聯合設備租賃 (URI) 2015 Q1 法說會逐字稿

Good morning and welcome to the United Rentals first-quarter 2015 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 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 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 or changes in expectations. You should also note that the Company's earnings release, investor presentation and today's call include references to free cash flow, adjusted EPS, EBITDA and adjusted EBITDA each of which is a non-GAAP term.

Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer; William Plummer, Chief Financial Officer; and Matt Flannery, Chief Operating Officer. I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin.

Thanks, operator, and good morning everyone and welcome. Thank you for joining us on today's call.

Today we will talk about how we're managing the business in light of our expectations for 2013. With almost four months of the year behind us we've been able to draw some conclusions of how this year is shaping up and I'll talk more about that in a minute and then Bill will cover the results followed by your questions.

So let's begin with the numbers you saw last night. We had a solid start to the year. Our revenue, EBITDA and return on invested capital were all first-quarter records, and that's a credit to our employees.

Our rental revenue increased 12% year over year based in part on an 8% increase in volume. We generated $602 million of adjusted EBITDA at a 46% margin.

Our return on invested capital improved to 9% and our free cash flow for the quarter was $450 million, more than 60% higher than a year ago. We also reported record adjusted EPS of $1.34 for the quarter.

Now we achieved these results despite some notable headwinds. The most significant constraint was the decline in upstream oil and gas activity. The rapid shutdown of almost 50% of drill rigs had both a direct and knock-on effect on this was felt most strongly in our pump operations.

The slowdown also happened earlier than expected and we now think it's likely to continue to at least the next three to six months. We still expect to mitigate the decline within our guidance for revenue and adjusted EBITDA and we will have more opportunity to do that now during the peak seasonality.

Now given the timing of the impact we felt it was realistic to narrow the ranges of revenue and EBITDA. Our updated revenue range is $6 billion to $6.1 billion and adjusted EBITDA up $2.95 billion to $3 billion. And these ranges still fall within our original outlook.

Now in addition in the first quarter we had a negative currency impact from a relatively weaker Canadian dollar and this will likely impact our year-over-year comparisons throughout 2015. And a harsh winter slowed the pace of projects in several regions where we dealt with historic cold and snow. And with that one we can stay safely that's behind us.

But despite these headwinds we put a record $5.4 billion of OVC on rent in the first quarter in a highly competitive marketplace. We could leave it at that but as you know we're not a company that shies away from looking at numbers from every angle. And in the first quarter the metrics of time utilization and rate merit further discussion.

Time utilization decreased in the quarter by 40 basis points to 64%. That hasn't changed our outlook. We're still comfortable with our full-year time utilization of approximately 69% and when we look at branches without any meaningful exposure to upstream oil and gas activity time utilization was actually up 40 basis points in the quarter.

With pricing our rate increased 2.9% in the quarter versus last year and that was lower than expected and we're now anticipating a very competitive rate environment going into the summer months. But I know that our field management feels like I do that there are actions that we can take to get our prices up.

Coming off the quarter we now expect our rate increase to be about 3% for the full-year instead of the original outlook 3.5%. Regardless of any headwinds, we will continue to transfer underutilized fleet to areas of higher demand where our sales force has more leverage to negotiate rate. And we will have even more opportunity to get the equipment on rent as we go into our seasonality as it picks up.

Our focus on achieving that optimal balance of metrics that we've talked about before, that is where rate and time utilization intersect to drive returns. We see this as being absolutely essential as we continue to capitalize on the up cycle. And a large measure is within our control regardless of external developments.

Now let's turn to the marketplace starting with specialty rentals. The organic revenue growth in our specialty segment was 25% in the quarter and EBITDA was up 57%. Trench safety and power were particularly strong.

Specialty rentals are a high margin business and they help drive our fifth consecutive first-quarter increase an EBITDA margin companywide. We'll expand all of our specialty lines this year with an addition of approximately 18 new branches. This will give us a strategic presence in new trade areas and strengthen our cross-selling abilities.

From a broad perspective our operating agreement continues to match up favorably against last year. Our sales force is reporting high level of project starts and if anything our customers are even more optimistic than they were in December. And this is true of our large national accounts as well as regional operators and local contractors.

We're serving a diverse customer base that has maintained a healthy balance year over year going into April. Key accounts represent 65% of our base by revenue. That includes national accounts at 46% of our base, and our local customers which we classify as unassigned accounts ticked up slightly to 35%.

Now turning to geography on a constant currency basis all but one of our regions had year-over-year growth and that one was nearly flat. The Mid-Atlantic, South, Midwest and Mountain West regions had a particularly strong quarter. I want to give a nod to our industrial team which has continued to score wins in the downstream energy sector, and energy gets a bad rap right now but from our perspective we're seeing some impressive numbers.

We currently have commitments for eight multibillion-dollar energy projects, four which are underway, two are in the dirt stage and the other two will kick off in 2016 and 2018. All of these are three- to six-year projects in Texas or Louisiana.

But beyond energy we're seeing many different sectors pickup. For example our major infrastructure renovations in Ottawa and Montreal, large stadium projects in Atlanta and Fort Lauderdale and renewables such as wind farms in Kansas. And I want to share something new about Texas which is a large and diversified market for us.

If you exclude pump the increase in rental revenue was in the mid-teens on a year-over-year basis. That points to a solid demand outside of upstream oil and gas. We always have to write out some sector-related cycles but the fundamentals of our markets are very strong.

We should see broad-based growth well beyond 2015 as our customers take on more work and secular penetration adds an extra layer of demand. Most industry forecasts support this view. One recent release is the Consensus Construction Report put out by the American Institute of Architects and it takes into account seven major forecasters including Dodge and Moody's.

The report concludes that commercial construction which is our bread-and-butter is forecast to remain on a strong upward trajectory. Hotels, office buildings and retail are just some of the areas, just a few of some of the year is projected to contribute to that growth. And the institutional sector which had a disappointing decline in 2014 appears to have bottomed out.

The consensus is that institutional construction will reverse to a gain in 2015 and climb again in 2016. And that's good news for markets such as health, education and public safety.

So that gives you an idea of where we see challenges in the opportunities in 2015 and to some degree in 2016 as well. Taking everything into consideration we remain confident in our full-year guidance of adjusted EBITDA of at least $2.95 billion on total revenue of at least $6 billion. We're balancing these metrics behind those numbers in light of the market dynamics and we expect to spend $1.7 billion of gross rental CapEx this year as planned.

Now in short we show that we have the right plan, we know we have the right plan in place for 2015 and our strategy for long-term, profitable growth remains intact. So with that I will ask Bill to cover the financial results and then we will take your questions. Over to Bill.

Thanks Mike and good morning to everyone. We have got a lot to cover here so I am going to try to streamline my comments about the actuals so we can save a little time to touch on the refinancings that we did, touch on our oil and gas experience for the first quarter and also the outlook.

Real briefly on the financials we had a good revenue result in the quarter. Rental revenue was up almost 12%, 11.9% as Mike called out. That's a $119 million, $120 million improvement and the drivers were as follows.

The ancillary and re-rent revenue performance for the quarter was good. We had about $14 million year-over-year improvement from those two combined, the bulk of it being ancillary pickup delivery in our RPP program. Re-rent was just a little better than flat year over year.

So that was about $14 million of the $120 million. Within owned equipment revenue OER rental rate growth you saw was 2.9%. We translate that into about a $26 million improvement over last year.

On the volume front we had 8.1% improvement and that translates into about $72 million of volume impact which I'll note includes the impact of having pumped this year and not in the first quarter of last year.

Also sprinkled throughout the volume and some of the other lines is the FX impact that we experienced in the quarter. I'll summarize that at the end.

Inflation, replacement CapEx inflation we called it about 2.1% for the quarter and that's a headwind of just under $19 million year over year. And then mix all other including some portion of FX accounted for $27 million year over year.

That includes the impact again of the pump acquisition. As we talked before pump not only contributed through the acquisition but has a more attractive mix than the rest of the business. And so that was a significant part of that $27 million.

So those were the key components of the $120 million improvement. And I'll just call out separately if you aggregate all of the currency impacts we estimate that currency cost us about $16 million of rental revenue year over year. And that certainly is a significant headwind when you think about the growth that we were able to experience.

The only other revenue comment that I'll make is about used equipment sales. We had another good used equipment sales result in the quarter, $116 million, and that's up about 6% from last year and also very importantly very robust 50.7% adjusted gross margin for the quarter. And as has been the case that was helped not only by solid pricing in the quarter, pricing as measured by proceeds as a percent of OEC was just under 50% in the quarter but is also supported by our continued focus on the retail channel.

We get the best margin result there. And so selling about 61% of our used sales through retail channel was a nice support for the results.

Turning quickly to profitability at EBITDA first, adjusted EBITDA of $602.2 million was a Company record for the quarter as Mike pointed out, as was the adjusted EBITDA margin; 45.8% was a very robust margin. So that's $83 million worth of dollar improvement over last year and 170 basis points with a margin improvement as well. Flow-through in the quarter was strong at 60.6% and we'll certainly touch on some of the drivers there in the year-over-year EBITDA bridge.

Speaking of which that $83 million of improvement was driven by volume. Primarily volume was up about $51 million of the $83 million year-over-year improvement. Rental rates contributed another $24 million toward that $83 million improvement.

The cat class makes primarily from the impact of adding pump we would call that about $14 million of incremental improvement. And then we also had the improvement from ancillary and re-rent revenues that I called out earlier. That's about a $7 million improvement on the incremental $14 million of revenue that I called out.

We did have a lower incentive compensation accrual for the first quarter this year compared to last year reflecting some of the headwinds that we experienced with oil and gas, weather and currency. So that contributed $6 million of year-over-year improvement.

Used equipment sales, already called out the sales margin improvement. That was about $5 million of improvement.

And then a few headwind items. The fleet inflation and mix component combined was about a $13 million headwind versus last year. Bad debt expense, we reverted to a more normal bad debt expense this year compared to a solid bad debt expense performance last year, so that cost us about $8 million in year-over-year EBITDA.

And then merit increases were about $6 million of impact this year as well. That leaves about $3 million of all other nits and nats combined. So all in all a very robust EBITDA result in the quarter even in spite of the headwinds.

And as Mike called out on EPS it was a great EPS result for the quarter as well, $1.34. That's up almost 50% against the $0.90 of adjusted EPS that we delivered in the first quarter last year. So another good result there.

Moving on to free cash flow, continued the good result commentary. $450 million of free cash flow in the first quarter and that's up from $278 million in the first quarter of last year with minimal merger-related adjustments showing up in the current quarter, only about $1 million of merger-related payment. So the way we talk about free cash flow on an adjusted basis we would call $451 million.

A variety of different drivers including the operating profitability. We also had lower AR and the timing of some of the other working capital payments were also favorable for us, primarily accounts payable.

Rental CapEx for the quarter was $323 million and that's certainly a start consistent with the comments we've made previously about the timing of CapEx this year looking similar to last year. We as you saw in the outlook we continue to expect to spend $1.7 billion in gross capital this year for a net of about $1.2 billion. The net rental CapEx in the quarter was just under $210 million for the quarter.

On capital structure and liquidity a busy quarter in capital structure actions. You all have seen that we refinanced two of our outstanding issues. We issued calls on the 8 3/8 senior subordinated notes and the 5 3/4 senior secured notes.

We refinanced those issues by issuing two new issues, $1 billion of 4 5/8 8-year senior secured notes and then another $800 million worth of 10-year senior unsecured. Very attractive overall impact for those refinancing transactions. But we didn't stop there, we also amended and extended our ABL facility and increased its size as well, so the ABL is now to $2.5 billion.

We then drew on that new and improved ABL and used it to partially call the 8.25% senior notes. And I go through all of that just to note that the timing of those transactions were split between first quarter and second quarter. And so as you think about the results in first quarter and as you anticipate the results for the second quarter you have to remind yourself that we will have some impacts in the second quarter from those first-quarter transactions.

In particular we will report in the second quarter about $121 million loss on the redemptions that covers both the premium of calling the outstanding notes as well as writing off any remaining deferred financing costs. That will happen in the second quarter.

When you aggregate it all together we expect that the aggregate run rate of interest expense reductions from all those transactions should come in to an improvement of about $48 million a year. So that gives you a summary, and to put it even more directly, our interest expense estimate for cash interest this year -- excuse me, GAAP interest this year we expect to be about $460 million. So hopefully that will help you as you think through all those transactions.

Real briefly on ROIC. Company record ROIC result in the quarter, 9% and that was 120 basis points compared to first quarter last year and 20 basis points better than in the fourth quarter.

So despite all the headwinds as Michael discussed we continue to be on a path to improving our ROIC which has been a major focus of our efforts. Even with the revised guidance that we provided we fully expect a very nice improvement in ROIC as we go through the full 2015 year.

Before I finish up with the outlook just a real brief summary of our progress in oil and gas. We talked in the first quarter about a downside oil and gas scenario and I just wanted to provide a couple of data points about progress against oil and gas and how we compare to that downside. Recall that we called out about a $400 million maximum fleet size impact from the downside scenario we laid out.

You will also recall that we said that $400 million impact we modeled it as hitting us in the second quarter. Obviously we didn't expect it would be zero impact until June and then $400 million from June on but we certainly modeled it that way. So that $400 million maximum impact averaged out to a $200 million OEC impact over the course of 2015.

We are about halfway to that $400 million maximum impact just based on the path of fleet in our oil and gas branches. And in particular when you look at those oil and gas branches most of the impact that we've seen has come from the oil and gas branches that have the highest share of their revenue from oil and gas. If the branch has more than 20% of their revenue from oil and gas in aggregate those branches have seen about a $200 million equivalent OEC impact.

For the branches that have less than 20% of their share in oil and gas there's been virtually no impact. So we find that to be a very interesting feature of how oil and gas is progressing throughout our branches. The thing as Mike pointed out that surprised us a little bit is that the impact came a little sooner than what we expected but certainly not outside the context of the size of what we expected.

But the fact that it came sooner means that it will have an effect over the remainder of the year longer than the way we modeled the downside. So when you net altogether we're probably seeing an impact through the full 2015 calendar year of something in the area of 88% of the full downside impact that we talked about previously. We call that $36 million of EBITDA as you all recall and so we'd probably say that we're seeing something like a $32 million EBITDA impact assuming oil and gas maintains at the level that it is currently.

That is not an unreasonable assumption given that when we look at our oil and gas branches we are seeing a slowdown in the decline. In fact, if you look at all of our oil and gas branches for the months of March and so far in April we've actually seen a slight sequential increase in fleet on rent in those branches. So that gives us some level of encouragement that the decline has slowed if not completely arrested.

The question is where does it go from here? And that's going to be the wild card and we can talk more about that in Q&A if anybody's interested.

So that's the oil and gas picture at a very high level. The last thing I'd like to update is just the outlook. You saw the announcement, essentially what we did was to take off the top end of the revenue and EBITDA ranges, reduce the expected rental rate realization and left everything else unchanged.

We think that's a very realistic view of where we will be for 2015. So the outlook now is for rental -- excuse me, total revenue, total revenue in the range of $6 billion to $6.1 billion and within that as I said we expect rental rates to be approximately 3% for the full-year.

Time ute, we have not changed our view, 69% for the full-year or an increase of about 20 basis points. And in adjusted EBITDA we are now in the range of $2.950 billion to $3 billion for that measure.

We're continuing to target $1.7 billion of gross capital spend for a net of about $1.2 billion and we continue to expect free cash flow to be centered around $750 million, with $725 million on the low side and $775 million on the high side. All of that will net out to our continued expectation of leverage at the end of the year at about 2.6 times net debt to EBITDA. And that assumes that we complete the share repurchase program at about $500 million in calendar 2015.

You all saw that we did spend about $316 million on share repurchase in the first quarter. That brought in about 3.5 million shares at an average price of about $89.16 in the quarter and we continue to believe that spending on a path to $500 million is the right place to be for right now for 2015. Obviously we will continue to reevaluate as we see how profitability and cash flow develop as well as how the stock price traits.

So those are the key points that I wanted to make and certainly would welcome all of your questions. It was a solid quarter for us when you step back and look at the results with some headwinds that not only had we to deal with in the first quarter we'll have to continue to deal with going forward. But we've got confidence that we've got a program that can get us to the outlook that we've given and certainly we'll update you as we go forward.

So with that, operator, I will ask you to open up the call for questions and answers. Operator?

(Operator Instructions) Seth Weber, RBC Capital.

Hey, good morning everybody. I'm wondering can you talk a little bit more about the redeployment. Bill I think you mentioned you've seen about $200 million of fleet that's been affected so far in the oil and gas regions.

Can you size for us how much fleet you've redeployed year to date so far? Where is it going, is it going intra-region, is it going out of state just to nonresidential construction markets?

And can you talk -- how do you think the nonres markets are going to shape up competitively? We've heard anecdotally about the independents adding more fleet recently.

I think Michael you mentioned competitive pricing so can you help us frame all of that stuff? Thanks.

Sure, Seth. I will start with sizing and Mike and Matt you guys if you want to chime in on where it's going.

The way we look at it we've got about $80 million of fleet that have come out of oil and gas branches going into non-oil and gas branches. And primarily that $80 million has come out of the branches the more than 20% share branches that I mentioned earlier.

So the issue has been concentrated in those high share oil and gas branches and we responded there with the defleeting of about $80 million so far. The challenge of course is putting that fleet on rent usefully elsewhere. We think we stepped up to the challenge.

It is more of a challenge in the first part of the year than it will be in the second and third quarters in particular, just given the relative business of those quarters compared to first quarter. So we're encouraged by our ability to mitigate by moving fleet around. As to where it's going and sort of the environment that is facing you guys want to add anything?

Yes, Seth, so we're seeing and you can look at the construction growth maps that are in the deck on slide 14 specifically where the demand is we're shipping the assets to where the demand is.

The good news as Bill said that demand will increase as we get into the seasonal uptick will be in our favor. And as we look at our non-oil and gas branches the encouraging news is that they are acting very similar to how we expected them to act to have they acted in the past.

And as we sit here today we're seeing both time and sequential rate in those non-oil and gas branches yet the ramp-up that we need to hit our goal so that's where it's going to go. The end markets and the demand tell us that the opportunity is there and most importantly we have as a team and the customers and the footprint to deploy it there.

I would just only add that I think you asked a question where is it going and it's actually most of it is staying within the region where it's coming off rent. We are doing transfers. We are also doing sales and redeployment of capital.

That's an ongoing effort for us and we will continue to do that. But I also want to point out one thing. If you recall over the last several years we have been very disciplined in the way it which we have given out capital and over the years many of our non-oil and gas regions have been looking for fleet.

So this is their opportunity. They are taking it and we are supplying them.

Okay. And if I could just as a follow-up to that can you just talk about how deep into the year -- where do expect to make the CapEx your $1.7 billion CapEx decision, where do we get to the fork in the road on the $1.7 billion number? If you don't see trends, pickup is it May or June or how deep into the construction season will you go with that versus just continuing to move more fleet around?

I'll start, Seth, and other guys chime in please. I think maybe it would be helpful to come at it from the other direction. How late can we go before we have to make a decision about reducing CapEx if we decided there and the answer is pretty doggone late.

As we've talked before we don't have a lot -- we don't have cancellation penalties or a lot of constraints on our ability to pull back once we placed orders. Up until the point that it shipped we can cancel it for the most part. So that gives us a tremendous runway to make that call.

Certainly we want to see how the second quarter ramps up and again a real solid feel for that before we start making any decisions. Matt, I don't know if you want to add anything.

The only thing I would add to that is we're not -- we don't need to make that decision and we're not trending towards that decision. Because as you look at the data, when you take comes out of the equation, even absorbing oil and gas, we're 10 bps down in the first quarter and that's improving. When you look at the non-oil and gas branches in Q1 they were actually 40 bps up on a year-over-year basis, so if we deliver 3% rate, 79% time that's a good reason to spend that $1.7 billion.

We do have the flexibility in case anything changes as Bill stated but we feel good about being able to deploy that as well as 18 cold strikes that we're doing in the full-year many of which are opened already. So actually it's 21, it's 18 specialty and three general rent cold starts that we've already opened up. So those are all the reasons why we feel like deploying the capital is something that we will be able to do effectively.

Yes, it was 69% time, not 79%.

Did I say 79%? I had my Nirvana hat on. I apologize.

Thank you very much, guys.

Ted Grace, Susquehanna.

Hey gentlemen how are you? I was wondering if you could walk through the sequential progression of time utilization in 1Q and then what's happened in April, what gives you confidence that the trajectory can reverse out that a lot of the challenges are reversing out? I know you mentioned the oil and gas branches that rate of decline has slowed dramatically but could you maybe quantify that with some of the time utilization data points that you can talk about?

Sure, Ted, it's Matt. So the time utilization in January was 63.7% and in February it was 63.9% and in March it was 64.9%.

And when we talk about April we see that gap that March was our biggest gap on a year-over-year perspective. We see that gap narrowing and as we sit here today we're very close to and this is all in, this is not just non-oil and gas. We're very close to being on top of year-over-year time utilization.

More importantly as we look at the OEC on rent build we've had a very strong two weeks and this is when we need that to build. April, May and June Q2 is where the build has to come and we're expecting to cross over the year-over-year time utilization somewhere in mid-May. That's our target and that's what's got to happen and then have some sequential improvements from there on a year-over-year basis as well as seasonal increase.

So I don't know if I answered your question. That is the data that we're sharing today.

Yes, that's helpful. I think that helps people understand what that curve looks like. Then I think did you mention in the first quarter non-oil and gas branches time utilization was up 40 basis points?

Yes.

Okay. Versus the reported of negative, 40?

That's right.

Correct.

And then the second thing I wanted to ask is just as a follow-on to Seth's question on the oil and gas exposure, a quarter ago you walked through the framework, it was very helpful. You've updated to say that the reasonable worst-case scenario is 88% of that $36 million.

Did I hear that correctly? Is that you still feel that the reasonable worst-case scenario is that $36 million? Or I just want to make sure we understand what the updated message is on the framework?

Yes, we do still think that's a reasonable way to think about the maximum downside, Ted. As I said the impact came sooner in the year than what we modeled certainly and then what we expected quite honestly. But yes I'd still say that $36 million is a reasonable downside scenario.

Remember when I said the 88%, the $32 million I think I said of impact is our view right now. That's excluding some of the mitigation that we have been and will be doing over the course of the year.

That $80 million of fleet that I said came out of oil and gas and went into other non-oil and gas branches we haven't given any benefit for mitigation from that fleet being moved the way it has. So that's why we think that the $36 million is still a reasonable downside for EBITDA impact from oil and gas this year.

Okay. And so the last thing I will ask when we square that up against the updated EBITDA guidance, $2.95 billion to $3.0 billion, you did 25 at the midpoint. How much of that is the updated oil and gas expectations just so we understand how that's baked into the updated guidance?

We weren't that explicit when we set the range and therefore set the midpoint on the new guidance, Ted. What I would say is that what we feel is that if oil and gas continues where it is now or even deteriorates a little bit more it would have been a part of the reduction in the midpoint of the range but not the entire reduction.

We still certainly have the impact of currency that's continuing throughout the course of the year. We did have the weather impact and we are going to claw our way back from that in the second quarter here that continued to impact the full-year. So I don't know how to categorize it numerically but I'd say oil and gas was part of it but everything that we experienced everything else we experienced in the first quarter was part of it as well.

The only thing I would add Ted is there's a $25 million number on rate. So just the absorbing that half a point of rate change is part of that movement as well.

Okay. Solid quarter guys and best of luck this quarter.

Nicole DeBlase, Morgan Stanley.

Yes, thanks guys. Good morning. So my first question is just clarifying Ted's point.

So the $32 million, I'm sorry if we're going on about this, but the $32 million impact that you guys now expect from oil and gas, is that fully baked into your guidance? Like is it in the low-end, is it in the midpoint, is it in the high-end of the new EBITDA range?

It is baked into our guidance. We're not characterizing whether it puts us at the low, medium or high of it. It's in our thinking when we set the guidance.

Okay got it. Thanks for clarifying that.

My second question is it seems to me like the new 3% rate guidance is assuming that we get normal seasonality from here which makes sense since you guys are already starting to see a pickup in those oil and gas states. But I guess my question is what you've seen from a rate perspective quarter to date, so in early April does that gel with the 3% rate guidance that you have and what's the downside risk at this point that we could have a down revision? Would we need to see a deterioration in oil and gas prices in markets for that outcome to occur?

Sure, Nicole. All take that. It's Matt.

So as far as the rate guidance what we're seeing in April is that we've gotten it back to flat and now we are going to get our sequential climbs that we need as you pointed out we usually get in this season. And you're looking at about 6/10 a month May through November and then a small drop in December.

And something that looks similar to that. And the good news is as we look at our history we've done that before. So between the strength in the end markets and the fact that we have the tools and the capability of doing it is why we felt comfortable setting that target at 3%.

Okay, got it. Thank you. I will pass it on.

Scott Schneeberger, Oppenheimer.

Thanks guys. Just curious with regard to the guidance and the softness in the quarter with regard to rate. Could you address ForEx?

I think you talked about the rental revenue impact in the quarter. Could you speak to EBITDA? And then just other drivers of the rate guidance, is it predominantly the oil impact or are there other things asset class, geographies just curious.

So on currency I called out $16 million of revenue impact in rental revenue and about $7 million and EBITDA. As we look for the full-year if currency stays you can use 60 and 30 as the full-year impacts for the remainder of 2015.

And that is considered in our guidance as well. So that's the currency story. And then I'm sorry what was the other part of your question, Scott?

That's helpful Bill. Just as a follow-on let's go with when moving around assets from the oil locations could you speak to the asset classes that are being moved and what's coming off and just not going back and what are the asset classes that you're moving and what's having more success than not? And how that ties to rate as well?

Sure, Scott, this is Matt. So as far as the assets that are moving what you would expect, Reach forklifts, some booms, some light towers as well as pumps. If you ask me which one of the most challenge to move until we further build out our footprint we have a headwind to move in the pumps as fast as we move the other more fungible assets.

But that was always our game plan when we made the pub acquisition was to grow out that footprint and penetrate other markets as well as chasing our cross-sell opportunity. You will see in the slide deck on I think it's slide 35 that we've identified $80 million of cross-sell opportunity. So we don't only have the strategy and the hope, we actually have the opportunity to continue to move some of those pumps out of the oil and gas and into existing customers through cross-sell.

So stay tuned for what our close rate will be but there's an opportunity out there that we've identified and that we're chasing. And that will be the last part of the asset class that we need to move more aggressively, it would be pumps.

Thanks.

Joe Box, KeyBanc.

Hey guys. Mike, you said earlier that you expect a competitive rate environment as we start to get into the summer months. I'm curious is that across the board or is that much more concentrated in the energy exposed markets? And I apologize if I missed this earlier, but did you give us a break down of rental rates within the energy markets versus outside?

Well, I don't think we gave -- it's hard for us to break it out that way because the way in which we do it the ARA it's a weighted average on the asset class and it's hard to break it out that way. With regards to the competitive marketplace I just think that typically look we all had a bad winter, we all had the oil and we see that the competitive marketplace will change as the season swings to a more seasonal opportunity.

So we just see it to be more competitive. I wouldn't take it as anything more than that. That's it in a nutshell.

I mean do you think it's fair to say that inside energy is negative and outside of energy it's kind of in line with that 3.5%-plus that you had highlighted? Earlier in the year?

I would say that -- I would quantify it by saying that the non-O&G you'd see a normal trend that you would normally see that we've experienced over time as opposed to what with the when you add the O&G in it gives us that full impact.

Understood. One last one for you.

Bill, it looks like there's only about a $6 million difference between the revenue contribution that you're getting from rental rates and then the offset from fleet inflation. And that doesn't give you a whole lot of wiggle room.

We know where you're guiding for rental rates but what are your expectations for fleet inflation? Kind of curious if rental rates continue to exceed inflation or if they go to parity or even negative from here?

So the expectation is for fleet inflation to continue sort of the trend that it's been. We're replacing something like 15% of our fleet every year and we continue to experience inflation on new purchases at something like a couple percent a year. So when you aggregate that over the average life of what we're replacing we're going to stay in that 2% area for fleet inflation going forward and so if we deliver about 3% that we talked about for rental rates we still got a spread.

My expectation is that the inflation will not change dramatically and I certainly expect that we'll continue to drive rates as hard as we can. I won't give you a long-range forecast. You know we've talked about delivering 3% a year rental rate improvement over the long haul for a long time.

That's been our long-term view. Oil and gas has made that challenging this year but I don't see a reason to change that longer-term view as we sit right here.

Yes, Joe, I would only add that aside from just rate is not the only thing that we're leaning on. We're also looking at driving efficiencies in our process improvements. We continue to march down that path and so we're looking at ways in which we can be more efficient and driving not only our fleet but also our cost structure around our process.

Understood, thanks guys.

David Raso, Evercore ISI.

The rest of the year guidance, the first quarter incremental EBITDA number was the margin was pretty healthy, it was 61%. But when you look at the rest of the guidance it requires a bit of a step-up where the incremental EBITDA margin has to be around 76% to hit the year.

So I'm just trying to walk through are there some cost reductions that we can think about to expect the incremental EBITDA margin to accelerate that much as the year goes on or a mix issue? If you can just dive into that a little bit more.

Thanks, David. So I called out the impact of one particular item, bonus accrual difference year over year was $6 million in the first quarter. If we continue on the path that we're on that's going to continue to contribute as we go throughout the rest of the year.

In fact the contribution will increase because last year we increased our bonus accrual as the year wore on. The second half we ran very strong versus our plan and so we accrued up to a much higher level for last year's bonus. This year assuming we stay and deliver the guidance that we've given it's going to be less.

So that $6 million will go up a little bit in future quarters, so that will help. And as you know the incremental margin calculation is very sensitive even to reasonably small dollar amounts. So I think that's one example.

To Mike's point we've got a very intense focus on productivity overall. We realized what was the number guys $7 million of year-to-date impact of our efficiency, our lean focus, and that's at a run rate of $42 million.

So we'll continue to drive that run rate higher and we'll realize the amount higher as we go forward as well. So that's going to contribute and help support the incremental margin.

Then I'd say bad debt expense, it's always a little bit of a wildcard but we think that there could be an opportunity in bad debt expense as we drive some process changes internally to focus on how effectively we collect. So I think those are the things that I would point to that give us some confidence that the 60% flow-through margin or flow-through that we talk about is very realistic for the year.

Given it's completely under your control so it's something you really could just make happen if you need to, can you help us a little bit more in quantifying the potential benefit from the accrual on the bonus? Because this quarter say you needed another $20 million of help year over year on accrual bonus to get to the 76% incremental for this quarter, that's a pretty healthy jump. This quarter the benefit was only 6.

So just give us more comfort that that is a lever you could pull. Can that add not 6 in the second quarter and third quarter, could it be 20s and 30s, is it that significant a number?

It could be. Right now if you are looking for a number I'd say something in the neighborhood of just -- I'm hesitating I am going to far here -- but in the middle to upper 30s it could be.

On the year-over-year benefit? Okay, so that's something under your control, I'm sorry is that a full-year or per?

That's full-year. And it could be a little bit more depending on how the year plays out. Again it depends on how the year plays out as to how we do versus the targets that we set for the year.

All right. Then on the rates, the comment Matt about 60 bps per month gets you to I'm not sure if you quite get there but you get close, I guess maybe more for the cadence, even if we can do that, it appears the rate for the second quarter would still be lower than the 2.9 we just printed. So I'm just trying to get a sense of the cadence.

When do you expect a quarter to show above 3? Basically what I'm trying to figure out is when do we make that harder decision on CapEx, utilization rate? I would think you need to make that decision probably as you said by the end of the second quarter if not maybe a little earlier. What's the cadence or rate increases year over year that we should be thinking about to help think about that trigger decision on CapEx?

So if you do the math you will see that you don't cross the 3 -- you don't get to the 3 threshold until the second half of the year. So we understand that, we understand that the headwind that we got in Q1 compounds and has a carryover effect to our Q2 results when you look at the year over year and that's within our modeling and where we're expecting. So you're back talking towards the end of the third quarter and then moving on from there.

Okay, that's helpful. Okay I appreciate it. Thank you.

George Tong, Piper Jaffray.

Hi, good morning. I want to drill into the downside scenario. In your prior earnings call you noted $400 million of fleet would be affected by oil and gas and then you assume you could mitigate half of that by redeploying the fleet so that's about $200 million of fleet affected.

And then previously you had assumed you had expected only half-year impact so that works out to be $100 million of fleet affected. $100 million of fleet assuming 60% dollar utilization gives you $60 million of revenue impact and then $60 million revenues on 60% EBITDA flow-through gets you to the $36 million EBITDA downside.

So it appears your prior downside of $36 million assumes a half-year impact and assumes you can mitigate the downside by redeploying the fleet. So given the greater part of the year is being affected by oil does that increase the downside beyond $36 million?

That's what I was trying to call out. The fact that we've now experienced the equivalent of a $200 million decline for now it's going to be three quarters assuming it doesn't get any worse or doesn't get any better. It will be three quarters at $200 million of impact and one quarter at an average of 0 to $200 million, so call it a net effect of $175 million of impact before mitigation and then the math flows through from there to that 88% or $32 million number that I gave earlier.

But the mitigation I want to point out the mitigation is not included in that calculation on the $80 million of fleet that came out of oil and gas and went somewhere else. We would have to do a separate calculation of the mitigation impact of that and that's why I said that I don't believe that it will be a full $32 million impact that we'll experience but something less than that. And I tried to range it between 18 and 36, and you probably would say 18 and 32 as the realistic range.

So that's how we're thinking about it this year. And obviously it requires us to continue to mitigate pretty aggressively with the fleet that does come out of oil and gas. And as I pointed out that's harder to do in the first part of the year in the first quarter than it is when things get busy in second and third quarter.

So we're encouraged about our ability to mitigate even more effectively as we go forward. Hopefully that answers, if not ask again, George.

Okay. That makes sense. If I look at your updated guidance range for revenues and EBITDA at the midpoint of the range EBITDA flow-through works out to be 70%; however, you're still maintaining a 60% flow-through target for the full-year.

So this suggests either EBITDA will be below the midpoint or revenues will be above the midpoint of both. Can you comment on which of these you're thinking about as you target the 60% flow-through?

Yes, this is where the ranges always make life challenging. I don't want to go further than just the ranges that we've given and the fact that we believe that revenue and EBITDA will fall within the range.

Given the sensitivity of the calculation the combination of those two will get you we think at least to about 60% flow-through that we expect and not go any further than that, George. Otherwise we might as well just give you the whole forecast, right? And that might be happy for some of you but not for us.

Joe O'Dea, Vertical Research.

Hi, good morning. First just on end markets it sounds like nonres feedback that you're getting through the market remains pretty constructive. Could you talk about with the 8% or so fleet growth that you have baked in on the current CapEx guide what the underlying breakdown is on the nonres growth that you anticipate to drive that versus the industrial growth that you anticipate within that?

Well, I don't know that we break it down specifically in those two categories. There is two pages on our deck that parses it out by state. The forecasted industrial growth rate for 2015 is 3.3 and the construction -- nonres construction is 6.2.

So it gives you a lot of detail by state within those two categories. Aside from that some of the macro things I mean AVI index just came out, but that's another positive. By the way that's 11 of the last 12 months that shows a positive trend and it seems to have built particularly in construction and industrial.

It was 50.9 in January, it was 51.2 in February and in March it's 53, so you continue to see that momentum building and that is a future, a leading indicator. And then when you couple that with housing and the consensus report that I mentioned those are some of the backdrops or some of the leading indicators that we're thinking about.

Thank you. Then just back on rental rate and given some of the details that you've provided and I guess but without knowing exactly where March wound up are you able to just frame what the rental rate for 2Q would be if you see the typical sequential climbs through the course of the quarter?

Yes, Joe, it's Bill. It would be below the 2.9 year over year for the full quarter that we achieved in Q1.

So you could do the math. It comes out to about 2.5% in the second quarter just on the sequential month the way Matt described it. And that certainly reflects the strong second quarter that we had last year making for a tougher comp.

Great. And then on that with the tougher comp and the high flow-through, I know 60% is a full-year target so it seems like that there's a little bit harder comp on getting that 60% incremental maybe in 2Q and again it gets better into 3Q, 4Q where you have better rental rate support.

You got it. It will be more challenging in the second quarter and then it gets better in the back half.

Great, thanks very much.

Due to time constraints this does conclude the question-and-answer session of today's program. I would like to hand the program back to management for any further remarks.

Thanks, operator. By the way I want to thank everybody for joining us on today's call. I hope we've given you some insights into our current operating conditions and what we expect in the months ahead.

Please be sure to download our updated investor presentation and also feel free to reach out to Fred Bratman in our Stamford office any time for any additional questions if he can be of assistance or lineup any presentations and/or some field site visits. So thank you very much and operator you can end the call now.

Thank you. Thank you, ladies and gentlemen, for your participation in today's conference.

This does conclude the program. You may now disconnect. Good day.