Earnings Call: Q1 2017

Apr 20, 2017

Good morning, and welcome to the United Rentals first 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 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 to the back of 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. Before we begin, I want to mention that our prepared remarks this morning will include some comments by Matt, and he'll talk about the field operations and give you a progress report on the NES integration. Bill will discuss the numbers before we go over to Q&A. Here we are in 2017, and I'm pleased that we reported such a strong start to the year. In January, I described 2017 as a critical period in terms of both positioning ourselves with our broader customer base and driving new efficiencies in our operations, and we're executing well on both fronts. Many of the actions we took in the quarter were designed to strengthen our earning power in future periods. This includes finalizing the NES transaction, which we closed as planned on April 3. Internally, I'm impressed how quickly our combined workforce has adopted the mindset of a single team, and customer reaction to the acquisition has been positive. I want to take this opportunity to publicly welcome our more than 1,000 new employees to the United Rentals family. They're a great addition to the team. We also got off to a solid start on Project XL in the quarter. Six of the eight work streams have now moved past the pilot stage, and we're pleased with the early progress. We have confidence in our EBITDA run rate target of $200 million by year-end 2018. At the same time, we're keeping our focus on immediate results. Demand is on the rise, and we captured a lot of that business in the first quarter. Our revenue increased 4.4% year over year on a 7% increase in volume. That's the strongest quarterly increase on volume we've seen in a while. We're also efficient with our fleet. Time utilization came in at 66%, a record high for a first quarter, and we generated a solid $490 million of free cash flow. Rental rates remained under pressure, down 1.4% year-over-year, due mainly to market dynamics. While this was disappointing and a bit below our expectations, we're encouraged by the trends that continue to point to an industry-wide right-sizing of supply and demand. This should continue to absorb excess fleet to the marketplace, which is positive for us. Matt Flannery will talk about this in greater detail, but for a variety of reasons, I want to emphasize that I'm confident rates will head in the right direction as we work through our busy season. For our part, we plan to spend about $1.5 billion of CapEx this year. Given the positive market trends and our commitment to growing our specialty offering, we feel comfortable with that number, and it should match up well against the demand. As you know, we issued new guidance yesterday, primarily to account for the combination with NES. It includes a nine-month EBITDA contribution of $135 million from the acquired operations. The increase in free cash flow reflects both the impact of the acquisition and our expectation for higher cash generation in the base business. In other words, excluding NES, we are reaffirming our standalone guidance for revenue, adjusted EBITDA, and CapEx, and increasing our guidance for free cash flow. Here are some of the drivers behind our expected performance. Most forecasters are looking at solid growth in the U.S. equipment rental industry in 2017. Our customers and employees feel very good about their prospects this year. Our customer optimism index in March was the highest we've seen since 2014. Demand is trending up in our core construction and industrial sectors. Commercial construction remains strong. There's a nice inflection with upstream oil and gas, where their macro is improving. The worst of the drag from Canada appears to be behind us. In addition, the vertical sales strategy we put in place is working. Infrastructure is a great example. Our revenue from infrastructure was up almost 5% in the quarter in a down sector. Our digital presence is growing as well. In the first quarter, we had a 15% sequential growth in online rental transactions, and we gained over 1,100 new customers in those three months alone. Finally, our specialty segment in Trench, Power and Pump continues to outpace the company as a whole. These three operations combined were up almost 17% in the quarter versus the prior year. We opened three cold starts through March, bringing our specialty network to 217 total branches in North America, with a plan to open at least 17 branches this year. Even with the steady expansion of our footprint, the bulk of our growth in specialty comes from same store and at higher margins than our gen rent operations. It makes the strong case for continued investment in this segment. Specialty also benefits from cross-selling with our gen rent branches. Specialty revenue from cross-selling to national accounts grew by almost 12% in the first quarter versus a year ago. Cross-selling our fleet started years ago as a way to boost returns on assets. Now it's become one of our most valuable core competencies. In closing, the year is off to a strong start. The NES acquisition was finalized on schedule, and the integration is on track. We have numerous avenues for growth with positive momentum across the board. Our branches and our customers are optimistic about the prospects. Our confidence on the cycle remains intact. With that as a backdrop, I'm going to ask Matt to update you on the operations and also on the NES integration. Over to you, Matt. Thanks, Mike. I'm going to start with NES because I know there's a lot of interest in the integration, and it's obviously early days, but things are moving along consistent with our aggressive schedule. We believe that speed is the key to alleviate uncertainties for the team. We've already finalized the leadership decisions and incorporated the NES managers and branches and stores into our region and district networks. Last, only nine days after close, we converted every new location over to our rental management system. The acquired fleet and the customer histories are visible in the system, and we're already seeing the team use this data to share fleet. They're also passing along leads to meet market demand. This is very encouraging so early on. We're still going through a thoughtful evaluation of our combined footprint, and some changes will be necessary. We want to make sure we get it right, and we're going to take some more time with that. Most importantly, we've made it the team's top priority to focus on serving our customers. They're really coming through on that front. The next several months will be key to unlocking the full potential of the combination. Since announcing our plan to acquire NES back in January, we've been able to take a much deeper dive into their operations, and I'm glad to report that the first quarter results performed largely as we expected. We continue to feel good about the cost synergies that we put out there in January. We believe that we're on track to deliver a run rate of about $40 million of incremental EBITDA in year two. The same goes for our revenue synergies, where we're still targeting $35 million by year three. In the near term, the combined company has an immediate benefit to our business. As Mike mentioned, our new guidance reflects what we expect for the balance of this year. Now I want to look back at the first quarter to give you a quick tour of our operating landscape. There were a lot of commonalities across our regions, fueled by demand in core projects. These include stadiums and resorts, data centers and factories, as well as bridges and power plants. The demand in the quarter was not only strong, but it was broad. Our OEC on rent trended up in over three-quarters of the U.S. states and eight out of the 10 Canadian provinces. That's a sign of a healthy operating environment. Regionally, we continue to see the strongest growth along the Eastern Seaboard and the West Coast, as well as some of the South Central states. Another strong highlight was our Pump Solutions business, which grew rental revenue by more than 20% year-over-year, and almost all of that growth was same store, reflecting our cross-selling efforts, our gains in market share, and an underlying improvement in our end markets. We've been executing a diversification strategy for Pump for the past two years, so it's nice to see that paying off. We've always had big plans for Pump. We never saw it strictly as an oil and gas acquisition. But as the upstream sector continues to recover, it's giving this business an extra bounce. Now I want to take a minute to discuss rates, which are obviously front and center to both our investors and our employees. While there are challenges in certain markets, on balance, we're encouraged by what we're seeing. First, as I mentioned, demand is strong and broad-based, and you could see the momentum build across the first quarter in our monthly time utilization. As best we can tell, our peers saw a similar strength. We believe it's been a trend for the past six months or so, and this dynamic has got to have positive implications for rates going forward. Another factor is seasonality. It's never easy to get rate in the first quarter. This is our seasonal trough in demand. That being said, we delivered a better sequential improvement in the first quarter this year than last year. If you look at the trajectory of our sequential and year-over-year rates across the quarter, it certainly suggests an ongoing absorption. Finally, and let me be absolutely clear about this, our strategic focus on rate has not changed. I personally discussed the importance of rate integrity with our field leaders, and they are keenly aware of how important this is to our business and our ability to serve our customers. All of these things taken together give me confidence that rates have the potential to get better in the back half of the year. That's the point I really want to emphasize this morning. So we're getting to gain time for our field operations. We're entering our busiest period with a bigger talent pool, a more extensive branch network, a larger fleet, and many new customers to serve. Our employees know the goalpost, and it's a point of pride for them to get us there. If you have any questions about operations, I'll be happy to answer them during Q&A. Right now, I'm going to hand it over to Bill for the financial review. Bill? Thanks, Matt, and good morning to everybody. Got a lot to go through, so I'll dive right in. Starting with rental revenue. The $49 million year-over-year change in rental revenue was up 4.4%, and the components of that $49 million start with ancillary and re-rent revenue that combined was up $12 million. That was driven by ancillary revenues associated with higher volume. Delivery fees in particular, but also fuel recovery for rentals. So a strong quarter driven by high volume. You hear that throughout a number of the comments that we'll make. Volume is a huge part of the story in the quarter. In owned equipment revenue, volume contributed $68 million over last year, but $14 million of that went the other way against rate. Then replacement CapEx inflation took another $16 million versus last year. Mix and other was relatively flat in the quarter, only $1 million of headwind. So those are the pieces of the $49 million increase, and that certainly suggests and ties to the notion that volume was a very strong contributor this quarter. If you move to used equipment sales, $106 million of proceeds in the quarter. That was down $9 million from last year, and that reflects just the volume of used equipment sales that we did in the quarter. Nothing more than volume. Actually, if you look at pricing was a positive. Pricing improved, and that led to an improvement in our adjusted gross margin. The margin was up 2.2 percentage points compared to last year to 50.9% in the quarter. I continue to remark at how we're able to sell equipment that, in this case, was almost 90 months old, at something like 51% of the original cost of that equipment. So a very robust used equipment market that we're selling into. Moving to adjusted EBITDA, $591 million of adjusted EBITDA. $7 million improvement last year at a 43.6% margin. The components of that change, $46 million of volume, but rental rates taking $13 million against that. Fleet inflation down $11 million. Used equipment sales, you can see the GP impact. It was $3 million of headwind versus last year. Our usual merit increase in that $5 million-$6 million range, so call it $5 million in the quarter. Then $7 million of mix and other. Included within that $7 million was about $3 million from the year-over-year increase in our bonus accrual. I call that out because we've talked previously about the bonus accrual in the full year of 2017, going up materially from last year. It was $3 million of increase in the first quarter. Those year-over-year impacts will increase in subsequent quarters, because of the timing of when we adjusted our bonus accruals last year versus our expectation that we'll continue to accrue at 100% payout for this year. So those are the pieces of the $7 million of year-over-year improvement in adjusted EBITDA. The 43.6% margin was down a point from last year. That reflects the impact of rental rates. Actually, if you just adjusted out the rental rate impact in adjusted EBITDA, you get back to flat with last year's margin. On adjusted EPS, we had $1.63 result in the quarter. That's up from $1.40 last year, and it reflects the improvement in operating performance, but also lower interest expense from both a lower debt balance and some of the restructuring that we've done. It also reflected the impact of our tax expense going down as we adopted new guidance on how we treat stock-based compensation, and it's now recognized in the tax line as opposed to a direct adjustment to a balance sheet item. So that stock-based compensation guidance benefited us by about $0.09 in the $1.63 quarter. EPS was also benefited in the quarter by the reduction in share count as a result of our share repurchases since last year. About 5.6 million fewer shares this year compared to first quarter of last year. On free cash flow, $490 million of free cash flow in the quarter. It's a very strong first quarter, although down from last year. Last year was $137 million higher in the first quarter, but that change primarily reflects the difference in net rental CapEx spend in this year compared to last year. Last year was a very restrained CapEx spend in the first quarter. The cash flow impact brought our net debt balance at the end of the quarter down to $7 billion, and that's $520 million less debt than we had last year. So pretty significant improvement in the absolute quantum of debt that we have outstanding as a company. I do note that $7 billion number had not yet included the impact of actually acquiring NES. If you add back the NES funding, as we sit today, we're at about $7.9 billion of net debt on yesterday's close. Liquidity finished the quarter at $2.1 billion. That included $1.7 billion of ABL capacity and a little over $300 million of cash on the balance sheet. Again, those were higher balances for our liquidity sources because it was in advance of the NES acquisition. If you look at it today, we sit at about $1.2 billion after the NES close. Rental CapEx, you saw the $219 million in the quarter. That's up from a very depressed level of rental CapEx spend last year. The net rental CapEx change year-over-year just reflects the difference in that gross number, plus the difference in net proceeds from used equipment sales. Let me finish out spending a little time on our guidance. As we noted in the press release and Michael's comments, we have updated the guidance to include the impact of NES. For the underlying URI performance, this guidance reflects no change in most of the metrics, with the exception of free cash flow, which we've increased. The changes for NES reflect obviously owning the business for nine months, and they do include the impact of synergies realized or expected to be realized in 2017, both the cost synergies and the net of any revenue dis-synergies and synergies that we might realize. Just to be clear, the impacts that we added were $300 million in revenue, $135 million in adjusted EBITDA. We did put in an extra $50 million to cover gross rental CapEx for the remainder of the year at NES. Those were the real changes to the exact guidance components. On free cash flow, we added $150 million to our prior guidance. That reflects the addition of NES, plus some improvement in the cash tax position of the underlying United Rentals operation. NES, if you just add the EBITDA of $135 million, subtract $50 million of cash flow for CapEx, subtract $30 million from the incremental interest expense that we carry for the debt of acquiring NES, and then add $100 million of improvement in cash taxes, you get to that $150 million increase. Within that $100 million of cash tax improvement, about 50 of it came from the NES acquisition, either from applying the NOLs that we acquired with NES, or from the deduction available for deal-related expenses. That in aggregate added about $50 million to cash tax benefit. The other 50 is from adjustments in estimates that we've made on the underlying United Rentals business as we've gotten a sharper view of what our cash tax picture will look like on the legacy business. Those are the pieces of the $100 million cash impact or cash tax impact that led us partially to the increase in free cash flow guidance. Just one last point on NES. We haven't changed any of our views, as we said before, about the synergies that we went into thinking about this deal, with one exception. The NOLs that we acquired, that we at announcement pegged at a present value of about $150 million. We've looked at that more closely as we've worked with the NES folks in tax and evaluated the positions that they've taken and that we can take going forward. We now believe that those NOLs will have a higher present value than what we initially thought. Something like $150 million instead of the $125 million that we initially thought. That's a little nugget that we found that gives us more confidence about the value of the NES acquisition. I think I'll stop there, and we'll address either questions about these or anything else that you all are interested in hearing in Q&A. I'll ask the operator to open up the call for Q&A. Operator? Certainly. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes to the line of Timothy Thein from Citi Research. Your question, please. Morning. Hey, Tim. Good morning. Just a first question, maybe Matt, you could just put a little bit more color around your earlier comments in terms of your confidence in terms of rate improvement as you get into the second half of the year. Presumably, you're talking year-over-year, but maybe you could just flesh out the dynamics between sequential versus year-over-year rates. Sure. I think you might have seen it in the release last night, but you could see both from a year-over-year perspective and a sequential perspective, the negatives tempered some as we went through the quarter. And we find that encouraging. When you combine that with the time utilization that we achieved, and we believe that the industry is seeing a similar progression, it may be not the same relative number, but a similar progression. All that points to the opportunity for us to be able to realize rate improvements in the back half of the year. Now, that improvement first would have to start with sequential. We're not sure that the slow first start would allow us to get to positive rate on a year-over-year basis. But if you wanted to model what that would take, and we're not forecasting, it would be a healthy half a point sequential improvement through our peak months of May through October. That's what it would take to get to flat. We don't know if that's there or not, but I think the point we really wanted to get across is the demand is there, which is very strong, and it's really about if this absorption continues, and the industry continues to see the opportunity, we're hopeful that that'll realize itself into better rate performance than we had in Q1. Q1 was certainly a little softer than we had expected. Let me just add one factual point. I don't think everybody has the progression of year-over-year. We didn't put it in our investor deck. January year-over-year was -1.8%, February was -1.5%, March was -0.9%. That progression, along with the sequential progression, I think, is sort of evidence that we think the absorption will help move us in the right direction and supports the comments that Matt made. Okay. Would you care to kind of extend us forward a couple of weeks in terms of what you've seen thus far in April? As you know, Tim, we've gotten out of the business of- Yeah. Okay. talking prospectively about rates. We will back off. Thanks. Okay. Understood. Just more definitional, but will there be any meaning, or should we expect any meaningful impact on URI rates as you fold in the NES contracts? Or is it kind of de minimis, or? So- Meaning, what impact, if any, on your rates will it have as you pull that business in? Yeah. We will talk about that more when we got the data at the second quarter. I do not think it is any surprise to say that when we add NES rates, we will be adding rates that are below the rate level that United Rentals has historically achieved. That will have an impact of adding lower rates on that portion of the business. But the impact, we believe, will lessen as we gradually manage rates in the way that we have overall managed rates at United Rentals. We will talk more about the impact there to the extent that we can once we have got the actual data in front of us. But it will be add lower rates and then migrate those rates in the way that we normally would manage them from there. I think additionally, Tim, Bill's comments is the opportunity to cross-sell into that customer base can help defray some of the separation, and just putting the tools, as Bill said, in the hands of his employees to be able to have a broader offering to sell their customers would be very helpful. Okay. I appreciate the time. Thank you. Sure. Thank you. Thank you. Our next question comes from the line of David Raso from Evercore ISI. Your question, please. Hi, David. Hi, good morning. On rates geographically, the split between U.S. and Canada, obviously Canada has been a drag. If you can just give us that exact split, then within the U.S., are there territories where rate is already positive? We're just trying to figure out how much is this certain pockets are dragging the rate down, or is it still very broad across the U.S.? Sure, David. This is Matt. For your first part of your question, if we had pulled Canada out, our 1.4 year-over-year rate decline would've been one point up. So closer to normal what we would expect in a Q1. As far as regionally, I won't give specific regions, but we had a couple of regions that were positive year-over-year rate in Q1. Really, not many of them were planned to be positive in Q1 because that's the seasonal trough. The challenge came in some of the markets. There were a handful of markets that just dragged us down, and it's identifiable. It's areas that we think seasonally we can help them improve. If not, we're going to move fleet out of there and into the markets that their environment can support a better result. When it comes to the cadence of standalone URI's CapEx, has there been any impact on trying to focus on rate, on the timing of fleet going into the field? Not as of yet, David. It's still early days to make that decision. Certainly, as Matt said, we're looking at where that CapEx goes once we spend it. We haven't yet gotten to the point of saying we need to make a significant change in the timing of the CapEx. We're going to monitor that very closely. This month, next month are important months. I'd say stay tuned, and we can talk about it in more detail in the second quarter. Matt, while you've sort of given the marching orders to focus on rate here a little bit with your branch managers and regional managers, has there been anything officially instituted on pushing rate differently than the constant tweaking that you always do on supply-demand in every region? Yeah, there's been some strategies that we've employed, some that have been used in the past, some new. Like always, it's disseminating that information all the way down to the field network, and I think we've done that effectively. I think that was frankly started mid-February, which when we saw January coming softer, and that's why you saw the trend start to turn. Hey, David, it's Mike. I would just tell you that we don't rest. We continually learn through our analytics on ways in which we can become better and how we manage, how we can communicate that throughout the organization. It is still, it will always be one where we're always open and looking at ways to improve it. I guess lastly, Canada rental revenues for the quarter appear they may have gotten back to flattish. The rate going forward in Canada, how would you frame currently down mathematically over 5%, given the impact you implied for the whole company? What kind of rate performance should we expect the rest of the year in Canada? I know we're not going to get back to flat for the full year, but just trying to get a feel for if Canada can get close to flat as the year goes on, maybe what the impact could be. Yeah. Again, we've gotten out of the business of speculating too much about what rates could be. What I would say is that Canada, certainly we're encouraged by the strength that we're seeing in the eastern part of the country, the flattening of what we've seen in the western part of the country. We believe it's troughed. That will encourage improved rate performance in Canada. But when you're down over 5% in the first quarter, you've got some work to do in order to flatten later in the year. So, I'd just suggest that we talk about it as we go through the year. Okay. I appreciate it. Thank you. Thank you. Thank you. Our next question comes from the line of Joe O'Dea from Vertical Research Partners. Your question please. Hey, Joe. Hi, good morning. Could you just talk about when you see transitions in demand historically, how you think about leading indicators and where we see the strength in the used equipment prices, we see the strength in utilization, clearly some surprise on rate. But how do you think about the progression of those and the typical lag, and whether rate would typically lag and how long that would be? Joe, this is Mike. I have always said that throughout my career that when you see used prices improve is step one, then as you look at utilization. As Matt mentioned about the absorption of the fleet, it is no secret that when we went through the oil and the surrounding markets around the oil markets, there was a surplus of fleet. That is being absorbed, then as the industry begins to achieve better performance on utilization, gives confidence towards rate. Throughout my career, I have seen that. Is there any given cadence? It is not a science. It is just something that happens, that I have experienced. That is kind of what gives us some confidence based on the demand that we are seeing and how our employees who are straight on the field as well as our customers, the optimism they have for the remainder of this year into next. What is your sense for maybe why we did not see rate react more quickly? Is there just a general wait and see in terms of confidence and sustainability of some of the improved demand? It is promising to see that the rest of the industry also appears to be seeing a similar progression of improving utilization. Just why the industry would be a little bit apprehensive to run with that and start to flow through rates. Well, again, it goes back to the absorption and time utilization. They start to see it, number one. If you take a look at where we are sequential to this year versus last year, albeit somewhat disappointing, it is still an improvement. The time utilization is one that gives us better confidence. As we talked to David, the rate impact in Canada of 5.3%, Canada it is no secret that its more commodity-driven economy suffered during last year, and it started to level off. Seeing time utilization improve there as well at the same time, the inflection of the rate, you would say that there is opportunity as we go forward. Again, it is building a confidence with inside the industry of utilizing the fleet that they have. Joe, I think you hit on it early on when you said the rate is the leading indicator. The time utilization, excuse me, is a leading indicator, and I think that is what we are seeing. You just have to remember the seasonal trough that we spoke about. You would have to go back all the way to 2014, where we did not have negative sequential rates in Q1. Even then, they were fairly close to flat when I remembered looking at them last night. So part of it is seasonal, and we are really encouraged by the leading indicator that you pointed to, with time utilization being up, should help us ramp up. That's helpful. Then maybe just one more on end markets and specifically anything that you're seeing in industrial, and I think that tends to be more MRO related, but have you seen some improvement in activity there and specifically any industries or sectors that you would call out within industrial? I think within industrial, I think we're still at the point of looking at the timing of some of the downstream oil and gas turnarounds that may have been postponed. So I wouldn't point to improvement there just yet. But in other industrial segments, I think there are pockets that you can look at that have felt a little better than they had in the past. So we continue to see some aerospace related, for example, and there are probably some other pockets that we could call out that are going to be important. I'm trying to read and talk here at the same time, which is never a good thing. But for example, paper and forest products is excuse me, power is one that I might point to. Pharmaceuticals, biotech. We've actually had a couple of industrial manufacturing-oriented businesses that have done better. So a little bit of green shoots in some of the industrial areas, but it hasn't developed into a powerful wave just yet. When you look at the 7% growth, obviously any offsets to some of the verticals in industrial that might have dipped and some of them that might have called flat overall, really the non-res market picked it up strong, and that really helped drive that 7% volume growth. Exactly. Got it. That's really helpful. Thanks very much. Thank you. Thank you. Thank you. Our next question comes from the line of Robert Wertheimer from Barclays. Your question, please. Yeah, good morning. I wonder if we can just go back to SG&A for a minute, and you talked about some of the compensation increase. SG&A, you've had it that high in past 1 Qs relative to sales, was a little higher than we thought. I wonder, can you maybe clarify how much of the compensation bump was unique to 1 Q versus evenly spread throughout the year? And was there anything else in 1 Q really, that you would call out on SG&A that made it higher than you might have thought? Yeah. So why don't I get just a couple of pieces out. The seven, excuse me, it was $16 million, if I recall, year-over-year increase. Within that, I called out the $3 million bonus. And in addition to that, there was $7 million of stock compensation expense increase, separate and apart from the cash bonus that we pay out. And again, that $7 million reflects the change in accounting guidance about how stock compensation expense is treated. But it also primarily reflects the fact that our stock price went up a tremendous amount in the quarter. And so, that increase shows up as stock compensation expense in the quarter. Now it comes out of adjusted EBITDA. That's why I didn't call it out as a component of the year-over-year change in adjusted EBITDA. But it was about $7 million of the $15 million, $16 million increase that we saw in the quarter. And the other $4 million or $5 million or so were really timing items among pro fees, T&E and some other nits and gnats. But those are the big chunks. Thank you. Does that help? It does. But I'm sorry for not understanding, but does that stock compensation increase repeat across the quarters, or is it more lumpy in 1Q due to timing of grants or exercises or accounting? It's more lumpy in 1Q, just because of the timing of when our stock compensation awards are made and when they vest. Yep. You have to adjust for the stock price at that point, at the vesting point. So the bulk of that $7 million impact will be in the first quarter. It'll be nits and gnats as we go through the rest of the year, just based on other awards that are granted. But that's going to be the biggest chunk. Yep, that's helpful. Thank you. Great. Thanks, Rob. Thank you. Thank you. Our next question comes from the line of Ross Gilardi from Bank of America Merrill Lynch. Your question please. Yeah, good morning. Morning. Thanks, guys. I just want to ask about Project XL and the $200 million of savings. Are you having to put costs into the business to generate those savings? Should we look at that as a kind of a gross or a net number? The $200 million run rate, it's going to be a net number. We do have to put some cost into the business in order to achieve some of the initiatives that we do. But when we talk about that run rate achievement, it's going to be the net. For example, if we're focusing on another service line to our customers. Servicing customer equipment is one example. You've got to have service techs able to do the work. So that's an example of the expense that'll come in, but the net impact is what we're tracking in that 200. When do you think we'll see it, Bill? Is it going to be heavily kind of weighted towards the back half of 2018? Is that more of a run rate by the end of 2018, or should we- Yeah and where should we see it? Should you see your SG&A all of a sudden start to go down a fair amount? So for the win, I think, well, first, to be explicit, the 200 is the end of 2018 run rate. That's how we're stating the impact of the program overall. But you'll start to see impacts as we go through 2017. It will be weighted a little bit more heavily in 2018 than it is in 2017. But you'll start to see some impacts later this year, and those impacts should show in a variety of areas. A number of the initiatives are revenue driven, and so you would see the impact in top line. But we do have initiatives. For example, we've got a G&A-focused initiative that is pure cost, that would show up in SG&A. We have others that are a mix of revenue and cost. I think it would be best to let us get more data out there, and then we can talk a little bit more specifically about where to see the impact. That'll come later this year as we get the reporting package defined in a way that we feel confident talking about externally. Okay. Then in the past, you guys have expressed some confidence that you could still do a 60% type incremental margin in a flatish rate environment. Not to put words in your mouth, I wanted to just clarify that first. If I have that right, do you still sort of feel that way on the back of this quarter? Yeah, I think if we had a flat rate environment, I think we could be in the neighborhood of 60%. It requires us to be able to do some other things in the business that improve productivity. But I think we would be within hailing distance of 60%, just with pure flat rate. Still feel that there are opportunities in the business to do that, especially, you would have to have the business growing, for example, right? You can't say that when the business is declining. You would have to have some productivity-focused initiatives. You can't just rest on your laurels and say 60% is going to fall in your lap. But flat rate gets us in the neighborhood. And just lastly, what are you assuming on the high and the low end of your EBITDA guide in terms of the NES cost synergies that you've outlined over the next several years for 2017? I think a reasonable range to think about for NES cost synergies realized this year is in that $10 million-$15 million range. The range that we've given should encompass that kind of range on cost synergies. Got it. Thank you. Okay. Thank you. Thanks, Ross. Thank you. Our next question comes from the line of George Tong from Piper Jaffray. Your question please. Hi, this is Adrian Paz on for George Tong. Hi. In regards to the NES synergies, can you provide a bit more detail on where those synergies will come from, and also perhaps timing on how you expect those synergies to ramp? So maybe I'll start on the cost side, and Matt, if you want, you can address the cross-sell. On the cost, it's good old-fashioned cost synergies, right? It's about G&A expense represented by wage and benefits and pro fees and T&E and all the basic things that you get at that are duplicative between NES and Legacy United Rentals. We will be addressing those as we go through the year. And then the $40 million that we guided to fully developed synergies. There's also some branch consolidation that's included in there. As Matt said in his comments, we want to be very mindful and thoughtful about when and where and whether we have branch consolidations. But we assume there would be some, just because of the overlap of the network. Those are the main sources on the cost side. On the revenue side, Matt, do you want to offer anything? I would just say that on the revenue side, it's certainly, you could see from our commentary that it's more back-loaded. It'll take more time to cross-sell into the customers. The first step is to stabilize the customers, make those that have any overlap with us feel comfortable that they don't need a second supplier. And then after that, we'll start selling in our additional product offerings to the team. That's why you'll see the revenue synergies be more back-loaded. On timing, how do you expect the synergies to ramp in 2017 and also 2018? On timing. On specific timing, metric, or you mean timing? No, sorry, on timing of when you expect to see those synergies flow through. Embedded in the updated guidance that we just gave including NES is how we see this play out for this year. From there, we probably would hold until we absorb a lot of the opportunities and challenges and give you more information, maybe in the next quarter. The $195 million EBITDA that we gave out as the thesis of the deal still stands firm in our minds. In regards to rate, do you believe rate pressure is largely reflecting the energy headwinds, or do you see them as maybe the industry adding fleet too quickly. Any additional context on fleet dynamics would be helpful. Well, I actually think the industry's done a pretty good job on the absorption and not bringing in fleet too quickly. If that continues, that's why you'll hear a more positive tone on us about the forward look, as opposed to what we experienced in Q1. I'm not worried about that. We spoke about it. Demand is what we think is going to drive this. I don't know, Bill, if you had anything to add. No. I'll let that stand. Yeah. All right. Thank you. Thanks. Thanks. Thank you. Our next question comes from the line of Seth Weber from RBC Capital Markets. Your question, please. Hey, Seth. Hey, good morning, guys. How are you? Good. Hey, Seth. Just going back to the confidence in the rates moving in the right direction again. Do you anticipate any change in project type, more project versus MRO, or any change in customer mix, national versus local, that's helping you get more confidence in that? Or is it just really just pure, you think demand is good, supply-demand balance is going to get better through the year? We may get some lift from mix. We may even get some lift from product mix, which is a continued focus of ours, as you see through our specialty growth. But I would say the big driver here is the basic block and tackling of selling the full product offering, and the demand gives us that opportunity. So demand will be the big rock that we'll have to move. We really feel good about that. Yeah, I would say it's broad based, Seth. Yeah. Okay. Then, sorry, just going back to the cost side, the bonus accrual discussion. I think, Bill, you called out $3 million in the first quarter. It sounds like that's going to get larger as we go through the year. It sounds like you're going to get some benefit from Project XL and things like that. I'm just trying to net all these things together. At the end of the day, does some of this XL benefit get wiped out by some of these other costs that are going to be accelerating in the model this year? Or is there any way to understand the slope of some of these costs that are coming in versus the savings that are going the other way? Yeah, hard to guide you at a precise level here, Seth. On the bonus accrual, I think the answer, well, I said that it will be expanding as we go forward. I think we said in the first quarter that the full year impact, if we finish this year at 100% payout over last year, would be $27 million, if I remember correctly. Right. We got 3 of it in the first quarter. I think if you started out just saying, okay, the remaining $24 million will come equally over the next three quarters, that'll give you at least a starting point on that line. Stock compensation expense, we talked about that being heavily focused on first quarter. You might just assume a smaller amount in subsequent quarters. The timing items of Pro fees, T&E, and some others, it's hard to figure out how to give you much guidance on what to do with those items as we go through the year. Because there will be some impacts on Project XL, probably not huge, but some. It certainly is something that it's hard to figure out how to give you more guidance. All of that's embedded in our guidance overall, the total company guidance. But I understand your question as being more focused on the particular line of SG&A and maybe some other particular lines. Yeah. Okay. We can follow up offline. Then just one last one. Now that the deal is closed, any thoughts about the share repurchase? If you restart that, or do you kind of need to get through some more of this integration before you feel comfortable doing that? Yeah, get through more of the integration. We will come back to it as we get, probably, I have not talked to my boss about this, so I am living dangerously right now, but probably get through the second quarter and sort of in the third quarter when we can reengage the discussion. I think that will give us a good four months of seeing how the integration is going and making sure that it is playing out the way we thought, getting a better handle on how cash flow is evolving this year. Then we will consider it and decide whether we want to do something or we want to wait a little longer. Sure. Okay. Thank you very much, guys. Appreciate it. Thank you. Thanks, Seth. Thank you. Our next question comes from the line of Nicole DeBlase from Deutsche Bank. Your question, please. Hi, Nicole. Yeah, thanks. Good morning, guys. Morning. Hey. Just one, I hate to go back on rates because it feels like we've been spending a lot of the Q&A on this, but I guess the one thing that I didn't hear answered is just from a competitive perspective, what you guys are seeing. Are peers or competitors behaving rationally, or are you seeing some increased competitive pressure, which is adding to the rates decline? It depends on the market. In the markets where we're seeing the demand being the strongest and our performance being stronger, we're seeing similar behavior by most of our competitors. In the markets where it's a challenge, we're not able to get what we want. I would say, it's exacerbated by the other folks that are living through that same reality. It's not really too different from what we've experienced in the past. The difference that we feel this year versus, let's say, last year is the demand is much stronger. This feels like a much different. Although numerically you could look at sequentials and talk yourself into it similar, this feels much different coming out of this Q1 than coming out of Q1 last year. I don't imagine that same dynamic's not playing through for our competitors. I think it is. I think they probably feel much better coming out of Q1 this year as well. Okay. Thanks, Matt. That's helpful. Then just a nitpicky one. Your tax rate was low this quarter, and you talked about stock comp as the reason why. I know that the stock comp is a lumpy issue in SG&A for the first quarter. Is it also a lumpy issue in the tax rate, and we should expect a bump up again in the second quarter and beyond? I think, if you look at the full year, we still think that we'll be somewhere in that 37%, 38% tax rate. So, it'll be more of an impact in the first quarter than it will over the remainder of the year. Okay. Got it. Fair? Thank you. Yeah, great. Thank you. Thank you. Our final question comes from the line of Justin Jordan from Jefferies. Your question, please. Hey, Justin. Good morning. Just one thing, just going through the slide decks. On slide 15, you have changed the basis at which you are showing your top 1,000 accounts, the diversified account base slide. I am just curious, it looks like key accounts are now 71% of revenues. I am just curious what you have done there. Equally, just when, sorry, I know we are talking about rate all the time, but within what you are seeing in terms of the rate development, is there a difference between rates that you are achieving on key accounts versus the unassigned accounts? I am implying, is there greater pressure within rate on key accounts? Yeah. Justin, it's Mike. I'm going to ask Ted to start, answer part of your question, and then we can ask Matt. Yeah. Justin, just as it relates to the slide deck, the way we used to present it was actually measured a little differently. It looked at the sub-accounts. What we've done is actually aggregated all the sub-accounts. It actually now matches within the 10-K. I'll take responsibility for that. Nothing's changed except we're reporting it, I think, as people would want to interpret it. Before there was some confusion on whether. Just that's what it was. It was the child accounts were obviously more diffuse than the parent accounts. Does that make sense? Yep. That's great. Thank you. Just on the rate pressure by key accounts versus unassigned? You'll see variance by geography more than by account type. I think that's what I had been pointing you to earlier. When you look across the account type along the whole network, it's fairly similar, by whether it's our national assigned or what we call territory accounts. Got it. Thank you. Thanks. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Mr. Kneeland for any further remarks. Well, thanks, operator, and we look forward to speaking with you again, when we wrap up the second quarter. In the meantime, feel free to reach out to Ted Grace, head of IR, to ask any questions or feedback. As always, as you pointed out, our investor deck has been posted out on the internet. So thank you very much, and we can end the call. See you next second quarter. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.