聯合設備租賃 (URI) 2015 Q4 法說會逐字稿

Good morning and welcome to the United Rentals fourth-quarter and full-year 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 risk 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, 2015, 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 welcome and good afternoon, everybody. I want to thank you for joining us on today's call.

These first-quarter calls are always about the future than the past and today is no different, but I want to start with a recap of 2015 for two reasons. First, it was a solid year for us with some excellent results and as I will discuss, that says a lot about how we're managing the business. And second, we saw some trends emerge in 2015 that are likely to impact the current year.

I will start with the operating environment. It offers some challenges although the underlying foundation of the recovery remained positive. We capitalized on some broad-based opportunities such as the continued rebound in commercial construction and we saw lively demand from sectors such as hospitality, renewables and public works. At the same time, we dealt with a significant drag for upstream oil and gas and its knock-on effect, a weak Canadian dollar and fleet growth in the industry which according to Rouse is outpacing demand.

Nonetheless, for the full year 2015 we delivered record amount of adjusted EBITDA of $2.8 billion in a margin of 48.7%, which is the highest in our Company's history. Our free cash flow came in at $919 million after CapEx, which was also a record. These numbers tell a good story. They show how we can be flexible and adjust our tactics while delivering value for investors.

As we look to 2016, the headwinds are still with us. There are also some evident macro constraints for this pressure on industrial activity, the Canadian economy, as well as some unknowns. But underneath these dynamics, the nonresidential construction markets are continuing to recover, and that is a key point. The equipment rental industry is continuing to grow.

That is why if you ask me where we stand on our operating environment, there is really two answers to that. One has to do with the short-term, meaning 2016 and the other is longer term relating to the rental cycle.

Short-term, our stance is to be cautious on CapEx and proactive about pursuing possible growth opportunities in areas such as specialty services. I will talk more about specialty in a minute.

For the Company as a whole, we think that our 2016 revenue can range from roughly $100 million to $200 million on either side of last year's performance and this includes a significant negative impact from FX, as Bill will discuss in a moment. It takes into consideration the continued drag from Canadian economy on our performance.

Canada is a commodity-driven country with economic issues that go deeper than Alberta and the oil sands. Real GDP growth in Canada this year is projected to be less than 1% and as the largest rental company in Canada, we are going to feel some pain and it could be significant. We will do what we can do to mitigate the impact on rates and utilization through fleet management.

Now with rates, for the Company overall we are projecting a year-over-year decline of 1% the 2%. We've moved rates higher for five straight years and we've maintained a premium price for services and sometimes I can make our rates more vulnerable to pressure in the short term. Rate integrity is the best long-term strategy for value creation.

With utilization, we're guiding to approximately 68% which would be an increase of 70 basis points. We see improvement coming from our disciplined management of CapEx, an OEC (interant), the continued recovery in nonresidential construction spending, secular penetration and the absorption of fleet excess in the industry.

What our outlook doesn't show is timing. That is big part of our 2016 plan. We are going to be very careful about the rollout of our CapEx.

In first quarter, we expect to spend less than half of the CapEx we spent in last year's first quarter. The CapEx that we do spend will be focused on growth sectors and key customers and from there we will test the waters. Our full-year plan is for approximately $1.2 billion of gross CapEx and we have the flexibility to move that number up or down based on the data that we see from our operations.

Now turning to the longer term, beyond the current market uncertainty we agree with the industry forecasters that there are multiple years of growth ahead for equipment rental in North America. The latest projection from Global Insight is about 6% annual growth in construction and industrial rentals through at least 2017. Now, we're seeing levels of customer activity to support this view. That point can't be lost when revenue flattens out for reasons I mentioned earlier. So it's important to note that our actual market activity solid and in many cases trending upward.

Our customers are, on the whole, optimistic. I will give you a few examples.

Our Southeast region had a strong finish to the year. The activity is coming from a mix of sectors, including automotive plants, infrastructure and amusement parks.

On the West Coast, commercial construction is going strong along with renewables. Our Pacific West region has won some business on a number of solar projects. And more universally we are on large multi-year construction projects at industries ranging from ag business to biotech to hotels and to sports arenas.

The real standouts continue to be our specialty services of trench safety and power and HVAC. For the full year combined, these services increased our rental revenue by 21% and a healthy 16% of that revenue increase came from same-store. Now we will continue to invest in fleet and cold storage for these specialty operations as well as our pump business. We have been expanding our pump footprint in new geographies and diversifying our customer base beyond upstream oil and gas and we expect to realize some benefits from these actions in 2016.

Specialty services are an important part of our game plan for value creation, but when I speak to investors one on one, I often caution against thinking specialty is a stand-alone business. It's true these are high-margin operations in their own right but their greater value lies in the holistic view of the Company and specifically in cross selling. We cross sell our specialty services to national accounts to create a -- stickier customer relationships, compete more effectively on major contracts and earn a larger share of their wallet. In 2015 we generated 22% more revenue from cross selling versus the prior year and we believe there is significant more financial benefit to be realized.

This is just one area of the business that we are operating more effectively. In 2015 we also performed at a record safety level. We became a more technology enabled Company.

We're even better change management. And we are continuing to invest in improving our rental process and service capabilities. Our employees are incredibly engaged in our Company's future. All of these are important attributes that matters to customers.

Finally, I want to talk -- make a comment about our liquidity. We generated over $900 million of free cash flow in 2015 and we do expect to create about the same or more in 2016. The plan to utilizes this cash flow to buy back shares and pay down debt this year. These are the most prudent uses of our cash at this time.

So in closing, I want to emphasize that while 2016 contains some unknowns, we are absolutely certain about our ability to manage through any volatility. 2015 didn't always go according to our plan but was very profitable for us. We executed on our strategy, we showed discipline as an organization and this year we also showcased our resilience and flexibility we have in adapting to change in order to drive returns.

These qualities will serve us well in 2016 and when we expect to deal with some ongoing challenges. And they will serve us equally well in the longer term as we benefit from a rental cycle that has still years of growth ahead.

With that, I will shift this over to Bill for financial results and after that will take your questions. It's over to you, Bill.

Thanks, Mike, and good afternoon, everyone, from me as well. I will try to add some more color to the key metrics that you've all seen, starting with the revenue picture, rental revenue in particular.

Rental revenue was down 3.2% in the quarter this year versus last year. That is about $42 million of revenue decline. The pieces of that really start with re-rent and ancillary. Those two combined were a little better than flat, so call it up $0.5 million the net of those two components.

The real driver in the change in the quarter was OER growth. Within that, rental rate down 1.8%. That was about a $21 million decline versus last year.

Our volume increase of 0.2% counted for about $3 million of improved revenue year-over-year. That is plus year over year.

Inflation -- CapEx inflation cost us about $19 million, a little more than $19 million versus last year and then everything else, mix and all other components, aggregated to a decline of about $6 million year-over-year. Those are the key pieces of that $42 million rental revenue drop in the quarter and explains the 3.2% decline from last year.

One other operating measure within that year-over-year rental revenue performance was time utilization. 68.2% for the quarter was down 2.4 percentage points for the quarter. I will point out that, that does include the impact of Canadian currency translation of the fleet on rent in the volume component.

Speaking of Canadian currency, the impact in the quarter for the currency was very significant. The Canadian dollar cost us $22 million versus where we would've been had it stayed flat. So a pretty significant impact in revenue growth for the quarter.

And just one real quick note on the full-year rental revenue $4.949 billion, up 2.7% last year. I'll note that, that also included the impact of the currency headwind. Currency in the full year cost us $78 million versus unchanged currency, so a very significant impact in the full year as well. In fact, if you excluded that our growth rate it would've been as high as 4.3% for full-year rental revenue as opposed to the 2.7% that we reported.

On used equipment we generated $157 million of used proceeds in the quarter. That is basically flat with the prior-year period and the adjusted gross margin came in at 46.5%. That margin is down from the prior year by about 2% but it is still very strong relative to the margin that we've achieved in our long history. And I think that reflects the fact that we've been very focused on driving as much of our used agreement sales activity through our retail channels as we could.

In the quarter, retail accounted for 77% of the proceeds that we realized and that is the highest share through the retail channel the we have achieved in a number of years, probably going back to before the last downturn. We feel good about the overall used equipment result that we drove in the quarter and the year and look for the used equipment market to continue with robust pricing and momentum here in the near term as well.

On the profitability front, starting with adjusted EBITDA, it was $744 million in the quarter and came in at a margin of 48.9%. That is a $31 million decline, or 70 basis point decline, in the margin.

The $31 million versus last year is made up as follows. Rental rates cost us about $20 million in EBITDA whereas the volume was a positive of about $2 million over the last year. CapEx inflation was about a $14 million reduction versus last year and that used sales margin in dollars terms cost about $5 million versus the last year.

Our usual merit increase impact of about $6 million of reduction in EBITDA came through in the quarter. And then we had the biggest positive in the quarter year-over-year, as we've talked about throughout the year, was our reduced incentive compensation accruals. That was a benefit of about $19 million.

Bad debt expense was about $2 million of headwind versus the prior year and everything else aggregated to $5 million headwind versus the prior year. Those are the key components of the $31 million of EBITDA change in the year.

I will also point out that spread throughout the number of those lines was be impact of currency. It all aggregated to about $8 million of headwind from currency on a year-over-year basis to bring us to that full-year -- excuse me, that quarterly number.

For the full year, just real briefly, our adjusted EBITDA $2.832 billion was an increase of 4.2% and that included an unfavorable currency impact of $29.3 million for the full year. Again, currency with pretty significant impact.

On flow through, adjusted EBITDA flow through for the Company finished the year at 86.4% but I will point out that, that includes the impact of the lower incentive accruals. That was a benefit as well as the impact of the currency change year-over-year which actually sounds bizarre but it was also a benefit to flow through as well, just given the impacts -- the separate impacts, on revenue and EBITDA. If you exclude both currency and incentive comp, the flow through calculates out to 65% for the Company and that is broadly consistent with the roughly 60% that we guide to -- or guided to for 2015.

Moving to EPS, adjusted EPS in the quarter was $2.19 and that was essentially flat with the prior year. I will point out, however, that on a year-over-year basis currency was at play and in the adjusted EPS number it costs us about $0.02 in adjusted EPS.

We also had a significant tax law change that was finalized in the fourth quarter in the state of Connecticut. Lots of detail around that but when you net out the impact of that tax law change it cost us about $0.06 versus last year and then I'd also point to the mix shift between the US and Canada. Canada took a smaller share of our income in the fourth quarter and actually, indeed, over the full year in 2015. If that mix shift had not happened, we would've been better by $0.02 as well in the adjusted EPS number, so keep those three things in mind as you think about the quarter EPS.

Same with the full year. $8.02 adjusted EPS for the full year. That was an increase of 16% last year but again, that was impacted by the currency impact which in the full year was about $0.08 of headwind.

Also the Connecticut tax law change, a portion of which was accounted for in the second quarter tax rate and the remainder was finalized in the fourth quarter. So if you aggregate those impacts in the year, that was about $0.12 of headwind and then the shift in mix between the US and Canada cost us about $0.13 for the full year.

On free cash flow, great story here in 2015 -- $919 million which compares to $557 million in 2014. Obviously the lower rental CapEx was a big part of the positive impact year-over-year but also the higher profitability contributed as well.

Our cash taxes also had an impact. They were lower cash taxes paid and favorable working capital FX were also at play during the year for that $900 million, or $919 million of free cash flow. Rental CapEx, as you've seen already, gross rental CapEx reduced in the quarter by $109 million and that brought the full-year total $1.534 billion, somewhat below the $1.6 billion we guided to. And net rental CapEx was about the $1 billion number for the full year.

On the liquidity front, $1.1 billion of liquidity at the end of the quarter. That included ABL capacity just over $870 million and cash on the balance sheet of about $180 million there. So we're well-positioned on liquidity as we typically are.

Just a quick note on our share repurchase programs. We completed during the quarter the $750 million repurchase program that we are operating under previously. We bought out the remaining $10 million of that program in the quarter.

And then we also began purchases under the new $1 billion authorization and in fact completed $111 million against that authorization during the quarter as well. So a total of $122 million of repurchases in the quarter and it put us on a path to executing the new $1 billion program over the course of the next 18 months. We started it in November of last year and so we expect to complete it by the end of April in 2017.

As I pointed out in prior quarter, we do need to be mindful as we execute the program of our limitations on share repurchases, in particular the restricted payments limitation in our debt covenants. However, when you aggregate those RP baskets available to us plus the available cash that is held at the holding company, we have about $500 million worth of available capacity at the end of December in order to execute share repurchases. We feel that we are well-positioned to be able to manage the program on a prudent, timely basis as we go through the year.

Return on invested capital in the year, just to touch that real briefly, was 8.8%. And that number was essentially flat compared to 2014.

Let me finish just by addressing our outlook really briefly. You have all seen the numbers that we put out. I would just point out that as Michael mentioned, we have a somewhat wider range around the midpoint of our guidance for revenue EBITDA and indeed, we have instituted a range for view on rental rates. That wider range represents truly our view of the uncertainty that we are managing through right here and now. We put the wider range there to give us a little bit more flexibility in responding to whatever the environment hands to us as a go throughout 2016.

In particular, the range on rental rate, the minus-1% rental rate top end of that range reflects our carryover. Our carryover from 2015 is essentially 1% and so as we go through 2016, in order to achieve the 1% decline at the top-end of the range would require us to have some slight increases during the peak season on a monthly sequential basis, which we think is a reasonable outlook. To get to the 2% would require essentially flat monthly sequentials during the peak season.

The time utilization improvement, 70 basis points is also, we believe, very reasonable, given the approach that we're taking to our management of the CapEx spend. $1.2 billion of gross capital netting down to about $700 million after used proceeds we think, again, is a great way for us to approach the environment that we are managing through right now. If we do that then we will net out to that $900 million to $1 billion of free cash flow that you see in our guidance very comfortably.

Those are the key things that I wanted to offer as prepared comments. Before I open the -- ask the operator to open the call for Q&A, I will just reiterate some of the comments that Michael made.

Caution and flexibility are two of the key watchwords as we think about 2016 and we're going to make sure that we continue to evaluate the environment very carefully and make decisions about what to do in response in a very prudent way. I think you can count on that and certainly look forward to talking to all of you as we go forward throughout the year in managing the business.

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

(Operator Instructions)

Our first question comes from Nicole DeBlase from Morgan Stanley.

Thanks. Good morning, guys. I'm going to ask a question about free cash flow allocation. I think you guys said you have $500 million available from the buyback -- for the buyback into 2016 but generating $900 million to $1 billion of free cash flow. I'm curious about the potential for debt pay down, what you guys are looking at for 2016?

Sure, Nicole. I think it's fair to say that we are thinking any free cash flow in excess of the share repurchase program that we've talked about will go to debt pay down. So we have still got the view that the share repurchase program, we want to execute over the 18-month period. That averages out to something like $165 million a quarter or so. And that would eat up about $700 million of the free cash flow if we do that on that pace. The remainder of the free cash flow we would use to pay down debt. That is our baseline view of the best use of the cash flow given our outlook for the market and opportunities that are in front of us.

Okay, thanks, Bill. I will follow the rules and pass it on.

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

Hi, good afternoon. My question relates to free cash flow beyond 2016. We all can of our own views of the length of cycle but just thinking about your maintenance CapEx levels. It appears that 2016 CapEx is getting down toward maintenance levels already. And then we have cash taxes going up in 2017 as well.

Can you help us a little bit with the lever that we usually have to pull if things go awry economically in 2017 or 2018? You usually have a pretty good lever on pulling the CapEx down. But given we are ready down to maintenance levels, can you just walk us through where we could see CapEx get cut beyond 2016 in case the need arises? I'm just trying to understand the dynamics there.

Yes, so maybe I will start and Mike and Matt, you guys can chime in. The maintenance level for maintaining fleet size and age is probably in that $1.1 billion kind of area these days and so that certainly is one view of maintenance and one view of where we could go to if things are softening up. I would argue that there is no need to replace the units that we have if our view became that we truly were headed for a downturn. I would argue that we could be even more aggressive than that and be a sub-$1 billion in total CapEx if a downturn started to develop. How far below $1 billion? I think would have to discuss that in more depth before we give an answer to that, but could we carve up another couple hundred, $300 million out of the [$1.2] billion we're spending this year? Yes, I think so, without too much trouble.

David, I would just say that $200 million of that growth capital is going to the -- or the growth capital we have is going to our specialty business. So if things were to turn south as you described, we would obviously pare that back and as Bill mentioned, it's not unusual for us to ratchet back even the maintenance CapEx going forward if we had to.

That is helpful. I know it's relatively early in the quarter, but can you give us a bit of an update, and if you said earlier, I apologize, I missed it, but how the year started when it comes to sequential trends? Usually January is not a strong rate month but just given the way the year ended, how are rates trending sequentially and year over year relative to the full-year guidance?

We won't characterize it with a number but I would say that rates are trending as we expected. By the way, I'd say the same thing for OEC on rent in the early part of the year here, even including the impact of currency. OEC on rent is trending at what we expected and that is consistent with the rates ending up in the range of guidance that we've given. That is as far as will go on that one right here and now.

Okay. I appreciate it. Thank you.

Ted Grace from Susquehanna.

Bill, maybe as a follow-on to that last comment to David, I was wondering if you could just decompose rate dynamics in the fourth quarter and broadly in 2015 and the relate them to expectations on 2016. Just wondering if you can talk about rates in Canada versus the US, talk about rates in more heavily exposed energy markets versus non-and then construction versus industrial, just so we can get a sense for what the interplay was last year and how we should think about those dynamics in the current year.

Guys, help me out. I will start here. Regards how rate finished out 2015, I think it's fair to characterize it as they finished weaker than we expected. We have given the sequential months there, minus 10 basis points for October, minus 50 for November and minus 50 in December as well. You remember we had told you that we expected seasonal to maybe slightly -- well, seasonal declines in that fourth quarter. I think it came a little weaker than we thought and Canada was certainly a part of that. As a result, the carryover that we brought into 2016 starts at a lower point and we are watching very carefully how rates develop from here and to our point earlier, that is going to be the watchword the entire year.

Canada, don't know if you guys want to handle Canada notion, but Canada did have a fairly sharp decline in the fourth quarter, sharper than we expected when we talked to you at third-quarter call. We are watching it very carefully and thinking very, very aggressively about what we do in response, right? What are the drivers? Is it something that we can address and if not, what can we do in response? That it's how we're thinking about Canada and honestly thinking about the whole business as we come early into the year. Matt, Michael, you guys want to add anything?

Ted, I think Bill captured it well. I would just add the team up in Western Canada is really fighting it hard, specifically in Alberta and they are continuing to take the actions necessary to adjust their fleet appropriately and if they can outrun macro environment there and we're going to adjust the properly and that'll get some growth capital to the lower 48.

Maybe asked a little differently, if you were to look at rates being down 180 basis points in the fourth quarter, can you just talk to dispersion? On a relative basis, what the Canada do versus, call it, Texas and the Gulf coast or the stronger regions like the west and the south. I think what people are really trying to understand is if you look at down 10, down 50, down 50 by the monthly progression, how broad based was that sequential degradations?

Ted, I think you could say it was spotty, and you can imagine the places where they had more challenges. So if you think of the relative rate we have enjoyed in the past, Western Canada and anywhere where we are doing shale drilling was the highest relative rate. So in markets were that was dramatically impacted, mostly in Western Canada and any other single end market, you saw large rate declines. We saw rate declines in Western Canada in Q4 of over 6%. That would be the highest that you would see. But as you can imagine, losing your highest rate business in Texas or North Dakota or in Western Pennsylvania, Ohio; right? Up in the Marcellus shale, those were the ones that had a bigger declines. And then you had positives in markets on the coasts where non-res was really caring the ball for us and they were able to do well on some of the projects Mike referenced in his opening remarks.

Okay, that is really helpful. I appreciate the color and will jump back in queue. Good luck this quarter, guys.

Jerry Revich, Goldman Sachs.

This is actually Brandon Jaffe on behalf of Jerry. Can you please provide some commentary on what you're seeing out of your industrial customers? Are you seeing any difference in activity from refiners, manufacturers, or chemicals companies?

Go ahead, Bill.

No, no, please.

Brandon, this is Matt. I think that we are still seeing growth and solid steady business from our chemical and also in our downstream oil and gas customers. We're also seeing pressure from those that have a more significant holdings in any kind of exploratory or upstream oil. So I think that is predicable. But when you look at what we count in our industrial, you have to recall in our industrial and other we also put in our infrastructure, and we see some growth opportunities there.

We see some growth opportunities in manufacturing and then above all that, and I know you specifically asked about industrial, but we continue to see growth opportunities in non-res. So you will see Global Insight say the industrial's got 5% growth opportunity and you'll see reports that we are in an industrial recession. I would say we are experiencing somewhere in the middle of that pack. That is what we are seeing in our business and what we are hearing from our customers.

I would only add that if you take a look at our investor deck it has industrial outlook for the US and outlook for Canada. It's really a story of two different worlds. They are going to grow. It's not so much capital projects, there's also maintenance so that is why they go to a spending and look how the industrial is forecasted for 2016.

Great, thank you.

Joe O'dea, Vertical Research.

Hi, good afternoon. Just trying to understand a little bit more in terms of how things unfolded over the quarter. I think as of one quarter ago, you were anticipating 0.25 to 0.33 of a point of carryover headwind and now that is a 1 full point. In terms of the experience you've had with customers, you talked about no surprise where the weaker areas are. But was it really just a function of customers coming back and pushing for those price concessions? Or was it more a matter of increased competition that whereas we had expected a lot of fleet would've been moved but still access supply and you still see that competition pushing rates down.

This is Matt. I would say that the concession part of the equation happened earlier in the year and mostly in upstream and in Western Canada. Not really any concessions outside of that. But I think the growth opportunity from an OEC on rent perspective tempered any kind of rate improvement that we would get. And we certainly had to partner up and defend some strong relationships here and there in our national account base. But I wouldn't point to it as a concession-driven situation. The fact of the 1 point carryover is really a function of what Bill stated, what Q4 sequentials look like. When you have 0.5 negative in both November and December, that makes the full-year carryover of 1 full point negative. So when you look at our range of one to two, we would have to be flat for the full year of 2016 to achieve that one. That is what we are driving towards and if there is more there, we will take whatever opportunities we can get. Mike it said earlier that rate discipline is a key lever for the industry as well as for us.

I would only add two things, one of which is in the fourth quarter is where we saw a significant drop off in Canada. That impacted our carryover as well. That's number one. Number two to answer your question, last year we talked about the supply and demand imbalance. And with oil and then the fleet additions coming in, it's not unusual to see some pricing pressure and as we went to the fourth and first quarter, I've always told a lot of investors that, that's -- this is going to be the challenge. This is the challenge that we have simply because we don't have oil like we've had over the last five years.

So it's more seasonal trend, more non-res trend. What gives me a lot of comfort is I'm seeing the trend where the absorption is coming through in the fourth quarter with Rouse and some of the data points they had. The other one is the declines we are seeing in OEMs. Their book of business tells me that we think it's prudent decision making.

Okay. Thanks very much.

Seth Weber from RBC.

Good afternoon, everybody. I just want to follow up on a couple earlier questions. I think the first one on potential levers to pull, I think you guys have -- you are at $40 million or $50 million through your efficiency program so far. Are there actual measures that you could take from a cost cutting perspective other than cutting fleet? I mean, branch closures, any other more on the expense initiative side that you guys have considered? I have not really heard any talk about that so far.

Sure, Seth. We certainly are looking at opportunities to help address any shortfall should it develop as we go through the year. We have taken some actions. You saw in the quarter that we took restructuring charge in the quarter as we restructured some of our organization in the last couple of months. We are looking for other opportunities that might make sense should the environment deteriorate from where we are.

Those actions come across a wide variety of our operation, right? So we have our usual lean initiatives that we've been talking about for a couple of years now. Those initiatives really resulted in a run rate of savings at the end of the year of about $53 million. We still are targeting getting that run rate up to $100 million by the end of this year. So there are lots of other actions we're going to continue to look at.

Right here and now, we don't have a notion of branch closures. Right here and now we don't have a notion of large head count headcount reductions but those are questions that we are going to continue to evaluate as we go forward. We think that is a prudent way to get at it. In the meantime there are some specific things we're already doing the we think we can double down on to help drive that run rate of cost savings higher and to help realize some of those cost saves in the current year. Those are the things we're focused on right here and now. We continue to evaluate to see what other the actions we might need to add to the list that we already have.

The only thing I would add to that is this very seasoned team and we have done this before, if need be. We have got the experience. We have not only through economic downturns but also in achieving synergies during your mergers. I have high respect for the team and what they're capable of doing. And as Bill mentioned, we're not thinking about it now but we are more than capable of making adjustments as they come.

Okay, thanks. That's helpful. And then just circling back on the oil discussion, can you update us on what you think your direct oil exposure is today and whether you're still -- whether you think you need to continue to move fleet around? I think you had a target of $200 million for 2015. Is there an estimate for 2016 or do you feel like we are near the bottom on the oil and gas, the weakness, are you starting to anniversary that soon?

Yes, Seth, this is Matt. We had talked about at the end of the third quarter as far as fleet movement, that we were down to about $30 million, $35 million of seasonal items. We pointed out heat and light towers. I would say other than the heat being a little bit light, we still may have another $10 million, $12 million of excess heat right now in oil and gas that we've not repositioned because the demand has not been there. They're pretty much through the oil and gas movement.

The exposure now in the upstream is down to 4%, down from 6% 1.5 years ago when we started tracking this. So our exposure is certainly less and if we end up getting a little bit more of a dip than where the baseline is today, I certainly don't think it's anything we would have to call out in large fleet movement. It would be like any other end market that ebbed and flowed that we had to move fleet out.

The other thing I would add to that is the fact that, look, we expect continued weakness in oil and gas, particularly in our upstream. And more importantly, Canada as I -- in my opening comments, I think the issues there will likely persist with a very meek GDP growth that they're going to have for 2016.

Sure. Okay. Thank you very much, guys.

Steven Fisher, UBS.

Great, thanks. Good afternoon. It sounds like you guys are still pretty committed to buying back stock at these levels, which I understand simply because stock is down and a (inaudible) you still believe you have a very good opportunity ahead you but how are you weighing the possibility to reduce debt as the cycle moves on? And as a follow-on, what would you have to see in order to start to being more aggressive in paying down debt?

We are, as I said in my prepared comments, we are still on the pace that we talked about for the share repurchase and we think that is appropriate given the baseline view that says that the cycle still has room to run. We believe there will be growth in construction in 2016. We believe that there is likely growth in construction in 2017. On that basis, we think that the cash flow is going to remain robust and we can still execute that share repurchase, pay down some debt, and end up in a better place.

What would have to be true in order to change that point of view is, I think we would have to come to a different conclusion about how long the cycle has to run. I realize that there is a reasonable position that says; hey, Bill, 2016 and 2017 are not looking good right now so you should change your view right now. We have not gotten to that point. The good news is we've got the capability, all right? We're executing the program on a steady pace over time, and we have got the capability to pull it back if we do change our view based on the experience we have in the market place, right? If the first several months of the year come in weaker than we expect right now, then we would have to rethink that approach to the share repurchase and debt pay down.

And that is how we are approaching it, right? This is part of the notion of flexibility. We set up a point of view, we establish a plan based that point of view but then we keep our head on a swivel, as they say, and keep asking ourselves, is it still right? Is it still right? And at the point where we can convince ourselves that it's not, then it's time to do something different and that might include paying down more debt and buying back less shares.

I would just add that capital allocation for us is very important. It's also a Board discussion we have quite frequently. Bill is right, how we see the world. I guess the point I would make is, we are approaching the world and this year cautiously with our capital, with our CapEx and we will kind of see how things unfold. We will make adjustments and changes if need be. But right here and now, we spend, we frequently spend at least either monthly or at least once a quarter with the various industry experts, Scott with Global Insight and McGraw Hill and other industry experts, to try to gauge the marketplace and try to understand what they see. That forms our decision -- is part of our decision process.

It sounds like, just to paraphrase, that you believe the debt reduction is really the downturn tool and capital discipline is really your up-cycle tool for not letting the debt get too far, the leverage get to out of control? Is that the way to sort of paraphrase it?

Yes, I think that is fair. Obviously, the capital control and the cash flow it drives links to the amount of cash flow that is available for debt reduction or share repurchase and we have to manage and balance all of that as we go forward. I think is a high-class problem to have to be able to say, oh, we are buying back shares and paying down some debt but maybe the mix isn't right, right? It's great to be in a position where you can do both. And that is the approach we've been taking and we've been talking to you about for a number of years.

That is a great position to be in. Now we just got to come to a view about what is the right mix. We have a view that says [700 250] to use the midpoint of the cash flow, is the view that we want to manage to right here and now. So let's go forward and to see if anything comes along to convince us that, that is not the right view.

Okay, thank you.

Robert Wertheimer from Barclays.

Afternoon. If I can do a twofer, is there any flexibility to move fleet from Canada to the US or you just under spend of that market just semi-structurally declines? Second, just to ask a question that a bunch of us --a little more bluntly. Have you benchmark more on a branch-by-branch basis against major competitors to see if you have any competitive issues versus just mix issues that you've been talking about for a long time on rate and utilization? Thanks.

Thanks, Robert. This is Matt. We are absolutely going to move fleet out of Canada. The first lever that we pull, as we discussed before, is to sell any excess fleet that's outside of its rental useful life. We are being very aggressive in doing that as we speak right here, now in the first quarter. The next lever would be to go through our normal retail channels and target, and maybe it would be some special values and to move some of that fleet.

The third value -- lever would be to move it. There is a more complexity about moving it out of Canada than there would be if it was internal, but not enough that we can't get over through most of our assets. I think the first two levers are going to be enough to adjust the fleet where it needs to be but if we have to go further we are capable of doing it. And we absolutely are doing it today.

Your question around what kind of metrics and down to the granular level of a branch on where we stand amongst our peers, is something that we utilize Rouse for. It's not by branch, it is by market. It's a rear view mirror of 90 days. But it is a useful tool that we use to help judge us in our process. We didn't have that years ago. It's relatively new. It represents about 40% of the market or somewhere around there and we push that down, all the way down to the district level which is kind of how they measure their markets.

And the outcome -- you feel confident, you talked about it, I understand that, at a high level. You feel confident that you are in a district level, let's say, or regional level that it's more mix then competitive slippage?

When you say competitive slippage --

I know you're saying that you're better than (inaudible) overall. I get that. I guess I'm just thinking of larger competitors.

It only measures you against your peer group. It doesn't give you specific people. It's a very general measurement and it's the best measurement we have because we all report electronically, with our electronic feeds nightly to the Rouse report.

Look, on balance we are doing very well. Is there opportunities? Absolutely. And those are things that we pick up on that helps the way in which we manage to become a better company. That is why we subscribe to it and we use it -- we're actually utilizing it as a tool.

Thank you. Great.

Scott Schneeberger, Oppenheimer.

Hi, guys, good afternoon. I'm going to little bit off here and a question on rent versus buy. On your three biggest general rent categories arial, earthmoving and reach forks, where would you say we are in the rent versus buy percentage? Also, if you would address it in your specialty category as well? Thanks.

That is a loaded question but I would tell you that from an aerial perspective, and Matt correct me, it's probably in the high 90%s goes to the rental channel. There is not a real distribution network to speak of. With regards to earthmoving, I think it's probably, and there's reports out there so I may get a little bit wrong, but it's somewhere around 50%/50% or 60%/40% or one way or the other, but earthmoving is predominately still owned as in comparison to a lot of the rental assets.

With regards to our specialty, I think our specialty is not just a product, it's really the solution. We are trying to solve problems whether it be pump, how much fluid, what kind of distance, what type of fluid, what is the velocity that you need, and how often does it need to be reoccurring. The same goes for power. There is various sizes and then also with HVAC, whether it's industrial cooling or whether it's something that you are doing for just air-conditioning. Each one is more of a solution than it is just the asset.

Yes, I think Mike hit it very well. Trench, would add with trench, the only one we -- he did not touch on would be, we really got secular penetration against noncompliance which is a great end market to sell into, to grow that pie. I agree wholeheartedly.

Scott, I heard your question as being what the guys answered, but I also heard your question as being, has the rent versus buy decision dynamic changed in any fundamental way? And my view would be, no it hasn't. There is still a pretty powerful argument for rental versus purchase across all of those cat classes that you mentioned. And we believe that, that is going to continue to be the case going forward.

And on that point, the OEMs, we are seeing the distribution network add more to their rental fleet, so rentals become more of a viable channel.

Thanks, guys, for all the color.

Ross Gilardi, Bank of America Merrill Lynch.

Thanks, guys, good afternoon. Thanks for squeezing me in. Michael, I just want to ask you, your number-one competitor seems pretty insistent out there publicly that things are great in the rental space and that nothing is even remotely changed outside of the oil and gas space. They are clearly taking a much different stance on capital spending then United Rentals and I'm just wondering, is that one of the reasons why the pricing environment still hasn't really firmed up, or is the pressure on rate coming from elsewhere? How willing are you to cede market shared to them if they continue to keep their foot on the accelerator?

Look, everyone has got different strategies. We have ours about value creation and that is what we are going to stick to. I have mentioned about the fleet imbalance. That is data that comes out of Rouse in comparison to the growth of the industry. We compete in different markets as well. We have more of an industrial non-construction related than others. We also have a more geographic footprint, like I mentioned in Canada, which also has an impact. I think that each one has their own strategy. But the industry has its own challenges and I can only speak to what we are going to do and how we're going to approach it.

But in terms of the pricing pressure that is out there, do you think it's -- is it coming from Sunbelt or is it coming from the smaller players who are the ones that are really saddled with more of the over capacity right now?

Ross, this is Matt. I wouldn't speak any individually to any one competitor, because we don't have visibility to what their baseline is and what their price levels are. All I would say is when you look at the Rouse data, which is industry average, so instead of just looking at 6% or 7% of the market, looking at one-third to 40% the market, it's very clear that there was too much of fleet early on, time utilization was impacted and you can make the inference that, that impacts rate growth in each individual market.

As far as the small regional players, if you're in some of the markets where we are seeing great growth on the coasts, I'm sure we have small regional players that are seeing great growth as well. It's really spotty as where as far as we were on the map. And I think that is why you'll hear different versions of what people are enjoying.

I got it. Thanks, guys.

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

Great thank you all for coming in joining us. We actually shifted to one hour later to accommodate everyone. I hope we have given you visibility in 2016 and the flexibility we have to address any changes in our operating environment. As always, please be sure you download and update our investor presentations. It's rich with a lot of material. We also have a new corporate responsibility report on the website and always feel free to reach out to Fred here in Stanford any time to set up a call or potential visit. So, Operator, you can now end the call. Thank you.

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