Earnings Call: Q2 2017

Jul 20, 2017

Good morning, and welcome to the United Rentals second quarter 2017 investor conference call. Please be advised that this call is being recorded. Before we begin, note that the company's press release, comments made on today's call, and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the company's earnings release. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31, 2016, as well as to subsequent filings with the SEC. You can access these filings on the company's website at www.ur.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances, or changes in expectations. You should also note that the company's earnings release investor presentation and today's call include references to free cash flow, adjusted EPS, EBITDA, and adjusted EBITDA, each of which is a non-GAAP term. Please refer back to the company's earnings release and investor presentation to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer; William Plummer, Chief Financial Officer; and Matt Flannery, Chief Operating Officer. I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin. Thanks, operator, and good morning, everyone, and thanks for joining us on today's call. We have a lot to cover today, starting with a strong second quarter. Our results reflect some of the best fundamentals we've seen in years. Some of that's external, but a lot of it comes from executing well as a company. I also want to talk about market demand, which has been stable at a high level, and we have some thoughts on how 2017 and 2018 will play out. Then there's the guidance that we gave an update last night. Let's start where we are today. I want to mention four metrics that are especially meaningful, and then Bill will discuss them in detail for the quarter. One metric is our volume. Pro forma for NES, volume in the second quarter was up 6.6%, and we had a similar increase in the first quarter, which points to a healthy marketplace. Rates, another good story. We achieved positive rate trend across our business in the quarter, with sequential improvements each month, and we're very close to being positive on a rate year-over-year. But don't expect us to rest. Rates will continue to be a major area of focus for us. Our employees understand how critical it is as part of our strategy. Importantly, we gained around rate. We also increased time utilization to a new record of 69.4%. This is the highest time utilization of any second quarter in our history. In fact, each month set a new record. Finally, our free cash flow through June stands at a robust $614 million, which is right on track, and that's after $968 million of growth CapEx spend. These are excellent metrics that show how effectively we are running the company. Our people are out there every day managing the business with discipline, right through the height of the NES integration. One thing you'll notice as we go through the call is that we're no longer talking about standalone NES and United Rentals. While the integration is ongoing, we are now operating as one organization. We've made a great deal of progress on the $40 million of cost synergies we identified in April, as Bill will discuss. Now, I'll give you some of the operational milestones. The back office, sales, and operating teams are now fully integrated, and the branches have moved onto our management systems. We're in the process of training our new employees on salesforce.com and our rate management tools. We're rolling out route optimization technology for equipment deliveries, and dispatcher training is underway. We're also installing telematics on the acquired fleet, and we're about 10% through the retrofit program with telematics installed on over 2,500 machines. But one of the most important parts of the integration has nothing to do with equipment. Back when we bought NES, we noted that our two companies shared a strong safety culture. Well, I'm pleased to say that last month, we had the safest June on record. We recently finished a series of town hall meetings for over 1,000 employees in our combined company. For some, this was their first town hall and their first chance to meet company executives. We opened these meetings with comments on safety, operational excellence, technology, and communication. As always, our employees are not shy about voicing their opinions. I was pleased to see so many different perspectives put out there, and we're always willing to change how we do things if there's a better way, and the town halls help us get there. NES has turned out to be a strong fit, and we bought them at the right time. Our performance this quarter was about more than NES. Our entire industry is in a growth cycle. Customers need more equipment, and we're in front of them with a bigger fleet and a larger footprint. Key indicators such as the Dodge Momentum Index, the ABI, and construction backlogs are all positive. Spending on commercial construction remains strong. The forecast for the U.S. equipment rental industry overall is continued growth over the next few years. Two former drags on demand have turned a corner. One is upstream oil and gas, where the inflection point we saw last quarter has been sustained, and the other is Canada. Western Canada seems to have stabilized and the eastern provinces are going strong. Nationally, rental revenue was up 7.3% in the quarter, and volume was up 8.8% with improving rate trends. That's the strongest growth we've seen in Canada in eight quarters. In the U.S., our largest revenue gains continue to come from the two coasts. In New England, for example, more than $5 billion of large projects are either starting or ramping up in the third quarter following a strong spring. These range from casinos and plant expansions to office complexes. In the West, we're seeing multi-year projects for entertainment venues and large corporate campuses. In the Southeast, it's automotive plants, data centers, infrastructure, and manufacturing. Another important indicator is our customer confidence index. in June, the level of optimism remained strong, with the majority of our customers indicating that they expect their business to improve over the next 12 months. We've arrived at the same conclusion. In our opinion, the cycle has substantial runway ahead. Turning to specialty. Our trench, power, and pump segment continues to outperform, underpinned by strong organic growth. In the second quarter, the segment revenue increased 19% year-over-year, primarily on a same-store basis, and gross margin improved by 250 basis points to 49.6%. Our pump solutions business had an outstanding showing, with revenue up more than 37%. Some of this is due to the rebound in upstream oil and gas, but they're also getting traction on other verticals. We'll continue to expand our specialty networks with a total of at least 17 cold starts this year. Seven of those are operating now, bringing our specialty footprint to 224 locations out of a total of 960. Our specialty cold starts tend to hit the ground running, in part because many of our existing accounts need solutions that are outside the scope of general construction. This helps to differentiate us as a premium rental provider. Four years ago, in 2013, specialty accounted for 10% of our rental revenue in the second quarter. This year, the number was 19%. So specialty rentals are becoming increasingly important to our business. Another initiative that's well timed for the upcycle is Project XL. Project XL is a toolkit of work streams focused on driving improved profitability, and we're targeting $200 million of run rate by year-end 2018. All the pilots are complete, and we're phasing them into operations. Before I hand it over to Bill, I want to spend a minute on guidance that we issued yesterday. It raises our 2017 outlook for revenue, adjusted EBITDA, capital spending, and free cash flow. We're confident that the market will support our higher expectations for revenue and EBITDA. We've allocated another $100 million of CapEx to ensure that we can meet that demand. It helps that our industry continues to be more disciplined about fleet purchases, and the supply of available rental equipment is being absorbed in the marketplace. When we look at third-party data, we're encouraged by the broader industry is getting rate improvement. As long as growth and demand continues to outpace new supply, our rate dynamics are likely to benefit. I hope my comments this morning have conveyed not only the broad scope of the opportunity ahead, but also how well-positioned we are to take advantage of it. The decisions we make are designed to balance growth with margins, free cash flow, and returns to maximize our long-term value. In the second quarter, we showed that we can achieve this balance across the business. As we enter the busiest period, we see even more potential to convert our strategy into value for our shareholders. With that, I'll ask Bill to cover the numbers, and then we'll go to Q&A. So over to you, Bill. Thanks, Mike, and good morning to everyone. As Mike said, we got a lot of information this morning on the second quarter, a lot going on in the quarter. I'll try to give you my normal color on the information that we usually report. We've also had a lot of questions about NES and the impact there. We'll try and carve out where we can information there that'll give you a sense of how NES is going for us. Let me start, though, as usual, with rental revenue in the quarter. $1,367,000,000 was up $163 million or 13.5% over last year. The components driving that were We'll start with the ancillary revenue, had a good quarter there, with ancillaries adding $21 million over last year, really driven by volume partly from NES, but just the raw volume of more fleet on rent, as well as higher revenue from the delivery and fuel associated with rentals. Re-rent was a positive 2 year-over-year, basically volume related there as well. The bulk of that $163 million was the own equipment revenue growth. Within that, $140 million from OER growth, $181 million was the contribution from volume. So a really strong quarter in getting more fleet on rent. Rate cost us about $13 million of decline year-over-year, that from the 1.2% reported decline in rental rates versus last year. Our replacement CapEx inflation was $16 million in the quarter, and then that left $12 million of unfavorability from mix and all other. There's a lot going on within the mix and other column this quarter. You'll see that when we get to the bridge for EBITDA year-over-year, the addition of NES, as well as other mix factors like cat class and period mix. So those are all the key components to the revenue change year-over-year. Let me just take a minute to say a little bit more about our rate for the quarter and the impact of NES within that rate. It's a very difficult question to try and address how much did NES impact our rate for the quarter. Obviously, the 1.2% as reported decline in rate reflects the fact that we didn't have NES in the last year period, but we did in this year, and as you all know, and you've heard us say before, NES rates came in lower than United Rentals rates, and so it had a drag effect on the reported 1.2% decline. You can see that by comparing that 1.2% decline to the pro forma rate performance, which was a 40 basis point decline, with pro forma being defined as NES was put into the last year period as well as this year period. So that difference just gives you a sense of how much the addition of NES rates weighed down the as reported number. When we dig in and try and identify exactly what happened to the NES rates period-over-period, what happened to the legacy United Rentals rates period-over-period, it becomes very difficult to really carve things out that way. We've integrated NES very rapidly. The fleet has moved tremendously. We've consolidated branches, and all of that just makes it really hard to say what's NES and what's United Rentals. We still want to give you an indication. So what we did was we looked at the regions in our business, our U.S. GenRent business, where there was no NES impact. We had three regions where there was either exactly zero or very close to zero impact from adding NES. Our Pac West, our Midwest, and our South regions. For those three regions, when you look at their year-over-year rate performance, they were down 0.3, very similar to the overall pro forma decline of the total company. So that gives us a sense that we were moving rates effectively in the right direction, both for areas that were impacted by NES and areas that were not. In fact, if you look at the months of the quarter and look at the monthly sequential rates for those three regions combined, it was a pretty solid month. They had an April sequential of 20 basis points positive, 70 basis points in May, and 120 basis points in June. So nice improvement in rates even away from where we had impacts from NES. Hopefully, that gives you a little bit more flavor for what the rate picture looks like, both in the areas affected and the areas not affected. Let me move on to used equipment sales. $133 million of used proceeds in the quarter. That was essentially flat with last year and delivered an adjusted gross margin of 52.6%, which was up robustly 4.8 percentage points versus last year. Here again, there's an impact of NES we just wanted to try and call out for you. Within the $133 million of proceeds was included $15 million of proceeds from the sale of what had been NES equipment. That accounted for about $32 million of original cost equipment from the NES sales. That NES sale impact, we estimate at something like $6 million of benefit to the adjusted gross margin. So that'll give you a sense of what happens when we're selling the NES fleet, which as I'm sure most of you know, typically is older fleet. They operated with an older average age of the fleet, so it generated more robust margins than maybe we'd have got out of our legacy United Rentals sales. They also had a more rapid depreciation schedule that also contributed to the book value being lower, and therefore the contribution to adjusted profit from used being higher. All of the sales continue to happen in a robust market environment. Our pricing experience is still pretty good within United Rentals, and that compares to market pricing that our indication is still pretty good as well. In fact, in the quarter, we sold equipment at a little over 89 and a half months of age, and we still realized 54% of the original cost for the sales this quarter. So a pretty robust pricing environment for used equipment sales overall. Let me move to our adjusted EBITDA performance in the quarter. $747 million in the quarter. That is up $68 million compared to last year. The components of that 68 increase were as follows. Volume, again, the big story, $121 million positive over last year, only offset by that roughly $13 million of rental rate decline that I called out in the revenue bridge. The ancillary gains contributed about $11 million at EBITDA, and they were just about enough to offset the fleet inflation headwind that we normally experience. That fleet inflation was about $12 million of headwind in the quarter. Used equipment sales year-over-year contributed $7 million. We did have our normal merit increase. That was a headwind of $6 million. We did also in the quarter, have a bonus accrual increase as we adjusted our bonus programs to reflect the better performance of the company year-to-date and what we expect for the full year. That increase in bonus accrual cost us about $14 million compared to last year. Earlier in the year, back in the first quarter, we said that we thought that the bonus accrual adjustment this year would cost us about 27 over the entire year, $27 million. Our view now is that it will be more like a $38 million impact for the entire year compared to last year. Again, that is reflecting the improved performance of the business overall. The last piece of the bridge to $68 million was mix and other. Again, that is a complicated story this quarter, given the addition of NES fleet and NES transactions to our results. NES revenue came in at a lower average dollar ute. NES revenue came in with all of the NES fixed costs and all of those things count against the mix and others. Mix and other was a decline year-over-year of $26 million versus last year, which made up the last piece of that $68 million year-over-year change. Let me take a minute here to try and carve out the impact of NES at revenue and EBITDA, just to give you a sense of how it is playing through the quarter. Again, I will emphasize that this is a very challenging thing to do because of the integration. What we did here was to look at the individual assets that were brought in with the NES acquisition and track those assets to get a sense of the revenue they generated during the quarter. When you do that, you get a rental revenue impact from those assets of about $87 million. Obviously you can debate all day whether just tracking the assets will give you the real revenue impact of adding NES. We think that is the fairest way that we can think of to try and categorize what the revenue impact is. So $87 million of rental revenue impact. Beyond that, we will add to it the $15 million of used equipment revenue that I called out earlier. We had $3 million or so of other revenue gains from the NES addition. Altogether, that is $105 million worth of revenue that came with the NES acquisition or were the direct result of the acquisition. It gets harder to say what that means in adjusted EBITDA terms, obviously, because it gets difficult to allocate costs and to carve them out specifically to NES exclusive. It is easy to do in an NES location, but when the fleet moves, how do you allocate costs? Still, we took a turn at it just to have a framework for thinking about the EBITDA impact. We come up with a number that is about $46 million of adjusted EBITDA that we would attribute to NES. So $105 for revenue and $46 for EBITDA. If you look at the flow-through in the quarter, our flow-through for the total company was 38.6% year-over-year. If you use those NES numbers for revenue and EBITDA, you can back those out to get a sense of the flow-through of the company when you exclude the NES impact. That number calculates out to about 31% flow-through in the quarter. I know some of you are thinking, "Okay, 31%, that is not great for the business ex NES. What is going on?" I will remind everybody that flow-through is impacted by the rate performance of the legacy business. It is impacted by the differences in used equipment sales this year compared to last year. It is impacted by the differences in the amount of other lines of business revenue and profitability this year versus last year. Of course, it is impacted by the $14 million of incremental bonus accrual that I talked about previously. If you take an estimate of all of those factors, which we did, and add them back as appropriate to the legacy URI business, you get to a flow-through that looks a lot like the 60% that we have always talked about. Our feeling, bottom line, is that the business is performing well, both for the legacy URI business and the NES added business. We are going to continue to look for improvements still. Let me move real quickly to cash flow. Free cash flow in the quarter was $614 million, as Michael pointed out. Excuse me, that is year-to-date. As Michael pointed out, that is down from last year by $178 million. The big driver there was the increase in rental CapEx. Our gross rental CapEx was $913 million year-to-date period, and that alone was up $190 million. So that was the biggest driver. There were puts and takes in other areas. Obviously, EBITDA improved, our interest expense improved, but our cash taxes went up as you all remember that we burned off our NOLs during the course of last year. That cash flow picture brought our net debt for the quarter at the end of the quarter to $7.9 billion. That was up from last year, and it was up from where it was at the end of last year. The primary driver of the increase, obviously was the addition of NES, the purchase of NES, offset by the free cash flow that we have generated so far year-to-date. Let me touch on Project XL real quickly. As Michael mentioned, we are making good progress there. We have the eight work streams well underway, some of which had pilots ongoing that now have been completed. We feel good about what they are delivering in terms of the impact versus what we had in our targets. We took a turn at giving you a little bit more information about two of the work streams in our investor deck. I will point you all to that page and those work streams. One is the growth in infrastructure vertical, and the other is just continuing to drive our labor productivity. Certainly, we can address it in Q&A if you have questions. But the big message is that we're on track to deliver the $200 million impact from these initiatives that we talked about at our investor day, that run rate by the end of 2018. I will remind you, I said this back in December, this is not $200 million of incremental EBITDA that you can just add on top of what you otherwise would model. Some of these initiatives are a part of how we're going to continue to drive profit improvement at our company. So you need to carve out which ones are add-ons and which ones are just part of the ongoing base business. As we get further into them, we'll talk more about how you might frame that. On the NES integration, just real briefly there, it is going very well, as Michael mentioned. We're on track to deliver the $40 million of cost synergies by the end of 2018 that we called out at the deal. Based on the actions that we've actually taken so far this year, we would say that we've realized in the second quarter about $2.5 million worth of synergies from those actions. The run rate as we sit today is nicely on the path to delivering that $40 million by the end of next year. We should realize this year something between $15 million and $20 million of actual impact in 2017. Again, that's including the 2.5 that we've already realized in the second quarter. So well on our way on the cost synergies. By the way, also on the procurement savings that we called out, we gave the $5 million to $10 million range at the deal, and we believe we'll be at the higher end of that range when it's all said and done. Let me finish up real briefly with our guidance. You've all seen the numbers, so I won't repeat the numbers. But just regarding the changes, just looking at the midpoint changes for total revenue and adjusted EBITDA. Total revenue went up $175 million, adjusted EBITDA up $78 million at the midpoints. The big driver of both of those increases were rate and time, or rate and volume, I'll say. Obviously, you see it in the numbers in the bridges for second quarter and year-to-date. Our expectation is that those will continue to be the big drivers for the remainder of the year. There'll be puts and takes of other ins and outs, but it's really going to be a story about rate and time. The $100 million of gross capital that Michael mentioned that we're adding, we added to both ends of the range, but you really should think about $1.6 billion as being our focus target for CapEx this year. Obviously, as we always have, we will be very mindful to not spend that if we're not seeing the performance of the business shape up the way that we would like, and neither will we be afraid to come back and move it higher if we see the business performing better than our expectation right here and now. Then finally, on free cash flow, the $25 million increase just reflects some refinements of our estimates. As we refine our views of cash taxes and working capital are probably the primary changes along with the operating profitability improvement that we pointed to. It is a lot, I know, but we certainly wanted to give you as much information as we could in a complex quarter. It was a good quarter, though, and one that we are very pleased with and look to continue that momentum as we go into third and fourth quarter. With that, I will stop my comments and ask the operator to open up the call for questions and answers. Operator? Certainly. Ladies and gentlemen, if you have a question at this time, please press star then 1 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 Ross Gilardi from Merrill Lynch. Your question, please. Thanks. Good morning, guys. Hey, Ross. Morning. Look, this time last year, you guys got a little bit of pricing for a couple of months, and then it just sort of tracked seasonality for a while. What, if anything, is different this time and why? Hey, Ross, this is Matt. It is a fair question and one that we have asked ourselves to make sure that we maintain the momentum. I would say what is different is a couple of things. Number one, and most importantly, the demand environment. Not just for us, but what we are seeing in the industry. The information that we are looking at looks like absorption continues to drive positive in the industry, which is a good indicator. The other thing is the record time utilization that we are experiencing. Then thirdly, we have growth this year, and we did not have this kind of growth. Whether you want to use the standalone or the pro forma number, that was not really the same story last year. There is a lot of indicators as well as a strong end market macro environment that we feel should be very helpful to maintain the momentum that we have versus last year. Yeah, Ross, I would only add that last year we were going through really still adjusting to the fleet imbalance, and we are in a much better place as an industry today. Got it. Thanks, guys. Then just to follow up, you guys have acquired NES, and there seems to be a lot of mid-sized M&A happening. Does it feel like we're on the cusp of a more substantial wave of consolidation in this space? Well, Ross, I've always said that consolidation would continue to play out inside of our industry. It's very fragmented. I think it speaks more to people have strategies, as we do, and they all do as well. The market cycle, I think it speaks volumes that their belief that the market cycle is still there. I also sit back and say from a strategy point and from an industry point of view, having increased professional management, I think will overall be a benefit to the industry collectively. Thanks, guys. Yep, thank you. Thank you. Our next question comes from the line of David Raso from Evercore ISI. Your question, please. Hey, David. Morning. Hi. It's been probably 2 and a half, 3 years since you've had at the same time, year-over-year growth in utilization rate and CapEx, and it looks like we're on the cusp of getting back to that. You haven't done that since like 2013, 2014, and you were doing 60% incremental EBITDA margin. As much as I appreciate pull this out, pull that out, you say we're kind of doing that right now, but still it is what it is, right? Incrementals right now are 30%-40%, 50%, if you want to pull out the bonus accrual. Still the power of having those three things going the same direction into 2018, can you try to handicap for us how we should think about incremental EBITDA margins and why they wouldn't be materially stronger? Sure, Ross. I think materially stronger, obviously, would be the result of all of those things going together, throughout 2018, as you said. Rate will be an important driver there. How much of a rate improvement could we see in 2018, I think would be the critical question about how the flow-through might trend throughout. Look, the analysis that we did, there were a lot of assumptions to it. So I don't want to go too far with the specific about 60% statement that I made. But at the same time, if we get rate to be mildly positive, if we continue to improve utilization, although that's a big ask, given the record nature of what we're doing now. But say we improve it just marginally, and we're putting more growth capital into the business. Again, that's an assumption, not saying we're there yet. But if all those things are lining up, 60% is, I wouldn't say a given, but it's certainly the starting point of the discussion about where flow-through could go next year. All of that, of course, needs a market that will support all of the assumptions that I just went through. Yeah, I'm just trying to set up a base case because, the pushback could be, well, back then you were getting a lot of rate and some utilization. That mix next year, it's probably hard to assume the same kind of rate growth as you had back then. But that said, you also have some fodder for cost improvement with NES and so forth. Not to ask you to give 2018 CapEx guidance right now, but can you help at least sort of frame how we should be thinking about growth CapEx or total CapEx, however you want to describe it for 2018, just for a base case? Yeah. David, it's still early for us to be thinking about that, or talking about that. We're certainly thinking about it as we speak. But I would say that if the momentum this year continues late into the year, I think it's very reasonable to say that 1,600 is the starting point for the discussion. Right? And then we'll see where we go from there. Last quick one then, Bill. In the month of June alone, we're talking pro forma on rental rates. Were there any regions or how many of the regions, what percent of the regions actually were already positive on rate year-over-year for just the month of June pro forma? For month of June pro forma, year-over-year, I can quote the sequential, but the year-over-year, in the month of June. Yeah. It looks like it's 5 of the regions that were positive, and for the ones that were not positive, another 3 or 4 were reasonably close to breakeven. Remind us, you run the company with how many regions exactly? Thirteen. Thirteen. Thirteen. With 13. So basically 5 out of 13 up, a few more kind of flattish, and the other ones are still the drag. Okay. I appreciate it. Thank you very much. Thanks, David. Thanks. Thank you. Our next question comes from the line of Tim Thein from Citigroup. Your question please. Great. Thank you. Just to follow on that last point, can you quantify within the total what the two drags as you called out earlier? I guess not a region comment per se, but just energy and I guess you define that as the branches that are in those heavy oil and gas regions, and then I do not know if you can extend that to upstream, but if you kind of bucket energy as a broad kind of segment and then just Canada as a whole, just given the movement in the currency, I am guessing we should not just use the difference between the 7.3 and the 8.8 that you outlined. So maybe just help us in terms of those two drags you called out in terms of what they detracted from rates in the quarter. Sure thing, Tim. This is Matt. I will answer the upstream conversation first. As you can imagine, as we have seen land rig count continue to climb, our upstream business has climbed. So we are up 68% year-over-year in Q2. That brings us to just under 5% of our total portfolio. So to answer your other question, if you want to look at our total energy exposure, we have about 5% of our business in upstream, about a little less than 2% midstream, and about 7% in the downstream business. So that nets to a little under 12%-technically 11.5% of what you would call energy exposure. And we are very comfortable at that level and encouraged to see the upstream. And we have seen a lot of pickup in our pump business, specifically in that sector, as well as other verticals within the pump business. As far as Canada, our Canadian business is kind of a tale of two cities, but all of the provinces actually had some growth. We are a little bit more challenged in Alberta. When you look at the country as a whole, our rental revenue was up 7.3%, and that is on almost 9%, just under 9% volume, but still over 3% rate drag year-over-year on that business. But we feel really good about Eastern Canada, and we feel that the other provinces in the Western Canada have bottomed out, and some of them are even moving forward a little bit. So we are encouraged by that. Okay. Matt, just can you remind us how quickly you would expect to reprice the NES book? I am guessing that a little shorter contract duration than maybe the legacy URI, but can you just update us there in terms of the repricing opportunity with NES? Yeah. We are not really looking at it as just repricing NES. When we look at our pricing, it makes us a little bit unique, as far as in customer buckets, geographies, and products. We are not really parsing out the NES. There are some key accounts with NES that we will treat probably a little more gradually, just as we would our key account business at United Rentals. But overall, we are looking at these customers blended. We are merging our rate zones, we are harmonizing our pricing, and we are merging customer accounts. So it will not be long before we will not even really be able to identify them as NES and United Rentals. We have a rate strategy as a company that is based on the segments we talked about, and we are going to deploy that across the board. All right, I appreciate it. Thank you. Yep. Thanks, Tim. Thank you. Our next question comes from the line of Joe O'Dea from Vertical Research. Your question please. Hey, Joe. Hi, good morning. Morning. First question just on the specialty side. I appreciate that we're right on the heels of NES, but as you see in the headlines, a little bit stepped up activity on the M&A front. Just what you're seeing on the landscape there in the 2018 plans you had talked about back in December that included some inorganic growth in specialty, and so just kind of where you're seeing that environment right now. Well, first and foremost, we don't talk about the acquisition other than the fact that we do have a robust backlog of things that we're looking at. With regards to specialty as a whole, as you can see, going from 2013 to today, in second quarter from 10% to 19%, and the growth capital that we're putting in there, along with the cold start, we have a very firm strategy of growing that business, and we're going to continue to fund it. I think it differentiates us in a different way, and our customers obviously are very open to it. We're always looking. We're always looking both for market opportunity, we're looking at potential acquisitions, and we're also looking at different product mixes that we could do within the specialty group. It's all the above, but it's going to continue to grow. Thanks. Then in terms of just tone of the industry, it looks like the survey results maybe stepped down a little bit. Not sure if that's just having run up and then come back down. Maybe just to kind of address what we're seeing in the reported survey results and then, in general, kind of what you're hearing from customers and some of the confidence that's contributing to seeing 2018 positively. Yeah. I would say we continue, whether it's the customer confidence index, whether it's any of the macro data we look at, or whether it's intelligence we gain on absorption of fleet and rate improvement in the industry, everything is pointing to a strong environment for the balance of the year, and we see that playing into 2018. That's the framework in which we're making our business decisions, and we really haven't seen much to challenge that. There may be a pocket here and there by sector or by vertical, but overall, we're very encouraged with the demand outlook for the future. Yeah, and just to be clear on our customer index, if you're referring to that, it is strong. March was unusually strong, and therefore it made it look like it was dropping, but in fact it is very strong. Perfect. Thanks very much. Thank you. Thank you. Thank you. Our next question comes from the line of Nicole DeBlase from Deutsche Bank. Your question please. Hi, Nicole. Good morning. Hello. Morning. Hi. My first question is just around the revenue outlook. I know you guys are refraining from providing explicit rate guidance. Totally understand that. Is there any way you can kind of frame the way the back half plays out according to the low end and high end of your guidance with respect to normal rate seasonality? Is this a normal seasonal outcome? Is it better? Is it worse? Nicole, it's, as you can imagine, challenging when we don't want to be explicit about rate and time guidance. What I would say is that we are not making heroic assumptions about where rate goes in the back half of the year in that revenue guidance. The range of sequentials that we assume is well within what we've done historically. We feel like we've got a comfortable set of assumptions there, and that's about as far as I think we should go. Okay. No, that's helpful, actually. Secondly, just around the CapEx, the increase in the full year guidance. Can you just talk a little bit about the equipment categories or the priorities of spending for that new incremental bit of CapEx? Yeah, Nicole, this is Matt. I would say that it's going to be fairly consistent with what our fleet profile is. We'll continue to put about 20% of that incremental capital into our specialty business. Specialty will continue to grow a little bit faster than our GenRent. If you look at Q2, we think that'll continue. When you look at the rest of the mix, whether you're trying to model whether it'll be more aerial, more dirt, or more of the other, it'll be across the board, very similar to our fleet profile as a company. Okay, thanks. I'll pass it on. Thank you. Thanks. Thank you. Our next question comes from the line of Seth Weber from RBC Capital Markets. Your question, please. Thanks, Seth. Good morning, guys. Morning. Just going back to Tim's question first, is there any way to frame what the starting point is here for the delta between URI's pricing and the NES pricing, just so we understand where you are starting at and where NES prices could come up to? As I kind of tack onto that, if there is an average length of NES contract? Yeah. Seth, it is challenging to think about how to frame the impact beyond what we gave already. I think I recommended to somebody last night that if you sit down with a simple spreadsheet and make some reasonable assumptions about what the share of business that NES contributes both this year and last year, you can frame out sort of in broad terms how to get to that 0.4 pro forma number, and how that compares to the 1.2 as reported number. The actual assumptions that go into your spreadsheet about sort of the relative rates of NES versus us, we have characterized broadly in the past as being double digits the difference. So that is the starting point, obviously with United Rentals being the premium. That gives you a sense of over time, how much of a gap there is to bridge. How much of that gap we actually bridge and how quickly we actually bridge it, time will tell. But that is the field that you are playing on, sort of a double digits kind of number, that we are working to make sense for our customer base as we go forward. Okay. That's helpful, Bill. Thanks. There's been a lot of discussion around the industry about mix, right? Big industrial contracts and whatnot. Can you talk about the competitive rate environment, specifically going after these larger, bigger, longer term industrial contracts, what that looks like today? Sure, Seth, this is Matt. Depending on what markets you're in and what customer you're going after, and the volume, these are always competitive. The good news is they don't go out for bid regularly, and we have been the incumbent in many of these, and that gives us a lot of credibility. So we're comfortable with our positioning. It doesn't mean that we can ever take any of it for granted. This business will always have somebody wanting it, and that's part of being the leader in the industry. There's always someone that wants what you have. That's nothing new for us. It's something that we're very comfortable with. I wouldn't call it out any more or less competitive in whether it's a national account sector or whether you're fighting to get more share in an MSA. So we feel comfortable with the level of competitiveness. We're encouraged by the level of responsibility from an absorption and rate improvement that we see in the industry as well. Yeah, the other thing I would add to that is, the onus is on us to make sure our value proposition is such that we meet or exceed our customer expectations, and that's why when you talk about our specialty, you talk about the capital that we're spending, you talk about the digital, and things that we're doing with Total Control, finding ways to assist our customer to be more of a partner and find ways to drive productivity and safety. That's what we need to do, and that's what we need to keep focused on. We're very good at that, and the team's really focused on it. Yeah. Okay. All right. Thank you very much, guys. Appreciate it. Thank you. Thanks, Seth. Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question please. Hey, Jerry. Hi. Good morning, everyone. Morning. I'm wondering if you folks Good morning. I'm wondering if you folks can talk about how you're thinking about adding capital into the oil and gas impacted regions. Obviously, big swings in the rig count, and how has your risk appetite around capital deployment in those areas changed as we're clearly ramping up short-term here? Jerry, much of our growth has really come from absorption. As we had talked about in the past, and probably the biggest example of it is our pump business. We made the decision a couple of years ago to hold onto some assets that we knew had a lot of life left in them. We mothballed them, and we're really getting the benefit of that decision today when you see the type of growth that we're getting in that pump business. And those are the type of decisions we made overall. We didn't expect to run 80% time ute in oil and gas markets, anymore after it turned. If we were willing to leave our footprint there, de-fleet enough to keep some capacity there, it gave us the opportunity to respond to this growth, and I think that's where we are today. We aren't having to dump a lot of fleet in there to drive that growth. And it feels good, a little bit of self-congratulations here, admittedly, but it feels good to have put in that faith and commitment and to be able to benefit from it. That said, we learned a lesson last time, right? We want to be mindful of how much of the business that oil and gas upstream activity represents, and make sure that we're making a more balanced decision and a more conscious decision this time around. That last time it was just, "Hey, it's a gold rush. Let's go." Nobody said that out loud, but that was sort of the mindset. This time around, we're saying, "Okay, let's make sure that when we're putting fleet in, it makes sense, both for right here and now and what it means for the business longer term. Okay. Thank you. And on that note, I'm wondering if you just frame the CapEx growth that you folks are laying out here over the balance of the year. Can you just give us a regional flavor, which regions are getting an outsized share of fleet growth? In other words, where are you folks seeing the strongest growth? It's very broad. I know we say that a lot, but that's because it's factual. When you look at it, maybe it's been a little more jaded to the coast, but because they've been so hot. But it is very broad. It's across the board. The folks in Western Canada are probably getting the least of it, for obvious reasons, because they had some fleet to absorb. But everybody else is running real strong utilizations and really improvement throughout the P&L and have earned that growth. That's how we look at it. You have to earn the growth, and then we allocate it. Again, the team has done a good job very broadly. Okay. Thank you. Thank you. Thank you, Jerry. Thank you. Our next question comes from the line of Nick Coppola from Thompson Research Group. Your question please. Good morning. Hey, good morning. I wanted to follow up on the NES integration. Now that you're a few months in, sounds like it's going well. You're on track to hit your synergy targets. Have there been any surprises to the positive or negative? Any color you would add surrounding the integration? Well, I would say the positive is we have a tendency to lean towards speed when it comes to integrations. It's our firm belief that you move that way, and you get the benefit of it. I would say this is even faster than we expected. That's what makes it difficult, why Bill had to go through so many assumptions to give you NES standalone information. We view that as a very positive story to operating as one company. Another is the time ute improvement. If you looked at slide, you saw that right panel of that slide, you saw that NES came in a little bit heavy on fleet, a little bit lower time utilization. A part of our improvement is that we really ramped up that time utilization by absorbing that fleet quickly as a combined entity. It just goes to prove that if you get everybody working together quickly, you can take advantage of all the capital that you have as a new combined team, and that was probably even ahead of schedule for what we thought. Yeah, that's certainly a strong chart there. I guess just another question I wanted to ask about, there's another slide about Project XL moving more into infrastructure. Can you just maybe add some detail around how you are moving forward with that goal? Are there new equipment types or mix shift that we should be expecting, or is it really just more of a sales initiative of reaching out to new contractor types? Maybe you can just kind of expand on that. Yeah, sure Nick. It really is a focus on that key customer segment, that project type, and making sure that we're well-positioned to identify the opportunities, and that we've got the fleet to support those opportunities when we win them. So, it's more than just a new sales initiative, but there's very much a focus that we're bringing to infrastructure projects now that we hadn't in the past. You can see in that XL slide the impact when you compare us to sort of overall aggregate infrastructure spending in the economy. We're outperforming. That's the good news. We want to make sure that we continue to drive that focus because it's a vertical where we think we line up very well with those kinds of projects, those kinds of customers. We don't believe we were getting our fair share in the infrastructure space previously. We're driving hard to address that. Okay, perfect. Thanks. Those are my questions. Take care. Thanks. Thank you. Our next question comes from the line of Steven Fisher from UBS. Your question please. Thanks. Good morning. Steve, hi. Good morning. As you guys step back and think about the market today, how would you characterize the supply-demand balance for equipment rental? Where do you see that balance headed in the next few quarters as you think about the demand trends versus industry CapEx additions? I mean, would you say that it is actually kind of tight today in some of these markets where you are getting pricing? Or is it just more of your own initiatives? Or are we headed toward a position of kind of a tight market per se? Steve, it is Matt. There are certainly initiatives, right? Coming out of the first quarter, just like we did last year, it is your time to take advantage of what the market can give you as far as your focus on time and rate. The demand has to be there. With that being said, we feel that this is not just broad-based for us. We expect the industry is doing a better job of being very rigorous on capital management and returns. I think that we are seeing that play through. There is no sign that we would expect that to diminish. Everybody that we talk to, whether it is OEMs, whether it is customers, everybody is feeling better about the industry demand and the industry behavior. I guess that is the most fair way to categorize that. Okay. I guess a related question, just thinking about the strong time utilization, really just trying to gauge how much structural change you've made in driving efficiency in fleet utilization. I'm just curious how many points of time utilization do you think you've maybe added over the last year that are a result of better processes and less OEC not available for rent, that time utilization that may be sticky over time? Yeah. I think it's a great point, and it's one of the reasons why we felt good about the NES acquisition because that density of fleet in the market gives you the opportunity to drive higher time utilization, and we do think we're enjoying that. When you think about where the mix of our fleet has come, and you look at our year-over-year time utilization, we continue to mix in assets, specifically in specialty, that run usually lower time utilization, in some instances, significantly lower time utilization, yet we keep climbing. So you'd have to look at it by category to truly break down the advantage. But we're very pleased about the time utilization trend that we've created on a year-over-year basis and how that comps to the industry. We feel strongly that's due to our density allows us to do things that maybe a regional or a local player can't do from a time utilization perspective. But thanks for recognizing the fact that we are putting an effort in changing our processes. There's a chart on our investor deck on page 8 that shows the NES during a time of acquisition where it is today. It speaks volumes about our team stepping up and making sure that we leverage our capabilities to drive better time. The question we have to ask ourselves is there more for us to pull? We do believe that. As Matt mentioned earlier, our team has earned it, and we want to continue to make sure that we meet that demand. But there's a lot of things that we're working on, and as you pointed out, our processes and lean management is paying some dividends. Could that be as much as maybe a couple of points of utilization? It's hard to quantify exactly because there's so many things that we're doing inside the organization. Okay. Thanks a lot. Yeah. Thank you. Thank you. This does conclude the question and answer session of today's program. I would like to hand the program back to Mr. Mike O'Neill for any further remarks. Well, thanks, operator. I want to thank everybody for joining us on the call this morning. As always, we are available to continue the dialogue. We will have more insights for you in 90 days. In the meantime, please feel free to reach out to Ted Grace, our head of IR, at any time. I think this wraps it up for the day, and we will see you at the end of the quarter. Have a great day. 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.