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United Rentals Inc (URI) Q4 2018 Earnings Conference Call Transcript

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United Rentals Inc  (NYSE: URI)
Q4 2018 Earnings Conference Call
Jan. 24, 2019, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 31st, 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 reconciliations 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.

Michael Kneeland -- Chief Executive Officer

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 two 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 up front.

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%, two 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 on things like interest and tariffs -- interest rates and tariffs, but as you can -- 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 US rental industry was 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. But looking forward, we remain 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 two years. And we bought 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 were all part of the narrative at our annual management meeting two weeks ago. We had almost 2,000 leaders with us in Minneapolis, including many managers who recently 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 8th. 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 8th, at our Annual Shareholder Meeting. At that time, I expect to replace Jenne Britell as Non-Executive 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 has 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 lot of continuity with our transition. Matt's 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. It's over to you.

Matt Flannery -- President and Chief Operating Officer

Thanks, Mike. I appreciate the kind words, but more importantly, you're helping 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 three 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 three 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 for 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 Baker Corp., And extend both the depth and reach of our fluid solutions business. We also did some smaller deals and site services and we opened 30 additional specialty cold-starts, with another 27 planned for 2019. So combined, our trench power in 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 Companywide 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 number one priority is and always will be our people. Our people know they are 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 recordable rate was below 1 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've seen 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 US and Canada are showing solid activity. Canada is out of its slump from a couple of years ago, and in '18, they drove double-digit revenue growth nationally for the quarter.

Companywide, 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 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're very pleased with the timing of our M&A path over the last two 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.

Jessica Graziano -- Chief Financial Officer

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 rerent and ancillary, which increased by a combined $77 million. Both benefited from increased volume, as well as the additions of Baker and BlueLine. 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%, and 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 a 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 million. 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 31st 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 have two months of BlueLine contribution in the fourth quarter. Results for those two months were in line with what we communicated in our third quarter call. As far as synergies go, we are 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. And as a matter of fact, based on numerous conversations I had during our annual management meeting earlier this month, overwhelming sentiment from our managers was positive. They all feel good about what should be a strong 2019. And 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 mid-point 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 two 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 midyear. 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 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 a net change in OEC, that'll give you a window into our rental CapEx decisions in the quarter.

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

Questions and Answers:

Operator

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

Michael Kneeland -- Chief Executive Officer

Hey, Ross.

Jessica Graziano -- Chief Financial Officer

Hi, Ross.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Thank you. Hi, everybody. And Michael congratulations and thanks for everything and best of luck in the Chairmanship.

Michael Kneeland -- Chief Executive Officer

Thank you. I appreciate it.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

I just had a few questions . First, can 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, so maybe you could give a little more granularity, what regions and end markets are the relative out-performers versus the laggards and what really gives you any true visibility into what's to come in 2019?

Michael Kneeland -- Chief Executive Officer

Yes, Ross. Let me start it out and then Matt can chime in and give you more of the details 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 telltale sign. Our customer survey, our confidence surveys have been 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?

Matt Flannery -- President and Chief Operating Officer

Sure. Ross, this is Matt. I think Mike covered it, but then additionally, when we see the results being brought, not just the customer confidence index which is an 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 our ears to the ground. This is their job. So they are in customers offices. They're 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's relying on to drive growth.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Okay. Thanks very much guys. And then I wanted to ask, or just talk a little bit about 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 to stock that way, but if you look at the last five years for a supposedly cyclical business, I mean your rental gross margins have been 42% to 43% for five years in a row and that's through a pretty challenging industrial recession. Same holds true for EBITDA margins. I think you've been in 48%, 49% for the last five 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.

Jessica Graziano -- Chief Financial Officer

Right. Hey, Ross. So good afternoon. 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.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

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

Jessica Graziano -- Chief Financial Officer

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.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of David Raso from Evercore ISI. Your question, please.

Michael Kneeland -- Chief Executive Officer

Hey, David.

David Raso -- Evercore ISI -- Analyst

Hi. Good morning. Hey, Jess, you just mentioned core incrementals for next year at 60%, or at least, you said framework-wise, you think of 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 Baker Corp., It seems to be implying the incrementals more like low 50s. I'm trying to add some of the savings that you spoke of on top of the core margins at both Baker and BlueLine, and I am just trying to understand, is that a lower 50 number a reflection like what happened in the fourth quarter or assuming lower margins on the used equipment? I'm just trying to understand is that, maybe conservatism in the guide or something I am missing about the incrementals at a core basis?

Jessica Graziano -- Chief Financial Officer

Yes. Hi, David. So, I think, the first caution I would give is on the mid-point, right. Obviously, if we use the mid-point that is going to (inaudible) specific number. If we look at the contribution that we're expecting for the acquisitions in '19, and we also adding the synergies that we expect -- what we expect to realize within a year, excluding those, we're still plus-or-minus closer to closer to 60% across the floor.

David Raso -- Evercore ISI -- Analyst

Okay. Let's take it offline. Just because I would think you're getting what incremental sales of about $87.5 million (ph) from BlueLine and Baker combined just the incremental. And I'm just using a core about $40 million on BlueLine, add $20 million of savings, $28 million on Baker, add $12.5 million of savings. I am just coming out with the core business seems a little bit light and I just -- I'm not trying to characterize it as pessimistic, conservative just a framework. I am missing something on the numbers. But we can take it offline. You're still going with the idea, your guide mid-point implies core incrementals at $60 million?

Jessica Graziano -- Chief Financial Officer

Closer to $60 million. That's right. Yes.

David Raso -- Evercore ISI -- Analyst

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

Jessica Graziano -- Chief Financial Officer

2.5, that's right. Yes.

David Raso -- Evercore ISI -- Analyst

How should I think about -- and 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 US construction spending, but still positive. So when I think about CapEx needs in 2020, I would think they are, at a minimum, no greater than this year necessarily. What do we do with cash flow as just a base framework? And again, just we have the model past one 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 on leverage at the end of '19. How do we think about deploying 2020 cash flow?

Jessica Graziano -- Chief Financial Officer

Well, so obviously we haven't locked in on a plan for 2020. So 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 were very comfortable with where the leverage range is right now, at 2.5 to 3.5 times. We know that we will 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 is no change to talk through right now, but we obviously will have those discussions with our Board as the year plays out.

Matt Flannery -- President and Chief Operating Officer

And I would just add...

David Raso -- Evercore ISI -- Analyst

Yeah. Okay, I'm sorry.

Matt Flannery -- President and Chief Operating Officer

Go ahead, David.

David Raso -- Evercore ISI -- Analyst

No, there are two questions, Matt. Obviously, Mike will still be in there as non-Exec Chair, but if you want to add your $0.02 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 -- well, there is obviously some scale, logical consolidation thoughts, but maybe the right thing to do and you've seen the reaction of late, maybe that just keep buying back your shares. I'm just trying to get maybe the transition of CEO, your $0.02 on the tape here of how do you think about this valuation versus the consolidation angle?

Matt Flannery -- President and Chief Operating Officer

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've 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 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 the combination of paying down debt. If our leverage is already in a good spot, then we look at how to return cash to shareholders and that, as Jess appropriately said, something that we go through our Board. But I wouldn't look for a major shift in strategy. And as if we do develop strategy, we'll certainly, as always, communicate.

David Raso -- Evercore ISI -- Analyst

I appreciate. 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. Thank you.

Matt Flannery -- President and Chief Operating Officer

Thank you.

Michael Kneeland -- Chief Executive Officer

Thanks, David.

Jessica Graziano -- Chief Financial Officer

Thanks, David.

Operator

Thank you. Our next question comes from the line of Rob Wertheimer from Melius. Your question, please.

Rob Wertheimer -- Melius -- Analyst

Hey. Good morning, everyone. My question is going to be on customer retention or expansion and acquisitions. And it's one 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 sort of gain loyalties through better execution, maybe through some of the IT things you talked about in your Investor Day on benchmarking and providing more value to people. And the only opportunity to lose customers is they may be dual source versus what they had done. So would you comment on just your trend on customer retention through the acquisitions you've done in recent times? Thanks.

Matt Flannery -- President and Chief Operating Officer

So, as you know, Rob, we've done what nine acquisitions in the last two years and we model each one of these out 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. And 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 two biggest focuses in the first days, not even weeks, days of an integration. Or 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.

Rob Wertheimer -- Melius -- Analyst

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

Matt Flannery -- President and Chief Operating Officer

Sure. We're really pleased with the BlueLine integration for the first couple of months here. As I mentioned in the script, we'll have most of the decisions. Structural decisions have been made and they will 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 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, looking ahead to that, looking forward to it.

Rob Wertheimer -- Melius -- Analyst

Perfect. Thanks, Matt.

Operator

Thank you. Our next question comes from the line of Joe O'Dea from Vertical Research Partners. Your question, please.

Michael Kneeland -- Chief Executive Officer

Hey, Joe.

Jessica Graziano -- Chief Financial Officer

Hi, Joe.

Joe O'Dea -- Vertical Research Partners -- Analyst

Hi. 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 carves out between what you talked about in terms of transformational versus bolt-on and just how you are generally approaching the M&A opportunities?

Matt Flannery -- President and Chief Operating Officer

Sure. Well, if you think about that in the last 24 months we've bought three 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 three strategic levers that we've always talked about, right, the three points of entry. And I would say that the financial bar has to be higher right now. We've got lot on our plate. We're doing great job absorbing it, but we still have opportunity 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.

Rob Wertheimer -- Melius -- Analyst

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

Matt Flannery -- President and Chief Operating Officer

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 are 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 five this year at the same rate, it just shows up as a zero impact to rate, the volume doesn't change, nothing changes.

If I flip my -- well, 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, shows no impact to rate. Actually the mix of those two 60 booms usually have higher time utilization. Light towers have lower. We would have a negative impact on time ut. 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. (inaudible) a little bit at Investor Day if you remember a couple of slides and we've done -- the team's 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 there?

Jessica Graziano -- Chief Financial Officer

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 to 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 three levers have kind of played against each other, right. The interplay across the three of them.

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 change in the OEC that you'll see is 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.

Matt Flannery -- President and Chief Operating Officer

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, 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.

Joe O'Dea -- Vertical Research Partners -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Steven Fisher from UBS. Your question, please.

Steven Fisher -- UBS -- Analyst

Thanks. Good afternoon.

Jessica Graziano -- Chief Financial Officer

Hi, Steven.

Steven Fisher -- UBS -- Analyst

Hi. It's good to hear that the macro is broadly positive, but there's still some investor concern about the private non-res 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, bet cold-starts, cross-selling, verticals expansion or anything else? And if you can quantify what do you think the revenue impact of those top two or three could be that will be helpful?

Michael Kneeland -- Chief Executive Officer

So, first of 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 onsite services platform right now. That's a great growth opportunity. It's 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. Matter of fact, most can't as broadly as we can. So that's how we look at the levers, Steve, and I think that that's the way I would characterize it.

Steven Ramsey -- Thompson Research -- Analyst

Okay. Thank you. And then just to 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?

Jessica Graziano -- Chief Financial Officer

Yes. Hey, Steven. It's 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's happened in the aggregate across 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 acquisitions. 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.

Matt Flannery -- President and Chief Operating Officer

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'll help people get to reconcile right, how they've 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 little 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 in to 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.

Steven Fisher -- UBS -- Analyst

Perfect. Thanks a lot.

Jessica Graziano -- Chief Financial Officer

Thanks, Steven.

Operator

Thank you. And our next question comes from the line of Seth Weber from RBC Capital Markets. Your question please.

Michael Kneeland -- Chief Executive Officer

Hey, Seth.

Jessica Graziano -- Chief Financial Officer

Hey, Seth.

Seth Weber -- RBC Capital Markets -- Analyst

Hey. Good afternoon, everybody. How are you?

Michael Kneeland -- Chief Executive Officer

Good.

Matt Flannery -- President and Chief Operating Officer

Great.

Seth Weber -- RBC Capital Markets -- Analyst

So, Jess maybe I just wanted to go back to some of the EBITDA pull through questions. 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 are anticipating being an incremental headwind that could weigh against that 60% core number for 2019?

Jessica Graziano -- Chief Financial Officer

Hey, 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 any thing that needs any kind of call out.

Seth Weber -- RBC Capital Markets -- Analyst

Okay. Thanks. And then, maybe just on -- a question on CapEx. The $2.2 billion-ish that you are talking about from a growth CapEx level for this year, is it possible, Matt -- maybe, it's a question for Matt or Dale if he is 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 are thinking today?

Matt Flannery -- President and Chief Operating Officer

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 build 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 is kind of locked in, there is 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 April, May and into June, we will need to pull CapEx forward or delay some CapEx. So, those are the leverage 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 we start to move toward 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.

Seth Weber -- RBC Capital Markets -- Analyst

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

Matt Flannery -- President and Chief Operating Officer

Yeah. Our planned number. It's usually -- this is something that we finish before the new year. So our process hasn't changed.

Seth Weber -- RBC Capital Markets -- Analyst

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

Matt Flannery -- President and Chief Operating Officer

Yeah.

Seth Weber -- RBC Capital Markets -- Analyst

Quarter-to-quarter?

Matt Flannery -- President and Chief Operating Officer

Yes.

Seth Weber -- RBC Capital Markets -- Analyst

All right. Thank you very much, guys. Appreciate it.

Michael Kneeland -- Chief Executive Officer

Thanks.

Jessica Graziano -- Chief Financial Officer

Thanks, Seth.

Operator

Thank you. Our next question comes from the line of Steven Ramsey from Thompson Research. Your question, please.

Steven Ramsey -- Thompson Research -- Analyst

Hey, everybody. 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 ask it another way, thinking longer term, do you expect specialty to be more or less resilient from a cyclical standpoint?

Matt Flannery -- President and Chief Operating Officer

So, we already -- so just as a note, about a third of our growth CapEx this year will go toward 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 far in pulling back the gen rent CapEx, that would be a separate discussion on seeing 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, so they are very connected. And strength of one helps strength to the others. So, I think that's just important to note. You don't report them separately. We've really intertwined these businesses together as one United Rentals' value prop.

Steven Ramsey -- Thompson Research -- Analyst

Got you. And then, thinking about -- I know you're upstream exposure is not large, but it wasn't that large in the last downturn. So you've talked about that market continuing to perform well, but if 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?

Matt Flannery -- President and Chief Operating Officer

So just to clarify a data point for you, in case you didn't have it. So 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, I'll just say, barrel of pull in the past. And I think they've lowered their costs to pull in some of the more (Technical Difficulty) I think the industry's in the same position. So we're not worried about an oversupply. If something did collapse, which we're not seeing -- we saw 5% percent growth in Q4 and 4% sequential growth on our upstream oil and gas in Q4. So the true momentum is still positive, but we're not getting a overly weighted in that category and I think the industry is also very conscious of that.

Steven Ramsey -- Thompson Research -- Analyst

Excellent. Thank you.

Michael Kneeland -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question please.

Jerry Revich -- Goldman Sachs -- Analyst

Yes. Hi. Good afternoon. And Mike and Matt congratulations and best wishes in your new roles.

Michael Kneeland -- Chief Executive Officer

Thank you.

Matt Flannery -- President and Chief Operating Officer

Thank you.

Jerry Revich -- Goldman Sachs -- Analyst

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 five-plus years? What do you hope to accomplish with the business from here? I appreciate we are 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 turning points on that front?

Matt Flannery -- President and Chief Operating Officer

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 he was CEO as well, so he was always driving us forward. But I think the Company that we've created and the trajectory of the strategy has a 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 is opportunities to expand in different products and services for a same customer base or just the 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, we think we can 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 that was our primary focus if I was going to call out any single one.

Michael Kneeland -- Chief Executive Officer

Jerry, I would only add that Matt, you got that completely right. The Company over time -- our cap 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 where we'll turn to and Matt and team will work with the Board in developing that strategy and we're very excited about it.

Jerry Revich -- Goldman Sachs -- Analyst

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 flush out what makes improvement entailed, whether it's specialty or otherwise just to help us better understand the transition?

Matt Flannery -- President and Chief Operating Officer

Sure, Jerry. So first off, the dollar ut 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 that balance was very -- what's the right word, it was an important one for us in making decision on that acquisition. Also, it's additional products and service 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 through. 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.

Jessica Graziano -- Chief Financial Officer

Hey, 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 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 cheat sheet to be up very soon after this call is over.

Jerry Revich -- Goldman Sachs -- Analyst

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 inclusion right from your comments.

Matt Flannery -- President and Chief Operating Officer

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

Jerry Revich -- Goldman Sachs -- Analyst

Okay. Appreciate it. Thank you.

Matt Flannery -- President and Chief Operating Officer

Thank you.

Michael Kneeland -- Chief Executive Officer

Thank you.

Jessica Graziano -- Chief Financial Officer

Thanks, Jerry.

Operator

Thank you. 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.

Michael Kneeland -- Chief Executive Officer

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'll be updating our new metric, so that we'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.

Operator

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

Duration: 59 minutes

Call participants:

Michael Kneeland -- Chief Executive Officer

Matt Flannery -- President and Chief Operating Officer

Jessica Graziano -- Chief Financial Officer

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

David Raso -- Evercore ISI -- Analyst

Rob Wertheimer -- Melius -- Analyst

Joe O'Dea -- Vertical Research Partners -- Analyst

Steven Fisher -- UBS -- Analyst

Steven Ramsey -- Thompson Research -- Analyst

Seth Weber -- RBC Capital Markets -- Analyst

Jerry Revich -- Goldman Sachs -- Analyst

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