth. Hi, Seth. Hey. Matt, I think you commented that you are starting to see there were some projects that may have gotten pushed due to weather here in the first quarter that are now restarting in the second quarter. I am trying to just tie your confidence, the confidence that you are talking to in the end markets against the ABI that came out yesterday that showed some softness, the first softness in a while. Maybe can you just give us any more detail on how much visibility you feel like you have and what is really supporting your confidence through the full year, frankly? Thank you. Sure. First and foremost, what gives us that confidence is the 1,200 touch points we have in our branch network with a couple of thousand reps that talk to customers every day. That is always going to be primary. Most every macro data point supports that feeling. Even within the ABI that was released, I think it was even noted in the report that they believe that it was due to weather. February was a tough weather month for us and for the industry and for job starts. We are not surprised by that. Also what came out this morning is the ABC's construction backlog indicator, which was up 8% month-over-month. In balance, we would say all the macro indicators are positive even in spite of the ABI number that just came out. We feel really good about it. Our customers feel good about it. As we have said before, we think we have good, strong visibility 12 months out, and that is because of our connection to the end markets and to our customers. I do not see anything that points to a concern within that visibility that we feel we have already had. I get the point about ABI and that one data set. We will see where that ends up in the oncoming months when the February weather hangover goes away. We still feel good about the end market. Okay, thanks. Then maybe just going back to the mix discussion. Is there anything you would call out there from an energy market perspective that is disproportionately helping the mix either from a rate or utilization perspective? Or how would you characterize energy markets at this point? I know you mentioned Canada. Anything else you could add? Thanks. I would call the energy market steady out, and certainly they did not have any impact on mix as far as the way we categorize mix. When we think broadly, the interesting thing about this last couple of years is that whether you look at geography, vertical, product lines, the growth has been very broad. There is no hot pocket we are relying on, and we feel good about that, and we are forecasting that to continue throughout the year and most of the backlog information and the customer information fortifies that. Okay. Thank you very much, guys. Appreciate it. Thanks, Seth. Thanks, Seth. Thank you. Our next question comes from the line of Steven Fisher from UBS. Your question, please. Thanks. Good morning, guys. Hi, Steven. Hi. Just on the flow through, curious what the expectation is that you have for the balance of the year. Should we assume that 60% is achievable on a quarterly basis, or will that drag from some of those acquisitions linger on for a little while? Hey, Steve. It's Jess. Yeah. When we look at the flow-through that we generated in the first quarter, it was actually a hair better than what we expected. If I go back to the conversation we had at Investor Day when we talked through full-year guidance, we still feel really comfortable that we'll be able to do something, give or take 60% on the core if I adjust for the acquisitions and for the synergies. Yeah, we feel really good about 60%. Okay, that's helpful. If you could just talk about your bid pipeline a little bit, particularly in terms of large projects. It seems like, maybe following up on Seth's question there should be some larger industrial projects that are taking shape at the moment. I know in the past you've also had some chunky CapEx put out there for specific airport projects. I'm just curious what your bid pipeline looks like for some of the larger projects at this point that you see coming over the next year. Sure, Steve. It looks robust. Our national account team and our strategic account teams, which are really the larger half of our account profile, backlogs are strong, and they're the ones that are going to be working on the major projects. LNG is still strong. There's still a lot of infrastructure work. Major capital projects remain robust, and it's coast to coast. There's strength throughout our network, and when you even think about some of the midstream work that needs to get done to help move some of the energy is really an opportunity for us, and we're very well-positioned with the contractors that are going to be doing that large work through our scale and through our broad footprint. Is there any particular timing that you see for some of those projects coming through? No, that's probably a little too precise for us right now. But I would say the pace of how our teams are building their revenue and what our expectations are for the year, which obviously informed our guidance, is on track. As far as where that moves, does Q2 get a little hotter or as expected? It's probably too early for us to say. Okay. Thanks a lot. Thanks. Thanks, Steve. Thank you. Our next question comes from the line of Tim Thein from Citi. Your question, please. Great. Thank you, and good morning. The first question is just on operating costs and how that is impacting the margins here for 2019. This point last year was more of a challenging backdrop in terms of pickup and delivery and some of the other operating buckets as you highlighted in the flow through bridge. Just curious, of the improvement that you have seen, how much of it is just maybe some loosening of the LTL capacity versus some of the things that maybe you've done internally to recover some of that inflation that you've faced? Hey, Tim. Good morning. I don't have that number isolated, but what I can tell you is as we looked at cost performance through the first quarter, we were very pleased. The performance came in pretty much as expected across those big categories of cost that gave us a little bit of heartburn first quarter last year, like delivery was one, and we had also talked about some higher overtime than we expected. So the team's done a great job in managing through that and managing through some of the integration work that we've had through the first quarter to stay really focused on disciplining costs as it related to, again, these big categories, delivery, repair, labor, costs like that. So there's nothing that we're seeing that we would isolate as being a concern for us as we're going into the busy season. Okay. Also just in the context of some fairly sizable percentage growth and not a huge driver for URI on the whole, but the ancillary was up quite a bit in percentage terms. So I guess I was just curious if there are things been done there that maybe are helping you recover some of the inflation. So a big chunk of that increase comes from better delivery recovery through ancillary, and that is really the recovery of the cost that you would see within the cost of rentals. There are two things going on there. One is that with the acquisitions, we have now modified processes, we have updated technologies. In bringing those businesses in, they are now using that same discipline that we have developed around delivery recovery being obviously an important part of our overall revenues. So that is part of it. The other part of it is that the team broadly continues to be really focused on making sure to have delivery recovery as appropriate across our sales. So it is good discipline, and it is bringing in those two businesses that is driving growth in that line. Okay. Got it. And just following back up on rates just in the quarter, were there any regions or geographies that stood out in terms of maybe being stronger versus softer? Just curious about any more, whether it is by geography or vertical, any more color in terms of just rate performance and how that, how does that likely inform you about the rest of the year? Tim, as you can imagine, this is Matt. As you can imagine, the rate follows the demand, right? And it was equally as broad. Every operating region had positive rates in the quarter year-over-year. So it should and did follow the demand environment as that is really the driver for the opportunity, and the team did a good job capturing that opportunity broadly. Got it. Thank you very much. Thanks, Tim. Thanks, Tim. Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question, please. Yes. Hi, good morning, everyone. I'm wondering if you can talk about. I'm wondering if you can talk about the Total Control rollout on the acquired businesses and BlueLine. What's the timing? As we look at Total Control now, it's a quarter of your business. Five, six years ago, it was half that. As we continue with the migration towards more customers using Total Control, I guess, what are the implications for the margin profile for your business? Can you just step us through that opportunity set, please? Sure, Jerry, this is Matt. I would say that most importantly, the team responded quickly to those customers that Baker was doing business with that were already on Total Control. The first step was to make sure that we got those assets integrated in, and that took some work, and I do not want to get into the details. Part of that work actually has to happen on the customer's end as well, because they built processes for each of their vendors, so they had to morph that over. In the BlueLine deal, you had a little bit of it as well. More influenced by Baker than BlueLine, but certainly an opportunity for us to continue to be a full provider to those Total Control customers. I would not say there were any material changes, especially when you look at it on a pro forma growth. What I would say is broadly, regardless of integrations and acquisitions, we continue to get further adoption and usage of Total Control as a tool to help our customers solve productivity issues. That is always what it has been built on, and as we put it along our footprint and get more and more of our employees and therefore customers educated on the opportunity, that is how we have driven that growth in Total Control. Matt, could you comment on part of the question related to the margin opportunity set? Obviously you are getting benefits of digital transactions and also better customer stickiness as the Total Control part of your business grows. Can you just address that part of the question in terms of the opportunity set if we are sitting here in five years and it is 40% of your business, can you just help us understand what that means from a margin standpoint? Yeah. Neither one of the digital channels or any kind of automation is really done from a cost to margin perspective. It is really done for meeting the customer where they are. The customers that want to interact with us in that way, we are going to support that, and that is why we are building the digital platforms that we are. So we do not see this as huge margin accretion opportunity as much as the other half of your point, which was accurate, is the stickiness, right? We have got to transact with the customers in the way they have built processes and comfort in transacting, and that is more of why you will see us do that. What it does give us the opportunity to do is maybe reach some broader customers that we were not reaching before because technology gives you a wider net to cast. I'd say it's more from that perspective than a cost to margin translation. Okay. Thank you. Your used pricing, you mentioned at retail was up 5% in the quarter, which is really good performance compared to what we're seeing for the industry overall and at auction results. Can you just talk about what you're seeing in the used market? Is the soft spot really just tier 4 equipment that you're now not transacting because all of your sales are tier 3? Or can you just talk about your views of the used market and how you folks were able to deliver such better retail sales performance compared to what we're seeing in the channel? Sure. This is something that we've been very proud of and that we've worked hard on to build over multiple years. This isn't a new thing for us. It's that our sales folks are involved in retailing equipment. We have a firm belief that we want to solve all of our customers' problems. Just because we're a rental company, if a customer wants to buy a piece of equipment, we've got good quality, well-maintained used equipment to sell to them, and we use the retail channel to do that. I think that is the single biggest differentiation between our margins and those that don't do that. Even with any auction results, you see dirt was a little bit of a drag, but you look at the aerial products, reach, they were still pretty strong. I don't see tier 4 as the big mover here. I see this just strictly as our channel and the products we sell giving us a good opportunity to keep margins strong and pricing strong. Sure. I appreciate the discussion. Michael, congratulations. It has been quite the decade. Matt, congratulations and best wishes as you formally take the CEO seat. Thanks, everyone. Thanks. Thanks, Jerry. Thanks. Thank you. Our final question comes from the line of Chad Dillard from Deutsche Bank. Your question, please. Hi. Good morning, everyone. Good morning. Hi, Chad. I just want to tie a couple of data points together from the call. It sounds like you guys are seeing some push out of activity from Q1 and Q2 that impacted your utilization. Also it sounds like there may be a little bit of catch-up CapEx, kind of like your seasonally normal CapEx schedule. Against that backdrop, how should we think about the cadence of fleet productivity as it goes through the balance of the year? Chad, this is Matt. I just want to correct one thing in case we misspoke or you misheard. The slower time utilization in Q1 was primarily due to, we did the second biggest acquisition in our history in November, which is going into the seasonal down curve of demand, period. Not macro activity, not anything like that, just working that fleet through and all the other integration processes that are normal for us. If we could have bought that fleet in April, you wouldn't even see it. But we had the opportunity to buy it in November. By the way, we'd do that all over again. We're very pleased with the BlueLine deal. That's what we did, the two things that you referred to, dampen time utilization, which we expected in Q1, and we'll see that play out through the first half of the year, and a tick down, maybe $20 million-$25 million less capital spend than we would have had we not done that deal. I just don't want anybody misunderstanding, think that we were blaming that on activity. We think the demand is robust, and we'll just work that through the system. I just wanted to correct that. Then as we think about fleet productivity, as I said in the earlier point, I think it was Ross who might asked a question earlier, or David, the fleet productivity metrics and output. Not any more than we could forecast rate or time, which are the two biggest inputs to fleet productivity, will we be able to have the ability to forward forecast that metric. But we do think that demand environments and what's embedded within our guidance will net us positive operating metrics, and we'll report them accurately as we get through the quarter. Got it. Okay. Also, can you give us your updated thoughts on your philosophy, anchoring decision on whether to potentially implement a dividend? By the end of the year, you'll be at a lower end of your leverage target, and sounds like M&A will probably more tuck in rather than large transformational. So just kind of like help me think through where could the balance of excess cash go between maybe dividend or more buyback. Hey, Chad. I'll actually come back to the question that David Raso asked and my answer around there's really no new news for us right now as far as changes to our capital allocation strategy. As we continue to have conversations internally and with our board about that, and we consider dividends as just one part of an overall strategy, we'll obviously update everyone accordingly. Great. Thank you. Thank you. Thanks, Chad. Thank you. This does conclude the question and answer session of today's program. I would like to hand the program back to Mr. Kneeland for any further remarks. Actually, operator, this is Matt, and I just want to thank everyone for joining the call and remind you all that our Q1 investor deck is available for download, and it has some really good information on much of the stuff you asked about today, fleet productivity. That is worth a look. Please reach out to Ted Grace, our head of IR, if you have any questions, and I look forward to sharing more of our progress with you in July. With that, operator, please go ahead and 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.