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Edited Transcript of URI earnings conference call or presentation 24-Jan-19 5:00pm GMT

Q4 2018 United Rentals Inc Earnings Call

GREENWICH Jan 28, 2019 (Thomson StreetEvents) -- Edited Transcript of United Rentals Inc earnings conference call or presentation Thursday, January 24, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jessica T. Graziano

United Rentals, Inc. - Executive VP & CFO

* Matthew J. Flannery

United Rentals, Inc. - President & COO

* Michael J. Kneeland

United Rentals, Inc. - CEO & Director

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Conference Call Participants

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* David Michael Raso

Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team

* Jerry David Revich

Goldman Sachs Group Inc., Research Division - VP

* Joseph O'Dea

Vertical Research Partners, LLC - Principal

* Robert Cameron Wertheimer

Melius Research LLC - Founding Partner, Director of Research & Research Analyst of Global Machinery

* Ross Paul Gilardi

BofA Merrill Lynch, Research Division - Director

* Seth Robert Weber

RBC Capital Markets, LLC, Research Division - Analyst

* Steven Fisher

UBS Investment Bank, Research Division - Executive Director and Senior Analyst

* Steven Ramsey

Thompson Research Group, LLC - Associate Research Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to the United Rentals investor conference call. Please be advised that this call is being recorded.

Before we begin, note that the company's press release, comments made on today's call and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the company's press 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, 2018, as well as to subsequent filings with the SEC.

You can access these filings on the company's website at www.ur.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances, and changes in expectation.

You should also note that the company's press release, investor presentation and today's call include references to free cash flow, adjusted EPS, EBITDA, and adjusted EBITDA, each of which is a non-GAAP term. Please refer to the back of the company's recent investor presentation to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure.

Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer; Jessica Graziano, Chief Financial Officer; and Matt Flannery, President and Chief Operating Officer.

I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin.

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Michael J. Kneeland, United Rentals, Inc. - CEO & Director [2]

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Good afternoon, everyone, and thanks for joining us. As you saw yesterday, we delivered a strong fourth quarter performance to cap another record year. Our results underscore 2 key dynamics that were fundamentally important to our narrative in 2018 and again in 2019. First, that our industry continues to benefit from a positive operating environment; and second, that we're positioned to leverage demand through a combination of scale, technology, and other sustainable competitive advantages.

And we take all these factors into account when we strategize about growth and profitability. And in our fourth quarter results, you saw proof that our strategy is working. In a few minutes, Matt will talk about our strategy and our operating landscape, and Jessica will cover the numbers. But I'd like to touch on the highlights of the quarter upfront.

As reported, our adjusted EBITDA was 18% higher than a year ago on a 20% increase on total revenue. This reflects both M&A and organic growth. Volume increased by almost 17%, and rates increased by 2.2%, 2 indicators of a healthy marketplace. Our time utilization decreased by 120 basis points to 68.8%, reflecting the impacts of Baker and BlueLine as well as the tough comp from the prior year hurricanes.

Now looking at the 12 months of 2018. Our free cash flow was very strong at more than $1.3 billion, and our return on invested capital was a robust 11%. And both of these were company records. So a lot of momentum going into 2019 and a broad-based market activity to support a positive forecast.

On the subject of the macro. As you might imagine, we get asked about it a lot. And obviously, there's some uncertainty out there in things like interest and tariffs -- interest rates and tariffs, but as you -- and you can see that in the stock market. But we have an industry's biggest ear to the ground, and from everything that we're seeing and hearing, there's no discernible impact on our business. All signs indicate another solid year of growth.

In addition, we have a long history of outperforming both the equipment rental industry and the construction marketplace. We did that again in 2018 when the U.S. rental industry is widely expected to report expansion in the mid-single digits. And by contrast, our revenue grew by almost 11% on a pro forma basis. And importantly, we have a robust capital structure that gives us significant flexibility in navigating any market conditions. And for all these reasons, we have confidence in the 2019 guidance that we reaffirmed yesterday.

Now looking forward, we remained focused on balancing growth, margins and returns, and free cash flow, and ensuring that our entire company operates with this goal. This includes aligning the acquisitions we've integrated over the past 2 years, and we've brought quality operations with great teams who can thrive in our ecosystem. And now we're identifying ways to optimize the operations as part of United Rentals.

So in some ways, 2019 will be business as usual for us, bearing in mind that we're in the business of constantly moving forward. And we'll continue to explore new technologies, leverage our assets and invest in better ways to serve our customers. These initiatives are all part of the narrative at our Annual Management Meeting 2 weeks ago. We had almost 2,000 leaders with us in Minneapolis, including many managers who recently became -- came on board. And it really drove home the fact that United Rentals is a very different company than we were a decade ago. Not just larger in size, but with a more resilient business model and a strategy that points us firmly toward the future.

Now before I hand it over to Matt, I want to mention the succession plan that we announced on January 8. This is a result of a comprehensive planning process that our board engaged over a number of years. As you know, Matt has been appointed our next CEO effective May 8 at our Annual Shareholder Meeting. At that time, I expect to replace Jenne Britell as Nonexecutive Chairman and Bobby Griffin as Lead Independent Director.

Now I want to take this opportunity to express my deep gratitude to Jenne as one of the architects of our transformation. She's also been a role model for our employees and an inspiration for me, personally. Succession planning can be a complex process in a company of our size, but the board got it absolutely right. There's a lot of continuity with our transition. Matt has been immersed in our strategy for the past decade and he knows where the opportunities lie, and I look forward to collaborating with him in my role as Chairman come May.

So Matt, over to you.

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Matthew J. Flannery, United Rentals, Inc. - President & COO [3]

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Thanks, Mike. I appreciate the kind words, but more importantly, your help in preparing me for this opportunity.

I couldn't be more proud to take on the CEO role. I look forward to leading the company with the support of our board, Mike, and the 19,000 dedicated employees, and continuing on the strategic course that's taken us from an early focus of building scale to a culture of profitable growth.

Before I talk about our operations, I want to summarize the 3 key themes I introduced on Investor Day. Number one, that we've built a machine with a large capacity for growth. Our base is already diversified by customers, geographies, end markets and products, but we want to explore more verticals and deepen our penetration in traditional markets. Number two is operational excellence where we've created a platform that turns our volume into growth and returns. This is a critical lever for us. And number three is fleet management. We have more than $14 billion of fleet, which represents a huge opportunity to manage these assets for optimal profitability, while continuing to broaden our offering for customers. All 3 of these areas require continued investment, and this is where our scale and our strategy converge.

Scale is synergistic. It gets us efficiency and productivity, and it also allows us to generate the cash that we need to advance our strategy. Our specialty segment is a compelling example of this. We planted the seeds of our Specialty segment about 10 years ago, when we first began to diversify our business. And over time, it's become a core part of our strategy. In 2018, you saw us acquire BakerCorp and extend both the depth and reach of our fluid solutions business. We also did some smaller deals in site services, and we opened 30 additional specialty cold-starts, with another 27 planned for 2019. So combined, our Trench, Power, and Fluid Solutions business generated 40% more revenue in 2018, and importantly, almost half of that came from same-store growth.

When we build out our specialty footprint, we're also creating cross-selling opportunities for our gen rent business. In the fourth quarter, with a record 323 specialty locations, our company-wide revenue from cross-selling grew by 27%. This is an example of how our connected network of locations, combined with a broad fleet offering, creates a major competitive advantage for us. We're able to take fungible assets and move them from geography to geography or end market to end market to help drive returns.

Assets are important, but our #1 priority is, and always will be, our people. Our people know they are a competitive differentiator for us, and they're very proud of that. We want to make sure they stay engaged and stay safe. In 2018, our record recordable rate -- our recordable rate was below one for the fifth consecutive year, and 92% of our branches remained injury free for the full 12 months. That's pretty incredible. So kudos to the team.

Now shifting to market opportunity. The majority of our strategy is focused on expanding our core business. We still have a lot of headroom to drive profitable growth, and importantly, our core end market demand continues to grow. Our branches and our customer surveys continue to report that our customers are busy, and they're optimistic. In addition, virtually every external indicator for construction and industrial is positive.

To give you a sense of what we see in the fourth quarter, all of our regions increased rental revenue year-over-year, and all of our verticals are up as well. The oil and gas sector remains strong despite some underlying volatility, and both the U.S. and Canada are showing solid activity. Canada's out of its slump from a couple of years ago, and in '18, they drove double-digit revenue growth nationally for the quarter.

Company-wide, our revenue from non-res construction was up 11% in the quarter, and this is important because this is our largest end market, and it's encouraging to see how broad based that demand is. We've beefed up our presence across many of our trade areas in the past 12 months with the acquisitions of BlueLine, Baker, and WesternOne. These branch integrations will be essentially complete by the end of the first quarter, and we expect the combinations to continue to drive benefits throughout the year.

We are very pleased with the timing of our M&A path over the last 2 years. It's given us substantially more firepower in a growth environment. And as Mike mentioned, we have a long history of outperforming the equipment rental industry and the construction marketplace. Our value proposition is much more durable and diverse today than it was when we started this journey 10 years ago. We look at every potential investment through the same lens. Is it sustainable? And is it profitable? Because the ultimate goal is to compete at that level that sustains superior financial returns.

And technology measures up to that goal. We believe there is an enormous amount of shareholder value to be realized by taking the lead in shaping the job sites of the future. The strides we're making in process innovation and the digital experience are driving up productivity for our field employees and our customers.

So while our size is a meaningful advantage, we're also defined by other attributes that position us as an industry leader such as our commitment to safety, investments in technology, our range of solutions and the caliber of our people. That strategy that created these differentiators has been driving us forward for over a decade. And now we have an opportunity to do more for our customers and our investors than any other time in our history.

So I'll ask Jessica to go over the numbers, and then, we'll take your questions. So Jess, over to you.

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Jessica T. Graziano, United Rentals, Inc. - Executive VP & CFO [4]

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Thanks, Matt, and good afternoon, everyone. As a reminder, the numbers I'll be reviewing are as reported, except for a few cases, where I'll call them out as pro forma. The pro forma numbers include the Baker and BlueLine acquisitions as if we owned them a year ago.

Let's begin with rental revenue. Rental revenue for the fourth quarter was $1.99 billion, which is up almost 21% or $343 million year-over-year. If we break that down further, OER grew 19% or an increase of $266 million. That growth came mostly from higher volume, which was up just under 17% or $239 million. Another 2.2% or about $31 million came from rate improvement.

The impact from inflation on our replacement CapEx was a headwind of about 1.5% or $21 million. That leaves the impact of mix and other, which was a benefit of 1.3% or a healthy $17 million coming primarily from the growth of our specialty business.

The other components of rental revenue were re-rent and ancillary, which increased by a combined $77 million. Both benefited from increased volume as well as the additions of Baker and BlueLine. Now I'll note that rental revenue on a pro forma basis was strong, up 8.5% year-over-year, and that included a 2.4% improvement in rates.

Taking a look at used sales. Used sales revenue was up 8.1% or $14 million year-over-year. Adjusted gross margin on used sales was 51%, down from 58%. Now that reflects the impact of selling older, fully depreciated NES equipment in 2017. Now to be clear, the used equipment market remains very strong. Our sales as a percentage of OEC was 59%, which is 500 basis points higher than last year. That came primarily from a strong pricing environment, and to a lesser extent, from the blend of equipment sold.

Moving to EBITDA. Adjusted EBITDA for the quarter was $1.117 billion, an increase of $170 million or 18%. Adjusted EBITDA margin was 48.4% or 90 basis points lower than Q4 of '17, largely due to the impact of Baker and BlueLine. Excluding them, adjusted EBITDA margin improved 20 basis points year-over-year to a robust 49.5%.

Here's the bridge on the changes. Higher volume in the quarter added $160 million of adjusted EBITDA. Better rates and ancillary revenues each increased another $30 million. Other lines of business contributed $6 million to adjusted EBITDA in the quarter, and incentive comp was better by 4. These benefits were partially offset by a few headwinds. The impact of fleet inflation on EBITDA was about $17 million. Merit increases cost us $7 million, and lower used sales margin cost us $6 million. That leaves a headwind of about $30 million, which comes primarily from the impact of carrying fixed costs for Baker and BlueLine that were not there in the fourth quarter of '17. This is partially offset by that positive revenue mix I mentioned earlier.

EBITDA flow-through for the quarter was 44%. Now as we've mentioned, the acquisitions are a drag on the flow-through calculation. So if we exclude the impacts from Baker and BlueLine, our flow-through for the quarter was 53%. And taking that one step further, if you exclude the impact of used sales to isolate the core business, our flow-through in the quarter came in right around 60%. So good performance across the business, with operating costs coming in as expected.

As for adjusted EPS, it was $4.85 in the quarter compared with $11.37 in Q4 of '17, which included $8.03 from tax reform. If we adjust for tax reform in both periods, adjusted EPS increased 19% in the fourth quarter, primarily from better operating performance across the business, including the contribution of our recent acquisitions.

Let's move to CapEx. For the full year, gross CapEx was $2.1 billion, which was at the high end of our guidance for 2018 and reflects fleet we've deployed in response to continued strength we see in the market. Now even with that significant level of CapEx spend, free cash flow for the year was a record, coming in at $1.33 billion, if we exclude the impact from payments we made for merger and restructuring. So we're pleased to deliver another year of significant free cash flow.

As we manage the business to balance growth and returns, we are also pleased to deliver a strong performance for ROIC, which was 11% in the quarter, a record for us. If I adjust for tax reform, ROIC increased 20 basis points year-over-year to 10.8%. That represents over a 200 basis point spread above our weighted average cost of capital.

Looking at the balance sheet. Net debt at December 31 was $11.7 billion. That's an increase of about $2.6 billion year-over-year related to the financing of BlueLine and Baker. Our total liquidity at year-end was $1.4 billion, comprised mainly of ABL capacity.

Quick update on our share repurchase program. As I mentioned at Investor Day, we restarted our $1.25 billion program after taking a short pause to assess the BlueLine integration. We were back in the market in December, and by year-end, we had repurchased $420 million worth of shares on that program.

On the subject of BlueLine. Matt mentioned the integration, but I'd like to add a little more color. We had 2 months of BlueLine contribution in the fourth quarter. Results for those 2 months were in line with what we communicated in our third quarter call. As far as synergies go, we're on track to get our full run rate of $45 million, and we'll likely get there sooner than we originally communicated. We had $3 million of these synergies realized in Q4.

So overall, it was a quarter and a year of excellent results in a favorable macro, providing solid positioning for 2019. Now as a matter of fact, based on numerous conversations I had during our Annual Management Meeting earlier this month, the overwhelming sentiment from our managers was positive. They all feel good about what should be a strong 2019.

Now you saw us reaffirm the guidance we issued in December, so I won't go through the details. But it's worth pointing out that our 2019 CapEx guidance includes replacement CapEx of $1.65 billion, adjusted for inflation. So at the midpoint, that implies about $575 million in growth CapEx.

Before we move to Q&A, I want to take a few minutes to introduce some upcoming changes in our quarterly discussion of rental revenue. As you know, we have been providing rental rates and time utilization as discrete metrics. But as we discussed during our Investor Day in December, our business strategy has evolved, and we need to evolve the way we talk about the business as well. Specifically, rate and time are just 2 of the many levers we manage daily as we focus on profitable growth. What really matters is the interplay of decisions made across rental rates, time utilization and mix that come together to produce revenue as efficiently and as profitably as possible.

So after numerous conversations with analysts and investors, we're introducing the metric of fleet productivity. This measure is meant to provide greater insight into how we optimize rental revenue by balancing rate, time and mix decisions with market dynamics. Now let me be clear. Rate and time remain important KPIs for us, but we've realized our reporting these metrics in isolation doesn't accurately convey how we're balancing these levers to impact our rental performance -- our revenue performance, and ultimately, our growth and returns. By combining these discrete levers into one metric, fleet productivity provides a more comprehensive view of the combined impact from decisions we make across the field.

Starting now, we'll provide quarterly year-over-year rental rate and time utilization in parallel with fleet productivity. This will give investors the opportunity to get familiar with the metric through mid-year. At that point, we plan to phase out quarterly rate and time, and continue to disclose our quarterly fleet productivity results. We'll continue to characterize the impact rate and time has on our results, but it'll be more qualitative rather than quantitative. And finally, as a part of the change to our communication strategy, going forward, we will no longer provide monthly results on rate and time.

Two other quick notes on how we'll speak to rental revenue, and specifically, our owned equipment revenue going forward. We'll describe these changes to OER by continuing to call out the impact of inflation on the fleet as a headwind. And second, starting with Q1, we'll provide the impact of the net change in OEC. That will give you a window into our rental CapEx decisions in the quarter.

Now I'm going to stop here and open the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Ross Gilardi from Bank of America Merrill Lynch.

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Ross Paul Gilardi, BofA Merrill Lynch, Research Division - Director [2]

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Michael, congratulations, and thanks for everything and best of luck in the chairmanship.

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Michael J. Kneeland, United Rentals, Inc. - CEO & Director [3]

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Thank you. Appreciate it.

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Ross Paul Gilardi, BofA Merrill Lynch, Research Division - Director [4]

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Just had a few questions. Just first, could you guys just talk a little bit more about the macro? It sounds like you're still seeing a lot of strength out there, fairly broad based. But maybe you could give a little more granularity, what regions and end markets are the relative outperformers versus the laggards. And what really gives you any true visibility into what's to come in 2019?

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Michael J. Kneeland, United Rentals, Inc. - CEO & Director [5]

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Yes, Ross, let me start out, and then, Matt can chime in and give you more of the details on the -- specifically on the regions. So when you take a look at -- look, our results speak for themselves, and it was very broad based. Both geography-wise and vertical end markets all showed growth, which is a tell-tale sign. Our customer survey, our confidence surveys remain very encouraging. We recently completed our annual bottoms-up budget process, which factors into that real-time data. And then, all the external data points across both our construction and industrial end markets continue to show a positive growth component, whether it be construction activity and construction put in place, the ABI, employment data, backlogs, industrial activity, ISM, PMI, the Federal National Activity Index, manufacturing surveys. Very broad. But as far as the level of detail, on the regions, Matt?

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Matthew J. Flannery, United Rentals, Inc. - President & COO [6]

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Sure. Ross, this is Matt. I think Mike covered it, but then, additionally, when we see the results being broad, not just the Customer Confidence Index, which is in addition to all the macro data that everybody has access to. But then, as Mike spoke about in his opening remarks, we have 1,200 locations with their ears to the ground. This is their job. So they are in customers' offices. They are looking at backlogs. So the data, the anecdotal, the local intelligence all point to a strong 2019. And once again, it's very broad. So there's no hot pockets that anybody is relying on to drive growth.

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Ross Paul Gilardi, BofA Merrill Lynch, Research Division - Director [7]

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Okay. And then, I wanted to ask, just talk a little bit about the margins. I mean, it's very clear, a lot of investors still view your company as incredibly cyclical and the same company it was 10 to 15 years ago, and value the stock that way. But if you look at the last 5 years, for a supposedly cyclical business, I mean, your rental gross margins have been 42% to 43% for 5 years in a row, and that's through a pretty challenging industrial recession. Same holds true for EBITDA margins. I think you've been at 48%, 49% for the last 5 years. So the key part of the message here that your margins are a heck of a lot more stable than people realize. Can you comment on that? And can you actually take margins higher from here? You're more or less assuming looks like 48% again for EBITDA in 2019.

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Jessica T. Graziano, United Rentals, Inc. - Executive VP & CFO [8]

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Right. Ross, it's Jess. Yes, I mean, we definitely believe that those margins are not only stable, but that we can actually grow them. As we've talked about flow-through, just even as we look at 2019, we've talked about the acquisitions being a bit of a drag. But as those acquisitions continue to be integrated, and we focus on the growth, the overall flow-through of 60% across the core business, just even mathematically, means that we believe there's opportunity to grow margins going forward.

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Ross Paul Gilardi, BofA Merrill Lynch, Research Division - Director [9]

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Okay. And then, just lastly, when does specialty rental gross margins inflect positively again? I think they've been down for a few quarters. And like in the fourth quarter, I believe they don't look that different from the gen rent margins. I realize some of that might be Baker and M&A. But when do we see a positive inflection in specialty gross margins?

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Jessica T. Graziano, United Rentals, Inc. - Executive VP & CFO [10]

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So I can't pinpoint one specific quarter for you, Ross, but as we talked about, Baker is a drag on those margins. As we continue to integrate that business, you will see the inflection as we anticipate growing those margins in the future.

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Operator [11]

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Our next question comes from the line of David Raso from Evercore ISI.

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David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [12]

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Jess, you just mentioned kind of core incrementals for next year at 60%, or at least you said framework-wise, you think you had a core of 60%. Unless I'm doing the numbers wrong, if I think of just the incremental, not the full year, the incremental business in '19 from BlueLine and BakerCorp, it seems to be implying the incremental's more like low 50s. And I'm trying to add some of the savings that you spoke of on top of the core margins of both Baker and BlueLine. And I'm just trying to understand, is that lower 50 number a reflection like what happened in the fourth quarter? We're assuming lower margins on the used equipment? I'm just trying to understand, is that maybe conservatism in the guide? Or something I'm missing about the incrementals at a core basis?

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Jessica T. Graziano, United Rentals, Inc. - Executive VP & CFO [13]

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Yes. David, so I think the first caution I would give is on the midpoint, right? Obviously, if we use the midpoint, that is going to connote a specific number. If we look at the contribution that we're expecting for the acquisitions in '19, and we also add in the synergies that we expect -- what we expect to realize within the year, excluding those, we are still plus or minus 60 -- closer to 60%, across the core. I mean...

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David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [14]

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Okay. So let's take it offline, because I would think you're getting, what, incremental sales of about [$8 75 million] from BlueLine and Baker combined, just the incremental. And I'm just using the core about $40 million on BlueLine, add $20 million of savings, right? $28 million on Baker, add $12.5 million of savings. I'm just coming out with the core business seems a little bit light, and I just -- again, I'm not trying to characterize it as pessimistic, conservative. Just the framework. And am I missing something on the numbers? But we can take it offline. You're still going with the idea, your guide, midpoint, implies core incrementals at 60%?

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Jessica T. Graziano, United Rentals, Inc. - Executive VP & CFO [15]

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At closer to 60%. That's right. Yes.

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David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [16]

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Okay. And my second question, as you know, in the slides, you're targeting at year-end, the leverage down to the low end of your range, right, the 2.5 leverage...

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Jessica T. Graziano, United Rentals, Inc. - Executive VP & CFO [17]

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Yes. 2.5, that's right. Yes.

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David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [18]

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How should I think about -- again, this is obviously conjecture looking out a year. But for what it's worth, some of the construction spend forecast that you put in your slides show 2020 is a slower growth year for U.S. construction spending, but still positive. So when I think about CapEx needs in 2020, I would think they're, at a minimum, no greater than this year necessarily. What do we do with cash flow as just the base framework? And again, just -- look, we have to model past 1 year. If you're at the low end of your leverage at the end of '19, and you're going to generate -- we can talk offline about all the puts and takes, the cash interest, and cash tax changes. But how should we think about the model going forward with, "All right, we're at the low end of the range, unleveraged at the end of '19." How do we think about deploying 2020 cash flow?

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Jessica T. Graziano, United Rentals, Inc. - Executive VP & CFO [19]

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So obviously, we haven't locked in on a plan for 2020. So we -- I don't want to speculate on this call, right? But we're always coming back to our capital allocation strategy and what we believe is appropriate for the business, given where the business is at that time, right? So we're very comfortable with where the leverage range is right now at 2.5 to 3.5x. We know that we'll be at the closer end of that range should '19 play out the way we think it will right now. And we have discussions with our board formally through the year about whether or not there should be any change to our direction on the way we approach our strategy. So there's no change to talk through right now, but we -- obviously, we'll have those discussions with our board as the year plays out.

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Matthew J. Flannery, United Rentals, Inc. - President & COO [20]

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And I would just add -- go ahead, I'm sorry.

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David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [21]

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I want to ask you a question, Matt. Obviously, Mike will still be in there as Nonexec Chair. But if you want to add your two cents on you've seen the reaction to the share repo. The stock is still, from a historical perspective with this cash flow yield, still very low. How do we think about the stock is still viewed in this manner? How -- is there a toggle here between -- look, there's obviously, some scale logical consolidation thoughts. But maybe the right thing to do when you've seen the reaction of late, maybe to just keep buying back your shares. I'm just trying to get maybe the transition of CEO, your two cents on the tape here of how do you think about at this valuation versus the consolidation angle.

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Matthew J. Flannery, United Rentals, Inc. - President & COO [22]

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So I think the prioritization of what we do with our free cash flow remains the same, right? So it's been a big part of the strategy. So it'd be a little disingenuous for there to be a major pivot. If there was, I should have spoke up sooner during my current role. But I think that the prioritization certainly influenced by what we think the end market looks like in the next 12 to 18 months, and that's how we've made our decisions for '19. We'll go through that same process. But organic growth primary. Looking for any opportunities, whether they'd be tuck-ins, I don't know at this point if I'll say too many transformational M&A. But looking at M&A, it's got a higher threshold, right, at certain points in the market. And then, how do we do a combination of paying down debt if our leverage is already in a good spot then we look at how do we return cash to shareholders. And that, as Jess appropriately said, is something that we go through our board. But I wouldn't look for a major shift in strategy. And as -- if we do, if we do develop the strategy, we'll certainly, as always, communicate.

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David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [23]

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I appreciate it. A little bit of an unfair question, but just given, obviously, some of the management changes and the recent repo announcement, I thought I'd just give you the platform to answer it as you wish. So I appreciate the answer.

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Operator [24]

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Our next question comes from the line of Rob Wertheimer from Melius.

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Robert Cameron Wertheimer, Melius Research LLC - Founding Partner, Director of Research & Research Analyst of Global Machinery [25]

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My question is going to be on customer retention or expansion and acquisitions. And it's what we've gotten from investors recently. Just as you look at the acquisitions you've done in recent years, including BlueLine, you have the opportunity to sort of gain loyalty through better execution, maybe through some of the IT things you talked about at your Investor Day on benchmarking and providing more value to people. And you have the opportunity to lose customers as they maybe dual source versus what they have been. So would you comment on just your trend on customer retention through the acquisitions you've done in recent times?

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Matthew J. Flannery, United Rentals, Inc. - President & COO [26]

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So as you know, Rob, we've done, what, 9 acquisitions in the last 2 years. And we modeled each one of these out just to justify the spend, and within that is customer retention, cross-sell goals, how can we take our value prop on this base of customers that we acquire and make it accretive, right? How can we be a better owner of the business? We've been very pleased with our ability to do that. I think that one of the primary reasons is the breadth and depth of our offering. There's nobody else that could own these businesses that we buy that has that opportunity, that muscle to flex. And I think it's been a big secret to our success and something that we're really focused on. It starts with retention of the employees and retention of the capacity that you acquired as well, and those are our 2 biggest focuses in the first days, not even weeks, days of an integration. How do we make sure we maintain the relationships, the capacity that we bought and leverage it into growth. And you hit on the head of that manifests itself in customer retention and customer cross-sell. So we feel real good about it. It's a huge focus for us.

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Robert Cameron Wertheimer, Melius Research LLC - Founding Partner, Director of Research & Research Analyst of Global Machinery [27]

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Perfect. And then, just any early look on how BlueLine is going with respect to that, and operational improvements?

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Matthew J. Flannery, United Rentals, Inc. - President & COO [28]

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Sure. We're really pleased with the BlueLine integration for the first couple of months here. We'll have, as I mentioned in the script, we'll have most of the decisions -- structural decisions have been made. And there'll be -- if they haven't been executed already, they will be by the end of Q1. And then the next phase as we get into the seasonal strength of our build, is when we'll really see how we leverage those additional relationships, sell more value into those customers that came with the BlueLine team. And we're looking forward to that. We'd love to buy every company in April when we get to the seasonal build because we won't really be able to take advantage of that scale we bought until April when the seasonality kicks in. So we're looking ahead to that. Looking forward to it.

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Operator [29]

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Our next question comes from the line of Joe O'Dea from Vertical Research Partners.

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Joseph O'Dea, Vertical Research Partners, LLC - Principal [30]

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First, Matt, I just want to go back to an earlier comment you made on acquisitions and you think about how active the company has been over the past couple of years. But just to kind of gauge, what your appetite is at this point and how that kind of carves out between what you talked about in terms of transformational versus bolt-on, and just how you're sort of generally approaching the M&A kind of opportunities.

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Matthew J. Flannery, United Rentals, Inc. - President & COO [31]

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Sure. Well, if you think about that in the last 24 months, we've bought 3 of the top 10 in the gen rent space, you'd have to imagine, at this point, we're looking at opportunistic tuck-ins, and certainly, anything that broadens our offering, such as you saw with Baker. Anything in the specialty space is something we'd be more focused on. But it has to still meet the 3 strategic levers that we've always talked about, right? The 3 points of entry. And I would say the financial bar has to be higher right now. We've got a lot on our plate. We're doing a great job absorbing it, but we still have opportunities to grow off this new platform. So that raises the bar a little bit on M&A as far as what has to be done. But we're still willing to look at tuck-ins, looking at opportunities to broaden our penetration and our offering. So I would just say a higher bar.

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Joseph O'Dea, Vertical Research Partners, LLC - Principal [32]

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Got it. And then, a second one, just on fleet productivity. And any details in how you kind of evaluate that internally? I would think, generally, a target at a minimum to offset inflationary pressures. But when we think about all the factors involved, just trying to get comfortable with what the right kind of bogey is or how you think about whether you're meeting targets there or missing.

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Matthew J. Flannery, United Rentals, Inc. - President & COO [33]

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So -- and I'll ask Jess to take you through some of this as well. But when I think about it qualitatively, it's real important to explain -- I think Jess did a great job in her opening remarks, but remind everybody of why we're doing this. It's because the other metrics that we were giving on their own, out of context, don't show what we're really doing in the field every day. I've often given the example of a 60-foot boom versus a light tower. If we rent 10 60-foot booms last year and I rent 5 this year, at the same rate, this just shows up as a zero impact to rate. If the volume doesn't change, nothing changes. If I flip my -- I'll use light towers as a high-return example of a category. If I switch my -- if I double my light tower volume, but at the same rate as I did the previous year, it shows no impact to rate. Actually, the mix of those 2, 60 booms usually have higher time utilization. Light towers have lower. We'd have a negative impact on timing, yet the business decision would bring us more profitability. That's captured in mix. That's really, just to put it in a simplistic operational view, why we're introducing the new metric. All that value that we created in that fleet ship gets hidden in the metrics that people were focused on. So we had to look in the mirror and say, "How can we put together a more comprehensive view of the benefit of that decision?" They all foreshadowed it a little bit at Investor Day, if you remember a couple of slides. And we've done -- the teams have done a lot of work on that since then, and that's why we're introducing this fleet productivity metric. We think it really captures the overall view of the decisions that are made in the field day in and day out. Jess, I don't know if you have anything to add.

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Jessica T. Graziano, United Rentals, Inc. - Executive VP & CFO [34]

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So what I'd add to that is as we think about fleet productivity, it's going to help from a communications perspective and giving insight into how we're managing across those levers that we talked about, right? The math behind it is that it's really aggregation of change in rate and change in time and change in mix. And so throughout the field, we're still going to be focused on each of those levers and how we can use them to continue to focus on profitable growth. And then, ultimately, decisions that with those levers, are going to optimize returns, right? But in bringing them together into a fleet productivity metric, it allows for us to communicate how those 3 levers have kind of played against each other, right? The interplay across the 3 of them. The -- when you think about it from a consolidated perspective, what that also does is it helps us to make sure that our capital decisions, right, that, that change in the OEC that you'll see as a separate component of how we talk about rental revenue, it'll help us to make sure that we're optimizing our decisions specific to what's arguably one of the most important decisions we make in the business, which is how much capital we're going to buy and sell.

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Matthew J. Flannery, United Rentals, Inc. - President & COO [35]

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So Rob, I'll take this opportunity to remind everybody. To be clear -- I'm sorry, Joe. To be clear, this is very much impacted by our focus on managing rate and time. So there's no change in that philosophy. It's just more comprehensive. And I want to share that with everyone. It'd be a big mistake if somebody mistook that we're getting away from managing rate. It's still a great lever for us.

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Operator [36]

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Our next question comes from the line of Steven Fisher from UBS.

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Steven Fisher, UBS Investment Bank, Research Division - Executive Director and Senior Analyst [37]

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It's good to hear that the macro is broadly positive, but there's still some investor concern about the private nonres side of construction being a little bit softer as we go forward here. So in the event that we were to see that decline a little bit, maybe, Matt, could you maybe rank for us what some of the most top few impactful initiatives would be that would drive some growth ahead of what that market would be, be it cold-starts, cross-selling, verticals expansion or anything else? And if you could kind of quantify what you think the revenue impact of those top kind of 2 or 3 could be, that would be helpful.

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Matthew J. Flannery, United Rentals, Inc. - President & COO [38]

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So first of all, all the impacts are embedded within the guidance that we gave. So I won't get into parsing out what participation each one has numerically. But I would just say, our overall portfolio, our continued focus on cross-sell, our continued headroom in the end markets that we serve organically, even more so in specialty, and then last would be any opportunities to add products and services. We're building out our on-site services platform right now. That's a great growth opportunity. It also further provides service to our customers as a one-stop shop. That kind of cross-selling has been the secret sauce to our success. And it's a differentiator because not everyone can do it. As a matter of fact, most can't as broadly as we can. So that's where -- how we look at the levers. And Steven, I think that, that's the way I would characterize it.

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Steven Fisher, UBS Investment Bank, Research Division - Executive Director and Senior Analyst [39]

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Okay. And then, just a follow-up on Joe's question there about fleet productivity. Just wondering how we should think about the pace of fleet productivity that's embedded in your 2019 guidance. Is it expected to be in sort of this low single-digit growth range? How lumpy might it be quarter-to-quarter? Is there sort of just kind of a general range that we should be thinking about?

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Jessica T. Graziano, United Rentals, Inc. - Executive VP & CFO [40]

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Yes. So Steven, this is Jess. So we're not going to guide to that number, right? That's going to be more of an output each quarter as to what happened in the aggregate across the rate, time, and mix. So I definitely don't want to try and put a number out there. I will -- just as folks are going through the information we've put in the investor presentation, I will just note that the as-reported fleet productivity will continue to be impacted by our acquisitions. They will be a drag on what the total productivity number is. So let me give you an example. You'll see in our investor presentation that the productivity on an as-reported basis is 1.5, right? So that's got a little bit of a drag from the acquisition. On a pro forma basis, that number is 3.9, right? So we'll give context to fleet productivity going forward when we give the quarter. But at this point, we're not going to guide to it.

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Matthew J. Flannery, United Rentals, Inc. - President & COO [41]

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And I think that's one of the reasons why we're going to continue to give the quarterly rate and time for the first half of '19. It will help people get to reconcile, right, what -- how they thought about the business, how we're continuing to focus on the overall returns. But also, it'll help some of the M&A noise flow through the numbers, and we'll get a bit more stable because you could look at the history here on Slide 36, and why we called out the M&A. It does make the numbers a little bit choppy for a couple of quarters. Then we integrate it into our network, we get the improved productivity and then we bought somebody else. So we think this will stabilize a little bit, and be helpful going forward.

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Operator [42]

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And our next question comes from the line of Seth Weber from RBC Capital Markets.

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Seth Robert Weber, RBC Capital Markets, LLC, Research Division - Analyst [43]

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So Jess, maybe just -- I just wanted to go back to some of the EBITDA pull-through questions. And I mean, is there anything that we should be thinking about that will weigh against the core number, whether it's higher incentive comp or mix that you're anticipating being an incremental headwind that could weigh against that 60% core number for 2019?

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Jessica T. Graziano, United Rentals, Inc. - Executive VP & CFO [44]

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Seth, no, honestly, there is nothing that I would call out that has any kind of a significant effect year-over-year within '19. Nothing that -- outside of the impact of the acquisitions on total flow-through, that 60% or something close to that 60% across the core doesn't have anything that needs any kind of call out.

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Seth Robert Weber, RBC Capital Markets, LLC, Research Division - Analyst [45]

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Okay. And then, maybe just on -- a question on CapEx. The $2.2-ish billion that you're talking about from a gross CapEx level for this year, is it possible -- maybe it's a question for Matt or Dale, if he's on. Just kind of how much of that is committed at this point? And how much flexibility you have to change that number if you see market conditions changing versus what you're thinking today?

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Matthew J. Flannery, United Rentals, Inc. - President & COO [46]

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Sure, Seth. So we do have a lot of flexibility. Depending on the vendor, we have 30 or 40 days cancellation policies. But we've also got a lot of pre-buys out there. The pipeline is built for us to be able to be responsive in the peak seasons of Q2 and Q3. And then, we make the appropriate -- as we see the seasonal build of Q2, Q1's kind of locked in. There's nothing in Q1 that would make us change our view to be overly optimistic or overly pessimistic, to be frank. But as we get into the build of April, May and into June, we'll need to pull CapEx forward or delay some CapEx. So those are the levers that we use. We've got great relationships with our partners to be able to do this. And it's part of why you keep hearing us talk about flexibility. And if we start to move towards the top end of our range that we've guided, and we see the demand for the next 12 months continues to be robust, we'll pull some forward. And then as we get into Q4 as we did this year, we'll continue to fund. If the opposite is true, we have that flexibility to respond. And so we're really comfortable within that spend bucket that we can be very responsive even within, let's say, 70% that we pre-slot for. Those are pre-slots to reserve, not necessarily commitments to buy.

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Seth Robert Weber, RBC Capital Markets, LLC, Research Division - Analyst [47]

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Okay. So that's a fair number. I mean, is that a kind of a similar number to where we were at this same point last year? Like a 70% number is pretty normal for you guys sitting here at the end of January then?

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Matthew J. Flannery, United Rentals, Inc. - President & COO [48]

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Yes. Of our planned number. It's usually -- this is something that we finished before the new year. So our process hasn't changed.

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Seth Robert Weber, RBC Capital Markets, LLC, Research Division - Analyst [49]

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Right. Okay. And the cadence for spending should be pretty normal quarter-to-quarter?

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Matthew J. Flannery, United Rentals, Inc. - President & COO [50]

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Yes. Yes.

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Operator [51]

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Our next question comes from the line of Steven Ramsey from Thompson Research.

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Steven Ramsey, Thompson Research Group, LLC - Associate Research Analyst [52]

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Also wanted to think about the CapEx topic. I guess, in flexing CapEx, is there a scenario or likelihood that you would pull back gen rent CapEx and maintain or grow the specialty side? Or to kind of ask it another way, taking a longer-term view that specialty to be more or less resilient from a cyclical standpoint?

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Matthew J. Flannery, United Rentals, Inc. - President & COO [53]

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So we already -- so just as a note, about 1/3 of our growth CapEx this year will go towards specialty. So that's -- we always -- we pretty much fund the specialty growth, not just for the cold-starts, but that continued organic growth that the team is driving over and above their 20%, 23% average of the company today. So that's how we continue to fund that robust growth because it's a great business decision for us on many levels, strategically and financially. As for in pulling back the gen rent CapEx, that would be a separate discussion. I'm saying if we were having opportunity or challenges in the gen rent business market-by-market, that's the way we manage it. We review it regularly. But it's important to understand, these are all mostly the same customer base. They're very connected. And one -- the strength of one helps strengthen the others. So I think that's just important to note. Even though we report them separately, we've really intertwined these businesses together as one United Rentals value prop.

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Steven Ramsey, Thompson Research Group, LLC - Associate Research Analyst [54]

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Got you. And then, thinking about -- I know your upstream exposure is not large, but it wasn't that large in the last downturn. So you talked about that market continuing to perform well. But with the choppiness does turn into you guys or even others pulling fleet out of those markets and creating an oversupply situation like a few years ago, how do you think that impacts you guys now, given where your fleet mix is, and being just a bigger company in general?

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Matthew J. Flannery, United Rentals, Inc. - President & COO [55]

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So just to clarify a data point for you, in case you didn't have it. So it's about -- we have about 5% exposure to upstream oil and gas, which is primarily where everybody's worried about, and I believe what you're asking about. That's less than half of what it was last time, back in '14, '15. I also think the industry doesn't have as much exposure for a couple of reasons. First of all, the end market is not trading at that premium that it was then. So your trade-off of how much fleet you're going to put in that end market versus other opportunities is not out weighted in pricing and returns. It's more like the rest of the business. And I also think to give that industry kudos. I think they've done a better job of driving productivity in their exploration, in their drilling. They get more pull per pad. There's all kinds of innovation going on in that space where they don't need the equipment that they needed for each, how to say, battle or pull in the past. And I think they've lowered their cost to pull in some of the more mature (inaudible). I think the industry is in the same position. So we're not worried about an oversupply if something did collapse, which we're not seeing. We saw a 5% growth in Q4 and 4% sequential growth on our upstream oil and gas in Q4. So the momentum is still positive, but we're not getting overly weighted in that category, and I think the industry is also very conscious of that.

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Operator [56]

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Our next question comes from the line of Jerry Revich from Goldman Sachs.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [57]

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Mike and Matt, congratulations and best wishes in your new roles.

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Matthew J. Flannery, United Rentals, Inc. - President & COO [58]

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Thank you.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [59]

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Over the course of your tenure in your prior positions, the company's profitability and free cash flow profile has meaningfully improved. And I'm wondering if you folks can talk about, in your new roles, what are the strategic signposts, if you will, of what you expect the company to look like if we're having this conversation in 5-plus years? What do you hope to accomplish with the business from here? I appreciate we're coming from the Analyst Day just a little while ago, but it was before the formal announcement. So I'm wondering if you could just step through a few talking points on that front.

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Matthew J. Flannery, United Rentals, Inc. - President & COO [60]

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So I'll tongue-in-cheek a little bit here. I think, I would love to say Mike's going to expect more now that he's Chairman, but frankly, he did that when you was CEO as well. So he was always driving us forward. But I think the company that we created and the trajectory of the strategy has the momentum to carry us forward. We are constantly looking at new opportunities. I think you see, just in our guidance here in '19, in the near term, we think there is more headroom in our existing space. But we're looking at new opportunities, whether they're adjacencies, whether there's opportunity to expand in different products and services for our same customer base or just a continued secular penetration that we think is still there for an industry that's maybe 50% penetration right now. So we don't think that our strategy needs to change. It needs to involve and enhance. And our investments in productivity and technology that we've made internally, I think we could turn outward now and help drive better performance, better productivity for our customers. So that's one of the areas that we're focused on. Our scale gives us that opportunity to invest and innovate in technology, and that I would call out as a primary focus, if I was going to call out any single one.

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Michael J. Kneeland, United Rentals, Inc. - CEO & Director [61]

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Jerry, I would only add that Matt got that completely right. The company, over time, our cash structure is solid. And we are a cash generator. And we are focused on returns. But as Matt mentioned, how can we help and facilitate productivity and safety in the workplace? And that's what we'll turn to. And Matt and team will work with the board in developing that strategy, and we're very excited about it.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [62]

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Okay. And separately, on the fleet productivity metric, just as we all try to get calibrated on that metric versus the rest of the rental industry metrics that we've been using, can you just talk about why dollar utilization was down year-over-year, but fleet productivity, which also captures rental rates and utilization, was up a few hundred basis points on a pro forma basis. Can you just help us bridge that and maybe flesh out what mix improvement entailed, whether it's specialty or otherwise? Just to help us better understand the transition.

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Matthew J. Flannery, United Rentals, Inc. - President & COO [63]

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Sure, Jerry. So first off, the dollar, on a pro forma basis, which is probably the more appropriate way to look at it, was up 30 bps. The 80 bps was dragged down, obviously, by some of the lower dollar utilization assets from Baker and other acquisitions. By the way, high-return assets as well, long-lived assets. So if anybody thinks that balance was very -- what's the right word? It was an important one for us making a decision on that acquisitions. Also, it's additional products and services for our customers. But to answer your question more directly, we feel that this fleet productivity measure is just going to be an accurate filter to look at the business. Clearly, we get that folks are going to need to be recalibrated. That is intentional, because we do need to be recalibrated. The specialty mix and that continuing growing specialty mix and evolution of our offerings has changed our company. It's made us more resilient. It's made us more diverse, and we feel very strongly. It's made us more profitable. That's why we're able to report record returns. So that's the way we're looking at it, and we will continue to be as helpful as we can to help the investment community through the transition and the evolution with us.

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Jessica T. Graziano, United Rentals, Inc. - Executive VP & CFO [64]

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Jerry, it's Jess. I'd just like to add one thing. We know that as folks are calibrating themselves to the new metric, there's, obviously, the math behind how fleet productivity comes together. What we will do after the call is we'll actually add a cheat sheet to our investor presentation that walks through the math behind how we used to reconcile OER in total rental revenue and how the new bridge to rental revenue will look like using fleet productivity as a component of OER. So everybody can look for that, that cheat sheet to be up very soon after this call is over.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [65]

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Okay. I appreciate it, Jess. And the short answer is, specialty mix is what's driving that gap, though? I just want to make sure I'm drawing that conclusion right from your comments.

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Jessica T. Graziano, United Rentals, Inc. - Executive VP & CFO [66]

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Yes.

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Matthew J. Flannery, United Rentals, Inc. - President & COO [67]

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Sure. Mostly. But as I gave you the other conversation, we look at mix within our gen rent offerings. We look at mix within same categories. So it's not just specialty. Specialty as it grows larger than a company average has, therefore, a larger impact. But it's not just specialty, it's a strategic decision throughout our portfolio.

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Operator [68]

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This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Mr. Michael Kneeland for any further remarks.

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Michael J. Kneeland, United Rentals, Inc. - CEO & Director [69]

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Thanks, everyone, for joining us this afternoon. Our fourth quarter deck is available to download, along with the presentation from our Investor Day. And as Jessica mentioned, we will be updating our new metric. So that'll be out there as well.

Any questions, please feel free to reach out to Ted Grace, our Head of IR, if you have any additional questions. And we look forward to reporting and talking to you again after the first quarter. And I want to thank everybody.

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Operator [70]

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Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.