Earnings Call: Q4 2012

Jan 24, 2013

Good morning, and welcome to the United Rentals fourth quarter and full year 2012 investor conference call. Please be advised 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 question 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 indicated 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, 2012, as well as subsequent filings with the SEC. You can access these filings on the company's website at www.ur.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revision to forward-looking statements in order to reflect new information or subsequent events, circumstances, or changes in expectations. You should also note that today's call will 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 Matthew Flannery, Executive Vice President and 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. With me today, as the operator stated, Bill Plummer, our Chief Financial Officer, Matt Flannery, our Chief Operating Officer, and other members of our senior management team. Typically, on the fourth quarter call, I will summarize the key results and then turn to the coming year. I know there is a lot of interest in our operating environment, and we will certainly address that today. But I also want to touch on the broader implications of our fourth quarter results. 2012, as you know, was not a typical year for us, and I think it is important to view the quarter in that light. First, the results we reported were clearly a strong finish to a very good financial year, a year in which we transformed the company for superior returns. In addition to the merger with RSC, we were also successful in executing our strategy in an expanding marketplace. Second, the numbers reflect the substantial progress we made on the integration with a beneficial effect on margin, and the alignment of our operations is now largely complete and we are working together as one. But bear in mind that the merger happened less than a year ago, and we realized some significant efficiencies in a brief time. In the fourth quarter, we captured another $42 million of cost synergies, bringing the total to $104 million for the year. Before I recap the numbers, I will remind you that any year-over-year comparisons I give you are on a pro forma basis. That is measured against the combined results of United Rentals and RSC for 2011. On the top line, our rental revenue for the quarter was up about 9% year-over-year, and total revenue was up more than 7%. Our adjusted EBITDA was $553 million for the quarter at a 44% margin. That's 580 basis points higher than the same period last year. Our flow-through was a very robust 125% for the quarter. These results stand on their own, but they become even more meaningful as a part of our trend towards superior performance. Over the past year, as you know, we've used these calls to explain how we're becoming more disciplined in running the business for value creation. In each quarter, the proof was in the numbers, and the fourth quarter was no different. A number of factors worked in our favor, including a modest improvement in the construction environment in 2012, a continuing trend toward market penetration, which is increasing the size of the industry pie, and a robust used equipment market. Within our own company, we had a more balanced mix of rental revenue with non-construction accounting for about 50% of our business, an effective focus on key accounts with the application of our technology for their needs. A 7% increase in the volume of equipment on rent and a 6% increase in the rates we charge for our equipment. Time utilization was 68.7%, which, although lower than last year, was still very strong in a much larger fleet. The ongoing optimization of our field operations. The fourth quarter, we closed 14 branches, nearly all of them merger-related. We had a mix of factors, most of which were created through our own efforts and some presented by the macro environment. But in every case, we were intensely opportunistic in making these factors work to our advantage. In the final months of 2012, our regions were still dealing with the tail end of the integration. But even so, they turned in very solid performance. 13 of our 14 regions had year-over-year growth in rental revenue for the quarter, and 13 regions had year-over-year increase in rental rates. Of those 13, 11 regions had quarterly sequential rate increases, so demand held up going into the off-season. Rental revenues from key accounts grew 14% year-over-year, and within that group, national accounts grew 16%. Another shining star was our trench safety, power, and HVAC business. It had an extremely strong quarter. Revenue from specialty rentals grew 37%, reflecting demand for construction, industrial, and emergency response application. That's a quick snapshot, and Matt's here and will be available during our Q&A to answer any questions about our field operations and the integration. Now I want to talk to you about 2013 and give you our insights. As you saw by our outlook, we're projecting strong growth in both revenues and adjusted EBITDA, and very strong free cash flow. Our expectations for rates and utilization are in line with the demand that we're seeing for our services. We feel confident that we can drive more improvement in rates while increasing time utilization year-over-year. We plan to do this while investing over $1 billion of net rental CapEx to our fleet. Several years ago, during the worst of the downturn, it was extremely difficult to plan our current market conditions. We are operating in a very murky economy, but to a lesser degree, that is still true. Nevertheless, our projections for 2012 are on the money, and that put us exactly where we expected to be in 2013. Now we have end markets that are showing signs of growth, especially in oil and gas and power sectors, and we see a continued trend toward secular penetration, driven by the growing appreciation for the economic benefits of renting. We have a broader, deeper value proposition that we can now bring to market. Time and again, we are seeing our customers come to the realization that they are wasting money by owning fleet that sits idle. Now these customers see equipment rental as a sound business strategy, which should continue to elevate demand in the recovery. If you were with us on our investor day in December, you know that we feel that we are still in the very early stage of a meaningful recovery. The macro consensus seems to be in line with Global Insight, which estimates the U.S. equipment rental industry to grow by 8% in 2013 and by 11% in 2014. Private non-res construction, which accounts for half of our business, is projected to grow about 6% in the U.S. in 2013, with accelerated growth in 2014. We think these are all reasonable forecasts, and they are supported by our own customer surveys, as well as surveys from other sources that serve the same markets as we do. Also, we agree with forecasters who think most of the market momentum in 2013 will come in the back half of the year. This is all good news, but I will reinforce something I have said in the past. We believe our strategy, our scale, and our customer service will keep us growing faster than our end markets. Now I want to spend a minute on customer service because we are very serious about service as a differentiator. We know what the attributes of great service are in the rental business, and we have built up a lot of credibility by focusing on those attributes. We track them at the branch, district, and region levels through metrics that measure customer service, fleet management, and process efficiencies. If a branch starts to slip on its on-time delivery, a manager knows it very quickly. Or if a district is having with a particular metric, our people are on it. We also have company-wide goals in 2013, like a more streamlined rental process and a metric called OEC Not Available for Rent, and we are very focused on improving that number. We are also running a tight ship when it comes to safety, and I am proud to say that we had a full year pro forma recordable rate of 1.4 for 2012, and that is our best safety record performance yet. Moreover, 84% of our branches had zero recordables for the year, and as far as we know, that is the best safety record in the industry, and we are going to keep driving all of our branches towards zero. So what else will you see from us in 2013? Great question. You will see us continue to focus on technology, including Total Control System. We are identifying key accounts who can benefit from Total Control to help them lower their equipment costs. You will also see us roll out the metro model to more markets. This model uses dedicated repair hubs and centrally managed field services to improve our margins in high-density areas. We now have 20 successful implementations of our metro model in cities like Toronto and San Diego, with another 15 or so planned for this year. We also will go hard after the remainder of the synergies targeted when we merged with RSC, and we continue to expect that we will reach a fully developed run rate of between $230 million and $250 million of cost synergies in 2014. We have plans to reduce our leverage, as Bill will discuss. The operating cash flow characteristics of our business are very strong, and the timing of the merger has dovetailed nicely with market projections. We are in a favorable position to reduce our leverage. Most important, you will see us continue to deliver on our promise of improved profitability and higher margins. We addressed that with our branch managers at our annual management meeting in Indianapolis earlier this month. Our managers are energized by the merger and hungry for growth. I think we all came away from that meeting that we are ready to take on the world. One year ago, I stood here and told you that 2012 was not just about the deals we would make or the forecast we put out there. I said it would be about delivering on our promise and to drive returns. You saw us deliver on that promise in 2012. Now the bar is set higher, and the stakes are bigger. You can expect us to deliver again on 2013. I am going to close on that thought, and I am going to turn it over to Bill for the financial results. After that, we will take your questions. Now over to you, Bill. Thanks, Mike, and good morning to everyone. As always, I will try to add a little bit more color to the quarter and the year that we just reported, and also spend a little bit more time on our guidance for 2013. Before I get started, let me just remind everyone what Michael said, that all of our discussion here is about our pro forma forecasted or actual performance. Anything that is not pro forma, we will call out as we go through. Let me start with our revenue performance for the quarter, up 8.7% year-over-year, with good contributions from rate and volume as always. Rates were up 6% over the comparable quarter last year, and they were up 0.8% sequentially versus third quarter of 2012. That brought us to a full-year rental rate performance of 6.9%, very consistent with our guidance of about 70%. If you look at volume and time utilization, we had nice growth in overall volume in the year. OEC on rent, which is our measure of volume, was up 7.2% in the quarter to an average of $5 billion of OEC on rent, clearly reflecting what is an overall strong demand environment and certainly reflecting the investment that we've been putting in our fleet over the last year and a half or so. Time utilization on that OEC on rent was 68.7% in the quarter, and that by any measure is a very strong level of utilization for the fourth quarter. Certainly consistent with the demand that we've seen, consistent with the ability to deliver price, and certainly is a focus of how we manage our business. It is down 90 basis points from the fourth quarter of the prior year, but I'll remind everyone that that's less of a year-over-year decline than what we had seen in the prior couple of quarters. Again, remind you of the discussion that we've had about the impact of the integration, the branch consolidations that we've gone through. We're continuing to claw back our leveraging of the fleet from that upheaval, and we're making very good progress, and I think that smaller decline in year-over-year utilization demonstrates that. For the full year, our time utilization was 67.5%, and that was down only 30 basis points from 2011. Again, I will remind you that that was on a larger fleet. The overall fleet, average fleet size for 2012 was up about 12% or roughly $770 million of incremental fleet, and certainly putting that to work very effectively explains that 67.5% utilization across the year. Before I move on to profitability, just a word on our used equipment sales results for the quarter. We had a very strong quarter and indeed a very strong year for used equipment sales. In the quarter, we generated $141 million of proceeds from used sales at a very robust 39.7% adjusted gross margin. Again, that's the adjusted margin excluding the impact of the step-up in basis due to the merger accounting. The margin reflects really a very strong performance in the channel mix. We had a great year as we drove more of our sales through our retail channel. 56% of our sales in the quarter were through our retail channel, and that's up almost six percentage points from that channel share last year. You all know that we get our best results in that retail channel. So great success there. We're having great success in accessing overall used equipment demand, and that certainly portends well for our used sales going forward, which will continue to be robust. Let me move now to profitability, and start there with adjusted EBITDA. Adjusted EBITDA for the quarter was $553 million, and that was at a margin of 44.3%. So that represents an improvement of $104 million of absolute EBITDA dollars, and that's 580 basis points better in margin than the prior year. For the full year, adjusted EBITDA came in at $1,988 million, and the margin for the full year was 42.6%. For that full year, that represents almost $500 million of incremental adjusted EBITDA, $490 million, and 650 basis points more in margin than the same period in 2011, full year 2011. Flow-through for the quarter, which we define as the change in adjusted EBITDA divided by the change in total revenue. Flow-through was an outstanding 125% for the quarter. If you look at the full year, we had another great result in flow-through, 93% flow-through for the full year. That margin and flow-through performance overall reflects the strong rate environment clearly but also obviously reflects the impacts of the synergies that we realized from the integration. Even if you exclude the synergies, the flow-through story is still pretty robust. Flow-through still had a 74% impact in the quarter if you exclude the synergies. For the full year, it was comparable, about 73% flow-through for the full year if you exclude the synergies that we realized in the course of the year. If you move down to EPS on a profit basis, our adjusted EPS for the quarter was $1.27. It is worth pointing out that that $1.27 reflects an underlying tax rate that was just under 30%, 29.5% to be precise. If you look at our GAAP tax provision for the quarter, you see that we actually reported a tax benefit of about 5% on a GAAP basis. That benefit is really driven by the effect of a couple of key items in the quarter. We had, you all know, a refinancing of our 10 and seven-eighths notes during the course of the quarter. We reported a loss for the premium paid to refinance that issue. That loss was recognized in the U.S. as a deduction, and therefore pushed down the U.S. pre-tax income very significantly. Our effective tax rate as a result, mixed more significantly toward Canada, which you all know has a lower tax rate. That was a very significant mixed impact that drove down the underlying tax rate on a GAAP basis. It was further exacerbated by the fact that we had favorable settlements of tax audits really around the States, and in particular in Canada during the quarter. The discrete items there were very favorable for the tax impact in the quarter, and that was a significant part of driving that 5% tax benefit in the quarter. All in all, the EPS performance on any basis is pretty strong. As I said, the $1.27 reflects about a 30% tax rate. Even if you wanted to use a 35% tax rate, our view of adjusted EPS would still be in that $1.17, $1.18 area. So a good strong EPS performance. Let me move to integration just briefly, and talk about the $42 million of synergies that we realized in the quarter. Very robust integration performance as has been the case. We believe we are comfortably on track to deliver what we have talked about as $230 million to $250 million of fully developed cost synergies. The contributions were pretty solid across all the different areas of synergy delivery in the fourth quarter. The $42 million brought us to $104 million, as Mike said, of synergies in the fourth quarter, and sets us up very nicely to continue to drive those synergies through 2013. Before I move to the outlook for 2013, let me just touch on free cash flow and capital structure and liquidity briefly. Free cash flow. This is the only measure that I will talk about that is not pro forma adjusted. We report free cash flow on an as-reported basis, and that number came in for the full year at $223 million of cash usage. Keep in mind that that includes the impact of all the restructuring and merger-related payments that we made in cash. That impact was about $150 million at cash. So if you net out the $150 of merger-related costs, we had a free cash flow usage of $73 million for the year, and that is within the range that we guided to between -$25 million and -$75 million for the full year. In terms of our capital structure and liquidity, we finished the year with a total of $782 million worth of total liquidity. Within that, $654 million was ABL capacity, and the remainder was cash and our AR facility. I will remind everyone that as I mentioned just a couple of minutes ago, during the quarter, we redeemed our 10 and seven-eighths notes, and incurred a significant interest expense charge to do that. Roughly $72 million was the impact that played through our P&L. Before we move to Q&A, just on 2013 outlook, just briefly. Since Mike hit the high numbers, just a little color. We put the revenue in the range of $4.9 billion to $5.1 billion. That is total revenue. Within that, the rental revenue performance we expect to be driven by our rental rate expectation at 4.5% year-over-year. That includes a carryover impact from where we finished 2012 of about 2%. For time utilization, we are expecting about 68% for the year. That is a 50-basis point improvement for the year. Again, continues to reflect the focus that we put on driving our utilization performance. Reducing the fleet unavailable for rent, as Mike pointed out, will be an important focus there, and certainly that will help us drive utilization more effectively without having to invest capital underneath it. Adjusted EBITDA for the year, we expect to be between $2.25 billion and $2.35 billion for the year, so midpoint of $2.3 billion. Our net rental capital expenditures, we expect to be just over $1 billion, $1.05 billion. That reflects roughly $1.5 billion of gross rental CapEx, and the difference being proceeds from used sales. Full year free cash flow for the year, we expect to be between $400 million and $500 million. As we have discussed in the past, we will use that primarily to reduce our leverage. On leverage, we certainly expect a significant move during the course of 2013. We are right now saying that based on the guidance that we are providing, that we should finish the year at right about three times debt to EBITDA, and it will be that number, whether we use any of the cash proceeds to finish out our share repurchase program or not. So a very nice deleveraging coming during the course of 2013. Those are the key points that I would make right here and now. There are plenty of other topics that we can talk about in Q&A. So certainly look forward to your questions. We can move to that now. Operator, let us open it for Q&A. Certainly. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone telephone. If your question has been answered and you 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. Your question please. Hey, good morning, guys. Morning. Morning. Just wanted to get a sense for how committed you are to holding the line on this billion-dollar net CapEx number. What is sort of the optimal mix here? If you can get 68.5% utilization and keep the 4.5% rate, would that trigger a higher CapEx number? Or how are you thinking about the balance there? Because your 68% number would actually be above what you have done the last couple of years. Seth, this is Mike. I will answer it this way. Look, we are trying to drive profitable growth. If I were to see both rate and time start to accelerate, I have no hesitation to spend more. But I would like to see both of those come into play, and the other thing is, I would say is that we are generating a lot of free cash flow, and we have got a lot of blue sky in order to meet customer demand. As you're looking at your guidance, would you think that there's more relative upside to the rate number or to the utilization? Which would you push? Would you prefer to push rate, I guess, versus utilization if you had a choice? I think you know me. I would tell you that obviously rate is near and dear to my heart. It has the biggest flow-through and the highest potential for margin expansion, and I think that that's a fair statement. So rate, I think, if you go back last year, we started out the year saying 5%, we ended up just a hair underneath 7%. We'll continue to focus on it. We're going to continue to drive it, and I think the team is well-equipped. We got the tools. As I stated in my opening comments, we're now a unit as one, and we're going to focus on that. Are you seeing anything from a competitive standpoint? Are the smaller independent guys refleeting, or are they becoming more aggressive with pricing, or is everybody kind of being rational here? Hey, Seth, this is Matt. Overall, I think everybody's being very rational. The national players are in much the same mode that we are, and I think the rest of the industry is following suit, and that's good for the entire industry. So I'm very comfortable and encouraged by that. But do you get the sense that the smaller guys are refleeting, or they still are capital constrained? No, I'm not seeing a trend there at all. Okay. Thank you very much, guys. Thank you. Thank you. Our next question comes from the line of David Raso from ISI Group. Your question please. Hi, good morning. Hi, David. Two bigger picture questions. You keep referring to Global Insight's outlook for 2013, but the guidance you're giving appears to be no better than the industry outlook. I'm just trying to see how you're framing the year, and you keep referring to your ability to penetrate and take share, but your guidance is really only in line with, it seems like, how you're viewing the industry. Can you just step back for a second and explain to us why you don't think you'll be able to outgrow the industry this year? Well, I think, David, the way in which we look at the world, you can parse out the numbers however you want, but we believe that we're going to outpace the industry this year. As I stated, and I continue to state, we're driving profitable growth, but don't lose focus on the fact that our key accounts and our national accounts grew at very nice numbers, and those are the areas that we continue to focus on. You're going to see us put more effort on growing that segment of the business. I'm trying to backdoor into Bill telling us the rental revenue growth for the year. Because if you look at the implied used equipment sales, which is obviously the second biggest driver to your revenues, that's implied to be up nearly 13%. Total revenues are implied only up 7%. So I'm just trying to get a feel, are we thinking rental revenues are up 7%, 8%, 9%, 10%? I'm just trying to get a feel for that. Then the segue question is, we're implying the Core incremental EBITDA margins, forget about synergies, dropping 1,000 basis points year-over-year from roughly 73%, 74% down to an implied 63%. So I'm just trying to get a feel for why would the incremental margins be 1,000 basis points lower. Again, why the rental revenue maybe is not faster than the industry. But if you can help us in any way with those two questions, it'd be appreciated. David, it's Bill. What I would say on the rental revenue growth is at a certain level, it's a semantical question about outperforming the industry. We do have a rental revenue growth within that center point $5 billion revenue number that we gave. That is in excess of anything that we've heard from forecasting services for the industry in the year. We haven't given the exact number, but you can back into it reasonably close. I think you would have to know a little bit more about our assumptions for contractor supplies, new equipment, and so on in order to get super precise. But we feel very comfortable in saying that we will outperform the industry in the year. That's what underlies that guidance. In terms of the flow-through performance and the change versus last year, we view 63% as being very robust flow-through performance when you exclude the impact of synergies. If you look back over the history of the company and the industry, I think you have to say that that's a good level of performance. Is it as good as the 73%-74% range that we were in in 2012? Clearly not. But I think what we got in 2012, it's hard to imagine that you're going to be able to sustain forever. We don't have as much rate realization assumed for '13 as we actually had in '12. That backs off the flow-through impact. We aren't putting as much fleet in on a percentage basis in '13 as we did in '12, and you know the benefit of flowing more fleet through the fixed cost base is pretty significant. That would back off your flow-through in 2013. So when you start parsing through the things that we won't have there on our '13 forecast compared to what we had in '12, it's not shocking to me that our flow-through ex synergies would be down. And we can have a robust debate about how much they should be down. But we feel good about 63% ex synergies based on what we expect for the year. Yeah. No, I'm not denying it's a good absolute number. I was just wondering, you closed 187 stores over a six-month stretch. I have to believe that would've hurt the flow-through to some degree. But I guess you're saying the other items you've cited more than offset the positives of 2013 won't have those branch closures. Yeah. I think along with the branch closures, there were a variety of activities going on. I'll tell you, one of the things that benefited '12, for example, is as you're going through those consolidations and figuring out new responsibilities and how things are going to work, there's a level of uncertainty that's introduced that caused some people to say, "You know what? I'm going to hold off on adding headcount, even though I know that I might need to add headcount." So in that environment, ex synergies, you might actually be operating a little bit understaffed relative to where you otherwise should be. That's not going to be as much of an impact in 2013. At least we're not forecasting it to be. And so that's part of the story that causes ex synergy flow-through to back off a little bit. But please don't lose sight of the fact that 63% is still pretty good. No, that's all fair. All right. I appreciate it. And quickly, just the tax rate for 2013. We're saying the upper half of the 30s. So, 35, 6, 7, in that area. Thank you very much. Okay. Thank you. Thank you. Our next question comes from the line of Joe Box from KeyBanc. Your question please. Hey, Joe. Hey, good morning, guys. Morning. Mike, question for you on your metro model. I think you mentioned earlier that you are looking at about 20 current implementations and then maybe another 15 or so this year. I guess, one, is that the full opportunity? And two, what percentage of your overall markets might fit within this type of model? Matt's here. I am going to ask him because he is deeply involved in it. Matt. Great. Joe, so it is 20 that are already implemented and another 15 that we have got planned to roll out. There is probably another 10 to 12 after that. If you look at branch count, which is not necessarily tied to revenue, it is about 50% of our footprint is condensed enough to take opportunities of shared services that the metro model offers. I do not know if that answers your question, but we have been encouraged by the results of the models we had. And obviously the longer ones, the ones that have been in place in early first quarter 2012, have significantly better metrics than the company average. We are very encouraged by that. That is perfect. And then I know at your Analyst Day, you talked about one to three points of EBITDA improvement from this. Is that still fitting for some of the other markets that you plan to roll this out to? Yeah. We're not certain yet, but if we make the assumption that we took the biggest opportunities first, which would be a safe assumption, we probably front-loaded that. Some of the additional markets that we roll out you don't have as much density in. The scale may have some effect on where you're going to fall between that 1%-3% range, but we expect to be in that range. Excellent. Maybe one more for you real quick. Can we just dig into some of the moving pieces that would drive upside or downside to the 4.5% rental rate guidance? Maybe just to add to that, it looks like both used and new equipment prices are well above the prior peak as opposed to rental rates that are still below. How does new and used price play into your ability to raise rental rates? I guess, is it normal for rental rates to lag this far behind? To your last question, I don't feel that new and used pricing really has an effect on our rental rate whatsoever. In the big scheme of things, it's not a driver for the end users. The rental is still such an attractive value versus all the costs that come along with owning that I don't think that's part of the decision process. Your first question was about the 4.5% rate, and if I recall, it was what the opportunity is. We pegged 4.5% because that's what we think if you look at the 2% carryover that we referred to, and then the figure first quarter, some of the middle quarters are where we have our opportunity. We make some sequential assumptions that get us to that 4.5% rate that we're very comfortable with. If the demand picks up sooner, Mike had said earlier, the second half of the year, we feel stronger. If we see the demand in the first half of the year increase more than we forecasted, I think we've proven in the past, we won't hold off on getting that opportunity. That can very well show up in rate. Yeah. The other thing I would say, look, we try to be as transparent as we possibly can. We are trying to make sure that everyone can try to look at how we see the world and the metrics that go behind the revenue that we are putting out there. To the extent it is a balancing act, as Matt mentioned, and we are going to continue to drive rate. This is an industry that has to get over its cost of capital and through the cycle, and that is what we are focused on. Sounds good. Thanks, guys. Take care. Yep, thank you. Thank you. Our next question comes from the line of Nick Coppola from Thompson Research. How are you doing? Hey, Nick. I want to ask about the impact of Hurricane Sandy. Is there anything you can quantify there? Yeah, Nick, this is Matt. We had in the fourth quarter about $6 million of revenue that was directly as a result of the impact of Sandy. There's about a third of that that remains on rent today, so not a large number. As far as forward-looking, the starts have been now starting to come in as far as the construction planning starts now that the government's approved the funding specifically for the Jersey Shore. But we forecast maybe $20 million-$25 million of additional OEC on rent in those affected areas. So it will be big in those communities and in that area, and we will play a big role, but we do not see it as a needle mover, a big impact on the overall company's scale. Okay, that's helpful. Can you also give us rates by month on a year-over-year basis? Yeah. Rates by month on a year-over-year for the month of October, it was 6.5%. For November, it was 6.1%, and for December it was 5.3, and for the full quarter it was 6% on a weighted average. Okay. Can you tell us anything about how things are trending into January? Yeah, I'll take that one. January is tracking as we expected both for rate and fleet on rent and time utilization. I'll step back and say one of the things that you saw this year with Christmas being on a Tuesday is we saw the latter half of December things softened up a little bit more than you normally would see if Christmas were on a Monday or a Friday or over the weekend. The second half of December was a little softer. We started the year a little lower than we otherwise might have. But we've caught all that back. January is on pace, both in terms of rate and in terms of getting fleet into the market, and it feels pretty good at this point. Okay. All right. Thank you. Thank you. Thanks. Thank you. Our next question comes from the line of Ted Grace from Susquehanna. Hey, Ted. Hey, guys. Congratulations on a good quarter. Thank you, Ted. Michael, I was hoping to come back to some of your comments about the end markets. I know you commented that oil and gas and power were strong. Were those the strongest in 2012, and would you expect that to carry into 2013 as well, or do you see other groups maybe improving on a relative basis and kind of maybe get a little more granular about the end markets based on the client surveys or the other metrics you're looking at? Let me start with the client survey, and that's a great point because our December survey of our customers, 62% of the key customers expect growth over 2012, which is up slightly from what we had in our last quarterly call. We take that as a takeaway from our customers. The confidence level is beginning to remain bullish, and we take that as a positive. With regards to some of the industries, the power sector is still an area where we participate in a broad sense, and we think in 2012, it will continue in 2013. We could debate whether there's a pipeline. There's an awful lot of work that's being done once we've got all of the wells drilled for natural gas and for wet gas. It's an efficient way of fuel, and we see that demand. We're also having a colder winter than last year. Unlike last year, there was more of a pause because there's this oversupply of natural gas. Given the temperatures that we are unfortunately going through right now where it's rather cold, that's going to, I think, exacerbate some of the demand or the need for the fuel and energy sector. Our power grid continues to need to be refurbished. That's underway. That's a long-term project. The same goes for coal and all the fossil fuel plants. They're aging, repairs are ongoing. Then I would say that one of the things that we're seeing is more investment in the chemical side of the business, particularly in the South, West, or in the Gulf area from foreign investment coming in here. It's stable. We have lower energy prices, so we're seeing more of that start to play out inside of our industry. Having said all that, I will also point out that the one area that when we look at our markets, we don't see the growth in Eastern Canada. It came off of a high. It's still going to grow, but not at the rate we saw historically. Western Canada will remain strong. I hope I answered all of your question. Yeah, that is helpful. I was hoping to next touch on the synergies for 2013, and I don't know if this is a Matt question or a Bill question or Michael, but the guidance is for a step up of, I think, $96 million. Could you help us understand what that allocation looks like between COGS and SG&A, and how the realizations in 2012 split between those two buckets? Ted, I'll take a stab at it, and Matt, certainly feel free to chime in. So as we look at what's to come in 2013, I would say there's a majority of it that comes in cost of rent, because it's slated to come out of areas such as operational headcount metrics that we track, delivery efficiencies that quite honestly, we haven't recognized any synergies for as of yet. But we know that there are some benefits that are going on. We just got to get our heads around how do we capture them and calculate them. So the majority of that incremental 96 will be in the cost of rent lines of the company. It's not to say that we still don't have opportunities in SG&A. I think there's still some process changes to play out in some of the administrative areas. But it'll be skewed toward cost of rent during 2013. We have been more heavily skewed toward SG&A savings so far in the $104 million that we realized in 2012, and that's just natural, right? A lot of it came out of reducing redundancies in the corporate functions, reducing sort of the management structure in the field, and we've done a nice job of that. It's gone very well. The stuff yet to do is going to be more, it's the harder stuff, quite honestly, but stuff that's more directly tied to the operations. Matt, you want to add anything? No, Bill touched upon it right. A lot of the operational efficiencies you need time to actually achieve, right? So specifically as we report achieved synergies, you'll see more achieved synergies from branch operations coming in 2013 than you did 2012. We'll get to our $200 million achieved for the full year, and that should bring us to a run rate of $220 million by year-end 2013. So the achievement will be done by year-end 2013 to get to our $230 million or $250 million fully developed plan. Got it. The last thing I was hoping to ask you is, and I apologize if I missed it earlier, how should we think about the cadence of CapEx for 2013? Will it follow the normal splits of 60/40 or? Ted, it's Bill again. We thought very carefully about it this year, so I think what you'll see is that the cadence by quarters in 2013 will look a little bit more like what you've seen in prior years, like 2011, for example, than what you saw in 2012. We very heavily front-end loaded things in 2012. Roughly, I think I've got the numbers here in front of me. In the first quarter, we spent about 36% of our total year spend last year in the first quarter, and then another 35% in the second quarter, and then it went 18% and 11%. For 2013, I think you can look for us to be more like what we were in 2011, which was 19% in the first quarter of 2011. We're probably going to be around that level again this year. The second quarter may not be dramatically different than it was in the prior year. So call it 35%, 36%, 37% in that area. We will probably load a little bit more of a spend into the third quarter than we normally might. So call it 30% or so, and then the remainder in the fourth quarter of this year. We think it is important that you understand the pacing so that you get a good sense of how that capital spend will play out across the year. Does that help? That is super helpful. Well, best of luck this quarter, guys. Thank you. Thanks, Ted Grace. Thank you. Our next question comes from the line of George Tong from Piper Jaffray. Your question please. Hey, George. Thanks, and good morning. Morning. Morning, George. Could you outline some of the specific steps you are taking to ensure rental revenue growth in 2013 will outpace the overall rental market? Specific steps. I think if you take a look at our investor presentation, Juan, who is our Senior Vice President of Sales and Marketing, laid out a very detailed map of how we are looking at the world and how we plan to attack it using Total Control, going after verticals specifically, and also implementing Salesforce automation tools that we have out there. Those are a lot of dynamics that we have laid out. It is a lot of the best practices that we have learned between both companies of how we are going after the market. Core is another one that we have rolled out, and we have had to educate the legacy employees, and that has been fully laid out, and they have been educated on that. 2012 was as much as really kind of integrate and learn so that in 2013, that we could be prepared. Those are probably the biggest things that I can think of. Matt, if you want to add. Yeah. If you are just talking about it overall from 10,000 feet, we have spent more time and energy in the past six months on preparing our sales team for sales force effectiveness through new tools and training than we have in my 20 years in the industry. I really think we will see the benefit of that. On top of the stabilization of everybody being in their new territories, their new stores, and just the overall full year effect of having the team together, I think we will be able to achieve the growth that we have forecasted. Yeah, I would also point out that there's going to be some things that we're going to roll out this year that we just haven't announced. We're going to expand on some of the technology and leverage that. Some of the best practices that we haven't yet implemented will be rolled out. There'll be more to come. Got it. That's very helpful. Next question is related to margins. The midpoint of your 2013 guidance suggests EBITDA margins of 46%. Will that be the new steady state, or do you see additional upside to 46% beyond 2013? Well, I would be remiss if I didn't tell you that I think there's an upside, right? Because the idea is that we continue to drive profitable growth. We have a lot of things that we're going to be utilizing, some of what we just mentioned, some of the things around profitability by product and by customer. That technology exists, rolling that out, implementing those type of tools. Further capital efficiencies around what's OEC Not Available for Rent should all go to a margin improvement. So for me, I would tell you that there's more to come. Very helpful. Last question. Could you give us some color on how much revenue synergies you expect to achieve in 2013? This is Matt. George, we haven't pegged a specific number on it. I will say that we're well on target to hitting our commitment of $50 million of incremental EBITDA that we reported last year as our target. If you recall, that'll come at a high flow-through because of where we're getting it. That'll be somewhere between $60 million and $70 million of additional revenue. I'm not trying to avoid giving you an answer. The real challenge is, unlike cost synergies, we have set things in motion to achieve revenue synergies, but we actually have to bill the revenue, which is going to come throughout the year to take credit for it. But we do feel that we have the actions in place to meet and probably exceed our plan. Yeah, on that point, just to point out that the harmonization of all the contracts, although we've kind of got almost all of them done, they're not all done. We've got about 90% done. We'll get the balance of those baked into this quarter. I think Matt's exactly right. As you see the quarters unfold this year, you'll see more visibility around those numbers. Right. Thanks, and congratulations on the quarter. Thank you. Thanks, George. Thank you. Our next question comes from the line of Timothy Thein from Citigroup. Your question please. Great. Thank you. Good morning. Congrats again on a good year, and in terms of the acquisition as well, in terms of your integration. Question back on terms of the EBITDA guidance, Bill, and if you kind of walk through some of the key pieces, I am trying to get a feel for how we should think about the volume impacts. You just mentioned the incremental cost synergies, that gives you, call it, $100 million incremental benefit. The benefit from rate should give you another, call it, $180 million. Obviously these are not givens, of course, but I am trying to think about if you assume a more equal weighted spend on that billion of net CapEx implies about $500 million in higher pro forma average OEC, and you are saying that utilization is up some on 2012. What should be kind of an appropriate drop-through range that we can think about on that incremental volume? Tim, to make sure I understand your question. You're looking for the drop-through of just incremental volume alone? Exactly. What I would say is we haven't parsed it at that level. We gave the guidance that shows you that the drop-through for overall revenue, whether it's price, volume, mix, whatever, fleet, whatever, is implicit in the guidance. David Raso earlier talked about 63% if you exclude the impact of synergies. We haven't broken out the incremental impact of volume at that level of detail. I actually don't even have a number committed to memory that I'd want to throw out there. Clearly volume is going to be a focus for us. We're putting more fleet in. We're going to raise utilization, and certainly that's going to be a key driver of our overall profit improvement. But why don't we leave it at the discussion at the total revenue level? Okay. All right, fair enough. Then Bill, in terms of the mix impact, how should we just kind of bridging that price versus volume and then the additional kind of unknown, what should we think about from a modeling perspective in terms of what that mix factor looks like in 2013 as you've been moving more of your business towards these monthly contracts? Certainly. As we look at 2013 and what's implicit in the guidance is a mix impact that's somewhere around a point and a half of headwind. So 4.5% rate, whatever your model for volume is, and explicitly we're saying about a point and a half of mixed headwind. That'll give you the high single digits creeping up on 10% revenue growth that's implicit in that overall total revenue growth that we've guided to. So that's how we're thinking about it. Okay, great. Thanks a lot. Thank you. Our next question comes from the line of Philip Bolfanzetti from Goji Bank. Your question, please. Good morning. I have two quick ones and then one more philosophical. The first is, where do we stand on the stock repurchase authorization, and where do we stand on the RP basket? The last one is, with regard to acquisitions, clearly the integration of RSC is going well. In 2013, would you consider looking at other targets of size? On the share repurchase, Phil, we've got about 85 million left to do. We'll manage that the way we said initially, which was we were going to get it done over an 18-month period post the close. We'll just spend it as we go along. In terms of the RP basket, I'm going to look over at Irene Moshouris, who's sitting here, and say, where is it on your cheat sheet, Irene? Help me. It's the acquisition notes. Yep. Then the most restricted was $250 million. I'm sorry. Could you say that again? $250 million. Thank you, Irene. Yep. I guess, Michael, maybe the acquisition question? Yeah, with acquisition, we're always going to be focused on driving profitable growth. You're going to hear me say that over and over. Strategically, it has to fit. I've been a lot of rigor around this. It also has to be accretive and a cultural fit. Having said all that, we always look at what's out there. I think one of the areas that was very evident that we're going to be focusing on is our specialty side of the business, which is a very high return and bodes very well with our current customer mix as we go forward. Again, opportunistic, but no need to rush out there. We'll continue, as we stated earlier, we've got a lot of free cash flow not only this year, but in the years to come. We're going to be in a good position. That's great. Maybe I can just ask, are the number of books coming across your desk or opportunities increasing or decreasing in terms of potential M&A that you're analyzing? I don't measure it in that way. I think that people try to get in to talk to us, to get a sense of what our thoughts are. I will tell you that I turn away as many as I open up. I don't measure it in that form. It's just, I think people are trying to understand what our appetite is, and we've got this integration's underway that's foremost on my radar screen. It's delivering what we say we're going to deliver, and then some. We got the best in class. We've got to deliver on the best practices. It has to be strategic. How can it fit with our long-term view? Great. Thank you very much. Good luck. Thank you. Thank you. Ladies and gentlemen, due to time constraints, this does conclude the question and answer session of today's program. I'd like to hand the program back to Michael Kneeland for closing comments. Thanks, operator. Thanks, everyone, for joining us today. You will find our investor presentation on our website. We have got some updated data that we hopefully you find that is useful for all of you. As always, feel free to call us or Fred Bratman here in Greenwich. You can discuss the details and all of the comments in detail. Also, if anyone would like to, I extend a visitation to any one of our sites to get a better sense of how we operate. Thank you very much, and we look forward to our next quarterly call. Thank you. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.