Earnings Call: Q1 2014

Apr 17, 2014

Good morning, and welcome to the United Rentals first quarter 2014 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 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, 2013, as well as two 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. 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. I want to thank all of you for joining on today's call. We have three topics on the agenda this morning. First, our strong performance in the quarter. Second, our external environment and how that's playing out in terms of demand. Third, we'll give you an update on National Pump and some of the other initiatives that we have underway to drive growth and efficiencies. Our goal is also to provide you as much visibility as possible into how we are thinking about how the rest of the year will unfold. After that, we'll answer your questions. Let's get started. The first quarter is always about pushing forward against seasonal headwinds and driving year-over-year improvement. I'm happy to say that we overcame an unusually harsh winter and generated solid numbers in every major metric. We did this by managing the business very strategically to capitalize on pockets of demand, and you saw that in the results last night. We had a sizable increase in rental revenue, and our adjusted EBITDA dollars and margin were both first-quarter records for us. We also increased our volume, time utilization, and rates on a larger fleet. Something that wasn't in the release, we improved our rates sequentially for every month in the quarter. Frankly, that was a little better than we expected. Bill will discuss the numbers in a minute, but that gives you an idea of how we've turned a seasonal low point into a strong start of the year. I want to turn our attention to the marketplace at large. Last year, I said that we were bullish about the impending recovery. In January, we confirmed that equipment rental appears to be in the early stages of a multi-year growth cycle. Now commercial construction, which accounts for about half our business, appears to be in a broader recovery. As you know, commercial construction is typically the last end market to pick up steam in an upcycle, so any improvement is a positive sign. Even so, the first weeks of the year were very difficult. But as we moved through late February into March, things evened out, and we are now seeing near universal improvement in demand. That is not just a 10,000-foot view. A few weeks ago, we completed our quarterly business reviews, so we have very recent input from the front lines. The reports from the field indicate more optimism than we have seen in years. Our customers are upbeat about their own business prospects. In short, there is a widespread sense that things are back on track. The first quarter metrics support this. For one thing, our used margin was more than 5 percentage points higher than the first quarter last year, and that is another good indicator of end market optimism. All but one of our regions showed rental revenue growth in the quarter, and about half our regions had double-digit growth. To give you an idea of the scope of the recovery, our Midwest and Southeast regions turned in the strongest revenue performance. They had year-over-year increases in the range of 18%-19%. Our Gulf, Mountain West, and South regions were very close to the top. In the Southeast alone, we won bids on a city center complex, a power plant, a pharmaceutical plant, as well as two other sports facilities and a large residential tower. We are also seeing infrastructure projects come back online, both in the U.S. and Canada. Our industrial business continues to be robust, particularly with manufacturing and energy. This kind of project diversity is what we expect when a recovery begins to take root. We have been steadily scaling up to meet this demand. Now, in the second quarter, we are in an ideal position to take some significant steps forward. First, there is our capital allocation. We plan to deploy over 40% of our gross rental CapEx in the second quarter, and we will purchase roughly $750 million of fleet against our full-year guidance of $1.7 billion. As we noted in January, we increased our capital allocation for the specialty rentals this year with an eye towards growing these businesses. Our full-year CapEx plan for specialty fleet is approximately $240 million, and this includes capital for National Pump, which we closed on April 1st. On the subject of National Pump, this is a new platform that has all the hallmarks of a home run. It has really clicked into place as a key part of our equipment range, and the integration is doing well. We have rebranded the business as United Rentals Pump Solutions, in line with the way we market our other specialty offerings. The plan is to move the pump operation onto our technology by the end of June, and then launch a fully integrated cross-selling effort. Our other specialty lines continue to turn in strong performances. Same-store growth for trench safety, power, and HVAC was an impressive 19% year-over-year. And we're on track to open at least 18 branches this year, including some for our new pump platform and our industrial tool business. As we previously stated, we want to double the size of our high-margin specialty segment within 5 years. That gives you an idea of the importance we place on these businesses as a lever of ROIC. Although they are unique in certain ways, our specialty operations share the same culture and sense of purpose as the rest of our organization. For example, every branch, regardless of its focus, understands that safety is our first priority. In the first quarter, we worked together to drive our recordable rate below one for the first time in our history. That's really a major victory. I want to call attention to our lean initiative that we announced on our last call. Lean requires upfront investment of time and money. But we think we can generate a run rate of at least $100 million of efficiencies within 3 years. We've already introduced the lean process to over 100 of our branches. While it's still early, we've identified what should be sustainable improvements in productivity. But we'll be able to share more about this program with you later in the year. Finally, our entire sales force is out there talking to our customers about the benefits of sourcing their job site needs through a single provider. This gives continual cross-selling opportunities throughout the project life cycle. It also encourages more revenue from our key accounts, which are up almost 8% in the quarter versus last year. It encourages our local unassigned accounts to stay with us and grow over time. Unassigned accounts, roughly one-third of our revenue base, they were up almost 12% in the quarter. So we have a lot of momentum and a very promising year. Now before I turn the call over to Bill, I want to share a personal observation. I believe that one of our greatest strengths as any organization is our ability to manage all the initiatives I just described and still think about the business very strategically. We're a disciplined, thoughtful, inventive company that stays both focused and open-minded about our avenues of growth. These qualities have given us a strong start to the year. We'll continue to make sound decisions that earn us investor confidence. So with that, I'll turn the call over to Bill for the financial results, and after that, we'll take your questions. So over to you, Bill. Thanks, Mike, and I'll offer my good morning to everyone as well. I'll try to add a little bit more color to the numbers that were in the press release last night. Hopefully, it'll be helpful. If not, ask questions in Q&A. Starting with revenue and, in particular, rental revenue. A nice quarter for us in rental revenue growth. It was up 9.7% over last year. It's about $89 million of higher rental revenue. That rental revenue growth was really driven by all components. Within that, our owned equipment rental revenues were up 9.1%. Our re-rent was up 7.8%, and our ancillary and other items were up a robust 16% over last year. So a very nice growth in all the components of rental revenue. Within the owned equipment revenue line, OER, Mike mentioned rental rate performance was good. We were up 4.3% on our rate metric for the quarter. Very nice start to the year for us. The volume was also very strong in the quarter. We had an average of just under $5 billion of fleet on rent. That is up 7.6% compared to last year. So a nice volume quarter for us as well. To get those two lining up nicely in spite of the harsh winter that Mike mentioned, and also in spite of what was a headwind from the Canadian exchange rate, which was down almost 9% year-over-year, was a nice start for us. Those were two nice drivers. Obviously, inflation and mix were a headwind, call it 2.8% headwind on the year-over-year growth for those two components combined. All in all, a very nice start to the year on a rental revenue basis and carries us nicely into the start of the second quarter. Fleet overall was up this year. We spent roughly $330 million on fleet purchases for the quarter, and so our average total fleet size was up 7%. You combine that with the 7.6% growth in fleet on rent, and that gets you the 40 basis point improvement in time utilization that we reported last night. Again, another nice start on time utilization improvement for the year. Before I leave revenue overall, just to hit used equipment sales quickly, we generated $110 million of used equipment proceeds during the quarter, and very importantly, we did it at a very robust margin of 49.4% adjusted gross margin. We think that reflects a very strong demand environment, which despite the harsh winter start, started to build momentum later in the quarter. It was down from the prior year, and that 11% decline we think was heavily impacted by winter weather. We also think it was heavily impacted by the expiration of depreciation incentives in the tax code at the end of last year. We think some people accelerated their used purchases into the fourth quarter and borrowed it out of January and February of this year. We are encouraged by the fact that March used sales activity was very nicely rebounded, and so far April feels pretty good as well. So we feel we are well on track to deliver our used sales expectations for the full year. When we turn to profitability, starting at adjusted EBITDA, $519 million of adjusted EBITDA in the quarter and delivered at a 44.1% margin, which is a record first quarter margin for the company. So very nice improvement in adjusted EBITDA. $68 million year-over-year improved, and importantly, 310 basis points of improvement from last year. Just to walk you through the bridge components of the year-over-year change in adjusted EBITDA, we calculate the rental rate impact at $33 million of that $68 million improvement. Volume, that 7.6% growth in fleet on rent translates into $41 million of the 68 year-over-year improvement. Fleet inflation and mix was a headwind, a net of $16 million. The robust ancillary and other rental revenue growth that I referred to earlier translates into about $8 million of year-over-year improvement. We had a good bad debt expense experience for the quarter. Year-over-year bad debt was favorable $4 million compared to last year, so that contributed nicely. We had our normal merit increase process. It cost us about $5 million of headwind in the quarter. The net of everything else we lump into other, including much of the FX impact. All of that was a net $3 million improvement over last year. So those are the components, and certainly, if you have further questions about them, we can address them in Q&A. Flow-through in the quarter was very robust for us, 87.2% for the quarter, and that reflects not only the underlying performance of the business, but a couple of specific items that we'd call your attention to. You'll remember last year, in the first quarter, we had some one-off items that we called your attention to back then. It was $5 million to implement 5S across our branches. There was another $5 million that we spent to reduce the amount of fleet not available. So those were one-offs. They did not recur this year, and so that $10 million year-over-year impact helped to boost our overall flow-through. We also had the bad debt experience that I talked about. It was $4 million of year-over-year improvement, so that helped boost the flow-through effect as well. The last thing we'd point to is that we did have a decline year-over-year in used equipment sales. So we had a reduction in revenue dollars that took away roughly 49% margin dollars. So that reduction in a lower margin item actually helps boost the remaining overall flow-through. So we wouldn't extrapolate the 87% flow-through for the remainder of the year. We continue to believe that we'll deliver about 60% flow-through for the full year as a total company, and I'll point out that includes the impact of adding National Pump, which adds revenue dollars at about a 50% margin. So that's going to weigh us down. But we still think that we'll deliver about 60% flow-through for the full year. Dropping down to EPS real briefly, $0.90 of adjusted EPS for the quarter. That compares to $0.48 in the first quarter of last year. Obviously, a robust performance, and it really just reflects everything that I talked about previously. Before I go to the outlook, just real quickly on free cash flow and the capital structure, it was a busy quarter for us. Free cash flow came in very strong in the first quarter, $278 million, and that's, of course, after the 330 or so we spent on rental CapEx, and another 18 or so on non-rental CapEx. So a robust start to year on free cash flow, and it puts us nicely on track for the free cash flow that we've guided to for the full year. We had some capital structure actions during the quarter as well. We had previously announced the redemption of $200 million worth of our 10.25% notes. We made that announcement in fourth quarter. We actually closed that redemption in the month of January. And funded it from our ABL. So that transaction closed early in the quarter. Later in the quarter, we issued new notes, both to refinance another high coupon issue, the $500 million of 9.25% notes. We issued new notes there by reopening another existing issue, our 6.125% notes. We also issued $850 million of new notes to finance the acquisition of National Pump. I call your attention to the fact that all of those issues happened during the month of March. The actual payments, though, didn't happen until the month of April. They actually don't show up as outflows on the balance sheet at March 31. If you look at where we stand today, actually as of April 14, so earlier this week, on liquidity, the net of all those actions have happened, and so our liquidity overall is a total of $1.35 billion. That includes available ABL capacity of $1.2 billion and a net cash position of $132 million. Just briefly to touch on the share repurchase program. We executed about $43 million of repurchases in our common stock during the first quarter. If you add that 43 to what we did in the fourth quarter and what we've done in the month of April so far, we stand at about $90 million of shares that we've repurchased against the $500 million authorization that we have. Obviously, we've said before that we expect to repurchase about $450 million of shares during calendar 2014. We feel like we've gotten a decent start to it in the first quarter, but perhaps a little slower than otherwise it would be because so much of the first quarter was blacked out, either for reporting purposes or because we were working on the National Pump deal. You can expect us to ramp up that repurchase activity in the second quarter. We still are very committed to delivering $450 million of those repurchases in calendar 2014, and indeed getting the entire $500 million authorization done by April of next year, as we originally announced. Just to hit on our outlook real briefly. You saw that we didn't change any of the numbers to our outlook for 2014 last night, but perhaps a slight change in tone. Just to reiterate, we expect total revenue in the range of $5.45 billion up to $5.46 billion during calendar 2014. Within that rental revenue growth will be driven by our expectations around rental rates. We still see rental rates up about 4% for the year. Obviously, we did get off to a nice start, so we hope that we'll have an opportunity to do better, and always we'll try to do better. Our utilization for the full year, we continue to expect to be up 30 basis points compared to last year. I'd remind everyone that that would be another company record. For adjusted EBITDA, we expect the full year to come in between $2.55 billion and $2.65 billion. As I said before, we expect the flow-through to adjusted EBITDA to be about 60% for the full year. Our view of adjusted EBITDA is that we're not in a position where we think it's prudent to raise the range of expectation, but we have started to say that we expect to be near the top of that range. We'll continue to drive higher there if we have the opportunity. The CapEx picture is unchanged as well. $1.7 billion of gross CapEx for the full year is our expectation, and that'll net down to $1.2 billion on a net basis. And finally, on free cash flow, we continue to expect between $425 million and $475 million of free cash flow for the year. I will remind you that all of those outlook components reflect the addition of the performance that we will realize from National Pump. I will stop there and open it up for Q&A, but certainly do feel good about what we did to start this year, and we look forward to rolling out the rest of the year, hopefully into a very strong year for us overall. So with that, operator, let us open up the call for Q&A. Certainly. Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered and you would like to remove yourself from the queue, please press the pound key. Our first question comes from the line of Seth Weber from RBC Capital Markets. Your question, please. Sure. Hey, good morning, everybody. Morning. I just wanted to go back to, in your prepared remarks, you talked about this $100 million of cost initiatives. Can you talk about how much of that is embedded in your guidance for this year? It sounds like not a lot. How should we be thinking about that rolling through the model over the next couple of years and kind of helping the pull-through margin? That is my first question. Yeah, Seth, it's Bill. We haven't given a number for 2014. What we said is that we'll make a nice down payment on that $100 million run rate impact. We certainly think that anybody who saw the number would agree that it would be a nice down payment. That's as far as we've gone. Do you think it should have been linear, or will you think it's more back-end weighted? We're just starting to roll out the program, so sort of logically it has to be more back-end weighted. I think we expect that it will build nice momentum as we get into the second half. I'll remind you also that it is built into the guidance that we've given, right? The assumption that we have for how much we did put in. So it's not something that we're keeping in our back pocket. It's out there in the guidance. Right. If it's accelerating going forward, could that, in theory, support a pull-through margin north of 60% next year, say, in 2015? I'm not ready to say that just yet, Seth. I think what we need to do is to make sure that we've got a handle on all the components that'll impact flow-through next year. We certainly, over the longer haul, think that 60% is a good way to think about things. Yes, this could be a way to get higher flow-through, but it may be what we need to do it in order to get to the 60% consistently. So let us reserve comment on 2015 flow-through until we get a little closer. Yes. Seth, Mike, there's a level of transparency that we have with everybody, and as I mentioned in my opening comments, that as we go through the year, we'll be able to communicate more. There are several factors. It's not just a cost initiative, it's also a revenue initiative as well. So we want to be able to quantify it and be able to speak clearly to everybody. So expect to hear more as we go through the year. Okay. Thank you. Mike, if I could just follow up on National Pump. I know we're only a short time into the transaction, but can you characterize any conversations you've had with customers about cross-selling between the two? Any opportunities that have come up in the short time that you've owned the company? Well, I'll just say that I did spend a day out at the branch right after we closed, and I walked away very excited about the opportunities that are ahead of us, and also the management that we have brought on board. But I'll ask Matt to speak specifically to your question. Sure. Thanks, Mike. Hi, Seth. We obviously were very excited about the deal before we closed, or we wouldn't have made that investment. But we've been even more pleasantly surprised by the reaction from our employees and our customer base. We've had a strategy meeting over the last few days where Paul McDonnell and his team leading the specialty business and our national accounts team have been strategizing on cross-sell because the customers are pulling us in immediately. Once we're all on the same platform, which will happen by the end of the second quarter, that'll be even easier to do. But we already are working on plans of cross-selling. Our customer base has really received very positively us filling this gap in our product offering. Okay. Thank you very much, guys. Yeah, thanks, Seth. Before we go to the next question, I just wanted to correct one thing I said on our outlook for the full year. The total revenue range will be $5.450 billion at the bottom, $5.650 billion at the top. I think I misstated that previously. I just wanted to get it straight. Operator, next question. Certainly. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question please. Hi, good morning. Thanks, Jerry. Good morning. Can you gentlemen just talk about the actions that you took to manage the fleet? In the quarter you alluded to it in your prepared remarks, but I am wondering if you could flesh that out because you outperformed the typical seasonality from a utilization standpoint in Q1 versus Q4 in what should have been a really challenging quarter. If you apply typical seasonality from here, I guess you would get well above your utilization target for the year. I am just wondering if you just step us through what went right in the quarter. Sure, Jerry, it's Matt. Obviously, we really were focused on not putting any undue pressure on the areas that were having the bad weather impact and re-shifting fleet, both new fleet and existing fleet, to the markets where we had opportunities. With that being said, the Midwest had quite a harsh winter and was one of our highest growing regions, at 18% growth. So there is some of this that's just penetration and the continued growth off of the build we've been doing since the integration of RSC. But I would say from a macro perspective, broad base, it was how we managed our opportunities and make sure we funded our opportunities. The rate impact came as a result of us not putting undue stress on the impacted market. We're very happy with the way the team managed that. And given that, Bill, at which point do you start thinking about taking up your CapEx outlook for the year in the context of how strong the start has been from a utilization standpoint? At which utilization level on a full year basis would you say we probably don't have enough fleet on hand? Yeah, there's not a magic number on utilization where we would say, "Oh, it's time to spend some more." I think it's fair to say that we have an ongoing conversation about how much fleet to spend daily. The question is, what's the set of circumstances that get us comfortable enough to say, "Yes, we'll put more fleet into the business"? I think it's also though fair to say that we probably want to have a good look at how the season is building, and that means that you want to see April, you probably want to see May before you start having any serious conversation about possibly raising CapEx. So stay tuned. I think we'll talk more about it in the second quarter earnings call and have a tighter view at that point. Thank you. Thank you. Our next question comes from the line of Steven Fisher from UBS. Your question please. Hi. Good morning. Good morning. You guys have been exhibiting a greater level of discipline on CapEx as you were just talking about. But I'm curious what kind of discipline, or if relevant, lack thereof, are you seeing in the marketplace from competitors, both large and small? I will talk about at a high level. First and foremost, I think when you look at all the companies that report publicly they are all very prudent in the way in which they are approaching the markets. They have different strategies, but they are putting in the appropriate capital for their strategy. By the same token, you are seeing rental rates improvement. We also subscribe to Rouse. We have mentioned this before, there is about 84, 85 different companies that report. If you look in the rear view mirror, for legal reasons, about a 90-day lag on it, and it gives you a sense of different MSAs. When we look at how we are raising our rental rates, over time, we are seeing kind of the whole industry come up. That would tell you that everyone is appropriately trying to apply rental rates wherever they can. That is the best market data I have. Matt? I think Mike covered it well, and I do think, more importantly, the OEMs are. I think that the combination of the OEM participation and the credit markets are making people be more responsible than maybe they did going all the way in through 2008 and spending money and OEMs producing a lot of product. I think the growth is smooth, steady, and appropriate for the level of demand that is out there. That is helpful. Maybe just a question about the agility of your business model. You made a decision to focus on rates, as you talked about, and you are able to make adjustments for weather in the quarter. I am just curious, at what point in the quarter did you make those adjustments and set that strategy? How quickly can your ship be turned to address market conditions? How would you describe what your focus is for the second quarter? I would tell you that when you look at our fleet management process, it is an evolution of the best of both worlds when we went through the RSC transaction. We took some of their operating principles, we took some of our operating principles, we blended them together, and we developed a very disciplined approach in the way in which we are going to apply it. This is the end result. Do I think that we have as Matt mentioned, we had the ability to fund pockets where they were needed. Conversely, we did not put undue pressure in areas where it was not required, and I think that will be an ongoing process as far as our agility to move. It is very difficult to move things from, say, Canada down to, say, Florida. But you can sell, and you can repurpose that capital. Those are things that we do, and all of these things are how we manage the fleet on a go-forward basis. By the way, not just a snapshot of where we are today. We have to think about it, where are we going to be six months to a year down the road? Because we don't want to be moving this capital on a continuous basis in that format. Okay. No, I think the additional good news is that we have broad-based demand now. We got through the winter by maybe being a little more selective about our opportunities. But as Mike stated in his prepared remarks, we have growth in every region except for one geographically, and half of them are double-digit growth. I don't think we'll be as challenged with where we meet the demand from a rate perspective. It'll be which ones we choose to fund at a higher level than others. Great. Thank you. Yep. Thank you. Our next question comes from the line of Scott Schneeberger from Oppenheimer. Your question please. Thanks. Hey, Scott. Hey, good morning, guys. What I'd like to tackle is your sales force. You added, I think, 100 folks, mostly unassigned accounts last year. I want to get an update on productivity there and then your plans for 2014 and which areas are you adding? Just a number and productivity and areas of focus. Thanks. Sure, Scott, this is Matt. We actually have 153 more field sales reps on a year-over-year basis. We had had 100 for our goal for the second quarter last year, but we built that up to 150 throughout the year, and that's where we sit today. We think that's appropriate level for the OSRs other than additional reps we may bring in for our 18 cold starts, and you'll see some more there. We feel pretty good about the level of our sales team, and we've gotten very good productivity out of them. As you see, our unassigned accounts grew faster than the overall company growth in the back half of the year and for the first quarter this year. That was really us reconnecting with some of the business we felt we lost during the RSC integration. Thanks. On a follow-up. I noticed from the presentation pack this time around, you're focusing on the specialty rental categories that you have. Historically, you've been focusing on those that you are targeting, and pumps was one, and now you've achieved it. I'm just curious, how are you thinking? Is it going to be time spent on integrating? Are you looking still actively perhaps at M&A in some of the other categories, liquid storage tank rental or others that you had listed previously? Thanks. Well, this is Mike. I would tell you that we are clearly focused on integrating the pump business, and we dedicated ourselves to growing our specialty business, and we want to grow it, double the size of the business over the next five years. That is our main strategy. With regards to looking at other possibilities, I think it is prudent for us to always look at what the future may bring us, and that is a big laundry list. Again, going back to the discipline that we have talked about numerous times, we look at our strategy, we look at the returns, and then we also look at the culture. All of those will always play into our decision-making. Right now, we are focused on integrating the pump business, and we see a significant upside opportunity for us. Like I said, it has got the hallmarks of a home run, and that is what we are focused on. Great. Thanks, and good work. Thank you. Thanks, guys. Thank you. Our next question comes from the line of Philip Volpicelli from Deutsche Bank. Your question please. Thank you very much. With the goal of doubling the specialty business, how much of that is going to come from acquisitions, and how much of that would come from just organic growth and capital spending? Phil, it's Bill. Most of it's going to be organic growth. That's the way we're targeting the initiatives for the business. So, if there's an acquisition, we'll reevaluate whether we should raise that target, change that target, to add on the acquired growth on top of the organic growth. Okay. The last questioner asked the question about the liquid storage tanks. Obviously, with National Pump, it gets you into more of the oil and gas. Is that an area of focus that you will either spend CapEx or look to make an acquisition to kind of broaden out that pump portfolio? Oil and gas is an area of focus just as an industry vertical for the business overall. I do not know that I would say it is particularly a focus for acquisition, as much as a focus for how do we build the relationships with customers, and how do we make sure that we can offer value to them. If an acquisition makes sense, then we certainly will look at it. But it has got to hit our criteria, and we are not going to do it just because we want to plant a bigger flag in the oil and gas sector. But- Matt, Mike, if you want to add anything to that? No. No, I think Phil covered it well. Great. Just the last one from me. I think, Phil, on the last call you mentioned 2.7-2.8 net leverage by the end of the year. Is that still part of the guidance? Yeah. That is still in the neighborhood. It might be a touch higher. We put in the investor deck a slide that shows 2.9 at the end of this year. I think as we have gone through some of the refinance actions, as we have gone through finalizing the National Pump acquisition and just looking at how the cash flow will play out over the year, it may be just a touch higher. But it is still in that neighborhood. Thank you very much. Yeah. Thank you. Thank you. Our next question comes from the line of George Hong from Piper Jaffray. Your question please. Hi, good morning. Morning. Morning. Just wanted to get some color on your capital allocation strategy. You are generating attractive free cash flows of north of $450 million per year. Once you complete your delevering plans to 2.9 by the end of this year and your share purchase of 500 by April of 2015, what is your priority for use of excess cash beyond that? I am sorry, George. Ask that question again. I just want to understand what your priority for capital allocation is once you have completed your delevering plans and share purchases to the target that you have already issued. Once we complete our delevering plan. That is interesting. Well, I would say we still believe in the leverage range that we talked about, 2.5x-3.5x. If we get down to the 2.5x level and have completed the share repurchase program at that point, and we do not have an acquisition that hits all of our criteria, then I think it is legitimate that we would talk about whether a further share repurchase makes sense. That is certainly not something that we are afraid of. But we got to get through that priority of cash flow use that I just walked through. And we put a slide in our investor deck just trying to highlight the priority of thinking around cash flow allocation that very much reflects that order, right? First, you got to fund the organic growth of the business. But yeah, that is before free cash flow. And then once you have that free cash flow, we want to make sure that if there are acquisitions out there that make sense, that we will take a hard look at them. But if they are not lined up, the share repurchase makes a lot of sense. That help? Yes. Very helpful. Thank you. Yeah. Thank you. Let me go back to Phil's question just real quickly. The 2.7, 2.8 leverage ratio was before pump. When you include the acquisition of National Pump, the 2.9 is our view currently of where we will end the year, just to clarify that. Thank you. Our next question comes from the line of David Raso from ISI Group. Hi, good morning. Hey, David. Quick question on the guidance, what is implied. It sounds like you are pretty focused on pushing rate, and the rates start at the year above the full-year guide. Peers, April is off to where you are running even higher above the guide on rate. Obviously, rate is pretty powerful on flow-through for incremental EBITDA margins. Just so I am clear, the rest of the year, let us say the high end of the range for EBITDA now means $2.625 billion, just for argument's sake. It implies the rest of the year incremental EBITDA margins, basically only at 50%. If you want to pull out National Pump, 51%. I am just trying to make sure I understand, is the focus still on pushing rate? Because if it is, the 51% would be one of your lower incrementals in a while. I am just trying to understand, is there something implied in that incremental margin that there is a little more of a utilization push versus rate? I am just trying to understand, what does it imply? We do not spend a lot of time thinking about the incrementals by quarter or by half. It is not something that I am as facile with the numbers as maybe you are, David. I think as we do think about the full year, we think that we want to make sure that the 60% or so flow-through that we have been talking about is a high probability. We believe that it is. There are some things that, in the second half, may represent a little bit more of a challenge than we saw in the first quarter of the year. For example, we are going to ramp up our used sales activity. As we add more used sales in the back three quarters of the year, we are going to be adding revenue dollars at something like 50% EBITDA dollars. That will weigh on us a little bit more than it did in that first quarter. I do not see anything in particular that is a concern for the remaining part of the year. I do think that we want to be a little cautious in terms of how we guide you to think about flow-through. One other thing I would point to as well is, that bad debt expense, it was a very nice experience in the first quarter, $4 million benefit year-over-year. As we think about the full year, we do not expect to see that kind of a benefit in every quarter this year. We are doing a lot of good work around bad debt to reduce the amount of aged receivables. As we sit here today, we are not forecasting that benefit to continue at the level that it started out the year. So it's things like that as we think through the remainder of the year in more detail, we say, "Let's just make sure that we've got a handle on it before we get too aggressive in where we're going to end up for the full year. No, I appreciate that, Bill. But even if you pull out the $4 million benefit from bad debt, the incremental goes from 87 for the quarter to 82. Obviously, it wasn't that big a number. Again, I'm just trying a bigger picture, trying to understand, are you implying something, or is it what it is, and we can model as we choose? But I'm just trying to understand if there is a shift in what you're focusing on? Or would you argue, no, it's still a little more rate than it is utilization as your focus the rest of the year? Yeah. No, I think it's fair to say that we think about it more of it is what it is. We certainly are going to push rate. We think that we've got an opportunity, whether we'll actually be able to execute and get better than the about 4% rate that we're talking about. We'll see how it plays out as the year goes on. When we go back to the first quarter flow-through, that 87% was really aided by a few things. And if you take out the bad debt, if you take out the impact of those one-offs that we had last year, and if you restate used sales revenue to the same level as we had last year, sort of taking out those special items that I mentioned earlier, that drops that flow-through down into the high 60s, low 70s kind of area. So it's those kinds of things that we look at, and we say, "Okay. Let's just make sure that we've got a good handle on things before we start changing and raising our guidance on EBITDA or flow-through or any of the other measures. No, I can appreciate that. Okay. Thank you very much for the detail. Thank you. Thanks, David. Thank you. Our next question comes from the line of Nick Coppola from Thompson Research Group. Good morning. Morning. Good morning. On end markets, what are your customers telling you about their expectations for 2014? I saw your slide showing your customer survey results were very positive. Is there any further color you can add there about what they are saying? Also kind of alongside with it, if non-res activity really picks up after we have gone through this tough weather? Yeah, this is Mike. Let me just give you a few data points. One of which would be the AGC, which is the Associated General Contractors, came out with an outlook survey recently, and they compared it to 2013, and they broke it down into numerous categories from manufacturing, retail, private office, all the way down through to marine construction. The way they mapped it out was they had, how are you rating it? Expect your dollar volume or project you complete in 2014 to be either higher, lower, or the same. When you aggregate all those numbers, it is a pretty interesting chart that they mapped out where manufacturing, retail, private office, Hospital power, sewer, and highway were all double digit in comparison to 2013. So that would be one data point. The other one would be Global Insight. Global Insight is another one that we work with, in particular with the American Rental Association, and they're seeing spending in commercial construction, office construction, lodging, retail, manufacturing, and healthcare. Again, when you compare the two different ones, there's some similarities that kind of all fall together. It's not perfect science. It's another data point that we look at in comparison to the Dodge Reports and all the other reports that come out. But those are the things that we're seeing as far as our end market and the optimism in what our customers are telling us. Okay. That makes sense. That's helpful. My second question is on used equipment margins. They were up a real strong 520 basis points year-over-year on an adjusted basis. How much of your used sales went through the retail channel this quarter relative to last year? Just trying to kind of parse out mentally how much was from the shift to more retail sales versus just strong performance in used equipment pricing. Nick, it's Bill. Operating from memory here, 55% or so was through our retail channel this year. That's still a fairly robust level of retail. That certainly helps support the margin. But we've also been focused on the market, which is pretty robust. Pricing was pretty solid. You combine those two things, and it really does help drive the margin. We'll continue to emphasize our retail channels, continue to try and take out as much of the auction sales as we can, continue to tap into the overall strong market pricing. There's a mix component to our margins on a year-over-year basis as well, right? The mix of units that you sell that can move things around. So that was probably part of what played into the significant increase in margin in this quarter as well. But channel mix and overall price environment are probably the bigger drivers. Okay, thanks for taking my questions. Thank you. Thank you. Thank you. Thank you. Our next question comes from the line, Manish Somaiya from Citi. Good morning, almost good afternoon. Morning. Congratulations on a strong quarter. Thank you. Michael, I just wanted to go back to your opening remarks on the cycle. I guess as we kind of see the cycle play out, how are you thinking about the upcycle? You said multi-year, but are you thinking like three years, five years? Maybe if you can just kind of give your thoughts on that. Yeah. Look, I've learned that my point of view, I look at the next several years. That's probably after that it gets a little foggy. But all indications are, Manish, that when you look at the Global Insight, when you look at some of the other projections that are out there, 2014, 2015, and going into 2016, show nice improvement on a year-over-year basis, with 2015 being one of the strongest. I think it really what it is, it's convergence of all the projects coming together in 2015. But again, 2016 and 2017, they still remain very positive but not as great as you would see in 2015. All in, they're looking at about an 8% growth from Global Insight, 8.8% CAGR growth, which I think is very respectable. Those are kind of the things that we look at. But for me, I look at the next two years, and I say to myself, "Well, what is it that's on our plate, and what can we focus on?" Do I look at the outer years? Absolutely. But as we get closer and closer, then you get the metrics to come in, and you try to validate whether those numbers are going to be plus or minus in any direction. Maybe a question for Matt. I guess to support this growth, organic growth, Matt, are you finding the kind of people that you want to have on your team out there? What kind of issues are you having, if any, supporting this growth via hiring of the right folks with the right skills? That's a great question. We're having great success. We have a very active recruiting team out in the field that works with the regions. Sales, management, that type of talent is readily available. We've become, as we've grown into the largest in the industry, quite a big draw in our space. I would say if there was anything that I worried about long-term, it would just be like every trade, it would be the technical expertise. But we do a real good job of home-growing that talent, and we've invested a lot of money in the last 2 years in training because we do see that as a longer-term concern about making sure we've got the skilled labor to keep this equipment running. As far as management sales and all that, we're very, very well set. We're fortunate, Manish, to have low turnover for about the last 5 years, and that's really played into our favor as well. I don't think people will be an issue, but we're always focused on it. Right. Then just lastly for Bill, obviously, Bill, with performance having improved, with cycle showing good strength, I guess I'm trying to figure out why there's a 2-notch differential in the ratings that Moody's has for senior unsecured versus S&P. We're trying to figure that out. If there's any discussions that you plan to have to kind of hopefully fix that. We're trying to figure that one out ourselves. We have an ongoing dialogue with both of the major rating agencies, both regular structured calls that we do on a quarterly basis, also ad hoc calls as things change around acquisitions or any other key items in the business. You'd have to ask Moody's how they're thinking about the rating directly. Our view is that we've delivered a capital structure and approach to managing the business that is pretty robust. I'd point you to the Moody's folks and ask you to come back and tell me what they say. Okay. Well, thank you so much. Thank you. Thank you. 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 Michael Kneeland for closing comments. Well, thanks, operator. I want to thank everybody for joining us today. I just want to remind everybody that we were off to a strong start in 2014. When we look at the demand that we are seeing in almost every one of our markets, the confidence and the field is feeling upbeat. You will always find the new investor presentation on our website. As always, give us a call here in Stamford if there is something that you want to discuss. With that, we are looking to end the call. Thank you very much.