Earnings Call: Q1 2015

Apr 22, 2015

Good morning, and welcome to the United Rentals first quarter 2015 investor conference call. Please be advised that this call is being recorded. Before we begin, note that the company's press release, comments made on today's call, and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the company's earnings release. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31, 2014, as well as 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 expectation. You should also note that the company's earnings release, investor presentation, and today's call include references to free cash flow, adjusted EPS, EBITDA, and adjusted EBITDA, each of which is a non-GAAP term. Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer, William Plummer, Chief Financial Officer, and Matt Flannery, Chief Operating Officer. I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin. Thanks, operator. Good morning, everyone, and welcome. Thank you for joining us on today's call. Today, we'll talk about how we're managing the business in light of our expectations for 2015. With almost four months of the year behind us, we've been able to draw some conclusions to how this year is shaping up, and we'll talk more about that in a minute, and then Bill will cover the results, followed by your questions. Let's begin with the numbers you saw last night. We had a solid start to the year. Our revenue, EBITDA, and return on invested capital were all first-quarter records, and that's a credit to our employees. Our rental revenue increased 12% year-over-year, based in part on an 8% increase in volume. We generated $602 million of adjusted EBITDA at a 46% margin. Our return on invested capital improved to 9%, and our free cash flow for the quarter was $450 million, more than 60% higher than a year ago. We also reported record adjusted EPS of $1.34 for the quarter. We achieved these results despite some notable headwinds. The most significant constraint was the decline in upstream oil and gas activity. The rapid shutdown of almost 50% of drill rigs had both a direct and knock-on effect, and this was felt most strongly in our pump operations. The slowdown also happened earlier than expected, and we now think it's likely to continue through at least the next three to six months. We still expect to mitigate the decline within our guidance for revenue and adjusted EBITDA, and we'll have more opportunity to do that now during the peak seasonality. Now, given the timing of the impact, we felt it was realistic to narrow the ranges of revenue and EBITDA. Our updated revenue range is $6 billion-$6.1 billion and adjusted EBITDA of $2.95 billion-$3 billion. These ranges still fall within our original outlook. In addition, in the first quarter, we had a negative currency impact from a relatively weaker Canadian dollar, and this will likely impact our year-over-year comparisons throughout 2015. A harsh winter slowed the pace of projects in several regions where we dealt with historic cold and snow. That one, we can safely say that's behind us. Despite these headwinds, we put a record $5.4 billion of OEC on rent in the first quarter in a highly competitive marketplace. We could leave it at that, but as you know, we're not a company that shies away from looking at numbers from every angle. In the first quarter, the metrics of time utilization and rate merit further discussion. Time utilization decreased in the quarter by 40 basis points to 64%. That hasn't changed our outlook. We're still comfortable with our full-year time utilization of approximately 69%. When we look at branches without any meaningful exposure to upstream O&G activity, time utilization was actually up 40 basis points in the quarter. With pricing, our rate increased 2.9% in the quarter versus last year. That was lower than expected, and we're now anticipating a very competitive rate environment going into the summer months. I know that our field management feels like I do, that there are actions that we can take to get our prices up. Coming off the quarter, we now expect our rate increase to be about 3% for the full year instead of the original outlook of 3.5%. Regardless of any headwinds, we'll continue to transfer underutilized fleet to areas of higher demand where our sales force has more leverage to negotiate rate. We'll have even more opportunity to get the equipment on rent as we go into our seasonality as it picks up. We're focused on achieving that optimal balance of metrics that we've talked about before. That is where rate and time utilization intersect to drive returns. We see this as being absolutely essential as we continue to capitalize on the upcycle. A large measure is within our control, regardless of external developments. Let's turn to the marketplace, starting with specialty rentals. The organic revenue growth in our specialty segment was 25% in the quarter, and EBITDA was up 57%. Trench Safety and Power were particularly strong. Specialty rentals are a high-margin business, and they helped drive our fifth consecutive first-quarter increase in EBITDA margin company-wide. We'll expand all of our specialty lines this year with an addition of approximately 18 new branches. This will give us a strategic presence in new trade areas and strengthen our cross-selling abilities. From a broad perspective, our operating environment continues to match up favorably against last year. Our sales force is reporting high level of project starts, and if anything, our customers are even more optimistic than they were in December. This is true of our large national accounts, as well as regional operators and local contractors. We're serving a diverse customer base that has maintained a healthy balance year-over-year going into April. Key accounts represent 65% of our base by revenue. That includes national accounts at 46% of our base. And our local customers, which we classify as unassigned accounts, ticked up slightly to 35%. Now turning to geography. On a constant currency basis, all but one of our regions had year-over-year growth, and that one was nearly flat. The Mid-Atlantic, South, Midwest, and Mountain West regions had a particularly strong quarter. And I want to give a nod to our industrial team, which has continued to score wins in the downstream energy sector. Energy gets a bad rap right now, but from our perspective, we're seeing some impressive numbers. We currently have commitments for eight multi-billion dollar energy projects, four which are underway, two are in the dirt stage, and the other two will kick off in 2016 and 2018. All of these are three to six-year projects in Texas or Louisiana. But beyond energy, we're seeing many different sectors pick up. For example, our major infrastructure renovations in Ottawa and Montreal, large stadium projects in Atlanta and Fort Lauderdale, and renewables such as wind farms in Kansas. And I want to share something new about Texas, which is a large and diversified market for us. If you exclude pump, the increase in rental revenue was in the mid-teens on a year-over-year basis. That points to a solid demand outside of upstream oil and gas. We always have to ride out some sector-related cycles, but the fundamentals of our markets are very strong. We should see broad-based growth well beyond 2015 as our customers take on more work and secular penetration adds an extra layer of demand. Most industry forecasts support this view. One recent release is the Consensus Construction Report put out by the American Institute of Architects. That takes into account seven major forecasters, including Dodge and Moody's. The report concludes that commercial construction, which is our bread and butter, is forecast to remain on a strong upward trajectory. Hotels, office buildings, and retail are just a few of some of the areas projected to contribute to that growth. And the institutional sector, which had a disappointing decline in 2014, appears to have bottomed out. The consensus is that institutional construction will reverse to a gain in 2015 and climb again in 2016. And that's good news for markets such as health, education, and public safety. That gives you an idea of where we see the challenges and the opportunities in 2015, and to some degree, in 2016 as well. Taking everything into consideration, we remain confident in our full-year guidance of adjusted EBITDA of at least $2.95 billion on total revenue of at least $6 billion. But we're balancing these metrics behind those numbers in light of the market dynamics, and we expect to spend $1.7 billion of gross rental CapEx this year as planned. In short, we show that we know we have the right plan in place for 2015, and our strategy for long-term profitable growth remains intact. With that, I'll ask Bill to cover the financial results, and then we'll take your questions. So over to you, Bill. Thanks, Mike, and good morning to everyone. We have got a lot to cover here, so I am going to try and streamline my comments about the actuals so we can save a little time to touch on the refinancings that we did, touch on our O&G experience for the first quarter, and also the outlook. Real briefly on the financials, we had a good revenue result in the quarter. Rental revenue was up by almost 12%, 11.9%, as Mike called out. That is a $119, $120 million improvement, and the drivers were as follows. The ancillary and re-rent revenue performance for the quarter was good. We had about a $14 million year-over-year improvement from those two combined, the bulk of it being ancillary, pickup delivery, and our RPP program. Re-rent was just a little better than flat year over year. So that was about $14 million of the $120. Within owned equipment revenue, OER, rental rate growth you saw was 2.9%. We translate that into about a $26 million improvement over last year. On the volume front, we had 8.1% volume improvement, and that translates into about $72 million of volume impact. Which I will note includes the impact of having National Pump this year and not in the first quarter of last year. Also sprinkled throughout volume and some of the other lines is the FX impact that we experienced in the quarter. I will summarize that at the end. Inflation. Replacement CapEx inflation, we called it about 2.1% for the quarter, and that is a headwind of just under $19 million year-over-year. And then mix, all other, including some portion of FX, accounted for $27 million year-over-year. That includes the impact, again, of the National Pump acquisition, as we talked before. National Pump not only contributed through the acquisition, but has a more attractive mix than the rest of the business, and so that was a significant part of that $27 million. So those were the key components of the $120 million improvement. And I will just call out separately, if you aggregate all of the currency impacts, we estimate that currency cost us about $16 million of rental revenue year-over-year, and that certainly is a significant headwind when you think about the growth that we were able to experience. The only other revenue comment that I will make is about used equipment sales. We had another good used equipment sales result in the quarter, $116 million, and that is up about 6% from last last year. And also very importantly, a very robust 50.7% adjusted gross margin for the quarter. And as has been the case, that was helped not only by solid pricing in the quarter. Pricing, as measured by proceeds as a percent of OEC, was just under 50% in the quarter. But it also was supported by our continued focus on the retail channel. We get the best margin result there. And so selling about 61% of our used sales through the retail channel was a nice support for the results. Turning quickly to profitability and EBITDA first. Adjusted EBITDA of $602.2 million was a company record for the quarter, as Mike pointed out. As was the adjusted EBITDA margin, 45.8%. It was a very robust margin. So that is $83 million worth of dollar improvement over last year and 170 basis points worth of margin improvement as well. Flow-through in the quarter was strong at 60.6%, and we'll certainly touch on some of the drivers there in the year-over-year EBITDA bridge. Speaking of which, that $83 million of improvement was driven by volume. Primarily, volume was up about $51 million of the $83 million year-over-year improvement. Rental rates contributed another $24 million toward that 83 improvement. The Cat class mix, primarily from the impact of adding Pump, we would call out at about $14 million of incremental improvement. We also had the improvement from ancillary and re-rent revenues that I called out earlier. That's about a $7 million improvement on the incremental $14 million of revenue that I called out. We did have a lower incentive compensation accrual for the first quarter of this year compared to last year, reflecting some of the headwinds that we experienced with O&G, weather, and currency. That contributed $6 million of year-over-year improvement. Used equipment sales, I already called out the sales margin improvement. That was about $5 million of improvement. A few headwind items. The fleet inflation and mix component combined was about a $13 million headwind versus last year. Bad debt expense, we reverted to a more normal bad debt expense this year compared to a solid bad debt expense performance last year, so that cost us about $8 million in year-over-year EBITDA. Merit increases were about $6 million of impact this year as well. That leaves about $3 million of all other nits and gnats combined. All in all, a very robust EBITDA result in the quarter, even in spite of the headwinds. As Mike called out on EPS, it was a great EPS result for the quarter as well, $1.34. That's up almost 50% against the $0.90 of adjusted EPS that we delivered in the first quarter last year. Another good result there. Moving on to free cash flow. Continue the good result commentary. $450 million of free cash flow in the first quarter, and that's up from $278 million in the first quarter of last year, with minimal merger-related adjustments showing up in the current quarter. There's only about $1 million worth of merger-related payments. The way we talk about free cash flow on an adjusted basis, we would call $451 million. A variety of different drivers, including the operating profitability. We also had lower AR and the timing of some of the other working capital payments were also favorable for us, primarily accounts payable. Rental CapEx for the quarter was $323 million, and that's certainly a start consistent with the comments we've made previously about the timing of CapEx this year looking similar to last year. As you saw in the outlook, we continue to expect to spend $1.7 billion in gross capital this year for a net of about $1.2 billion. The net rental CapEx in the quarter was just under $210 million for the quarter. On capital structure and liquidity, a busy quarter in capital structure actions. You all have seen that we refinanced two of our outstanding issues. We issued calls on the 8.375% senior subordinated notes and the 5.875% senior secured notes. We refinanced those issues by issuing two new issues, $1 billion of 4.875% and 5.875% eight-year senior secured notes, and then another $800 million worth of 10-year senior unsecured. Very attractive overall impact for those refinancing transactions. We didn't stop there. We also amended and extended our ABL facility and increased its size as well, so the ABL is now up to $2.5 billion. We then drew on that new and improved ABL and used it to partially call the 8.125% senior notes. I go through all of that just to note that the timing of those transactions were split between first quarter and second quarter. As you think about the results in first quarter and as you anticipate the results for the second quarter, you have to remind yourself that we will have some impacts in the second quarter from those first quarter transactions. In particular, we'll report in the second quarter about $121 million loss on the redemptions. That covers both the premium of calling the outstanding notes, as well as writing off any remaining deferred financing costs. That'll happen in the second quarter. When you aggregate it all together, we expect that the aggregate run rate of interest expense reductions from all those transactions should come in to an improvement of about $48 million a year. That gives you a summary. To put it even more directly, our interest expense estimate for cash interest this year, excuse me, GAAP interest. GAAP interest this year, we expect to be about $460 million. Hopefully that'll help you as you think through all those transactions. Real briefly on ROIC. A company record ROIC result in the quarter, 9%, and that was 120 basis points compared to first quarter last year, and 20 basis points better than in the fourth quarter. Despite all the headwinds, as Michael discussed, we continue to be on a path to improving our ROIC, which has been a major focus of our efforts. Even with the revised guidance that we provided, we fully expect a very nice improvement in ROIC as we go through the full 2015 year. Before I finish up with the outlook, just a real brief summary of our progress in oil and gas. We talked in the first quarter about a downside oil and gas scenario, and I just wanted to provide a couple of data points about progress against oil and gas and how we compare to that downside. Recall that we called out about a $400 million maximum fleet size impact from the downside scenario we laid out. You'll also recall that we said that $400 million impact, we modeled it as hitting us in the second quarter. Obviously, we didn't expect it would be zero impact until June and then 400 from June on. We certainly modeled it that way. That 400 maximum impact averaged out to a $200 million OEC impact over the course of 2015. We are about halfway to that $400 million maximum impact just based on the path of fleet in our oil and gas branches. In particular, when you look at those oil and gas branches, most of the impact that we've seen has come from the oil and gas branches that have the highest share of their revenue from oil and gas. If the branch has more than 20% of their revenue from oil and gas, in aggregate, those branches have seen about a $200 million equivalent OEC impact. For the branches that have less than 20% of their share in oil and gas, there has been virtually no impact. We find that to be a very interesting feature of how oil and gas is progressing throughout our branches. The thing, as Mike pointed out, that surprised us a little bit is that the impact came a little sooner than what we expected. Certainly not outside the context of the size of what we expected. The fact that it came sooner means that it will have an effect over the remainder of the year, longer than the way we modeled the downside. When you net it all together, we are probably seeing an impact through the full 2015 calendar year of something in the area of 88% of the full downside impact that we talked about previously. We call that $36 million of EBITDA, as you all recall. We would probably say that we are seeing something like a $32 million EBITDA impact, assuming oil and gas maintains at the level that it is currently. That is not an unreasonable assumption given that when we look at our oil and gas branches, we are seeing a slowdown in the decline. In fact, if you look at all of our oil and gas branches for the months of March and so far in April, we have actually seen a slight sequential increase in fleet on rent in those branches. That gives us some level of encouragement that the decline has slowed, if not completely arrested. The question is, where does it go from here? That is going to be the wild card, and we can talk more about that in Q&A if anybody is interested. That is the oil and gas picture at a very high level. The last thing I would like to update is just the outlook. You saw the announcement. Essentially, what we did was to take off the top end of the revenue and EBITDA ranges, reduce the expected rental rate realization, and left everything else unchanged. We think that is a very realistic view of where we will be for 2015. The outlook now is for total revenue in the range of $6 billion-$6.1 billion. Within that, as I said, we expect rental rates to be approximately 3% for the full year. Time U, we have not changed our view. 69% for the full year or an increase of about 20 basis points. In adjusted EBITDA, we are now in the range of $2.95 billion-$3 billion for that measure. We are continuing to target $1.7 billion of gross capital spend for a net of about $1.2 billion, and we continue to expect free cash flow to be centered around $750 million with $725 million on the low side and $775 million on the high side. All of that will net out to our continued expectation of leverage at the end of the year at about 2.6 times net debt to EBITDA, and that assumes that we complete the share repurchase program at about $500 million in calendar 2015. You all saw that we did spend about $316 million on share repurchase in the first quarter. That brought in about 3.5 million shares at an average price of about $89.16 in the quarter. We continue to believe that spending on the path to $500 million is the right place to be for right now for 2015. Obviously, we will continue to reevaluate as we see how profitability and cash flow develop as well as how the stock price trades. Those are the key points that I wanted to make and certainly would welcome all of your questions. It was a solid quarter for us when you step back and look at the results with some headwinds that not only had we to deal with in the first quarter, we will have to continue to deal with going forward. But we have got confidence that we have got a program that can get us to the outlook that we have given, and certainly we will update you as we go forward. With that, operator, I will ask you 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. Also, we would like to ask, in the interest of time and fairness, please limit yourself to one question and one follow-up. Our first question comes from the line of Seth Weber from RBC Capital. Your question please. Hey, good morning. Good morning, everybody. Good morning, Seth. I'm wondering, can you talk a little bit more about the redeployment? Bill, I think you mentioned you've seen about $200 million of fleet that's been affected so far in the O&G regions. Can you size for us how much fleet you've redeployed year to date so far? Where is it going? Is it going intra region? Is it going out of state just to non-residential construction markets? I guess, how do you think the non-res markets are going to shape up competitively? We've heard anecdotally about the independents kind of adding more fleet recently. I think, Michael, you mentioned competitive pricing. Can you help us kind of frame all of that stuff? Thanks. Sure, Seth. I'll start with sizing and Mike and Matt, you guys, if you want to chime in on where it's going. The way we look at it, we've got about $80 million of fleet that have come out of O&G branches going into non-O&G branches. Primarily, that $80 million has come out of the branches, the more than 20% share branches that I mentioned earlier. So the issue has been concentrated in those high-share O&G branches, and we've responded there with the de-fleeting of about $80 million so far. The challenge, of course, is putting that fleet on rent usefully elsewhere. We think we stepped up to the challenge. It is more of a challenge in the first part of the year than it will be in the second and third quarters, in particular, just given the relative busyness of those quarters compared to first quarter. So we're encouraged by our ability to mitigate by moving fleet around. As to where it's going and sort of the environment that it's facing, do you guys want to add anything? Sure, Bill. Yes, Seth. So we're seeing, and you can look at the construction growth maps that are in the deck on slide 14, specifically of where the demand is, and we're shipping the assets to where the demand is. The good news, as Bill said, that demand will increase as we get into our norm. The seasonal uptick will be in our favor. As we look at our non-O&G branches, the encouraging news is that they're acting very similar to how we expect them to act to how they've acted in the past. As we sit here today, we're seeing both time and sequential rate in those non-O&G branches get the ramp up that we need to hit our goals. So that's where it's going to go, the end markets and the demand tell us that the opportunity is there, and most importantly, we have the team and the customers and the footprint to deploy it there. Yeah, I would just only add that, I think you asked the question, where is it going? And it's actually, most of it is staying within the region, where it's coming off rent. We are doing transfers. We are also doing sales and redeployment of capital. That's an ongoing effort for us, and we'll continue to do that. But I also want to point out one thing, if you recall, over the last several years, we have been very disciplined in the way in which we've given out capital. And over the years, many of our non-O&G regions have been looking for fleet. So, this is their opportunity. They're taking it, and we're supplying them. Okay. And if I could just, as a follow-up to that, can you just talk about how deep into the year, where do you expect to make the CapEx, your $1.7 billion CapEx decision? Where do we kind of get to the fork in the road on the $1.7 billion number? Is it, if you don't see trends pick up, is it May or June, or how deep into the construction season will you go with that versus just continuing to move more fleet around? Yeah, I'll start, Seth, and the other guys chime in, please. I think maybe it would be helpful to come at it from the other direction. How late can we go before we have to make a decision about reducing CapEx if we decided there? And the answer is pretty doggone late. As we've talked before, we don't have cancellation penalties, or a lot of constraints on our ability to pull back once we've placed orders. Up until the point that it's shipped, we can cancel it, for the most part. And so that gives us a tremendous runway to make that call. Certainly, we want to see how the second quarter ramps up, and get a real solid feel for that before we start making any decisions. Matt, I don't know if you want to add anything. Yeah, the only thing I would add, Seth, is we do not need to make that decision, and we are not trending towards that decision because as you look at the data, when you take pumps out of the equation, even absorbing oil and gas, we are 10 bps down in the first quarter. That is improving. When you look at the non-oil and gas branches in Q1, they were actually 40 bps up on a year-over-year basis. So if we deliver 3% rate 79% time, that is a good reason to spend that $1.7. We do have the flexibility in case anything changes, as Bill stated, but we feel good about being able to deploy that, as well as 18 cold starts that we are doing in the full year, many of which are opened already. So actually, it is 21. It is 18 specialty and three GenRent cold starts that we have already opened up. So those are all the reasons why we feel like deploying the capital is something that we will be able to do effectively. Yeah, it was 69% time, not 79%. Oh, did I say 79? Boy, I had my Nirvana hat on. I apologize. All right. Thank you very much, guys. Yeah. Thank you. Our next question comes from the line of Ted Grace from Susquehanna. Your question, please. Hey, Ted. Hey, gentlemen. How are you? Good, Ted. Doing well. I was wondering if you could walk through the sequential progression of time utilization in 1Q and then frame out what has happened in April, what gives you confidence that the trajectory can reverse out, that a lot of the challenges are reversing out? I know you mentioned that the O&G branches, that rate of decline has slowed dramatically, but could you maybe just help quantify that with some of the time utilization data points that you can talk about? Sure, Ted, it is Matt. The time utilization in January was 63.7%, and in February, it was 63.9, and in March, it was 64.9. When we talk about April, March was our biggest gap on a year-over-year perspective. We see that gap narrowing, and as we sit here today, we are very close to, and this is all in, this is not just non-O&G. We are very close to being on top of year-over-year time utilization. More importantly, as we look at the OEC on rent build, we have had a very strong two weeks, and this is when we need that to build. April, May, and June, Q2, is where the build has to come, and we are expecting to cross over the year-over-year time utilization somewhere in mid-May. That is our target, and that is what has got to happen. Then have some sequential improvements from there on a year-over-year basis, as well as a seasonal increase. I do not know if I answered your question. That is the data that we are sharing today. Yeah, that's helpful. I think that helps people understand kind of what that curve looks like. Did you mention that in the first quarter, non-oil and gas branches time utilization was up 40 basis points? Yes. That's right. Okay. Yes. Versus the reported of negative 40? That's right. Correct. Okay. That's really helpful. The second thing I wanted to ask is just as a follow-on to Seth's question on the O&G exposure. A quarter ago, you walked through the framework. It was very helpful. You've updated to say that the reasonable worst case scenario is 88% of that $36 million. Did I hear that correctly? Do you still feel that the reasonable worst case scenario is that $36 million, or I just want to make sure we understand what the updated kind of message is on the framework. Yeah, we do still think that's a reasonable way to think about a maximum downside, Ted. As I said, the impact came sooner in the year than what we model, certainly, and than what we expected, quite honestly. But yeah, I'd still say that 36 is a reasonable downside scenario. Remember, when I said the 88%, the $32 million, I think I said, of impact is our view right now, that's excluding some of the mitigation that we have been and will be doing over the course of the year. That $80 million of fleet that I said came out of O&G and went into other non-O&G branches, we haven't given any benefit for mitigation from that fleet being moved the way it has. That's why we think that the $36 million is still a reasonable downside for EBITDA impact from O&G this year. Okay. The last thing I'll ask, when we square that up against the updated EBITDA guidance, $2.95 billion to $3.0 billion, so you cut it 25 at the midpoint. How much of that is the updated O&G expectations? Just so we understand how that's baked into the updated guidance. Yeah. We weren't that explicit when we set the range and therefore set the midpoint on the new guidance, Ted. What I would say is that what we feel is that if oil and gas continues where it is now or even deteriorates a little bit more, it would've been a part of the reduction in the midpoint of the range, but not the entire reduction. We still certainly have the impact of currency that's continuing throughout the course of the year. We did have the weather impact, and we're going to claw our way back from that in the second quarter here, that continued to impact the full year. I don't know how to categorize it numerically, but I'd say oil and gas was part of it, but everything else we experienced in the first quarter was part of it as well. Okay. The only thing I'd add, Ted, is in there is a $25 million number on rate. So just the absorbing that half a point of rate change is part of that movement as well. Okay. Well, solid quarter guys, and best of luck this quarter. Thank you. Thank you. Our next question comes from the line of Nicole DeBlase from Morgan Stanley. Yeah, thanks guys. Good morning. Hi, Nicole. Good morning. Hi there. My first question is just clarifying Ted's point. The $32 million, and I'm sorry if we're going on about this, but the $32 million impact that you guys now expect from oil and gas, is that fully baked into your guidance? Is it in the low end? Is it in the midpoint? Is it in the high end of the new EBITDA range? It is baked into our guidance. Okay. We're not characterizing whether it puts us at the low, medium, or high of it. It's in our thinking when we set the guidance this time. Okay, got it. Thanks for clarifying that. My second question is, it seems to me like the new 3% rate guidance is assuming that we kind of get normal seasonality from here, which makes sense since you guys are already starting to see a pickup in those O&G states. I guess my question is, what you've seen from a rate perspective quarter to date, so in early April, does that gel with the 3% rate guidance that you have? What's the downside risk at this point that we could have a downward revision? Would we need to see deterioration in O&G prices and market for that outcome to occur? Sure, Nicole. I'll take that. It's Matt. As far as the rate guidance, what we're seeing in April is that we've gotten it back to flat, and now we can get our sequential climbs that we need. That, as you pointed out, we usually get in this season. You're looking at about six tenths a month, May through November, and then a small drop in December, and something that looks similar to that. The good news is, as we look at our history, we've done that before. So between the strength in the end markets and the fact that we have the tools and the capability of doing it is why we felt comfortable setting that target at three. Okay, got it. Thank you. I'll pass it on. Thank you. Thanks. Thank you. Our next question comes from the line of Scott Schneeberger from Oppenheimer. Your question, please. Hey, Scott. Thanks for coming, guys. Just curious with regard to the guidance, and the softness in the quarter with regard to rate. Could you address Forex? I think you talked about the rental revenue impact in the quarter. Could you speak to EBITDA and then just other drivers of the rate guidance? Is it predominantly the oil impact, or are there other things, asset class, geographies? Just curious. On currency, I called out $16 million of revenue impact in rental revenue and about $7 million in EBITDA. As we look for the full year, if currency stays you can use 60 and 30 as the full year impacts for the remainder of 2015. That is considered in our guidance as well. That's the currency story. I'm sorry, what was the other part of your question, Scott? No, thanks. No, that's helpful on that, though. I guess just as a follow on, when moving around assets from the oil locations, could you speak to the asset classes that are being moved, and what's just coming off and not going back, and what are the asset classes that you're moving, and what's having more success than not? Thanks. And how that ties to rate as well. Thanks. Sure, Scott, this is Matt. As far as the assets that are moving, what you would expect. Reach forklifts, some booms, some light towers, as well as pumps. If you ask me which one are the most challenged to move, until we further build out our footprint, we have a headwind to moving the pumps as fast as we move the other more fungible assets. But that was always our game plan when we made the pump acquisition, was to grow out that footprint and penetrate other markets. As well as chasing our cross-sell opportunity. You'll see in the slide deck on, I think it's slide 35, that we've identified $80 million of cross-sell opportunity. We don't only have the strategy and the hope, we actually have the opportunity to continue to move some of those pumps out of the O&G and into existing customers through cross-sell. So stay tuned for what our close rate will be, but there is an opportunity out there that we've identified and that we're chasing. And that'd be the last part of the asset class that we need to move more aggressively, it would be the pumps. Thanks, Don. Thank you. Our next question comes from the line of Joe Box from KeyBanc. Hey, guys. Hey, Joe. Hey, Joe. Mike, you said earlier that you expect a competitive rate environment as we start to get into the summer months. I am curious, is that across the board, or is that much more concentrated in the energy-exposed markets? I apologize if I missed this earlier, but did you give us a breakdown of rental rates within the energy markets versus outside? Well, I do not think we gave the It is hard for us to break it out that way, because the way in which we do it, the ARA, it is a weighted average on the asset class, and it is hard to break it out that way. With regards to the competitive marketplace, I just think that typically, look, we all had a bad winter. We all had the oil, and we see that the competitive marketplace will change as the season swings to the more seasonal opportunity. So we just see it being more competitive. I would not take it anything more than that. It is a nutshell. Do you think it's fair to say that inside energy is negative and outside of energy, it's kind of in line with that 3.5%+ that you'd highlighted earlier in the year? I would quantify it by saying that the non-O&G, you'd see a normal trend that you would normally see that we've experienced over time, as opposed to when you add the O&G in, it gives us that full impact. Understood. One last one for you. Bill, looks like there's only about a $6 million difference between the revenue contribution that you're getting from rental rates and then the offset from fleet inflation. That doesn't give you a whole lot of wiggle room. We know where you're guiding for rental rates, but what are your expectations for fleet inflation? Kind of curious if rental rates continue to exceed inflation or if they go to parity or even negative from here. Yeah. The expectation is for fleet inflation to continue sort of the trend that it's been, right? We're replacing something like 15% of our fleet every year, and we continue to experience inflation on new purchases at something like a couple of percent a year. So when you aggregate that over the average life of what we're replacing, we're going to stay in that 2% area for fleet inflation going forward. So, if we deliver the about 3% that we're talking about for rental rates, we've still got a spread. My expectation is that the inflation won't change dramatically. And I certainly expect that we'll continue to drive rates as hard as we can. So I won't give you a long range forecast. You know we've talked about delivering 3% a year rental rate improvement over the long haul for a long time. That's been our long-term view. Oil and gas has made that challenging this year, but I don't see a reason to change that longer-term view as we sit right here. Yeah, Joe, I would only add that aside from just rate, it's not the only thing that we're leaning on. We're also looking at driving efficiencies in our process improvements. We continue to march down that path. We're looking at ways in which we can become more efficient in driving not only our fleet but also our cost structure around our process. Understood. Thanks, guys. Yeah. Thanks, Joe. Thank you. Our next question comes from the line of David Raso from Evercore ISI. Hi, David. Hey, David. Hi. David. The rest of the year guidance, the first quarter incremental EBITDA number was the margin was pretty healthy. It was 61%. When you look at the rest of the year guidance, it requires a bit of a step-up with the incremental EBITDA margins have to be around 76% to hit the year. I am just trying to walk through, are there some cost reductions that we can think about to expect the incremental EBITDA margin to accelerate that much as the year goes on or a mix issue? If you can just dive into that a little bit more. Yeah. Thanks, David. I called out the impact of one particular item, bonus accrual difference year-over-year was $6 million in the first quarter. If we continue on the path that we're on, that's going to continue to contribute as we go throughout the rest of the year. In fact, the contribution will increase because last year, we increased our bonus accrual as the year wore on. The second half, we ran very strong versus our plan, and so we accrued up to a much higher level for last year's bonus. This year, assuming we stay and deliver the guidance that we've given, it's going to be less. That $6 million will go up a little bit in future quarters. That'll help. As you know, the incremental margin calculation is very sensitive even to reasonably small dollar amounts. I think that's one example. To Mike's point, we've got a very intense focus on productivity overall. We realized, what was the number, guys? $7 million of year-to-date impact of our efficiency, our lean focus, and that's at a run rate of $42 million. We'll continue to drive that run rate higher and the realized amount higher as we go forward as well. That's going to contribute and help support the incremental margin. Then I'd say bad debt expense, it's always a little bit of a wild card, but we think that there could be an opportunity in bad debt expense as we drive some process changes internally to focus on how effectively we collect. I think those are the things that I'd point to that give us some confidence that the 60% flow-through margin or flow-through that we talk about is very realistic for the year. Given it's completely under your control, so it's something you really could just make happen if you need to, can you help us a little bit more in quantifying the potential benefit from the accrual on the bonus? Because this quarter, say you needed another $20 million of help year-over-year on accrual bonus to get to the 76% incremental for this quarter. That's a pretty healthy jump, right? This quarter, the benefit was only six. Just to give us more comfort that that is a lever you could pull. Can that add not six in the second quarter and third quarter? Could it be 20s and 30s? Is it that significant a number? It could be. Right now, if you're looking for a number, I'd say something in the neighborhood of, I'm hesitating on going too far here, but in the middle to upper 30s, it could be. On a year-over-year benefit. Okay. So that is something under your control. I am sorry, is that a full year or per- That is full year. Oh, full year. Okay. It could be a little bit more depending on how the year plays out. Again, it depends on how the year plays out as to how we do versus the targets that we set for the year. Okay. All right. Then on the rates, the comment, Matt, about 60 bps per month to get you to the. I am not sure if you quite get there, but you get close. I guess maybe more for the cadence. Even if we can do that, it appears the rate for the second quarter would still be lower than the 2.9 we just printed. So I am just trying to get a sense of the cadence. When do you expect a quarter to show above 3? I am just making sure we. Basically, I am trying to figure out is when do we make that harder decision on CapEx, utilization, rate? I would think you need to make that decision probably, as you said, by the end of the second quarter, if not, maybe a little earlier. What is the cadence or rate increases year-over-year that we should be thinking about to help think about that trigger decision on CapEx? If you do the math, you will see that you do not get to the 3 threshold until the second half of the year. So we understand that. We understand that the headwind that we got in Q1 compounds and has a carryover effect to our Q2 results when you look year-over-year, and that is within our modeling and where we are expecting. So you are talking towards the end of the third quarter, and then moving on from there. Okay. That is helpful. Okay. I appreciate it. Thank you. Okay. Thanks, David. Thank you. Our next question comes from the line of George Tong from Piper Jaffray. Your question, please. Hi, George. Hi, good morning. Morning. Morning, George. I want to drill into the downside scenario. In your prior earnings call, you noted $400 million of fleet would be affected by O&G, and then you assume you could mitigate half of that by redeploying the fleet. So that's about $200 million of fleet affected. Then previously, you had expected only a half year impact, so that works out to be $100 million of fleet affected. $100 million of fleet, assuming 60% dollar utilization gives you $60 million of revenue impact. Then $60 million revenues on 60% EBITDA flow-through gets you to the $36 million EBITDA downside. It appears your prior downside of $36 million assumes a half year impact and assumes you can mitigate the downside by redeploying the fleet. Given the greater part of the year is being affected by oil, does that increase the downside beyond $36 million? Yes. That's what I was trying to call out. The fact that we've now experienced the equivalent of a $200 million decline for now it's going to be three quarters, assuming it doesn't get any worse or it doesn't get any better. It'll be three quarters of 200 of impact and one quarter at an average of zero to 200. So call it a net effect of $175 million of impact before mitigation. Then the math flows through from there to that 88% or $32 million number that I gave earlier. But the mitigation, I want to point out, the mitigation is not included in that calculation on the 80 million of fleet that came out of O&G and went somewhere else. Right? We would have to do a separate calculation of the mitigation impact of that, and that's why I said that I don't believe that it'll be a full $32 million impact that we'll experience, but something less than that. And I tried to range it between 18 and 36. And you could probably say 18 and 32 as the realistic range. So that's how we're thinking about it this year, and obviously, it requires us to continue to mitigate pretty aggressively with the fleet that does come out of O&G. As I pointed out, that's harder to do in the first part of the year, in the first quarter, than it is when things get busy in second and third quarter. We're encouraged about our ability to mitigate even more effectively as we go forward. Hopefully that answers. If not, ask again, George. Yep. Nope. Okay, that makes sense. If I look at your updated guidance range for revenues and EBITDA, at the midpoint of the range, EBITDA flow-through works out to be 70%. However, you're still maintaining a 60% flow-through target for the full year. This suggests either EBITDA will be below the midpoint, or revenues will be above the midpoint, or both. Can you comment on which of these you're thinking about as you target a 60% flow-through? Yeah, this is where the ranges always make life challenging, right? I don't want to go further than just the ranges that we've given and the fact that we believe that revenue and EBITDA will fall within the range. Given the sensitivity of the calculation, the combination of those two will get you, we think, at least to the about 60% flow-through that we expect, and not go any further than that, George. Otherwise, we might as well just give you the whole forecast, right? Thank you. I know that might be happy for some of you, but not for us. Thank you. Our next question comes from the line of Joe O'Dea from Vertical Research. Hey, Joe. Hi, good morning. Good. First one, just on end markets. It sounds like non-res feedback that you are getting through the market remains pretty constructive. Could you talk about, with the 8% or so fleet growth that you have baked in on the current CapEx guide, what the underlying breakdown is on, say, the non-res growth that you anticipate to drive that, versus the industrial growth that you anticipate within that? Well, I do not know that we break it down specifically in those two categories. There is two pages on our deck that parses it out by state. The forecasted industrial growth rate for 2015 is 3.3%, and the non-res construction is 6.2%. But it gives you a lot of detail by state within those two categories. Aside from that, some of the macro things, the ABI index just came out. That is another positive, by the way. That is 11 of the last 12 months that shows a positive trend, and it seems to have build, particularly in construction and industrial. It was 50.9 in January, it was 51.2 in February, and in March, it is 53. So you continue to see that momentum building, and that is a leading indicator. When you couple that with housing and the Consensus Construction Report that I mentioned, those are some of the backdrops for some of the leading indicators that we are thinking about. Got it. Thank you. Just back on rental rate and given some of the details you have provided, and I guess, but without knowing exactly where March wound up, are you able to just sort of frame what the rental rate for 2Q would be if you see the sort of typical sequential climbs through the course of the quarter? Yes. Joe, it's Bill. It would be below the 2.9 year-over-year for the full quarter that we achieved in Q1. So you could do the math. It comes out to about 2.5%. Okay in the second quarter, just on the sequential months, the way Matt described it. That certainly reflects the strong second quarter that we had last year, making for a tougher comp. Great. On that, with the tougher comp and the high flow-through, I know 60% is a full-year target, so it seems like there's a little bit harder comp on getting that 60% incremental maybe in 2Q, and again, it gets better into 3Q, 4Q, where you have better rental rate support. You got it. It'll be more challenging in the second quarter, and then it gets better in the back half. Okay, great. Thanks very much. Yeah. Thank you. Due to time constraints, this does conclude the question and answer session of today's program. I would like to hand the program back to management for any further remarks. Thanks, operator. I want to thank everybody for joining us on today's call. I hope we have given you some insights into our current operating conditions and what we expect in the months ahead. Please be sure to download our updated investor presentation. Also feel free to reach out to Fred Bratman in our Stamford office anytime for any additional questions, if he can be of assistance or line up any presentations or some field site visits. Thank you very much. Operator, you can end the call now. Thank you. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now-