M&A announcement

Jul 2, 2018

Slides

Afternoon, and welcome to the United Rentals Investor Conference Call. Please be advised that this call is being recorded. Before we begin, note that the company's press release comments made on today's call and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the company's press release. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31, 2017, 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 of subsequent events, circumstances, or changes in expectations. You should also note that the company's press release, investor presentation today, 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 company's recent investor presentation to see reconciliation from each non-GAAP financial measure to the company's comparable GAAP financial measures. Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer, William Plummer, 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, thanks, operator, and good afternoon, and thanks for joining us on such short notice. As you saw this morning, we have exciting news to share. This past weekend, we signed an agreement to buy BakerCorp, a leader in the fluid solutions market. It's a cash deal for approximately $715 million that we expect to close this quarter. We're going to keep the prepared remarks brief to leave time for your questions. You've all seen the release, so we'll focus on adding as much detail as we can. I'll start with the strategy, and then Matt will share his thoughts on operations. After that, Bill will run through the key numbers. We have Paul McDonnell joining us for Q&A. As many of you know, Paul leads our specialty operations. Before I begin, I want to mention the other important release we put out this morning. It announced Bill's planned retirement in October and our choice of Jessica Graziano to succeed him as CFO. Bill, as you know, has been instrumental to our growth as well as the architect of our strong financial team. He's also been the voice of our financial vision for the past 10 years and a tremendous partner for me personally in the execution of our strategy. We're fortunate that Jessica will be stepping into the role from a leadership position on our senior team. She's been a key part of our finance team for nearly four years, and as many of you have seen firsthand, she has an excellent understanding of our strategy and financial operations. Bill will be with us for the balance of the year to ensure a smooth transition, but today is the opportunity to give him a heartfelt thank you for his many contributions to our company over the last decade. Turning to the acquisition, we are excited about this deal. Once again, we found a great fit for M&A, and this time it is in our specialty segment. Baker is a leader in the North American market for fluid solutions. This is the same sector that we operate our Pump Solutions business, but with a broader scope than we offer now. Our acquisition of Baker will establish United Rentals as a leader in fluid solutions in North America, and we are making a strategic investment in one of our fastest-growing specialty businesses, opening the door for a wider marketplace for us. At the same time, it is core to our business because it builds on our current platform. Our press release laid out a strong rationale for the deal according to the three-part test for M&A: strategic, financial, and cultural. I am happy to say that Baker passed every test. In addition, we have identified ways to enhance Baker's already strong customer-facing operations, and Matt will talk more about that in a minute. I will not reiterate everything you just read, but I want to spend a minute on the geography because I know that is of interest. The main attraction for us is Baker's expansive network and market position in North America. At the same time, we will be establishing a toehold in Europe with operations in France, Germany, the U.K., and the Netherlands. Baker's European branches are focused on tank rentals, where we see significant opportunity. We are growing the core to serve customers better, which has always been a key strategic goal for us. We see this as an excellent use of cash to build long-term value for our investors. Culturally, we couldn't ask for a better fit. We are gaining a great team, a culture that is very similar to our own. We both have strong safety records and a customer-first business philosophy. We know from experience how important culture is in making an integration a success. Our values will dovetail from day one, and at the same time, there is a lot we can learn from each other to accelerate our growth. Now I will hand it over to Matt for his thoughts on the operations. Matt, you are on. Thanks, Mike. As we have said in the past, we are our own toughest customer when it comes to M&A. Mike just commented on the cultural fit, and Bill will cover the financial aspects of the deal. I would like to spend a few minutes on the strategic rationale for buying the Baker operations. This acquisition is compelling on a number of fronts. As always, when evaluating a deal, we ask ourselves: what are the big levers for value creation? In this case, the answers are market position, scale, and cross-selling. Baker serves the same construction and industrial markets that we do, and their expertise is complementary to what we offer today. Our current Pump Solutions business is one of the fastest-growing networks in our specialty segment. With Baker, we can build on our leadership position and become a major player in the broader market of fluid solutions. That is good for our customers and good for growth. In addition, Baker has developed comprehensive bundled solutions for fluid storage, transfer, and treatment. This offering will click right into place with our current specialty network. In short, we are accelerating our market position and density in a core competency, and in a way that would be very difficult to achieve organically. Additionally, we are entering Europe in the process. That is a synopsis for the growth rationale. Now let us talk more about the customers. Baker has over 75 years of experience under its belt, and during that time, they have earned strong relationships with blue-chip customers in construction, plant maintenance, environmental, and oil and gas. Almost 45% of Baker's revenue comes from the rental of the complex end-to-end solutions I mentioned. We do some of that now, but not to the same extent. This is going to be an exciting addition for many of our strategic accounts. We will be serving a large customer base with an offering that creates value in our customers' relationships with United Rentals. Baker is already a market leader for fluid solutions in a range of verticals, and they have reduced past volatility by limiting their exposure to the upstream oil and gas. Their fleet categories, in general, have durable life cycle, which helps with our CapEx needs, and their utilization is trending upward. The M&A presentation on our investor site contains more detail about their end markets and their equipment mix. Baker will be coming on board with a lot to offer, and we believe that we can accelerate top-line growth, improve the margins, and enhance the customer service through access to our technology and operational infrastructure. We also expect to leverage cost synergies from the combined scale. We see significant opportunities for revenue growth and customer service through cross-selling and re-rent conversion, meaning we will be able to reduce our reliance on outside suppliers for certain types of equipment. Very quickly, you will see the acquired operations become a cornerstone of our growth strategy for specialty rentals. It is a pivotal step towards the goal we set two years ago, which is to grow our specialty operations to at least $2 billion in revenue. One final point, the acquisition leverages another one of United's core competencies: M&A integration. As you know, we undertook two large-scale integrations last year in Neff and NES, and both went exceptionally well. We will be using a similar playbook with Baker, slightly tailored for their operations. For example, we expect to put all of the acquired branches on our rental management technology early in the process to start harmonizing data and customer groups, and most importantly, encourage cross-selling. Once the deal closes, we will provide future updates. For now, I can tell you that we like what we see, particularly with the Baker team. They are top-notch professionals and very good at what they do. We are excited to welcome them to United Rentals. When we say we are very bullish on the deal, what we are really saying is we believe strongly in the value of the combination for all the reasons that we just outlined. It is a very good match. With that, I will turn the mic over to Bill for an overview of the transaction, and then we will move on to Q&A. Bill? Thanks, Matt. Thanks, Michael, and good afternoon to everyone. Before I dive into the financials of this transaction, just a personal comment on my retirement announcement. It is a very bittersweet announcement. I have been honored to be part of this team for closing in on 10 years, and have been very proud of everything that we have built here in transforming the company and building the team. That is all going to be hard to leave behind, but I am also excited about what that might mean for the next phase of life. I am not going away just yet. As you saw in the announcement, Jessica will assume the CFO role in October, and I will be around until the end of January to finish out the fiscal year. We will have plenty of time to talk more about me and my retirement. Right now, I want to focus the discussion on BakerCorp. As Michael and Matt have said, this is an exciting deal for us. We are paying $715 million in cash for a business that is generating just under $300 million of revenue on a trailing 12-month basis, and just under $80 million of EBITDA for a 27%, or slightly under 27%, EBITDA margin. We are excited partly because of what we think we can do to improve that margin, and excited because the investment level that it takes to buy the business and to make the improvements that we want to make gives us an attractive return opportunity with BakerCorp. We calculate our internal rate of return on this transaction at something in the very high teens, which is obviously a significant margin over our cost of capital. If you think about the returns in terms of a return on invested capital metric, that ROIC will be nicely above our cost of capital within three years. From a return perspective, it is exciting, and it really gets us charged up to go out and deliver the model that we put together, the performance that we put together over the next number of years in this business. The purchase price multiple on those stats is about nine times trailing 12-month EBITDA, but that does not include the impact of our cost synergies or the impact of the tax benefits that will come along with the deal. We are identifying about $19 million a year of annual cost synergies that we think will be realized by the end of year two. On the tax benefit side, the present value of the tax benefits acquired here, we calculate at about $60 million of net present value, and those benefits will come to us over the first several years of the transaction. If you net out the synergy impact and the tax benefit, our multiple nets down to something like 6.6 times, which we think is an attractive multiple for a business that will offer the growth profile and return profile that we expect. Cross-sell is going to be an important part of that. As Michael and Matt have mentioned, we estimate our cross-sell impact of something in the neighborhood of about $60 million over the first three years. Again, it's in a customer segment and with a set of products and services that we think are very much within the wheelhouse of United Rentals. From a more specific financial perspective, the impact of this deal on our EPS will be accretive, and that'll happen over calendar 2018. The second half of the year, we expect this to be accretive to our adjusted EPS from all the performance that we've noted so far. The funding for this deal will be pretty straightforward. No need for an underwritten long bond issue. We're going to do it from our asset-based loan facility. There's plenty of capacity under that facility to do this deal, especially given the strong free cash flow profile of the core United Rentals that we're on a pace to deliver this year. So fairly straightforward financing, and it will leave us in a position whereby at close, our leverage will be about 2.7%. Excuse me, 2.7 times. By the end of the year, that leverage ratio, net debt to EBITDA, that leverage ratio will drop to about 2.5 times again by year end. All of that is very manageable, and as we look at the business, we don't think it requires any significant change in how we're thinking about anything that we do with United Rentals in 2018. In particular, regarding the share repurchase program, we're going to continue our share repurchase program. We don't think there's any need to pause in the case of this transaction, given that the integration effort here is significantly less than it was for NES and Neff. We continue to expect to execute the share repurchase program, the $1.25 billion new program that is, by the end of next year. I'm going to stop there with my comments, but certainly would be glad to address any other specifics on the deal in Q&A. I'll ask the operator to open the call for questions. Operator? Thank you, sir. Ladies and gentlemen, at this time, if you would like to ask a question over the phone lines, press star and then one on your telephone keypad. If your questions have been answered and you wish to remove yourself from the queue, simply press the pound key. Our first question will come from David Raso with Evercore ISI. Your line is now open. Thank you. Good afternoon. A quick question about the ending net debt to EBITDA for the end of this year, the 2.5x. That will be the lowest level in over, I guess, 10, 11 years. Can you update us, especially assuming you have been out kicking the tires a little bit in the M&A market, coming to the conclusion of this deal? Give us an update on how you are thinking about the leverage going forward, use of cash flow and balance sheet post this deal and post year end. Absolutely, David. 2.5x is a very low level for us, especially given the strength of the business, the momentum that we see in the business right here and now. We believe that positions us very well for other significant cash transactions. In particular, any of the Gen Rent opportunities, I think, are very much within our capacity to execute. Certainly any of the specialty opportunities that may be out there, we could execute as well. We have talked about it in the past, right? We think 3.5x is sort of the top of the range in normal times, but we are not afraid to go higher if we think there is a path for paying the leverage down after an acquisition to something within that range. Even after this deal, we will be very well positioned to do that. I'll add, even after this deal and completing the $1.25 billion repurchase program that we're on a pace for, we'll be well positioned to do any other transaction that comes along. Certainly you can throw out specifics if you want, but as we think about the landscape of possible additional transactions, we're very well positioned. A quick question about Baker directly. The adjusted EBITDA margins, where would you expect them to be, say, 2, 3 years from now? I know you put out some synergy numbers for the top line, obviously some cost out as well. Can you give us some milestones to think about on EBITDA margins a few years out? Yeah. Without being too specific, David, I'd say that 27% is a territory we're not familiar with in terms of margin. Our expectation, our model, and our actions will be focused on moving that margin materially higher. We feel very comfortable that we've got opportunities to do that. There's an interesting question about how high the margins need to go. Keep in mind, the level of investment relative to the revenue and profit that this business generates is higher than what we normally think of in the GenRent side of our business. So the margins don't have to go quite as high as the rest of United Rentals in order to make for an attractive return. Our returns are in the high teens here, with margins moving up, but they don't move up, quite honestly, quite as far as where the base business is today. That's because they don't need to deliver the return. So we're going to be driving toward margin improvement. We think the opportunities are very concrete to do that, and time will tell, but we feel very comfortable about it. The European business you are getting with the deal, can you just expand a little bit on how you see that business moving forward on the build-out or lack thereof, or just how you are thinking about it, given it is a new geography for URI? Sure, Dave. This is Matt. We like the entry into Europe to learn a little bit. Probably more importantly, we like what a strong business it appears to be. We got a chance to meet with the VP that operates that business, and a very capable, strong leader, and we have had boots on the ground at their facilities in Europe, and they have got a very clean, well-run business in Europe. We are going to move slowly, and we think there is enough growth opportunity in the existing fluid solution space that they are operating in. I would not expect us to start dumping GenRent fleet into their facilities in Europe. But we think this is a great opportunity over the next year or so to learn about the end markets, and not only that, take advantage of the growth opportunity in the space that they have built. But we are pleased with the European business that they have. Yeah. Echo that, and just what I would say is, there is not a better opportunity for us to step outside of North America than what this European part of Baker represents, right? It is of a scale that is not a significant impact, no matter what happens to the overall company. It is a business that has been growing nicely. It is a business that is in attractive margin and return characteristics. There is a structure there to help manage the business, so that there is expertise on the ground from day one. All of that fits very well and makes the European part of this acquisition a nice addition to what is overall a very attractive transaction. All right. I appreciate the time. Thank you. Thank you. Great. Thank you. Thank you. Our next question will come from Tim Thein with Citigroup. Your line is now open. Hey, Tim. Great. Thank you. Good afternoon. Bill, back to your comments on returns at Baker. Can you just clarify from a CapEx perspective, what are we looking at here in terms of an annual replacement CapEx, maybe relative to the 60-odd million of D&A? Is that a good way of thinking about it? Or any help there? Yeah, no. I think the better way to think about it, Tim, is just the assets that we're acquiring here have a life expectation of 25 to 30 years, right? So if you just look at it from that perspective, on average, you're going to be replacing 4% or 5% of the assets each year. I think that's a reasonable expectation for an ongoing maintenance level of CapEx. That's part of the attractive return characteristics here. We'll be investing a little bit more than that early on as we support growth in the business as well. But from a maintenance perspective, that low level of replacement really does give you a nice foundation for generating attractive returns. Okay. Does that help? It does. Thank you. Yeah. On the cross-sell, the roughly $60 million of annual cross-sell revenue opportunity by year three. If you are willing to disclose it, what do you see in terms of today? You said that the total cross-sell revenue opportunity. Any help there just in terms of that, just helping to frame that $60 million annual number? Well, I will not break it down too granularly, but feel safe to say that between adding some of the new offerings to our existing customer base that Baker brings, we have done pretty good in the fluid transfer. But now adding containment and treatment opportunities, we think will do very well with our key strategic accounts, specifically in plants and petrochem. Additionally, we think there is a lot of opportunity for us to cross-sell our much broader offering into some of the relationships that 76 years of being in business that Baker brings to the table. So that is the philosophy. We feel comfortable with that number, or we would not have put it out there publicly, and I would hope the team would actually be able to overachieve. Okay. Matt, do you have a sense of the 4,800 customers? It is early days, but any sense for what the overlap looks like maybe of their top, say 150 or 100 customers and URI? Yeah. Any overlap, or? Overlap in that we actually do business but not in product. Obviously any company that we buy at this point with our breadth, there's always going to be a significant amount of overlap if you exclude out the European business where there's none. But when you think about what products, there's a lot of product cross-sell still, even within those customer sets that overlap. Okay. All right. And Bill, congrats as well to Jessica Graziano. Tim, thank you. Next question. Thank you. Yes, sir. And our next question will come from Courtney Yakavonis with Morgan Stanley. Your line is now open. Thanks. Just on the cross-sell again, just wanted to make sure. Does any of the $60 million opportunity that you guys have outlined include any cross-sell into Europe, or would that all be incremental? It will not be cross-sell into Europe. Okay. Future opportunities, possibly one day, but not what we have been discussing so far. Okay, perfect. Then just on the margins, I think you said 27% is not something you are used to seeing. Can you just comment a little bit on why the margins were so low at BakerCorp? Do they have a lower utilized fleet? Do you feel like there is too many stores? Are you expecting any store closures as a result of this? Just try to give us a little bit of a sense for where some of these opportunities will come from. Maybe I will start, and Paul, maybe you can chime in as well. From a conceptual standpoint, to the point we talked about earlier, the level of investment needed to generate revenue and profitability here is just lower than what we are accustomed to in the Gen Rent side of the business. To get a return, you need less investment, and therefore margins can be lower in the business overall. I will let Paul address the specifics of BakerCorp if he wants to add anything about where the opportunities to improve margin might lie. If you are out there, Paul. Yeah. I think as we think on a go-forward basis, the opportunity to add additional products and services to what BakerCorp does today. For example, filtration is a part of their business that is more profitable than other parts of the business. As we think about scaling the business, filtration is an attractive investment for us. And Pump Solutions. As we leverage the BakerCorp relationships to cross-sell our pumps into their customer relationships and bundle a total fluid solution with filtration tanks and pumps, we see an opportunity to improve the margins. Thanks, Paul. Great. Sorry, just one last one on the oil and gas exposure. I think you said BakerCorp has about 8% to oil and gas. Just want to understand if that is specifically to upstream, and then if you can just comment on how your pump business as a whole will look coming out of that with its oil and gas exposure. That is specifically to upstream, and that is down from 23% at basically their peak. As far as for our Pump Solutions business, we gave you that number in Q1, now I got to remember. Overall, for the overall business, it is about 6% of United's business. This will not meaningfully change that. Obviously, it is relatively small scale, and it is only 8% of their business. But those are numbers that we have been giving out as far as upstream oil and gas exposure. This does not change that profile at all. Okay, great. Thank you. Thank you. Thank you. Thank you. Our next question will come from the line of Rob Wertheimer with Melius Research. Your line is now open. Hey. Just a bit curious on, as you look at acquisitions, how this one lines up against Gen Rent on near-term accretion/returns versus long-term potential. Is it lower near term and higher long term or not? Did you view it as an either/or versus other potential things in the pipeline, or do you feel like you have the ability to execute? Bill was fairly clear, but do you have the ability to execute on incremental opportunities if they arise even this year? Yeah. Just the last question first. Absolutely we can execute on anything else that we reasonably would consider, and we could do that tomorrow if we needed to. I think that's a key consideration that guides our thinking about the capital structure overall, and we're putting it into practice right here and now. So we're well-positioned there. In terms of short-term versus long-term view of this business, again, if you want to judge a deal on accretion to EPS, it's accreted right away in this calendar year. But we think long term, the opportunity is very robust. $60 million of cross-sell, and the improvement in margin that we got factored into this deal, I could argue is only accessing part of the opportunity that's in front of us. So, we see that longer-term attractiveness. We match it up with the short-term attractiveness, and it says, "Go do the deal." So we did. I don't know if you want to add anything to that. No, I think Bill covers it well. We feel good about this deal, both near and short term, and the potential for what a fluid solutions comprehensive business could look like in the future. This meets with our goal of growing specialty. Perfect. Then maybe if you, Bill, you touched on this also. The margins may be a little bit lower, asset turns a little higher into a very attractive ROIC. Structurally in how this business works, can you just maybe just describe what that means? Does that mean that you actually have assets sitting out there consistently on rent more often, so there's less volatility through it? Or is it just that you pull assets in and out, and they just longer live because they don't have the same moving parts? I'm just a little bit curious about how that statement plays out in the real world. Then I'll stop. Thanks. Yeah, no, I think it plays out in that whatever the level of utilization turns out to be, the revenue opportunity and profit opportunity underneath that is just attractive for the assets. The value to the customer is attractive enough for them to generate revenue that results in attractive return. We think that we've got an opportunity to drive improvement in the utilization of assets. We think that we've got opportunity to access and invest in even more access, and just grow in an absolute sense. All of that is part of how we get to the attractive returns that I described. So it's the overall balance of value provided to the customer against the amount of investment and the amount of expense that you have to incur in order to deliver that value. It all works to make it a fairly attractive business, if you work it right, if you manage it right. We think we will. Thank you. Congratulations, Bill. Thanks, Rob. Thank you. Our next question will come to the line of Ross Gilardi with Bank of America. Your line is now open. Yep. Yeah, thank you. Good afternoon. Hey, Ross. Hey. Look, you guys now have got a $1.5 billion specialty rental business on the way to, looks like $2 billion plus if you factor in this acquisition, you exceed your objectives. You look at the public valuations out there, the multiples for some of these specialty rental companies seem to be significantly higher than where your stock trading is. What I'm asking is, obviously you guys are growing the business now, but longer term, is there any thought being given to carving your specialty assets out at some point? And really, are they even carvable, or are they too integrated with the rest of your Gen Rent business? Yeah. Hey, Ross. Maybe I'll start, or maybe I should ask my boss to start. I don't know. Maybe that might be a smart thing. No. Go ahead, Bill, and I'll chime in. Yeah. No problem. We certainly are focused on growing the specialty component of our business as rapidly as we can. We have not had serious discussion about carving specialty out. We believe that it is very valuable as a part of the portfolio of United Rentals overall. There are lots of customer overlap, and delivering value to those customers in a broad range and comprehensive way is an explicit part of the strategy. It works. It works for the specialty side, and it works for the GenRent side as well. No explicit discussion about carving specialty out. Certainly, we are focused on growing specialty as a component of our business overall. You have seen us do that fairly robustly, and that will continue as we go forward. Michael? The only thing I would add is that, I would like to see it, at some point, as we grow this business, that we get revalued as we go forward. I think the more important point is that this is a United Rentals that is focused on returns. It is focused on being diverse products and diverse customer base. We understand we are patient to go through whatever cycles come our way to prove our point that we are a very different company than where we came from. It is not just GenRent, it is more focused around the customer and about profitable returns and growth. I will just add, so you could hear from all of us, and then we could have Paul really go on a rant on this. I just think at this point, specialty is core to us. To even think about going to our products with an incomplete value prop, it is no longer part of who we are anymore. That is the way the market looks at us as far as the end market of our customers. We do not want to diminish that in any way, shape, or form for any level of monetization. It is integral to what we do and who we are to our customers. I do not know if Paul was going to add to that, but I guess you guys have made very clear that there is no intention right now, but are these assets even carvable? Purely hypothetically? Or are they just too integrated with the rest of your GenRent business? Yeah. I think the success, I'll talk to Ross Gilardi, in terms of the products and the integration. Obviously, one of the benefits that we've had with the build-out of specialty is we haven't necessarily homogenized the businesses in terms of products. So each business kind of stands on its own, and that's one of the benefits with fluid solutions. You think about a business that can deliver complex end-to-end solutions with that institutionalized knowledge and experience to solve customer problems. But leveraging our sales organization, leveraging our national and strategic account sales to be able to solve customer problems in different industries and different verticals to customize a solution, is really what's been the success of cross-selling and kind of how we think about go to market and how we kind of think about winning with the customer. As William Plummer mentioned, it works. It works for specialty, and it works for GenRent as we think about a more integrated solution for customers. Got it. Thank you. Thanks, Ross Gilardi. You are welcome. Thank you. Thank you. Our next question will come from the line of Joe O'Dea with Vertical Research Partners. Your line is now open. Hi, good afternoon. First, just on specialty and the target to get to $2 billion of revenue by 2020. It looks like at this point, if we factor in the revenue synergies from Baker, that you could get there with high single digit organic growth. Just in terms of kind of where your plans are, where your thinking is around the importance of getting deals done in order to hit that $2 billion versus this is now something that is very much within your control and not something that is dependent on timing of deals being available. Yeah, I think from here, it is very much within our control. That does not mean that we are not looking at more acquisition opportunities, right? Acquisitions have been an integral part of how we have thought about growth just overall in the business, and it will continue to be. If we need to raise our targets because we got there too quickly by doing deals, that is okay. We are very comfortable raising targets around here. Acquisitions will continue to be very important part of how we think about driving the business go forward. Joe. And then, I guess just to understand a little bit in terms of margin potential, when you talk about 25 to 30 year life of assets, does a lot of it come down to some constraints just on kind of rent versus buy for customers? I think there are specialty assets that generate EBITDA margins in the mid-40s. Just trying to think about something where the potential is below that. What are the moving pieces that create constraints on exactly how high these margins can go? Yeah. Sorry, Joe, ask that question to me a different way. I'm- Yeah. Well, I'm just thinking about like power and HVAC. If we think about those margins should be somewhere in the mid-40s. I think trench probably not far behind that. Pumps that maybe somewhere in the high 30s, I don't know. But then, thinking about a business where, with cost synergies, you're talking about getting into the low 30s. I'm just trying to understand what the constraints are on getting Baker margins toward other specialty margins you're generating. Is a lot of that just a function of it's very long life equipment, so rent versus buy economics are different? Yeah, I don't know that I'd say it's rent versus buy economics as much as it is just economics overall, right? From a customer perspective, there's a certain value that they get from using the equipment that we'll be offering with this fluid solutions approach. That sets the price point at which they're willing to transact, right? They're willing to rent the equipment, and engage us at a certain price point. The question is, underneath that, can you offer that service at a level of expense that leaves a margin, which when compared to the cost of the capital you put into the business, is an attractive return, right? So the constraint is the return on the investment that the suppliers have to make. If that return is attractive, even at margins that are lower than legacy United margins, then it's all good, right? It's a deal that you'd want to do. By the way, you mentioned low 30s percent margin. We didn't say exactly what our target margins are, but it's a nice enhancement over where we are today. Most importantly, we're going to improve the margins to a level that makes the return on the investment more attractive. That's the key. To the extent that's a constraint, it's one that we're going to be working on as we go forward. Is it tanks within the Baker portfolio that would be the margin drag, if you will? That would be the lower margin kind of asset? The tanks would be the less complex part of the sale, as opposed to when you make them part of a whole fluid solution. That's when you'll get your higher margin deals, certainly. Got it. Thanks very much. Thanks, Joe. Thank you. Our next question will come the line of Seth Weber with RBC Capital Markets. Your line is now open. Hey, good morning, guys. Hey, good morning. Hi, Seth. Hi. A couple of just tie-up questions here. The oil and gas exposure has been as high as 23%, and are you consciously going to pivot this business away from oil and gas? It's about 8% today. Where do you kind of think that that would level out at as part of this revenue ramp, kind of up to that $830 million level? Do you need oil and gas to become a bigger percentage of the business versus the 8-ish percent today? I'll let Paul answer in a minute, but we don't need to pivot any further away from oil and gas. As you can see, we've even grown our oil and gas exposure a point or two over the last year as opportunities have been there. I think it'll be more managed growth in the space, but I also don't think the demand in the space is as high as it's been. So some of it will happen passively. We won't even have to be too active about it. But I think there's many other verticals, which I'll ask Paul to touch on, where we could fill our growth goals very comfortably. So Paul. Yes, Seth, I'd actually point to, I think it's slide 8 on the investor deck. If you kind of look back with Pump Solutions, we successfully grew that business across multiple verticals in the face of a sharp downturn in upstream, by cross-selling and focusing on a more diversified mix of revenue. Even as upstream revenue decreased 13% in 2014 through 2017, other verticals were growing at up to 60% per year. So that led to an overall increase in our Pump Solutions growth of $100 million during the same period. We really plan to use a similar playbook with Baker, and utilize United Rentals' unique competitive advantages to grow their business across all verticals. Right. Okay. That's helpful. Thanks. Just so I'm understanding this kind of this discussion about solutions, 44% of revenue comes from solutions. Maybe a little bit more detail on what that involves, and where do you see that number going to, I guess, over the next two, three years? Go ahead, Paul, please. When you I don't quite understand the question. 44% of- I think you said 44% of Baker revenue comes from some sort of bundled solutions business, or I'm just trying to conceptualize- Yeah. - what you mean by that, and where do you see Does that number go to 50%? Is that sort of where you're- Yes. That's a differentiated story here. Not breaking it down specifically across each of the product categories, I would just say that the focus strategically is to be able to combine fluid transfer, which is what we do today in our core Pump Solutions business, with fluid storage and fluid solutions to provide that total solution offering across each of those product categories as we build out the business. On a blended mix, as we look at our pump business and we look at our filtration margins, are higher than the tank business as a standalone business. Even though tanks is a standalone business over the life of the asset or in attractive return, as we're thinking about building out the business, we want to complement the great job that Baker's doing today with building out a more diversified mix. What that number is as a percentage, so that we're kind of working through that modeling as we speak, but that is how we're thinking about it strategically going forward. Right. I mean, philosophically, Seth, you would have to assume it's got to increase. If we're mostly offering pumps and they're mostly offering We're taking care of the transfer and they're taking care of the- Yeah the containment. You would imagine that as we put these two together, we're going to raise that bundling opportunity or that solution sell. The treatment aspect of it is something that you've been focused on growing anyway, right? Filtration as a product offering and a service is something that Pump Solutions was already looking at. Combining with Baker gives us a greater platform for treatment. So transfer, containment, treatment, put them together, that's your solution, and we look to grow that as we grow the business. My assumption is that's a higher return source of revenue for you guys versus tanks, right? So ideally that number would get bigger. So that's my- Just as importantly, a complete solution for the customer. So they- Right get a one-stop shop, right? That's what we're really shooting for. Yep, 100%. Okay. Appreciate the time, guys. Thank you. Yep. Thank you, Seth. Thanks, Seth. Thank you. Thank you. Our next question will come from the line of Stanley Elliott with Stifel. Your line is now open. Hey, guys. Thank you guys for taking my question. Quick question. Was storage a big re-rent item for you all? Yes. Yeah. That's obviously the first place that we would look, right? Looking at any future M&A opportunities is, how much of this do our customers need today, and re-rent is the most apparent way to identify that, and obviously talking to our strategic sales team about what customers ask for that we don't supply. But this one was pretty obvious. Yeah. Baker's not our largest supplier of storage re-rent, right? So there's an opportunity to displace other players that is part of how we think about the growth opportunity here. Is there much of a margin difference between their European business and their North American business? There is. Europe is an attractive margin story there. By, let's call it by I don't know. I'll throw out a number here. It's sort of in the low to mid 40% margin in Europe that we realize today. I think that reflects the relative newness of the tank sector in Europe and the approach that Baker has put in place. That's an opportunity that we want to make sure we understand and that we grow. It's a nice piece of this deal. We think it's a great deal even without that, but it's a nice add-on from the perspective of margins. Lastly from me, as far as the Baker management team, I'm sure you guys have been in discussion. Is there any update on what level of how many are going to end up joining and come to United Rentals? We've met with the team a few times already at the senior level, and we'll get deeper into the organization, but this is a growth play for us. We're going to need as many hands on deck as feel good about it, and we feel very good about their leadership team. Matter of fact, we're going to meet with them this Thursday. We're all going to enjoy the holiday and then get out of town and meet with their senior team to start to strategize how we can bring the two teams together in the most cohesive way. That's been a stalwart for us for all M&A. It's not just the assets, it's the talent, and then the capacity underneath that talent. We certainly want to hold on to the Baker team. Perfect, guys. Thank you very much. Have a great Fourth. Thanks, Stanley. Thank you. Thank you. Our next question will come from the line of Jerry Revich with Goldman Sachs. Your line is now open. Good afternoon, everyone. This is Ben Burud for Jerry. Hey there, Ben. Just wanted to ask about the longer useful life of the equipment you alluded to in the deck. Can you talk about what the average divested age is for Baker and what the recovery rates are? We're not really prepared to give you numbers that I feel comfortable with exactly, but they have assets as old as 60 months, and assets as Obviously, they've been bringing new assets in. The average life is a combination of refurbed assets that haven't been re-lifed, so that's why you're hearing me not want to give you an exact number. But I think the way that we're looking at it is the amount of capital that we have to put into the business. Over the next five years, we're going to replace about 20%-25% of their tanks. We'll spend more capital on that, as Bill alluded to earlier, because of the growth that we think we have the opportunity to, but we'll make decisions as we go along and learn more about the business. How much of the tanks need to be replaced versus refurbed. As you can imagine, it's not a very complicated asset, and there's a lot of flexibility in how you decide to manage those assets. There's tanks on rents today in the industry that probably exceed 60 months, so we'll figure it out. I'm sorry, I said 60 months. I meant 60 years. Someone just corrected. 60 months would not be very long. So we're very comfortable with the existing profile and how to add to that going forward. Got it. Then as you look through the pump and fluid storage landscape, are there any other adjacencies that look interesting to you guys? Let us eat this one first. That's what I tell my kids, right? Eat what you got on your plate before you go for more. I think we are always looking across the landscape of adjacencies, and there are a couple of areas that we've got ideas. But this represents an extension to what we do, so we want to make sure we do this right before we start looking for other extensions. Meanwhile, there are other scale acquisitions as opposed to scope acquisitions that we think are out there that could enhance our specialty and our GenRent position. So we're looking at those as we always are, and if we can make all the pieces come together, we're positioned to and won't hesitate to pull the trigger. Got it. Thank you. Thanks, Ben. Thanks, Ben. Thank you. Our last question will come from the line of Scott Schneeberger with Oppenheimer. Your line is now open. Scott. Well, thanks very much. Hey, Bill. Congratulations. Enjoyed working with you, and best of luck, and to Jessica as well. Thank you. Although it feels like I'm dying here. I'll be around for a little bit longer, but thank you, Scott. I appreciate it. I understand. Just wanted to jump on the opportunity, but it has been fun. I guess where I'd like to go is, you guys obviously didn't put utilization in here. I want to get a feel directionally, if you don't want to put numbers on it, as to where you are with utilization relative to past peak, where you think it can go on an overall basis for Baker. Then maybe thoughts on where Europe is or oil and gas is in referencing relative to the overall. Thanks. So on utilization, we didn't put the exact numbers, so I won't. Yeah. I'm actually looking for it myself. It wasn't an avoidance issue. But I think the key consideration for us is not where it is today, but what is the opportunity to drive it going forward. I just do not remember the exact number as we sit here, and Chris is over there scrambling through his papers to see if he has got it. But as we looked at it, the opportunity we thought was very real for us to drive it higher as we, again, started to realize that cross-sell opportunity. It is a business that should be at a reasonable level of utilization. But as I said earlier, whether it is utilization or the cost structure or the margin structure, what matters is how that utilization or cost or margin fits with an attractive return. We have convinced ourselves that we can get the business to a place where the return is very attractive, and that has guided our thoughts. And we do think that there is still headroom in the utilization. Their utilization is not too different from our specialty business as far as where you have more density, you run a little higher end on the band than where you have less density, like Europe may probably run a little bit lower. So Europe will run a hair lower, but you are talking about asset utilizations in a band somewhere between 40% and 50%, low 50s percent. Very similar to much of our specialty product. I appreciate that. Then following up, could you guys just address We track pretty closely the pricing dynamic for tanks. Obviously, this is more than just tanks. But could you address the industry dynamic on pricing overall, what you have seen of late, where you see that going? Then additionally, the rental duration just of, I guess, the entire BakerCorp portfolio is probably how you would want to address it, but kind of a perspective on where that has been and where that can go relative and maybe compared to the overall URI portfolio. Thanks very much. Sure. I do not know that we are prepared to talk about the pricing and specifically what our goal is about the bundled solutions. But as far as BakerCorp's The second part of the question? The rental duration. Yeah. Thank you. The rental duration is actually a little bit higher than ours. Their monthly average is in excess of 80% monthly as far as their business. I do not have the actual duration of the rental average, but they are more than 80% rentals, just slightly higher than ours. You can imagine that is all in. The tank business is probably even higher. You can just think about the assets. It is not something that is very transactional that you are going to be moving in a tank for a day or two. There you go. The average rental length is 34 days. Very similar to the type of business that we currently have in our blended Gen Rent and specialty business. Okay. Thanks very much, everyone. Thank you, Scott. Thanks. Thanks, Scott. Thank you. I am showing no further questions in the queue. For some closing comments and remarks, I am going to hand the call back over to Mr. Michael Kneeland for some closing comments and remarks. Yeah. Thanks, operator. As we come to the end of this call, I just want to go back to where I started by giving Bill a heartfelt thank you for his partnership and contributions to the company over the last decade. Also congratulating Jessica on her new role. For those of you who haven't had a chance, we do have an updated deck, investor deck, on the BakerCorp transaction out on our site. Please have an opportunity to take a look at it. Ted Grace, the Vice President of Investor Relations, is readily available if you have any additional questions. I would also say that we look forward to chatting once more in a couple of weeks when we release our Q2 earnings. So thank you very much and have a great day. Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and we can all disconnect. Everybody have a wonderful day.