聯合設備租賃 (URI) 2014 Q4 法說會逐字稿

Good morning and welcome to the United Rentals fourth-quarter and full-year 2014 investor conference call. Please be advised that this call is being recorded.

Before we begin, note that the Company's press release, comments made on today's call, and responses to your question contain forward-looking statements. The Company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the Safe Harbor statement contained in the Company's earnings release.

For a more complete description of these and other possible risks, please refer to the Company's annual report on Form 10-K for the year ended December 31, 2014 as well and subsequent filings with the SEC. You can access these filings on the Company's website at www.UR.com. Please note that UnitedRentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances, or changes in expectation.

You should also note the Company's earnings release, investor presentation, and today's call include references to free cash flow, adjusted EPS, EBITDA, and adjusted EBITDA -- each of which is a non-GAAP term. Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer; William Plummer, Chief Financial Officer; and Matt Flannery, Chief Operating Officer.

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

Thanks, Operator, and welcome and good morning, everyone. I want to thank everybody for joining us on today's call.

Let's get started with 2014. It was a great year for us, and we expect another strong year in 2015. Our message today is about progress, discipline, and consistency. These fourth-quarter calls tend to frame the year-end as a hard stop, but in reality, our performance is a continuum. And, that's especially true this year when we went into 2015 with so much momentum.

Now, I will talk about it in a minute. First, I want to give you -- the last 12 months their due because we turned in some outstanding results. Our rates were up 4.5% in line with our guidance. 2014 was the fourth straight year we moved rates higher, and we still see opportunity for improvement.

We had record time utilization of 68.8% for the full year, and our return-on-invested capital was also a record of 8.8%. Together, they helped drive more than $2.7 billion of adjusted EBITDA on rental revenue growth outpaced the industry growth by nearly two to one.

Our free cash flow was a home run for the year. This was due, in part, to the [use] margin of 48.5%, another indication of the ongoing recovery. And, we spent $1.7 billion on fleet, and as you saw last night, our CapEx plan for 2015 is approximately the same with even higher expectations for free cash flow.

Not only did we meet or beat every target in our outlook, we did it while making fundamental improvements in the way we operate. Take safety, for an example.

In 2014, we had the fewest number of recordable injuries in our history, and we drove our full-year recordable rate down below 1.0 for the first time. It was the ninth consecutive year of safety improvement for us. Clearly, it's not just a fluke. It's a progressive change for the better in our culture.

Specialty rentals was another great story. We grew our specialty segment very effectively last year with a disciplined mix of MA, cold starts, new fleet, and cross-selling. Our full-year revenue gain in specialty, which includes the acquisition of National Pump in April, was approximately 83% at a gross margin of almost 51%. That's nearly 400 basis points higher than the prior year, and our fourth-quarter margin for specialty was up nearly 500 basis points.

Company-wide, all but one of our regions had year-over-year rental revenue growth for the quarter with more than half of the regions showing double-digit growth. We had a very solid increase in key account revenue, up [16%] year-over-year. Financial accounts, which is a subset of our key accounts, grew by more than 18%.

From every perspective, a very strong year. We demanded a lot of ourselves in 2014, and I'm happy to say that we outperformed our own expectations.

Now, let's talk about this year. I'm going to start by acknowledging the concern that's out there about the effect of oil prices on our industry. Look, we are not running this business with rose-colored glasses, and we don't plan to be caught by surprise. We've dug deep into this issue, and while we haven't seen any significant the attrition to date, we do expect some impact as rig counts come down.

Now, we're constantly polling the field, not just to measure upstream oil activity, but also to gauge any knock-on effect. We've done a lot of detailed analysis based on conservative assumptions to identify our exposure. Bill is going to share some of those numbers with you in a moment.

I can tell you where they came out. Yes, we think oil prices will reduce demand for certain types of equipment in a handful of areas. But, we disagree very strongly with the idea that our growth is at risk. I'll give you five good reasons why we feel this way.

First, upstream oil and gas accounts for only 6% of our business, Company-wide. That's a very modest exposure given our fleet can be utilized with other types of customers.

Even in the battlefield states, our state of Texas, we've got deep customer relationships outside of oil. Currently more than 80% of our rental revenue in Texas comes from infrastructure, manufacturing, transportation, commercial building, and a host of other industries.

Second, we have strong systems in place for fleet management including the relocation of equipment and a re-purposing of CapEx through used sales. If circumstances change dramatically, we have the flexibility to reduce our CapEx spend for the year. We've done this before when warranted, and we wouldn't hesitate to do it again.

Third, we believe that any drag on demand for upstream oil will be mitigated by the positive effect on other industries. Take chemical manufacturing, one of our key sectors.

When oil prices decline, manufacturing costs drop, production is stimulated, and consumer purchasing power increases. The current growth rate of the US chemical industry is forecast to accelerate through at least 2016. This is just one of many examples.

Fourth, our geography plays to our advantage. Our upstream oil exposure touches just a fraction of our footprint in any meaningful way. Keep in mind, we serve 49 state and 10 Canadian provinces. That gives us a lot of room to deploy our assets.

The reality is, the field has been asking us for significantly more CapEx than we spend for a few years now, and we've been very disciplined in reining in that number. So, if we decide to move fleet due to localized weakness, we have branches that are eager to take it.

Fifth, we know how to outperform our end markets as well as our industry. We've shown you that for years. 2014, our 15% rental revenue growth was more than three times the year-over-year growth in non-residential construction through November, thanks in part to secular penetration. And, it was nearly twice the revenue growth of our industry overall.

Not only is there still a lot of runway ahead in the industry upcycle, the macro economy is also trending in our favor. Many economists predict the US GDP growth will be in the range of 3% to 3.3% for 2015 with lower unemployment, more consumers spending on goods and services, and a return to housing starts.

To the degree that any uncertainty still remains in our end markets, that actually works in our favor because we offer an alternative to large capital outlays. So, when Global Insight forecast nearly 8% rental industry growth for North America in 2015, and with more growth to follow and 2016 -- which they did on Sunday, you can take that as a starting point. But, be assured we have bigger plans.

Bottom line, this recovery has already had its share of bumps, and we think oil prices will be another bump. Given our scale and diversification, we do not see this as a roadblock.

In fact, we think the bigger picture is that low oil prices could have a significant upside for us, over time. More immediately, we will keep moving forward from a better-than-expected fourth-quarter by making disciplined investments to capture profitable business.

I've already mentioned that our specialty group is on a fast track. Power and HVAC in particular turned in a standout performance with 27% same-store growth and a 61% increase in revenue overall in 2014.

For 2015, we have earmarked $170 million, or about 30% of our growth rental CapEx to meet the increasing demand for our specialty fleet, and we plan to open at least 16 new branches. This includes [colsacks] for all of our specialty lines, power and HVAC, trench safety, pumps, and tools.

Our growth in specialty also reflects cross-selling to our broader operations where we've seen good diversity in large projects. For example, are central US districts are predicting a big year with a wide range of projects underway or with start dates in the next few months. These include healthcare, education, hydro power, renewables, bio research, and transportation, to name a few.

Further west, we've got equipment on mega-sites like [LAS] and acute major project work lined up. In the Southeast, we're on mixed-use developments -- sports arenas, theme parks, and airports. In the Northeast, our customers in high-growth verticals are hungry to snap up any fleet that comes available, and that's typical of many of our regions.

I hope I've given you a substantial insight into our thinking on 2015. Our outlook is positive because the facts support it. We like what we see. We like what we hear from our customers. Every indication is that the equipment rental is going to look at a multi-year upcycle with an ongoing recovery in our end markets and a tailwind from secular penetration.

But, we are also agile, and we are well prepared to respond to any changes in our operating environment. We have planned to spend $1.7 billion in rental CapEx this year because we believe the demand is there. We can adjust that number either way.

We're guiding to at least $6 billion of revenue and approximately $3 billion of adjusted EBITDA because we believe that we can hit these marks. We've done the math, and we're already moving forward on our goals.

Now, Bill will cover the financial results, and then we'll take your questions. Over to you, Bill.

Thanks, Mike, and good morning to everyone. I'll move through the financial results pretty quickly so we can save some time to talk about the oil and gas analysis Mike mentioned and the outlook which we wanted to make sure that we hit.

Start with revenue, rental revenue was a pretty strong quarter for us, as Mike mentioned. Total rental revenue increased 16.5%. That's $187 million year-over-year in the quarter. As usual, I'll bridge that $187 million number.

Re-rent and ancillary continue to be nice contributors to revenue growth for us. Re-rent and ancillary combined were up $26 million year-over-year.

But, the real driver is owned equipment rental revenue growth. That was up 16.3% for the quarter, or $161 million year over year. Here are the components of that $161 million.

Rental rate, up 4.1% as you saw, drives about $40 million worth of year-over-year revenue improvement. Volume was up 10.7% and that drove $106 million worth of year-over-year revenue improvement. And, that, obviously, includes the impact of National Pump's fleet being added to the volume calculation.

Our inflation on the fleet was a headwind. It was $18 million, detracting from the year-over-year change. And then, the rest -- we'll call it mix, other, including FX was a positive $33 million.

Within that $33 million, in addition to the volume that Pump brought along, Pump operates at a higher dollar utilization. They had a positive impact on mix of about $28 million within the $33 million, and I'd also call out the effect of FX in the quarter was pretty significant as a headwind. About $10 million of FX detraction from our year-over-year revenue performance. The other components were sum of a whole bunch of other nits and nats in the year-over-year performance.

So, those were the key drivers of our revenue performance in the quarter for rental revenue. I'd also point out that we had a very robust used equipment sales result for the quarter.

Used was up 16% over last year, and as importantly, the margin was also very good. 48.7% adjusted gross margin on our used equipment sales in the quarter. Certainly helped by our continued focus on driving as much as we can through our retail channel along with the overall market price environment continues to be pretty solid in the fourth quarter. We also -- just to touch on it -- had a very good new equipment sales quarter with robust growth in new equipment.

On profitability, I'll bridge the EBITDA performance year-over-year for us. We had a Company record for fourth quarter of $775 million of adjusted EBITDA. Likewise, it was a Company record, 49.6% margin in the quarter. So, that was $124 million of increase in adjusted EBITDA and 100 basis-point improvement in our margin over fourth quarter of 2013.

Here are the components of the $124 million year-over-year improvement. The rental rate improvement that I mentioned earlier for revenue, drops through the EBITDA at $39 million. That's just using a 95% flow-through on the rental rate revenue dollars.

Volume contributed $74 million worth of year-over-year adjusted EBITDA. And then, we had a couple of other positives, here. Ancillary, re-rent, I mentioned along with some other small pieces contributed about $16 million.

Used equipment sales. I mentioned the improvement in volume and margin there. That contributed about $14 million of improvement. And then, Pump, the cat class of pumps, because of their mix contribution, contributed about $15 million worth of positive mix impact.

Working against those positives, we had fleet inflation. That was about an $11 million headwind.

Additional incentive comp. We had very strong incentive comp year and quarter, and our adjustment to the incentive comp there cost us about $10 million over the prior year.

Bad debt expense cost us about $8 million. We had a strong bad debt expense result in fourth quarter of 2013. We had a more normalized result in 2014 along with a larger AR balance. So, that was the driver there, for that $8 million. Merit increases were about $6 million, and all other was the remaining $1 million.

So, those are the components of our adjusted EBITDA change for year-over-year. If you look down at EPS, we had an adjusted EPS of $2.19 for the quarter, up very nicely from $1.59 the prior year. All in all, a very, very strong profit picture for the quarter, as Mike mentioned.

Real quickly on cash flow. We had a great free cash flow performance in the quarter as well. $557 million of free cash flow, the way we calculated.

But, I'll remind everyone that that includes merger-related cash payments of about $17 million in the quarter. The way we look at free cash flow in the quarter -- excuse me, this is full year. Full year. The way we look at free cash flow for the full year is a $574 million result.

The real driver there -- and it did come in stronger than we expected. The real driver was better EBITDA performance along with really, really strong collections. We've mentioned that before. But, our AR collections have been coming in very strong for the last number of months now, and that was a big part of the betterment there in free cash flow.

Just real briefly to touch on our share repurchase program. We have been repurchasing shares. We mentioned that we bought back about $102 million of shares under the new $750 million authorization in the month of December. We add to that in the month of January.

To date, in January, we have spent an extra $125 million. We are now at $227 million of repurchases against that $750 million repurchase authorization. That's the latest update for share repurchase.

Also, as Mike mentioned, I will just reiterate -- we had very nice improvement in our return on invested capital, 8.8% for the full-year. And, that is a 130 basis-point improvement over the prior year with the fourth quarter sequentially improving by 40 basis points. So, we feel very good about the return direction that we have the Company pointed in.

Now, let's talk about oil. As Michael mentioned, we've done a lot of work assessing possible impacts from low oil prices. We've done it in a variety of different ways. We keep coming up with the same conclusion which is that we think any reasonable expectation for impact is manageable.

Here is one way that we've taken a look at it. We think will resonate with folks. If we look at every branch in our Company that has oil and gas revenue, we decided that the best way to look at this was to model that oil and gas revenue taking a significant hit. So, in this case, we said any branch that had oil and gas revenue -- upstream oil and gas revenue.

The upstream portion of their revenue stream -- let's assume it takes a 35% hit. In addition, for any branch that has more than a de minimis amount of oil and gas revenue -- upstream oil and gas revenue. Let's also assume that everything else, all of their revenue [takes a] 15% hit.

They get hit 35% in oil and gas upstream. They get hit 15% for everything else. If you do that and add it up across our Company, the aggregate amount of fleet that would be freed up by those kinds of impact would total about $400 million of average annual fleet.

So, $400 million, relative to an $8 billion-plus fleet, you could say, hey let's dismissed that. That's not significant. But, we don't think about it that way. $400 million is certainly a good amount of fleet to move around.

Then, we further ask ourselves, well, what could it mean financially? We made some assumptions.

The $400 million is the average annual fleet. Will that kind of an impact happen over the full-year? We said no. Let's just evaluate having that impact build over the year, and say, it's fully in effect at the second half.

So, the second half is really where that hit would apply. That $400 million annual impact, really in calendar 2015, would only have the effect of about $200 million on a full-year basis.

We ask ourselves, how much of that kind of a downside could we absorb, could we mitigate? While many of us could argue that we could absorb all of that kind of a hit, we decided to be conservative in our downside analysis and assume we could only mitigate half of that. $200 million annual rate, we cut down to about $100 million annual impact that represented real exposure to our Company.

How much is that $100 million fleet worth? We assumed $1 utilization on that. That was very high relative to the rest of our Company. We used 60% in our analysis. So, 60% is at least 5 percentage points higher than the dollar utilizations that we reasonably could expect in the second half for even the highest performing regions in our Company.

So, 60% on that $100 million annual impact gives you a $60 million revenue impact, and if I flow that through at 60% EBITDA, it's about a $36 million EBITDA impact. So, when you look at it in that light, it doesn't scare you, right? It's not the end of the world to say there's a $36 million hole that we've got to figure out a way to fill. As we said, we think that the assumptions are fairly conservative.

The good news, as Mike mentioned in his comments, is that we have a sense that there is going to be robust demand in other areas outside of oil and gas and other product types that we think can help address -- even if this -- what we believe is a severe downside plays out. That's the way we're thinking about the risk from oil and gas. And, if you add the $36 million impact that we just walked through to -- or subtract that from what we expect for the full year, we still feel like we can deliver the range of adjusted EBITDA that we've given in our guidance.

Speaking of our guidance for 2015, just to reiterate the key points you have already seen, we expect total revenue in the range of $6 billion to $6.2 billion. Within that, rental revenue will be driven by rates at about 3.5% for the year and time utilization of about 69%, or a 20 basis-point improvement over last year. The adjusted EBITDA range of $2.95 billion to $3.05 billion -- again, we feel is a range that represents the most likely outcome for the year.

We do expect to spend about $1.7 billion of gross rental CapEx and have that net down to about $1.2 billion for the year, and free cash flow will be a very robust result for us this year. Somewhere between $725 million and $775 million is what we expect. Obviously, that's significantly higher than the about $600 million number that we guided to back in our Investor Day in December, and it really reflects the reenactment of bonus depreciation for calendar 2014 that Congress passed and President Obama signed just recently.

So, put it all together, and it looks like a very robust year for us. We wouldn't say that if we didn't believe that and believe that we have the ability to manage to that. Oil and gas certainly is an exposure for us, but it's an opportunity as well.

And, we're going to look to take advantage of the opportunities that it presents as we always have. And, if we can do that, we feel like will be having a good conversation at this time next year.

With that, that ends our prepared comments, and we can open up the call for questions and answers. Operator?

(Operator Instructions)

Ted Grace from Susquehanna.

Congratulations on a strong quarter.

Thanks, Ted.

I was hoping to ask -- on 2015 margins. I know you give revenue guidance. You give EBITDA guidance. We can back in to what's implied both on the margin and on an incremental basis. Bill, maybe if you could walk through qualitatively some of the key headwinds or tailwinds we should think about influencing where we might come out in that range? Things like mix, fuel costs, incentive comp, lean, inflation. Just to help give us some guidepost?

Sure. I'll start. Certainly, Mike and Matt, please chime in. As we think about top line, a couple of things that swirl in the background in our thinking. Obviously, I walked through our oil and gas risk assessment. But, the question is, did we get it right? Could it be worse than that? Conversely, could it be better than that? So, those are the things that surround oil and gas performance that may bias the revenue one way or another. I'll leave you to make your own judgment about how much risk you think there is.

FX is another factor that we certainly need to be aware of. The Canadian dollar has been weakening pretty consistently. Average Canadian was down last year by about 6% to 7%. And, right now, as we sit, if it flat-lined from where it sits right now at about $0.81, that would be another 6% or so year-over-year headwind from the currency going down. So, that's a non-trivial amount of revenue that could erode.

The guidance we give is total revenue. So, you have to be mindful of used and new, as well. Our plan for used equipment sales this year is a reduction over what we achieved in 2014. Just looking at the difference between gross CapEx and net rental CapEx, we're guiding to something like $500 million of used sales proceeds. That compares to $549 million this year -- or, in 2014. That'll be a little bit of an impact to the revenues and maybe keeps the revenue guidance from being higher than it is.

Then, there are other items that might impact at the adjusted EBITDA line. For example, we had a very robust incentive compensation year this year and when we reset the incentive comp targets for 2015, our baseline plan assumes that we hit target and only pay out at target. We paid out nicely above target this year. That will impact in a positive way where we might end up on the adjusted EBITDA line. And, a host of other issues.

You mentioned lean. The lean initiatives are still rolling out and building momentum. We finished the quarter -- still a little bit of mass under here. We finished the year at an annualized run rate of about $30 million of lean impact That's up from the $23 million that we reported at the end of the third quarter. That another factor that's playing through our expectations for 2015. So, I'll start there. And, again, Mike and Matt, if you want to mention anything or if I've forgotten anything, please jump in.

I think you captured it, Bill. It's important to note the difference in used sales is really about what has reached has reached its rental useful life in the year. We don't have as much fleet that we had to sell. That's why we're guiding lower there. If retail opportunities go over and above that, we may swing. I think it's a good target, based on what we want to move out to keep our fleet fresh, and to the targets we set.

I would only add that -- everything that Bill and Matt said is spot on. I think that we look at the projections of the industry at 8% for North America is a little bit higher than what we experienced, or what they projected in 2014. Could there be some -- on rate, could there be opportunities? Could be. We don't know. Too early. We've somewhat tempered it as we went into the oil. But, that could be an upside for us going forward.

One other point, Ted. I know where you're going, right? You are looking at the midpoints of revenue and EBITDA and saying hey, flow-through there comes out at a pretty high level, 68%-plus. That's an artifact of the fact that we are using ranges, and the fact that the flow-through calculation is very sensitive.

If we were asked point blank, we would still say that we think about flow-through for 2015 being something like 60%. Toward the upside, because of the net effect of all of the things that I mentioned earlier. If your modeling, I'd say get your revenue where you want it, use 60%, and then maybe put your thumb on the scale a little bit higher to reflect some of the net benefits that we expect to accrue over the course of the year.

That's super helpful. The only follow-up I'd have is, any willingness to quantify what lean expectations are? I know you exited at a run rate of $30 million. You're targeting $100 million-plus through the program over a few years. Any sense, could you just calibrate us on what a tailwind might look like this year?

You could do -- this is Matt, Ted. You could do the trends. We would expect it to follow that trend, right? We've set external -- internal targets above that for 2015. We've even -- we've put even extra emphasis on it this year. I feel very comfortable that we'll keep a steady pace toward that $100 million by the end of 2016.

Okay. Congratulations and best of luck this quarter.

Our next question comes from the line of Justin Jordan from Jefferies.

I just wanted to talk about the nice problem of having extra free cash flow and what that might mean in terms of changes or your thinking about capital allocation in calendar 2015? Obviously, your -- relative to the guidance you gave on December 4, essentially you've increased free cash flow guidance by 25% overnight. I appreciate there's a tax implication here that's not really that much of a percentage gain. Is that changing how you think about potential specialty M&A? Is that changing how you think about deleveraging? Or, potentially changing how you think about the amount of stock repurchasing you might do in 2015?

Yes. (laughter) (multiple speakers)

Would you like to give a bit more color on that?

No, you get one question. (laughter) I think what I would [say] on M&A is we're always looking at M&A opportunities and I'm flippant. I don't think it changes how we think about M&A. If we found the right M&A opportunity, then we would go ahead and do that whether we were at $600 million or $700 million or $675 million of free cash flow. So, M&A wouldn't change.

It is fair to say, that as we look at the share repurchase program, if you've got more cash flow and you're on a path to leverage -- we've already said we expect to be toward the low end of the leverage range that we want to operate in by the end of this year. We've called 2.6 as the leverage ratio we expect before the increase in free cash flow. So, I think we would be more inclined to say, okay, let's not go crazy and go below the 2.5 kind of leverage ratio this year now that we've got more cash flow coming in. That may change how we think about the timing of the share repurchase program. And, I think that's a sensible way to think about it. So, that's all still to be discussed. And certainly, we'll talk about it more as we make more decisions. I'd say M&A doesn't change, but everything else we've kind of put in the mix and say, okay, we've got an extra $100 million, what you want to do with it? And, we'll make that call.

Thank you.

Our next question comes from the line of Seth Weber from RBC Capital.

I wanted to talk about your CapEx commentary. Specifically the comments around flexibility around CapEx, and you kept the $1.7 billion gross number for the year. Should we think about cadence this year being similar to how it's been in the prior year? So, 60% to 65% in the first half? Or, do you hold back some of the spending to wait and see how the markets evolve? That's my first question.

Then, as an add-on to that, it sounds like your specialty as a percentage of growth capital is down. I think last year it was something like $270 million, $280 million, something like that. And, now it's $170 million, I think you said. Is that reduction primarily focused on the pump business? How should we think about your growth capital going toward the specialty category? Thanks.

I'll answer both questions. The first part as far as the cadence. We plan on it to being similar to this year. You know that we have really strong flexibility, as far as we don't need to make a decision on what we're going to ship, until literally a week before it's going to ship. The second quarter, by April, I think we'll get a very good feel about what the second quarter is going to be more or less, and it'll all be demand-driven. The first quarter is light already, which is good for us, and right now we'll restrict the inflow of CapEx, obviously into markets that we think may have a little bit of softening in demand in the back half of the year.

I really think will get a better picture on how much we adjust from our norm, and I would call last year's cadence the new norm. Depending on what the demand is and where we're getting our returns and where our customers need our services. That's how we feel about the cadence.

As far as the specialty, we spent -- we plan on spending over 30% of our growth capital on specialty. You're talking about more of a gross number when you were referring to last year's number and a lot of that was, I would say, re-fleeting at Pump. We needed that acquisition to grow. And, fleeting up the many cold starts that we've done in our other specialty segment, specifically power -- even the year before. They were now ready to absorb scale. So, we really pushed a lot into the cold starts over the last couple of years, and we will do some more cold starts this year, but not at the scale that we did over the past two years.

Sorry, Matt. Was my math incorrect? I thought your specialty last year represented 50% of the growth capital, or something like that?

This is Mike. You are close on that number. To Matt's point, if you go back to 2013, we had a significant amount of our cold starts that were in the later part of the fourth quarter that a lot of that CapEx ran into 2014. And then, the cold starts that we had through the course of the year. And then [treating] all of those as we went through the year. In total numbers, it's down. You're right. But, it hasn't changed our view on specialty.

We do reserve the right on Pump to understand what impact upstream could or could not have as we go through our cross-opportunities. And, as I mentioned, we will do cold starts with Pump to broaden their reach, and that was one of the key aspects of the acquisition was making sure that, if you recall, 6% of their business was only in our commercial and industrial space. So, we see that as a significant opportunity. So, it's kind of a more tempered look; take a look at it. And, as I also mentioned, if there's a need for more growth capital, we've got it and we'll do it. Flexibility is built into our model.

Okay. Matt, have you seen anything, can you make any comments on used equipment pricing? Because I think that's something that people are increasingly nervous about.

Other than that (inaudible), we enjoyed a real robust fourth-quarter from a volume -- a little bit more than we even expected in the month of December. With margins holding flat. And, flat at a very high level. So, we're seeing still a robust used equipment market.

Okay. Thank you very much.

David Raso from Evercore ISI.

On the oil downside scenario, I was just curious, what percent of your entire fleet is captured in what you are considering at-risk territories? Secondarily, just trying to think through rental rates in that scenario? Just trying to capture if you feel there is any potential knock-on effect to rates and territories where other equipment might be going into? Essentially just even the rate pressure you may see in those weaker energy-sensitive markets?

I'll tackle the rate one first. The 3.5 -- about 3.5 guidance that we gave is lower than where we were thinking about rate, call it a month ago or two months ago. In that sense, we have included some conservatism to reflect the fact that rate could be pressured as that oil and gas dynamic plays out. Yet, we still say 3.5. Could it be worse than that? Obviously, it could. Again, we think we've got opportunities to respond and manage it down. I don't remember off the top of my head the first question of what percent of the fleet -- ?

If you just do the math, we said 35% knock-on -- I mean the 35% upstream would net in about $400 million. It's over $1 billion. I would say it's somewhere in the $1 billion to $1.2 billion. I don't have the number right in front of me. I think that -- well, actually -- it's $1.2 billion of fleet that we think will be impacted and those are markets that have oil and gas upstream business today.

Okay. I may be oversimplifying it because not everything in these states are driven by energy. But, I'm just thinking about 29% of your branches, and all branches aren't the same, I know that. Just with going with the data we have, 29% of branches are in what I'd consider at least somewhat energy-sensitive states in the oil sands. In your analysis, you are saying roughly 50% of that is at risk, I guess. Right? Because $1.2 billion of the $8.44 billion of fleet is about 14%. Is that the right way to think of it, roughly? Is 50% of the branches in those states in oil sands is at risk? I'm just trying to understand the analysis.

It's hard to do the analysis based on branches and state and get anything useful, in our opinion. That's why we went to the individual locations. And, tried to reason from what business they have that's exposed right here and now. So, we didn't do it to go to great levels of detail on how much fleet -- how many branches or in which states. We have that. I don't know that it's something we want to go through in great detail.

But, the $400 million impact, I think, really does capture a pretty good view of what the exposure might be. But, if you don't believe it, okay. Make it a $500 million impact. Let's say we are off by 25%. Or, even a $600 million impact and say we were off by 50%. The end result doesn't change dramatically, right? It's still a $35 million, $40 million, $45 million, $50 million kind of risk, even with conservative assumptions about how far down it goes and how much we can mitigate. I like our chances with that kind of risk scenario.

I appreciate it. I think the issue is, is there more territory at risk than solely branches that happen to have upstream oil and gas in their region? It's obviously just a debate right now about contagion beyond just those direct areas.

Also, on the rates. You've done a great job this cycle on saying look, we're not going to throw capital at the fleet just to grow. We are going to focus on better returns. Should I expect if I'm thinking maybe a little more cautiously about the impact and broader contagion, you're going to hold rate before you try to hold utilization? If I had to model some downside sensitivity, should I be taking it more down on utilization, you'd argue? Or, taking it down on rate? I'm just trying to get a feel for philosophically if things got weaker than you're forecasting?

I'm sorry, Matt. I will let you -- .

It will depend, right, on what the demand is and what we're seeing. But, I would say that we're going to have utilization at the levels that it needs to be at because we can manage that. We can manage how much fleet we put into market, and how much fleet we remove out of a market. I think will be very diligent on both rate and time, but time is much more easily manageable. I think as Bill stated, we built in a little conservatism on the rate because moving the fleet from higher rate areas and your growth fleet into areas that aren't your top 10% is going to have some knock-on, whether it's 0.25 point, 0.5 point, I don't think we really know yet. But, I think we've captured it in our guidance.

I will take from that then is that if you feel the utilization is coming under some pressure, while you want to hold rate, you might play with it a bit. But, the key is, you also have the outlet valve of, well, I'm just going to sell a fleet. That's the idea. If the used prices hold up, you can manage utilization also by just simply shedding some fleet. I think that's the key issue of used prices. They hold up. You can do that relatively profitably. That's obviously part of the debate. We should think of less trying to move fleet -- you also can tap the retail market the best you can on selling used.

Yes. (multiple speakers)

Thank you.

(Operator Instructions)

Joe Box from KeyBanc Capital.

I've got a question on your construction pipeline on slide 13. I just want to tie that together, maybe, with your methodology on guidance. How should we be thinking about a $370 billion pipeline, and how you incorporate that into your guidance? Maybe just to take it one step further, what are your guys on the ground telling you for some of these energy-sensitive projects that have already started, or maybe are just a few months away from breaking ground? Are they concerned about this? Are they thinking everything moves forward as planned?

This is Matt, Joe. We do have some key account managers that specifically just call on oil and gas. Obviously, they're hearing the most noise about whether its future concerns or some job cancellations. Even in that space, the pipeline was so robust that individually they may have opportunity.

I think more importantly, the other 90% of our key account managers are extremely encouraged. Because we've always sent the fleet to the highest return opportunity, and oil and gas was pretty hot for a while. You could argue we may have underserved a lot of our other opportunities that will give us a very good returns and a little bit more geographically dispersed. So, I think that what we're hearing on the ground is encouragement and opportunity in markets like the West Coast, even the Northwest, the Southeast, the Mid-Atlantic where you see the math that we have on the investor deck. On, I think it was slide 14, where you see there's some real great opportunities. So, that's what we're hearing, and that's why we feel very strong about our guidance. Our customers have the demand and our boots on the ground are seeing it.

Okay. I'll respect the one question so I will hop back in queue. Thanks.

Scott Shneeberger from Oppenheimer.

Nice work on 2014. I'll follow up on Joe's question. On slide 14, that is -- it's a nice add. It says construction overall. Is that non-residential construction? Could you specify. Could you speak to the end markets in those six or seven states where you see the double-digit growth? Thanks.

You want to know about the verticals -- where the opportunities are in those states? Or, just the specific states?

I can see the states on slide 14. The vertical opportunities in those states, and what type of construction, specifically?

I think Mike covered a little bit of it in his opening remarks. When I say it's broad, it's broad. There is multiple state, multiple power plant expansions. Manufacturing. I say the single largest vertical would probably be chemical. Chemical plants have shown robust growth. Even in the state of Texas, we talk a lot about the contagion impact in Texas. We have very large portion of our business in Texas that's chemical-related. And, that's forecast to be 26% growth in Texas. So, we think that there's many verticals that are positive and places that we're going to serve in 2015. It is that broad base, which is why I'm not -- chemical stands out of just how much growth there is. Which is why I'm not honing in on the other verticals because it's very broad.

Just following up on that, how much of that is forecast? And, how much of that do you feel is in hand at this point in the year? Thanks.

I don't have the put-in-place in front of me right now, but you could think about it as the pipeline through the seasons of the year. And, certainly, there is less start right now, although our timings remain very strong. I would say by mid-summer, you're going to see at least 50% of that pipeline materializing rental opportunity. It's just a matter of how quick things move from it, and that's standard with the construction cycle that we've been experiencing throughout my career.

Great. Thanks.

Joe O'Dea from Vertical Research.

A question just on the potential risk of accelerated fleet growth across the industry with what is a pretty strong backdrop. And, really, your ability to monitor what your competitors are doing? And, if there's any particular competitor segment, whether that's by region or size of competitor, that you think would be the largest risk to, maybe, over-accelerating fleet growth and adding some rental rate price pressure?

I'll start. The ability to monitor is pretty good, right? We're everywhere and we touch -- I won't say every customer, but a lot of the market. We've got realtime intelligence on what our competitors are doing. We feel we have the ability to respond if we think responding is appropriate. That's one of the advantages of being who we are.

In terms of what competitor might be most at risk, I won't name names, here. I'll leave you to make your own judgment about that. All we can say is that United Rentals is going to be very conscious about any decision, whether it's to increase or decrease. And, it's going to be driven by what we are taking in from the market.

Okay. Thanks a lot.

Jerry Revich from Goldman Sachs.

Can you gentlemen talk about what you are hearing from your refining customers? I think that was one of RSC's bigger industrial end markets. If I remember their disclosures right, we've seen them cutback in CapEx. I think their equipment has been more on the maintenance side of every day-type work. Is that right? Can you just give us an update for that end market?

Certainly. We have heard of some CapEx cutbacks, and I would say, probably, more severe in the oil sands than anywhere else. There have been a couple of projects in the Gulf that have canceled. I would say, overall, that pipeline is still robust, and you're accurate. The large amount of on-site relationships that we acquired during the merger with RSC really, really, gives us a strong base to work from. We're not seeing any slowdown of that maintenance at all.

As a matter of fact, our industrial region is showing the highest time utilization we have in the Company, right now, and the highest year-over-year growth. They're primarily on-sites and what I would call, downstream oil and gas and chemical plants, and we are just seeing real strong growth there. I don't think maintenance is going to take a hit here. I think it's mostly capital spend. Which, if we really wanted to be rosy, you could say there's an opportunity there for us to get more penetration as capital spending continues to get cut from some of the end markets. (multiple speakers).

I was going to say, also on our slide. Our customer confidence index, reaching out, of the 170 key accounts that we reached out to, only 1% saw slower growth in 2015. We spent an awful lot of time and preparation for this call reaching out to our customers, reaching out to our employees. I know more about oil in the last two weeks than in my 35 years in the industry. I will tell you that we haven't seen any significant impact. Talking to our customers -- steel erectors. When you take a look at their book of business, not one of the projects I saw had any relationship to oil at all. It was -- they would say, it's a record opportunity and year for them coming up on their bidding requirements.

That, along with, Jerry, the feedback that we're getting from ARA and the Global Insight; which by the way, has been inside this industry for close to seven years, maybe longer. Working with our industry, refining the nuances of their model on how this industry reacts to things. When they come out with 8%, we take that to heart. That's not soft. That's not easy. We think that's a good indication of where our industry is going.

Thank you. Matt, just a clarification, if you don't mind. The cancellations that you mentioned. Was that ground-up projects that you were referring to? Or, is that just brownfield-type work?

Ground-up projects. There were a couple planned. The pipeline that we went through in our fourth-quarter QBRs with our regions, we saw more projects start with $1 billion than I've seen in the last couple of years combined. Candidly, if 50% of those projects cut, I think it would be a more robust pipeline than we've had over the past few years as far as large projects. And, we have seen maybe 10% of those get cut off the table right now because of concerns that everybody has. They will hold back on some of this new construction, new capital projects. I still feel that the pipeline, as Mike stated and we've all stated, very robust and the Global Insight Survey just kind of supports what we're hearing from our customers and from our boots on the ground.

Thank you.

Steven Fisher from UBS.

How would you describe your expectations for Canada, overall, and 2015, relative to the US? I know you just mentioned some oil sands weakness. But, just Canada, overall. How easy is it to reallocate equipment from Canada to the US? Or, would you more envision reallocating amongst the provinces? Thank you.

I'll start and asked Matt to tie in. As part of the overview with ARA, they're looking at a little over a 3% growth for all of Canada. That combines with the 8.5% they're projecting for the US would give them just around 8%, 8.1% growth for North America. I actually think that Eastern Canada, which by the way, has been down for the last several years, we'll see some activity there. And, come forward. The only headwind we would have, as Bill mentioned, is the currency exchange from a revenue. In constant dollars, we would expect that to grow. So, we see that, the Canadian market, grow and probably less growth on Western Canada than we've experienced in the past.

I would agree, Mike. We will just stay in the same currency, right. That's how I would manages those businesses and judge them. We will see growth in both of those -- in both Western and Eastern Canada regions next year. Like all of our regions, we zero growth CapEx budgets so they are going to have to earn their growth as they stack-rank against their peers. They've fared pretty well in the past, and I expect them fare pretty well in the future, specifically Western Canada.

In terms of reallocating equipment between Canada and the US, is that something you would envision doing? And, how easy is that?

I think because we have -- when you think about the $1.7 billion of new capital that we spend, that's 20% of the $8.4 billion base, if we start with this year's base. We've historically been able to re-shift geographically by utilizing equipment sales and either not replacing in that market, not putting growth capital in that market. So, we've been able to geographically re-mix through that. If we had to put trucks under fleet, we'd do that. There are some instances of doing it from Western Canada. If it was really dropping, that's not something that we would do. The costs are minimal compared to the opportunity you'd have by reallocating. Right now, they are running high-time utilization, and we're just going to manage the influx into any of these oil and gas markets first. And, I think that will prevent from having to move fleet, but we can react very quickly, whether it's in Canada or somewhere else, to move fleet.

Thanks very much.

Final question, due to time constraints is from Nicole DeBlase from Morgan Stanley.

Most of mine have been answered. Just one on utilization. I was kind of surprised to see that you are guiding for flattish utilization in 2015. Is that also conservatism around oil and gas risk? Or, are we at the high watermark for utilization this cycle?

I wouldn't say we are at the high watermark. We still feel we have got opportunities to continue to drive utilization. We've talked in the past -- all three of us -- probably agreeing that we can get into the [70s] if the market holds and if we do the things that we think we can do. The 69% would be up 20 basis points. I guess you could call that flat if you like. That is tempered somewhat, like the rate discussion is tempered somewhat by our concern about oil and gas and about while we think we can mitigate, we don't know that we'll be able to mitigate 100% of any oil and gas falloff. So, we backed off a little bit from where we were a month or two ago in our thoughts about 2015.

But, we still think that's a very robust performance on utilization. Matt's comments earlier, utilization is something that we certainly have lots of leverage that we can use. If it's falling down, you can sell more or you can buy less and thread the business you do have over a smaller fleet. We think that we can pull all the appropriate levers and deliver that about 69%, and we think that's a step on the way toward better utilization over the next several years.

Thanks, Bill. That's really helpful. For my follow-up, thinking about 1Q. As far as what you have seen so far quarter today, should we expect to see normal seasonality this quarter?

Yes, I would say so. We're experiencing very similar metrics than we did to last year when you look at rate and time utilization. Maybe up a hair in time for a couple of weeks. It's early. I think it'll fall right in line with our usual cadence.

That's great. Thank you.

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

Thanks, Operator. I hope we've got some distance of bringing clarity to what we see as favorable operating environment in 2015. Be sure to download our Q4 investor presentation and feel free to reach out to Fred and Stanford any time. With that, Operator, you can end the call.

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